Attached files
file | filename |
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EX-32.2 - InterMetro Communications, Inc. | ex32-2.htm |
EX-31.2 - InterMetro Communications, Inc. | ex31-2.htm |
EX-32.1 - InterMetro Communications, Inc. | ex32-1.htm |
EX-31.1 - InterMetro Communications, Inc. | ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
(MARK
ONE)
|
|
AMENDMENT No. 1 TO | |
x
|
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended September 30, 2009
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|
OR
|
|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
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For
the transition period from ______________ to
______________
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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, Including
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 o Accelerated
Filer o Non-accelerated
filer o 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 November 19, 2009 there were 70,951,401 shares outstanding of the
registrant’s only class of common stock.
Explanatory
Paragraph
This
Amendment No. 1 on Form 10-Q/A (this “Amendment”) to the Company’s Form 10-Q
filed with the Securities and Exchange Commission (the “Commission”) on November
19, 2009 (the “Original Form 10-Q”), is being filed in response to
communications received from the Commission requesting additional disclosure.
Specifically, this Amendment includes additional disclosure in Note 6 in regards
to the default on secured notes. Additional disclosure in Item 2, “Management’s
Discussion and Analysis of Results of Operations and Financial Condition,
Results of Operations for the Nine Months Ended September 30, 2009 and
2008” quantifies the metrics related to the decrease in revenue
between the periods presented. Additional disclosure in “Liquidity
and Capital Resources” and Note 1 discusses in more detail Management’s plans
for navigating challenges related to funding continuing operations. In addition,
the “Contractual Obligations” disclosure has been updated to include language
regarding the Company’s default on debt to secured note holders.
For the
purpose of this Amendment, except as stated herein, no other revisions are being
made in the Original Form 10-Q and no attempt has been made in this
Amendment to modify or update other disclosures as presented in the Original
Form 10-Q.
TABLE OF CONTENTS
Part
I. Financial Information
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Item
1.
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2
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2
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3
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4
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5
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6
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Item
2.
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19
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Item
3.
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29
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Item
4T.
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29
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Part
II. Other Information
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Item
1.
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30
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Item
1A.
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Risk Factors | |
Item
2.
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30
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Item
3.
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Defaults Upon Senior Securities | |
Item
4.
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30
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Item
5.
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30
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Item
6.
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30
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31
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PART
I - FINANCIAL INFORMATION
Item 1. Financial
Statements
INTERMETRO COMMUNICATIONS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars
in Thousands, except par value)
September
30,
2009
|
December
31,
2008
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Cash
|
$ | 70 | $ | 171 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $252 and $125 at
September 30, 2009 and December 31, 2008, respectively
|
2,874 | 2,333 | ||||||
Deposits
|
145 | 150 | ||||||
Other
current assets
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235 | 101 | ||||||
Total
current assets
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3,324 | 2,755 | ||||||
Property
and equipment, net
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102 | 377 | ||||||
Goodwill
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900 | 900 | ||||||
Other
intangible assets
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55 | 82 | ||||||
Other
long-term assets
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2 | 36 | ||||||
Total
Assets
