UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File No. 0-29025
NETVOICE TECHNOLOGIES CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
NEVADA 91-1986538
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3201 WEST ROYAL LANE, SUITE 160
IRVING, TEXAS 75063
-----------------------------------------------------------
(Address of principal executive offices, including zip code)
(972) 788-2988
---------------------------------------------------
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of May 9, 2001, 15,753,944 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits to the following documents filed with the Securities and
Exchange Commission have been incorporated by reference in Part II of this
Quarterly Report on Form 10-Q:
1. Annual Report on Form 10-KSB, dated as of April 2, 2001
NETVOICE TECHNOLOGIES CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Default Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
ASSETS 2001 2000
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 1,393,040 $ 4,158,359
Accounts receivable - trade, net of allowance for
doubtful accounts of $2,250,664 and $1,800,664,
respectively 3,741,363 4,777,125
Prepaid expenses and other current assets 744,630 584,886
------------ ------------
Total current assets 5,879,033 9,520,370
PROPERTY AND EQUIPMENT, NET 23,373,359 22,890,594
EXCESS OF COST OF INVESTMENT OVER NET ASSETS ACQUIRED,
net of accumulated amortization of $856,052 and $618,302,
respectively 8,680,732 8,917,483
VENDOR SECURITY DEPOSITS AND OTHER NONCURRENT ASSETS 477,636 286,643
------------ ------------
TOTAL $ 38,410,760 $ 41,615,090
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 14,439,838 $ 14,490,084
Current portion of note payable and capital lease obligations 17,778,366 3,470,399
Unearned revenue 289,301 342,913
------------ ------------
Total current liabilities 32,507,505 18,303,396
LONG-TERM DEBT 2,283,539 15,320,688
------------ ------------
Total liabilities 34,791,044 33,624,084
COMMITMENTS AND CONTINGENCIES (See Notes)
STOCKHOLDER'S EQUITY:
Preferred stock; 50,000,000 shares authorized at $0.001
par value, 4,638,690 and 4,582,280 shared issued and
outstanding with a cumulative liquidation preference
of $15,075,742 4,639 4,582
Common stock, 100,000,000 shares authorized at $0.001
par value; 15,753,944 and 15,636,444 shares issued and
outstanding, respectively 15,754 15,636
Paid-in capital 27,094,114 27,093,725
Accumulated deficit (23,494,791) (19,122,937)
------------ ------------
Total stockholders' equity 3,619,716 7,991,006
------------ ------------
TOTAL $ 38,410,760 $ 41,615,090
============ ============
See notes to consolidated unaudited financial statements.
-3-
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000
MARCH 31,
2001 2000
(UNAUDITED)
REVENUES
Telecommunication revenue $ 10,416,333 $ 409,808
Equipment sales 414,240
Installation and consulting revenues 206,338
------------ ------------
Total revenues 11,036,911 409,808
EXPENSES:
Direct expenses 9,693,611 625,572
General and administrative expenses 5,160,624 1,467,518
------------ ------------
Total expenses 14,854,235 2,093,090
------------ ------------
OPERATING LOSS (3,817,324) (1,683,282)
OTHER INCOME (EXPENSE):
Interest income 31,468 10,814
Interest expense (585,998) (315,417)
------------ ------------
Total other expense (554,530) (304,603)
------------ ------------
NET LOSS (4,371,854) (1,987,885)
Less accretion of preferred stock for beneficial
conversion feature 367,542
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,739,396) $ (1,987,885)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.30) $ (0.16)
============ ============
WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING 15,665,819 12,224,400
============ ============
See notes to consolidated unaudited financial statements.
-4-
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Three Months Ended March 31, 2001 (Unaudited)
Preferred Stock Common Stock
------------------- -------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
BALANCE, JANUARY 1, 2001 4,582,280 $ 4,582 15,636,444 $ 15,636 $ 27,093,725 $(19,122,937) $ 7,991,006
Restricted shares issued to
officers, directors and employees 117,500 118 (118) -
Shares issued upon exercise of
warrants 56,410 57 507 564
Beneficial conversion feature
related to preferred stock 367,542 367,542
Accretion of preferred stock
beneficial conversion feature (367,542) (367,542)
Net loss (4,371,854) (4,371,854)
--------- -------- ---------- -------- ------------ ------------ -----------
BALANCE, MARCH 31, 2001 (Unaudited) 4,638,690 $ 4,639 15,753,944 $ 15,754 $ 27,094,114 $(23,494,791) $ 3,619,716
========= ======== ========== ======== ============ ============ ===========
See notes to consolidated unaudited financial statements.
