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 JUNE 30, 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 August 15, 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 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Default Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
ASSETS 2001 2000
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 715,108 $ 4,158,359
Accounts receivable - trade, net of allowance for
doubtful accounts of $5,008,084 and $1,800,664, respectively 2,348,944 4,777,125
Prepaid expenses and other current assets 676,993 584,886
------------ ------------
Total current assets 3,741,045 9,520,370
PROPERTY AND EQUIPMENT, NET 24,531,951 22,890,594
EXCESS OF COST OF INVESTMENT OVER NET ASSETS ACQUIRED,
net of impairment of $5,791,176 in 2001 and net of accumulated
amortization of $1,025,612 and $550,794, respectively 2,651,489 8,917,483
VENDOR SECURITY DEPOSITS AND OTHER NONCURRENT ASSETS 737,844 286,643
------------ ------------
TOTAL $ 31,662,329 $ 41,615,090
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 18,314,033 $ 14,490,084
Current portion of note payable and capital lease obligations 18,538,743 3,470,399
Unearned revenue and other current liabilities 226,854 342,913
------------ ------------
Total current liabilities 37,079,630 18,303,396
LONG-TERM DEBT 2,146,046 15,320,688
------------ ------------
Total liabilities 39,225,676 33,624,084
COMMITMENTS AND CONTINGENCIES (See Notes)
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock; 50,000,000 shares authorized at $0.001 par
value, 4,877,921 and 4,582,280 shared issued and outstanding
with a cumulative liquidation preference of $15,853,243 4,878 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 27,096,267 27,093,725
Accumulated deficit (34,680,246) (19,122,937)
------------ ------------
Total stockholders' (deficit) equity (7,563,347) 7,991,006
------------ ------------
TOTAL $ 31,662,329 $ 41,615,090
============ ============
See notes to consolidated unaudited financial statements.
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NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
(UNAUDITED) (UNAUDITED)
REVENUES
Telecommunication revenue $ 9,570,107 $ 5,296,991 $ 20,010,758 $ 5,706,799
Equipment sales 529,647 983,177
Installation and consulting revenues 61,648 207,897
------------ ------------ ------------ ------------
Total revenues 10,161,402 5,296,991 21,201,832 5,706,799
EXPENSES:
Direct expenses 7,198,353 4,946,360 16,891,964 5,571,932
General and administrative expenses 7,643,805 2,664,997 12,804,393 4,132,515
Impairment of Goodwill 5,791,176 5,791,176
------------ ------------ ------------ ------------
Total expenses 20,633,334 7,611,357 35,487,533 9,704,447
------------ ------------ ------------ ------------
OPERATING LOSS (10,471,932) (2,314,366) (14,285,701) (3,997,648)
OTHER INCOME (EXPENSE):
Interest income 7,981 2,071 39,449 12,885
Interest expense (725,059) (212,443) (1,311,057) (527,861)
------------ ------------ ------------ ------------
Total other expense, net (717,078) (210,372) (1,271,608) (514,976)
------------ ------------ ------------ ------------
NET LOSS (11,189,010) (2,524,738) (15,557,309) (4,512,624)
Less accretion of preferred stock for
beneficial conversion feature 367,542
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $(11,189,010) $ (2,524,738) $(15,924,851) $ (4,512,624)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.71) $ (0.19) $ (1.01) $ (0.35)
============ ============ ============ ============
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING 15,753,944 13,434,329 15,709,882 12,829,945
============ ============ ============ ============
See notes to consolidated unaudited financial statements.
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NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 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 295,641 296 2,660 2,956
Beneficial conversion feature
related to preferred stock 367,542 367,542
Accretion of preferred stock
beneficial conversion feature (367,542) (367,542)
Net loss (15,557,309)(15,557,309)
--------- -------- ---------- -------- ------------ ------------ -----------
BALANCE, JUNE 30, 2001 (Unaudited) 4,877,921 $ 4,878 15,753,944 $ 15,754 $ 27,096,267 $(34,680,246)$(7,563,347)
========= ======== ========== ======== ============ ============ ===========
See notes to consolidated unaudited financial statements.