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$ | 4,383 | $ | 4,150 | ||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||||||
Accounts
payable net of dispute reserve of $4,150 and $3,402 at September 30, 2009
and December 31, 2008, respectively
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$ | 13,375 | $ | 10,395 | ||||
Accrued
expenses, $1,155 and $1,170 in default at September 30, 2009 and December
31, 2008, respectively
|
4,173 | 4,049 | ||||||
Bank
overdraft
|
256 | 562 | ||||||
Deferred
revenues and customer deposits
|
703 | 602 | ||||||
Note
payable to equipment leasing vendor
|
291 | — | ||||||
Borrowings
under line of credit facilities net of debt discount of $115 and $487 at
September 30, 2009 and December 31, 2008, respectively
|
2,657 | 2,112 | ||||||
Amount
due to former ATI shareholder (in default)
|
75 | 75 | ||||||
Capital
lease obligations
|
— | 133 | ||||||
Advances
from related parties
|
— | 310 | ||||||
Secured
promissory notes, including $875 and $500 from related parties net of debt
discount of $8 and $392 at September 30, 2009 and December 31, 2008,
respectively (in default)
|
2,375 | 1,528 | ||||||
Liability
for common stock put feature
|
288 | — | ||||||
Liability
for warrant put feature
|
437 | 250 | ||||||
Total
current liabilities
|
24,630 | 20,016 | ||||||
Liability
for warrant put feature
|
— | 78 | ||||||
Total
liabilities
|
24,630 | 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 September 30, 2009 and December 31,
2008
|
— | — | ||||||
Common
stock — $0.001 par value; 150,000,000 shares authorized;
70,951,401
and 65,643,901 shares issued and outstanding at September 30, 2009 and
December 31, 2008, respectively
|
71 | 66 | ||||||
Additional
paid-in capital
|
28,662 | 28,333 | ||||||
Accumulated
deficit
|
(48,980 | ) | (44,343 | ) | ||||
Total
stockholders’ deficit
|
(20,247 | ) | (15,944 | ) | ||||
Total
Liabilities and Stockholders’ Deficit
|
$ | 4,383 | $ | 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
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenues
|
$ | 5,162 | $ | 6,402 | $ | 16,776 | $ | 18,930 | ||||||||
Network
costs
|
4,187 | 5,799 | 13,454 | 17,545 | ||||||||||||
Gross
profit
|
975 | 603 | 3,322 | 1,385 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Sales
and marketing (includes stock based compensation of $11 for
each of the three months ended September 30, 2009 and 2008, respectively
and $33 and $32 for each of the nine months ended September 30, 2009 and
2008, respectively)
|
540 | 438 | 1,645 | 1,316 | ||||||||||||
General
and administrative (includes stock based compensation of $49 and $74 for
the three months ended September 30, 2009 and 2008, respectively and $147
and $233 for the nine months ended September30, 2009 and 2008,
respectively.)
|
1,268 | 1,337 | 3,880 | 4,188 | ||||||||||||
Total
operating expenses
|
1,808 | 1,775 | 5,525 | 5,504 | ||||||||||||
Operating
loss
|
(833 | ) | (1,172 | ) | (2,203 | ) | (4,119 | ) | ||||||||
Interest
expense, net (includes amortization of debt discount of $145
and $273 for the three months ended September 30, 2009 and 2008,
respectively and $1,305 and $628 for the nine months ended September 30,
2009 and 2008, respectively)
|
543 | 648 | 2,458 | 1,551 | ||||||||||||
Gain
on forgiveness of debt
|
— | — | (24 | ) | (92 | ) | ||||||||||
Net
loss
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$ | (1,376 | ) | $ | (1,820 | ) | $ | (4,637 | ) | $ | (5,578 | ) | ||||
Basic
and diluted net loss per common share
|
$ | (0.02 | ) | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.09 | ) | ||||
Shares
used to calculate basic and diluted net loss per common share (in
thousands)
|
70,951 | 61,438 | 67,901 | 60,335 |
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
|
Additional
|
Total
|
||||||||||||||||||
Shares
|
Amount
|
Paid-In
Capital
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Accumulated
Deficit
|
Stockholders’
Deficit
|
||||||||||||||||
Balance
at January 1, 2009
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65,643,901 | $ | 66 | $ | 28,333 | $ | (44,343 | ) | $ | (15,944 | ) | |||||||||
Amortization
of stock-based compensation
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— | — | 180 | — | 180 | |||||||||||||||
Cashless
warrants exercise relating to secured promissory notes
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5,227,500 | 5 | (5 | ) | — | — | ||||||||||||||
Warrant
issuance
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— | — | 75 | — | 75 | |||||||||||||||
Reclassification
of warrants put liability to equity
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— | — | 78 | — | 78 | |||||||||||||||
Stock
issued to equipment vendor
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50,000 | — | — | — | — | |||||||||||||||
Stock
issued to consultant
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30,000 | — | 1 | — | 1 | |||||||||||||||
Net
loss for the nine months ended September 30, 2009
|
— | — | — | (4,637 | ) | (4,637 | ) | |||||||||||||
Balance
at September 30, 2009
|
70,951,401 | $ | 71 | $ | 28,662 | $ | (48,980 | ) | $ | (20,247 | ) |
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)
Nine
Months Ended September 30,
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||||||||
2009