-5-
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000
MARCH 31,
2001 2000
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss $ (4,371,854) $ (1,987,885)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,506,590 104,615
Amortization of unearned stock compensation 292,635
Bad debt expense 450,000
Changes in operating assets and liabilities:
Accounts receivable 585,761 (113,124)
Prepaid expenses (159,744) (12,388)
Accounts payable and accrued expenses (50,246) 1,315,301
Unearned revenue (53,612) 65,000
Other assets (190,993) 62,832
------------ ------------
Net cash used in operating activities (2,284,098) (273,014)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,752,603) (1,374,855)
Increase in restricted cash and cash equivalents (327,320)
------------ ------------
Net cash used in investing activities (1,752,603) (1,702,175)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of issuance costs 4,981,250
Proceeds from long-term debt 1,618,135 386,027
Proceeds from warrants 564
Payments on long-term debt and capital leases (347,317) (847,999)
------------ ------------
Net cash provided by financial activities 1,271,382 4,519,278
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,765,319) 2,544,089
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 4,158,359 20,085
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 1,393,040 $ 2,564,174
============ ============
SUPPLEMENTAL DISCLOSURES - Interest paid $ 84,404 $ 210,294
============ ============
NONCASH TRANSACTION:
Assets acquired through capital leases $ - $ 764,230
============ ============
Issuance of restricted shares of common stock to officers,
directors and employees $ 118 $ -
============ ============
See notes to consolidated unaudited financial statements.
-6-
NETVOICE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS - The
accompanying consolidated unaudited interim financial statements of
NetVoice Technologies Corporation and its subsidiaries (the "Company")
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and in a manner consistent with that used in the preparation
of the annual consolidated financial statements of the Company at
December 31, 2000. In the opinion of management, the accompanying
consolidated unaudited interim financial statements reflect all
adjustments, consisting only of normal and recurring adjustments,
necessary for a fair presentation of the financial position and results
of operations and cash flows for the periods presented.
Operating results for the three months ended March 31, 2001 and 2000
are not necessarily indicative of the results that may be expected for a
full year. In addition, the unaudited interim consolidated financial
statements do not include all information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the Unites States of America.
These consolidated unaudited interim financial statements should be read
in conjunction with the financial statements and related notes thereto
which are included in the Company's 2000 consolidated financial
statements in its Form 10-KSB as filed with the Securities and Exchange
Commission on April 2, 2001.
BUSINESS DESCRIPTION - The Company is a provider of voice and data
transmission using Internet Protocol ("IP"), which allows our customers
to make high-quality, low-cost calls via traditional telephones using a
technology known as Voice over Internet Protocol.
EARNINGS PER SHARE - Basic earnings per share are computed by
dividing income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share are computed by including contingently issuable shares
with the weighted average shares outstanding during the period. The
Company has 283,675 EBITDA warrants, as defined in the Amended and Restated
Securities Purchase agreement, that were exercisable on April 2,
2001. When inclusion of the contingently issuable shares and warrants
would have an antidilutive effect upon earnings per share, diluted
earnings per share is the same as basic earnings per share.
PRINCIPLES OF CONSOLIDATION - The consolidated unaudited interim
financial statements included the accounts of the Company and its wholly
owned subsidiaries, NetVoice Technologies, Inc.; Synetric, Inc.; NetVoice
Encom GP; and NetVoice Encom LP. All intercompany transactions and
balances between the Company and its subsidiaries have been eliminated in
consolidation.