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NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000
JUNE 30,
2001 2000
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss $(15,557,309) $ (4,512,624)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,094,391 435,437
Impairment of Goodwill 5,791,176
Amortization of unearned stock compensation 436,658
Bad debt expense 3,207,420 20,000
Changes in operating assets and liabilities:
Accounts receivable (779,239) (1,969,673)
Prepaid expenses and other current assets (92,107) (159,258)
Accounts payable and accrued expenses 2,148,050 3,576,110
Unearned revenue and other current liabilities (116,059) 290,000
Other assets (451,201) (263,092)
------------ ------------
Net cash used in operating activities (2,754,878) (2,146,442)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,585,030) (2,084,563)
Cash outflow for acquisitions, net of acquisition costs (5,997,379)
Increase in restricted cash and cash equivalents (141,226)
------------ ------------
Net cash used in investing activities (2,585,030) (8,223,168)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of
issuance costs 7,863,393
Proceeds from the sale of preferred stock, net of
issuance costs 9,086,503
Proceeds from long-term debt 2,585,030 386,026
Proceeds from options exercised 6,251
Proceeds from warrants 2,956
Payments on long-term debt and capital leases (691,329) (3,062,198)
------------ ------------
Net cash provided by financial activities 1,896,657 14,279,975
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,443,251) 3,910,365
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 4,158,359 20,085
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 715,108 $ 3,930,450
============ ============
SUPPLEMENTAL DISCLOSURES - Interest paid $ 84,404 $ 519,608
============ ============
NONCASH TRANSACTION:
Assets acquired through capital leases $ - $ 764,230
============ ============
Purchases of property and equipment included in
accounts payable $ 1,675,899 $ -
============ ============
Common stock issued for the acquisition of Synetric, Inc. $ - $ 2,721,351
============ ============
Issuance of restricted shares of common stock to officers,
directors and employees $ 118 $ -
============ ============
Acquisition of Enhanced Communications, as defined:
Fair value of assets acquired $ 11,495,173
Liabilities assumed (3,397,794)
Note issued to seller (2,100,000)
------------
Cash paid $ 5,997,379
============
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 six months ended June 30, 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
44,444 EBITDA warrants, as defined in the Amended and Restated Securities
Purchase agreement, which were exercisable on April 2, 2001. Inclusion of
the contingently issuable shares would have an antidilutive effect upon
earnings per share. Accordingly, 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 six months ended June 30, 2001 and 2000
comprehensive income was equal to the net loss.
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management 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 these estimates.
One of the Company's telecommunication providers sought protection
under Chapter 11 of the bankruptcy code in April 2001 and discontinued
services to the Company on May 4, 2001. This vendor has been unable to
provide accurate records to support the amount payable. Management has
used its best efforts to estimate and accrue for the telecommunication
expense based on internal call detail records.
IMPAIRMENT OF GOODWILL - Based upon losing several of the large
customers acquired through the acquisition of Enhanced Communications from
World Access in June 2000, management evaluated the remaining goodwill
balance for impairment. Based upon the analysis, management recorded
an impairment of goodwill of approximately $5.8 million in June 2001.
2. GOING CONCERN CONSIDERATIONS
The accompanying consolidated unaudited financial statements have been
prepared on a going-concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred net losses for the first two quarters
of fiscal year 2001 and in the years ended December 31, 2000, 1999 and
1998. The Company has also experienced uncertainties, including, among
others, risks associated with technology and regulatory trends, evolving
industry standards, growth and acquisitions, actual and prospective
competition by entities with greater financial and other resources, the
development of the Internet market and the need for additional capital.
The Company must obtain additional debt or equity capital to continue its
current operations and to meet debt service requirements. These factors,
among others, may indicate that the Company will be unable to continue as
a going concern for a reasonable period of time.
The consolidated unaudited financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis,
to comply with the terms and covenants of its financing agreements, to
obtain additional financing and, ultimately, to attain successful
operations.
Management believes that there can be no assurances that additional
financing can be obtained from conventional sources. Therefore, management
is exploring alternative sources
-8-
of financing support that includes seeking strategic investors. There can
be no assurance that the Company will be successful in obtaining any
financing on reasonable terms or at all. The Company's inability to obtain
additional financing from strategic investors could have a material adverse
effect on the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
JUNE 30, DECEMBER 31,
2001 2000
(UNAUDITED)
Furniture and equipment $ 239,861 $ 163,929
Leasehold improvements 889,292 992,761
Computer and telephone equipment 28,212,779 23,924,311
------------ ------------
Total cost 29,341,932 25,081,001
Less accumulated depreciation (4,809,981) (2,190,407)
------------ ------------
$ 24,531,951 $ 22,890,594
============ ============
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations consisted of the
following:
JUNE 30, DECEMBER 31,
2001 2000
(UNAUDITED)
Convertible secured promissory note, LIBOR interest rate
plus 2%, quarterly payments beginning March 31, 2002
and maturing June 30, 2005 $ 2,100,000 $ 2,100,000
Credit facility with Cisco, LIBOR interest rate plus 5.5%,
maturing June 30, 2005 17,201,923 14,616,891
Capital lease obligations, with interest rates of 13.47%
to 22.5%, maturing through August 2003, net of amount
represents as interest 1,382,866 2,074,196
------------ ------------
20,684,789 18,791,087
Less current portion of long-term debt (18,538,743) (3,470,399)
------------ ------------
$ 2,146,046 $ 15,320,688
============ ============
As of June 30, 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 payments for the six months
ended June 30, 2001. As of June 30, 2001, the Company had accrued interest
of approximately $1.1 million related to this credit facility. 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
-9-
other rights and remedies granted to them, all rights and remedies of a
secured party. Therefore, the Company has classified the outstanding
principal balance due to Cisco as a current obligation as of June 30, 2001.
5. EQUITY
During the first quarter of 2001, the Company issued 56,410 shares of
preferred stock upon the exercise of the remaining NASDAQ warrants, at an
exercise price of $0.01 per share, pursuant to the Amended and Restated
Securities Purchase Agreement between the Company and the purchasers.
In April 2001, the Company issued 239,231 shares of preferred stock
upon the exercise of the EBIDTA warrants, at an exercise price of $0.01 per
share, pursuant to the Amended and Restated Securities Purchase Agreement
between the Company and the purchasers.
6. SUBSEQUENT EVENTS
On July 9, 2001, the Company entered into a letter of intent with
Cisco Systems Capital Corporation ("Cisco") to restructure the $25.0
million credit facility. The new terms include reducing the outstanding
principle and interest balance to $11.0 million, a fixed interest rate of
10%, and removal of all financial covenants. The Company will be required
to issue 2.0 million warrants for common stock, at a twenty (20) day moving
average strike price. The Company will also be required to raise at least
$5.0 million of equity and pay Cisco $1.5 million within forty-five (45)
days of the letter of intent. Currently, the Company has not raised the
additional equity and does not have the ability to pay the $1.5 million to
execute the letter of intent.
******
-10-
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 THAT WOULD
MAINTAIN THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN, 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.
The reader should be aware that the Company may not have the ability to
continue as a going concern. If funding is not obtained the Company may
have to seek bankruptcy protection.
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
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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 approximately 30 points of
presence ("POPs") throughout the United States. The decrease in the number
of POPs from the previous quarter is due to re-deploying equipment in more
cost-effective cities, which will provide cost savings to the Company. 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. 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 enhanced our network in order to provide additional value
added services such as IP Centrex.
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 primarily of IP
Centrex.
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.
There are little or no seasonal changes in the revenue stream of the
Company's business.
-12-
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.
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.
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 June 30, 2001, the Company borrowed approximately $17.2 million under
the Cisco facility and had $2.1 million payable to World Access. During
the six months ended June 30, 2001, we had net interest expense in the
aggregate amount of approximately $1.3 million.
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
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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 ("SFAS"), ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 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 ("SFAS 138"), ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES. 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 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.