-7-
COMPREHENSIVE INCOME - For the three months ended March 31, 2001 and
2000 comprehensive income was equal to the net loss.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
MARCH 31, DECEMBER 31,
2001 2000
(UNAUDITED)
Furniture and equipment $ 240,011 $ 163,929
Leasehold improvements 889,292 992,761
Computer and telephone equipment 25,704,303 23,924,311
------------ ------------
Total cost 26,833,606 25,081,001
Less accumulated depreciation (3,460,247) (2,190,407)
------------ ------------
$ 23,373,359 $ 22,890,594
============ ============
3. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations consisted of the
following:
MARCH 31, DECEMBER 31,
2001 2000
(UNAUDITED)
Convertible secured promissory note, LIBOR interest rate
plus 2%, maturing June 30, 2005 $ 2,100,000 $ 2,100,000
Credit facility with Cisco, LIBOR interest rate plus 5.5%,
maturing June 30, 2005 16,235,027 14,616,891
Capital lease obligations, with interest rates of 13.47%
to 22.5%, maturing August 2003, net of amount
represents as interest 1,726,878 2,074,196
------------ ------------
20,061,905 18,791,087
Less current portion of long-term debt (17,778,366) (3,470,399)
------------ ------------
$ 2,283,539 $ 15,320,688
============ ============
As of March 31, 2001, the Company was not in compliance with certain
financial covenants related to the Cisco credit facility. In addition,
the Company has not paid the quarterly interest payment for the three
months ended March 31, 2001. Pursuant to the Amended and Restated
Security Agreement, dated January 24, 2001, Cisco may declare any of the
obligations to be immediately due and payable and shall have, in addition
to all other rights and remedies granted to them, all rights and remedies
of a secured party. Therefore, the Company has classified the
outstanding principal balance to Cisco as a current obligation as of
March 31, 2001.
-8-
Company has classified the outstanding principal balance to Cisco as a
current obligation as of March 31, 2001.
4. EQUITY
During the first quarter of 2001, the Company issued the remaining
56,410 NASDAQ warrants, at an exercise price of $0.01 per share, related
to the NASDAQ Requirement pursuant to the Amended and Restated Securities
Purchase Agreement between the Company and the purchasers.
5. SUBSEQUENT EVENTS
In April 2001, the Company issued 283,675 warrants, at an exercise
price of $0.01 per share, related to the EBITDA Requirement pursuant to
the Amended and Restated Securities Purchase Agreement between the
Company and the purchasers.
******
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS DOCUMENT INCLUDES STATEMENTS THAT MAY CONSTITUTE FORWARD-
LOOKING STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE COMPANY WOULD LIKE
TO CAUTION READERS REGARDING CERTAIN FORWARD-LOOKING STATEMENTS IN THIS
DOCUMENT AND IN ALL OF ITS COMMUNICATIONS TO SHAREHOLDERS AND OTHERS,
PRESS RELEASES, SECURITIES FILINGS, AND ALL OTHER COMMUNICATIONS.
STATEMENTS THAT ARE BASED ON MANAGEMENT'S PROJECTIONS, ESTIMATES AND
ASSUMPTIONS ARE FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVE,"
"EXPECT," "ANTICIPATE," "INTEND," AND SIMILAR EXPRESSIONS GENERALLY
IDENTIFY FORWARD-LOOKING STATEMENTS. WHILE THE COMPANY BELIEVES IN THE
VERACITY OF ALL STATEMENTS MADE HEREIN, FORWARD-LOOKING STATEMENTS ARE
NECESSARILY BASED UPON A NUMBER OF ESTIMATES AND ASSUMPTIONS THAT, WHILE
CONSIDERED REASONABLE BY THE COMPANY, ARE INHERENTLY SUBJECT TO
SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND
CONTINGENCIES AND KNOWN AND UNKNOWN RISKS. MANY OF THE UNCERTAINTIES AND
CONTINGENCIES CAN AFFECT EVENTS AND THE COMPANY'S ACTUAL RESULTS AND
COULD CAUSE ITS ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED
IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE COMPANY.