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Statement of Financial Accounting Standards No. 141, BUSINESS
COMBINATIONS is effective July 1, 2001 and prohibits pooling-of-interests
accounting for acquisitions. SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS is effective January 1, 2002 and specifies that goodwill and some
intangible assets will no longer be amortized but instead will be subject
to periodic impairment testing. The Company has not yet determined the
effect adopting SFAS No. 142 will have on its financial statements.
-15-
RESULTS OF OPERATIONS
The following table sets forth, for the three months and six months
ended June 30, 2001 and 2000, respectively, the results of operations of
the Company.
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
(UNAUDITED) (UNAUDITED)
REVENUES
Telecommunication revenue $ 9,570,107 $ 5,296,991 $ 20,010,758 $ 5,706,799
Equipment sales 529,647 983,177
Installation and consulting revenues 61,648 207,897
------------ ------------ ------------ ------------
Total revenues 10,161,402 5,296,991 21,201,832 5,706,799
EXPENSES:
Direct expenses 7,198,353 4,946,360 16,891,964 5,571,932
General and administrative expenses 7,643,805 2,664,997 12,804,393 4,132,515
Impairment of Goodwill 5,791,176 5,791,176
------------ ------------ ------------ ------------
Total expenses 20,633,334 7,611,357 35,487,533 9,704,447
------------ ------------ ------------ ------------
OPERATING LOSS (10,471,932) (2,314,366) (14,285,701) (3,997,648)
OTHER INCOME (EXPENSE):
Interest income 7,981 2,071 39,449 12,885
Interest expense (725,059) (212,443) (1,311,057) (527,861)
------------ ------------ ------------ ------------
Total other expense, net (717,078) (210,372) (1,271,608) (514,976)
------------ ------------ ------------ ------------
NET LOSS $(11,189,010) $ (2,524,738) $(15,557,309) $ (4,512,624)
============ ============ ============ ============
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED
JUNE 30, 2000
Revenue increased to $10,161,402 for the three months ended June 30,
2001 from $5,296,991 for the three months ended June 30, 2000. The
increase is primarily a result of the acquisition of Enhanced
Communications and the acquisition of Synetric. Of revenue generated for
the three months ended June 30, 2001, revenue from wholesale voice sales
accounted for approximately 94%. The remainder was the result of equipment
sales, installation and consulting revenues. Assuming we can obtain
funding, we expect our wholesale revenue to remain stable, as we
aggressively grow our enterprise revenue. The focus on the wholesale
revenue gives us the ability to cover our network costs while we grow our
enterprise revenue. The enterprise market will primarily consist of
large corporate customers interested in converged IP telephony products.
Total direct costs increased to $7,198,353 for the three months ended
June 30, 2001 from $4,946,360 for the three months ended June 30, 2000.
The increase of costs in the three
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months ended June 30, 2001 over the three months ended June 30, 2000 is a
result of our increased revenue. As of June 30, 2001, we have stopped
the expansion of our IP network into additional markets and have begun
grooming the network to cut costs. Assuming we can obtain funding,
we expect our network costs to decrease as a percentage of revenue
in the subsequent quarters.
General and administrative costs, excluding depreciation and
amortization expense, increased to $6,056,003 for the three months ended
June 30, 2001 from $2,190,132 for the three months ended June 30, 2000.
The primary reason for this increase relates to expanded marketing efforts,
additional personnel and bad debt expense in the amount of approximately
$2.8 million. Between the period of April 2001 to July 2001, we eliminated
approximately 40% of the work force. These costs are expected to decrease
in the subsequent quarters until additional personnel are needed to
support increased revenue and additional financing has been obtained. The
increase in the bad debt expense is the result of unpaid receivables
related to certain contracts that were acquired from World Access
Telecommunications Group ("World Access"). We believe that as a result
of the representations and warranties made by World Access, that the
amounts related to these contracts will ultimately be recovered. Currently,
World Access is in bankruptcy, however, through the Asset Purchase
Agreement, we have the right to offset amounts against the $2.1 million
note payable to World Access.