SOME OF THE FACTORS THAT COULD CAUSE ACTUAL RESULTS OR FUTURE EVENTS TO
DIFFER MATERIALLY INCLUDE THE COMPANY'S INABILITY TO FIND SUITABLE
ACQUISITION CANDIDATES OR FINANCING ON TERMS COMMERCIALLY REASONABLE TO
THE COMPANY, INABILITY TO FIND SUITABLE FACILITIES OR PERSONNEL TO OPEN
OR MAINTAIN NEW BRANCH LOCATIONS, INTERRUPTIONS OR CANCELLATION OF
EXISTING SOURCES OF SUPPLY, THE PRICING OF AND DEMAND FOR DISTRIBUTED
PRODUCTS, THE PRESENCE OF COMPETITORS WITH GREATER FINANCIAL RESOURCES,
ECONOMIC AND MARKET FACTORS, AND OTHER FACTORS. PLEASE SEE THE "RISK
FACTORS" IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION FOR A DESCRIPTION OF SOME, BUT NOT ALL, RISKS, UNCERTAINTIES
AND CONTINGENCIES.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes thereto
which are included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2000 filed with the Securities and Exchange
Commission.
OVERVIEW
We are a facilities-based provider of converged communications
services utilizing a privately managed "next generation" communications
network. Our communications network is designed to carry simultaneous
toll-quality voice (known as Voice over Internet Protocol or VoIP), data
and video transmissions using packet-switching technology.
IP transmission uses a technology called "packet-switching" to break
voice, and other IP telephony services into discrete data packets, route
them over our managed network and reassemble them into their original
form for delivery to the end destination. Traditional long distance
calls, in contrast, are made using a technology called "circuit
switching" which carries these calls over traditional telephone networks.
Circuit switching requires a dedicated connection between the caller and
the recipient that must remain open for the duration of the
-10-
call. In contrast, packet-switching technology allows data packets
representing multiple conversations to be carried over the same line.
This greater efficiency creates significant network cost savings that can
be passed on to the consumer in the form of lower long distance and other
telephony products. Additionally, IP allows various telephony products
to utilize the same network, which results in an increased flexibility
for a robust product offering.
We currently provide dedicated wholesale and enterprise long
distance, dedicated Internet, and Internet protocol virtual private
network ("IPVPN"), through the NetVoice Network in 54 points of presence
("POPs") throughout the United States. In addition, our Network is
capable of supporting the delivery of enhanced IP communications services
such as unified messaging, online communications services provisioning,
video conferencing, video-on-demand and other cost differentiated
services.
As of March 31, 2001, our Network connects 54 POPs covering almost
600 cities in the United States and is expected to extend to an
additional 3 POPs by June 30, 2001. Currently, each of our markets has a
minimum capacity for 25.0 million minutes of voice communications per
year. We utilize a virtual private network ("VPN") not an unmanaged
network, such as the Internet, to provide network services.
We plan to continue to pursue wholesale carrier traffic and
wholesale network services as a means to cover the costs of our managed
network, while continuing to build a portfolio of value added products
and services that will be delivered to the enterprise markets on a
bundled or unbundled basis. We have currently enhancing our network in
order to provide additional value added services such as IP Centrex,
unified communications, wireless Internet, and video conferencing in
selected markets.
REVENUE FROM OPERATIONS
Currently, our revenues are primarily derived from (i)
telecommunication revenues, including wholesale carrier traffic,
wholesale network services and Internet services and (ii) equipment
sales. See Results of Operations below for a breakdown of our revenue.
One of NetVoice's initial strategies is to continue to run wholesale
traffic over our IP network while we aggressively pursue the enterprise
market. Enterprise revenue will be derived through direct sales by our
existing employees, independent agents, and by leveraging our
relationship with Cisco. Currently, our enterprise products consist of:
* IP Centrex;
* Wireless Internet; and
* IPVPN.
We will expand our network to target new markets based on cost
savings. This coupled with converging various products (voice, video,
data and Internet) over the same network are the key ingredients to
approach profitability. As we grow and build our network, we do not
expect to be profitable in the foreseeable future.
-11-
There are little or no seasonal changes in the revenue stream of the
Company's business.
COST STRUCTURE
Our costs and expenses include:
* network costs;
* selling and marketing;
* general and administrative; and
* interest, depreciation and amortization of the excess cost of
investment over net assets acquired ("Goodwill").
Network costs primarily consist of costs associated with the routing
and termination of our customers' traffic. The costs include:
* leased bandwidth and connection to the Internet;
* local lines used to carry calls to and from our network
locations;
* our network facilities; and
* calls terminated over other carrier networks.
We expect these costs to increase into the future as we further
expand as a percentage of revenue.
Sales and marketing expenses include the expenses associated with
acquiring customers, establishing brand recognition, commissions paid to
our agents and sales personnel, advertising costs and customer referral
fees. We expect sales and marketing expenses to increase over time as we
aggressively market our products and services.
General and administrative expenses consist of the salaries of our
employees and associated benefits, and the cost of travel, business
entertainment, rent and utilities. A large portion of our general and
administrative expenses is allocated to operations and customer support.
We expect operations and customer support expenses to increase over time
to support new and existing customers. We expect general and
administrative costs to increase to support our growth, particularly as
we establish a larger organization to implement our business plan. We
plan to incur costs for product development, though they are not expected
to increase as a percentage of revenue. Over time, we expect these
relatively fixed general and administrative expenses to decrease as a
percentage of revenue.
-12-
Interest expense includes the amortization of debt issuance costs in
connection with the issuance of the short-term notes, interest on the
short-term notes, interest expense on our capital lease obligations,
interest on our Cisco Credit Facility, interest on our note with World
Access and amortization of commitment fees on our Cisco debt facility.
As of March 31, 2000, the Company borrowed approximately $16.2 million
under the Cisco facility and had $2.1 million payable to World Access.
During the three months ended March 31, 2000, we had net interest expense
in the aggregate amount of approximately $554,530.
Depreciation primarily relates to our telecommunications equipment.
We depreciate this equipment over its estimated useful life of five to
seven years using the straight-line method. In addition, we will be
adding more originating and terminating IP Gateways as traffic volumes
justify. We expect depreciation to increase in absolute terms as we grow
our networks to support new and acquired customers, but to decrease as a
percentage of total revenue. We also record amortization of goodwill
from the acquisitions of Encom and Synetric. This goodwill is being
amortized over 10 years.
IMPACT OF INFLATION
General inflation in the economy has driven the operating expenses
of many businesses higher, and, accordingly, the Company has experienced
increased salaries and higher prices for supplies, goods and services.
The Company continuously seeks methods of reducing costs and streamlining
operations while maximizing efficiency through improved internal
operating procedures and controls. While the Company is subject to
inflation as described above, management believes that inflation
currently does not have a material effect on operating results, but there
can be no assurance that this will continue to be so in the future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"). SFAS 133
was amended by Statement of Financial Accounting Standards No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF
THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 and changed the effective
date for SFAS 133 to all fiscal quarters of fiscal years beginning after
June 15, 2000. In June 2000, the FASB issued Statement of Financial
Accounting Standards No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE
INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES ("SFAS 138"). SFAS 133 and
SFAS 138 require that all derivative instruments be recorded on the
balance sheet at their respective fair values. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on the designation of the hedge
transaction. For cash flow hedge transactions in which the Company is
hedging the variability of cash flows related to variable interest rate
liabilities or forecasted transactions, changes in the fair value of the
derivative instrument will be reported in other comprehensive income.
Any ineffectiveness between the hedged item and the hedge would be
recognized
-13-
currently in earnings. The gains and losses on the derivative
instruments that are reported in other comprehensive income will be
recognized in earnings in the periods in which earnings are impacted by
the variability of the cash flows of the hedged item. The Company
adopted the provisions of SFAS 133 and SFAS 138 in the year ended
December 31, 2000 with no impact on the Company's financial position,
operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION
IN FINANCIAL STATEMENTS. SAB 101 summarizes certain of the SEC's views
in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted the provisions
of SAB 101 during the year ended December 31, 2000 with no material
impact on the Company's financial position, operations or cash flows.
-14-
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO MARCH 31, 2000
The following table sets forth, for the three months ended March 31,
2001 and 2000, respectively, the results of operations of the Company.