Depreciation and amortization costs increased to $1,587,802 for the
three months ended June 30, 2001 from $474,865 for the three months ended
June 30, 2000. Depreciation consists primarily of the depreciation of our
IP gateways and other telecommunication 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. Amortization expense consists of the amortization
of goodwill from the acquisitions of Enhanced Communications and Synetric.
We amortize goodwill related to these acquisitions over a period of ten
years.
In the second quarter of 2001, we wrote-off $5,791,176 in goodwill
related to the acquisition of Enhanced Communications. Management believes
this write-down was necessary as a result of several of the acquired
customers being turned-off for non-payment.
Net interest expense increased to $717,078 for the three months ended
June 30, 2001 from $210,372 for the three months ended June 30, 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.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED
JUNE 30, 2000
Revenue increased to $21,201,832 for the six months ended June 30,
2001 from $5,706,799 for the six months ended June 30, 2000. The increase
is primarily a result of the acquisition of Enhanced Communications and the
acquisition of Synetric. Of revenue generated in for the six months ended
June 30, 2001, revenue from wholesale voice sales accounted for
approximately 94%. The remainder was the result of equipment sales,
installation and consulting revenues. We expect our wholesale revenue to
continue to remain stable, as we aggressively grow our enterprise revenue.
The focus on the wholesale revenue gives us the ability to cover our
network costs while we grow our enterprise revenue. The enterprise market
will primarily consist of large corporate customers interested in converged
IP telephony products.
-17-
Total direct costs increased to $16,891,964 for the six months ended
June 30, 2001 from $5,571,932 for the six months ended June 30, 2000. The
increase of costs is a direct result of the increase in revenue. As of
June 30, 2001, we have stopped the expansion of our IP network into
additional markets and have begun grooming the network to cut costs.
Assuming we can obtain funding, we expect our network costs to decrease as
a percentage of revenue in the subsequent quarters.
General and administrative costs, excluding depreciation and
amortization expense, increased to $9,710,001 for the six months ended
June 30, 2001 from $3,260,400 for the six months ended June 30, 2000. The
primary reason for this increase relates to expanded marketing efforts,
additional personnel and bad debt expense in the amount of approximately
$3.2 million. Between the period of April 2001 to July 2001, we eliminated
approximately 40% of the work force. These costs are expected to decrease
in the subsequent quarters until additional personnel are needed to support
increased revenue and additional financing has been obtained. The increase
in the bad debt expense is a result of unpaid receivables related to certain
contracts that were acquired from World Access. We believe that as a
result of representations and warranties made by World Access that the
amounts related to these contracts will ultimately be recovered. Currently,
World Access is in bankruptcy, however, through the Asset Purchase
Agreement, we have the right t offset amounts against the $2.1 million note
payable to World Access.
Depreciation and amortization costs increased to $3,094,391 for the
six months ended June 30, 2001 from $872,115 for the six months ended June
30, 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. Amortization expense consists of the amortization of goodwill
from the acquisitions of Enhanced Communications and Synetric.
In the second quarter of 2001, we wrote-off $5,791,176 in goodwill
related to the acquisition of Enhanced Communications. Management believes
this write-down was necessary as a result of several of the acquired
customers being turned-off for non-payment.
Net Interest expense increased to $1,271,608 for the six months ended
June 30, 2001 from $514,976 for the six months ended June 30, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 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 payments for the six months
ended June 30, 2001. As of June 30, 2001, the Company had accrued interest
of approximately $1.1 million related to this credit facility. 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 due to Cisco as a current
obligation as of June 30, 2001.
On July 9, 2001, the Company entered into a letter of intent with
Cisco Systems Capital Corporation ("Cisco") to restructure the $25.0
million credit facility. The new terms include reducing the outstanding
principle and interest balance to $11.0 million, a fixed interest rate of
10%, and removal of all financial covenants. The Company will be required
to issue 2.0 million warrants for common stock, at a twenty (20) day moving
average strike
-18-
price. The Company will also be required raise at least $5.0 million of
equity and pay Cisco $1.5 million within forty-five (45) days of the letter
of intent. Currently, the Company has not raised the additional equity and
does not have the ability to pay the $1.5 million to execute the letter of
intent.