THREE MONTH PERIOD ENDED
MARCH 31,
2001 2000
(UNAUDITED)
REVENUES:
Telecommunication revenue $ 10,416,333 $ 409,808
Equipment sales 414,240
Installation and consulting revenues 206,338
------------ ------------
Total revenues 11,036,911 409,808
EXPENSES:
Direct expenses 9,693,611 625,572
General and administrative expenses 5,160,623 1,467,518
------------ ------------
Total expenses 14,854,234 2,093,090
------------ ------------
OPERATING LOSS (3,817,323) (1,683,282)
OTHER INCOME (EXPENSE):
Interest income 31,468 10,814
Interest expense (585,998) (315,417)
------------ ------------
Total other expense (554,530) (304,603)
------------ ------------
NET LOSS (4,371,853) (1,987,885)
Less accretion of preferred stock for beneficial
conversion feature 367,542
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,739,395) $ (1,987,885)
============ ============
Revenue increased to $11,036,911 for the three months ended March
31, 2001 from $409,808 for the three months ended March 31, 2000. This
increase is attributable to the increase in our wholesale voice services
of approximately $10.0 million due to the acquisitions of Encom and
Synetric. We expect our wholesale revenue to continue to grow, as we
continue to expand our network into additional locations. The focus on
the wholesale revenue gives us the ability to grow our network and offer
more of POPs to the enterprise market. The enterprise market will
primarily consist of large corporate customers interested in converged
IP telephony products.
Total direct costs increased to $9,693,611 for the three months
ended March 31, 2001 from $625,572 for the three months ended March 31,
2000. Approximately $8.1 million of the increase in direct costs for the
three months ended March 31, 2001 as compared to the three months ended
March 31, 2000, is primarily a result of our acquisitions. In the future,
we
-15-
expect gross margin to grow as a percentage of revenue. At the end of
the first quarter 2001, we have slowed the capital expansion of our
network and are focusing our capital directly associated with enterprise
sales. Any new markets will be targeted to markets based on cost savings
to the Company.
General and administrative costs, excluding depreciation and
amortization expense, increased to approximately $3,654,035 for three
months ended March 31, 2001 from $1,467,518 for the three months ended
March 31, 2000. Approximately $1.3 million of the increase for the three
months ended March 31, 2001 as compared to the three months ended March
31, 2000 is primarily a result of our acquisitions. The primary reason
for this increase relates to the expanded marketing efforts, hiring new
employees and bad debt expense in the amount of approximately $450,000.
These costs are expected to increase as a percentage of revenue, until
all systems are in place to handle future revenue and support future
products. Thereafter, we anticipate that general and administrative
costs will increase but not as a percentage of revenues.
Depreciation and amortization costs increased to $1,506,589 for the
three months ended March 31, 2001 from $104,615 for the three months
ended March 31, 2000. Depreciation consists primarily of the
depreciation of our IP gateways and other telecom equipment. We
depreciate this network equipment over five to seven years on a straight-
line basis. It can be expected that depreciation will continue to
increase as we continue to expand our network. Additionally, we recorded
$236,750 in amortization of goodwill as a result of the acquisitions for
the three months ended March 31, 2001. As we continue to build our
network, expand our product offering, amortization of acquisition costs
and execute our business plan, we expect these expenses to continue to
increase. Amortization expense consists of the amortization of goodwill
from the acquisitions of Encom and Synetric. We amortize goodwill
related to these acquisitions over a period of ten years.
Net interest expense increased to $554,530 for the three months
ended March 31, 2001 from $304,603 for the three months ended March 31,
2000. This increase is the result of interest from the Cisco Credit
facility, interest from the World Access note and amortization of the
fees relating to the Cisco Credit Facility. We expect interest expense
to increase throughout fiscal year 2001, as a result of the use of the
Cisco credit facility to purchase equipment.
Our net loss before the accretion of Series A preferred stock for
the beneficial conversion feature, increased to $4,371,853 for the three
months ended March 31, 2001 from $1,987,885 for the three months ended
March 31, 2000. This increase is due primarily to the continued
expansion of our network, marketing expenses and an increase in personnel
and overhead. We expect continued and increasing losses as we continue
to pursue our growth strategy.
Accretion of Series A preferred stock increased to $367,542 for the
three months ended March 31, 2001 from $0 for the three months ended
March 31, 2000. In determining the value of the Series A preferred stock
and contingently issuable warrants, the net proceeds were allocated based
on their relative fair values. The Company allocated $1,361,638 of the
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proceeds to the warrants and convertible securities from the issuance of
the Series A preferred stock of $11,824,993 to the beneficial conversion
feature on the issuance of the Series A preferred stock. The beneficial
conversion feature was calculated at the issuance dates of the Series A
preferred stock based on the difference between the conversion price per
share and the market value of the Company's common stock on June 30 and
July 28, 2000. The amount, however, was limited to the proceeds received
from issuing the beneficial convertible security. The Series A preferred
stockholders have the right to convert at the option of each holder, at
any time after six months of closing, into shares of the Company's common
stock. The Company can require conversion of the Series A preferred
stock into the Company's common stock if the average of the closing price
of the Company's common stock for any twenty-one (21) trading day period
exceeds $27.50 per share and the shares of common stock are registered
and freely tradeable. Each share of Series A preferred stock can be
converted into one share of common stock. The Series A preferred stock
ranks senior to all classes of common stock.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, the Company was not in compliance with certain
financial covenants related to the Cisco credit facility. The Company is
currently negotiating with Cisco to obtain a wavier of noncompliance and
revise the financial covenants. In addition, the Company has not paid the
quarterly interest payment for the three months ended March 31, 2001.
Pursuant to the Amended and Restated Security Agreement, dated January
24, 2001, Cisco may declare any of the obligations to be immediately due
and payable and shall have, in addition to all other rights and remedies
granted to them, all rights and remedies of a secured party. Therefore,
the Company has classified the outstanding principal balance to Cisco as
a current obligation as of March 31, 2001.
As of March 31, 2001, we had approximately $1.4 million in cash and
cash equivalents. Our operating activities used cash of approximately
$2.3 million for the three months ended March 31, 2001, compared to
approximately $273,014 for the three months ended March 31, 2000. Our
cash used in operating activities was principally a result of our losses.
Cash used in investing activities for the three months ended March 31,
2001 was approximately $1.8 million and cash used in investing activities
was approximately $1.7 million for the three months ended March 31, 2000.
Our cash used in operating and investing activities was the purchase of
telecommunications equipment. Our financing activities provided cash of
approximately $1.3 million and approximately $4.5 million for the three
months ended March 31, 2001 and 2000, respectively. The principal source
of the cash provided was the notice of borrowing from the Cisco facility.
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Our future capital requirements will depend on numerous factors,
including:
* market acceptance of our services;
* brand promotions;
* the amount of resources we devote to the development of our
current and future products; and
* the expansion of our in-house sales force and marketing our
services.
We may experience a substantial increase in our capital expenditures
and lease arrangements consistent with the growth in our operations and
adding additional personnel. Our current cash flow from operations is
not sufficient to meet our working capital and capital expenditure needs
for at least the next twelve (12) months and accordingly, we will continue
to seek additional financing. Accordingly, there can be no assurance that
we will have sufficient capital to finance potential acquisitions or other
growth oriented activities, and may issue additional equity securities,
incur debt or obtain other financing. We have no other material capital
commitments.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not currently a party to any legal proceedings, nor are we
aware of pending or threatened litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
There were no changes in securities.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
As of March 31, 2001, the Company was not in compliance with certain
financial covenants related to the Cisco credit facility. In addition,
the Company has not paid the quarterly interest payment for the three
months ended March 31, 2001. Pursuant to the Amended and Restated
Security Agreement, dated January 24, 2001, Cisco may declare any of the
obligations to be immediately due and payable and shall have, in addition
to all other rights and remedies granted to them, all rights and remedies
of a secured party. Therefore, the Company has classified the
outstanding principal balance to Cisco as a current obligation as of
March 31, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We will hold an Annual Meeting of Shareholders in May 23, 2001.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
1. On March 12, 2001, we filed an amended Form 8-K (pursuant to Item 5
and 7) in connection with the acquisition of Enhance Communications,
a wholly owned subsidiary of World Access Telecommunications Group,
Inc. pursuant to a definitive Asset Purchase Agreement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NETVOICE TECHNOLOGIES CORPORATION
Date: May 15, 2001 By: /s/ JEFFREY ROTHELL
------------------------------
Jeffrey Rothell, President, Chief
Executive Officer
Date: May 15, 2001 By: /s/ GARTH COOK
------------------------------
Garth Cook, Treasurer, Chief Financial
Officer and Chief Accounting Officer
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