As of June 30, 2001, we had approximately $715,000 in cash and cash
equivalents and a working capital deficit of approximately $ 33.4 million.
Unless, the Company is able to obtain significant financing before August
2001, the Company may not be able to continue its operations.
Our operating activities used cash of approximately $2.8 million for
the six months ended June 30, 2001, compared to approximately $2.1 million
for the six months ended June 30, 2000. Our cash used in operating
activities was principally a result of our losses. Cash used in investing
activities for the six months ended June 30, 2001 was approximately $2.6
million and cash used in investing activities was approximately $8.2
million for the six months ended June 30, 2000. Our cash used in investing
activities was for the purchase of telecommunications equipment. Our
financing activities provided cash of approximately $1.9 million and
approximately $14.3 million for the six months ended June 30, 2001 and
2000, respectively. The principal source of the cash provided was
borrowing from the Cisco facility.
Funding of our future capital requirements will depend on finding
additional financing and revenue growth.
Our current cash flow from operations and our current cash position is
not sufficient to meet our working capital needs through the next quarter.
Accordingly, we have been seeking additional financing. There can be no
assurance that we will have sufficient capital to continue as a going
concern beyond August 2001. We have discussed the possibilities of seeking
Chapter 11 protection under bankruptcy law, if additional funding cannot
be obtained.
-19-
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 other then in the normal course
of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
There were no changes in securities.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
As of June 30, 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 payments for the six months
ended June 30, 2001. As of June 30, 2001, the Company had accrued interest
of approximately $1.1 million related to this credit facility. 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 June 30, 2001.
On July 9, 2001, the Company entered into a letter of intent with
Cisco Systems Capital Corporation ("Cisco") to restructure the $25.0
million credit facility. The new terms include reducing the outstanding
principle and interest balance to $11.0 million, a fixed interest rate of
10%, and removal of all financial covenants. The Company will be required
to issue 2.0 million warrants for common stock, at a twenty (20) day moving
average strike price. The Company will also be required to raise at least
$5.0 million of equity and pay Cisco $1.5 million within forty-five (45)
days of the letter of intent. Currently, the Company has not raised the
additional equity and does not have the ability to pay the $1.5 million to
execute the letter of intent.
-20-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the period subject to this Quarterly Report on Form 10-Q, the
annual shareholder's meeting was held on May 23, 2001. The following
matters were voted upon:
1. Election of Directors.
Name Votes for Votes against Abstained
Jeff Rothell 13,911,968 10,454 16,196
Garth Cook 13,627,519 294,903 16,196
William Bedri 13,909,968 12,454 16,196
Roger Clark 13,864,718 57,704 16,196
Gregory Somers 13,827,518 94,904 16,196
Mr. Spencer Grimes continues to serve as a Director of the
Registrant's Board in accordance with the terms of the Series A Preferred
Stock Purchase Agreement, as amended.
2. Proposal to amend the Company's 2000 Stock Option Plan to increase the
number of shares available for issuance under the plan by an aggregate
of 500,000 shares to 2,500,000.
Votes for Votes against Abstained
13,701,950 228,468 8,200
3. To ratify the appointment of Deloitte & Touche LLP, independent
accountants, for the Company for the fiscal year ending December 31,
2001.
Votes for Votes against Abstained
13,671,032 261,881 5,705
ITEM 5. OTHER INFORMATION.
Not applicable.
-21-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
(1) On June 4, 2001, we filed a Form 8-K (pursuant to Item 5) in
connection with the election of members of the Board of
Directors.
-22-
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: August 20, 2001 By: /s/ JEFFREY ROTHELL
-----------------------------------
Jeffrey Rothell, President, Chief
Executive Officer
Date: August 20, 2001 By: /s/ GARTH COOK
-----------------------------------
Garth Cook, Treasurer, Chief Financial
Officer and Chief Accounting Officer
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