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2008
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|||||||
Cash
flows from operating activities:
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|
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||||||
Net
loss
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$ | (4,637 | ) | $ | (5,578 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
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303 | 524 | ||||||
Stock
based compensation
|
180 | 265 | ||||||
Amortization
of debt discount
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1,305 | 628 | ||||||
Stock
issuance for consulting
|
— | 100 | ||||||
Provision
for doubtful accounts
|
147 | — | ||||||
Gain
on forgiveness of debt
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(24 | ) | (92 | ) | ||||
(Increase)
decrease in assets:
|
||||||||
Accounts
receivable
|
(688 | ) | (381 | ) | ||||
Deposits
|
— | 30 | ||||||
Other
current assets
|
(134 | ) | (81 | ) | ||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
payable
|
3,236 | 1,662 | ||||||
Accrued
expenses
|
123 | 307 | ||||||
Deferred
revenues and customer deposits
|
101 | 281 | ||||||
Net
cash used in operating activities
|
(88 | ) | (2,335 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
— | (33 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from secured notes
|
— | 1,320 | ||||||
Proceeds
from line of credit
|
175 | 1,969 | ||||||
Payment
of amounts to related party
|
— | (140 | ) | |||||
Advances,
including $65 from related parties
|
152 | — | ||||||
Bank
overdraft
|
(306 | ) | 91 | |||||
Principal
payments on capital lease note payable
|
(34 | ) | (102 | ) | ||||
Net
cash provided by (used in) financing activities
|
(13 | ) | 3,138 | |||||
Net
increase (decrease) in cash
|
(101 | ) | 770 | |||||
Cash
at beginning of period
|
171 | 277 | ||||||
Cash
at end of period
|
$ | 70 | $ | 1,047 |
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 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 and nine months period ended
September 30, 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 $4,637,000 and $5,578,000 for the nine months
ended September 30, 2009 and 2008, respectively. In addition, the
Company had total stockholders’ deficit of $20,247,000 and a working capital
deficit of $21,306,000 as of September 30, 2009. The Company
anticipates it will not have sufficient cash flows to fund its operations
through early 2010 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 $2,575,000. At
September 30, 2009, the Company had borrowed $2,575,000. These
agreements include financial and other covenants that the Company will need to
maintain beginning in October 2009. 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. In
regards to vendor disputes and lawsuits, the Company is actively engaging to
settle disputes and legal cases when appropriate and believes substantial
progress will be made in early 2010 toward resolution of outstanding issues with
vendors.
Management
believes that the 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 in the period from November 2008 to
February 2009 an additional $462,500 pursuant to short-term loan and security
agreement with individual investors. The terms of the secured notes are 18
months maturity (beginning in February 28, 2010 and July 15, 2010 for the
short-term loan and security agreement) 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. Though not yet due, the secured notes are
technically in default as the Company is not in compliance with certain
covenants. The Company and note holders are working constructively
and no “notice of default” or “cure period” processes have thus far been
invoiced. In addition, the Company entered into a revolving credit
agreement with Moriah, effective on April 30, 2008 (See Note 9) and expiring on
January 31, 2010, pursuant to which the Company could access funds up to
$2,575,000. Management does not expect additional increases to this
line of credit will be available. There can be no assurance that the Company
will be successful in completing any required financings 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 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. The Company is working through a debt
and obligations restructuring plan which includes negotiations with certain
vendors that may result in the issuance of shares of the Company’s common stock
and/or extended installment payments as consideration for cancellation or
reduction of some of the outstanding obligations. As part of this
plan, the Company is working with existing shareholders and potential new
investors on a modest round of equity-based financing available to accredited
investors and contingent upon a series of successful debt reduction
negotiations. The Company has developed this plan regarding proposed debt to
equity conversions and use of proceeds for the potential infusion of capital
which is being disseminated among the Company’s shareholders and other
prospective investors. Management is working with its historical vendors in
order to secure the continued extension of the credit required to operate until
such time that management’s working capital plan can be executed. Management
believes that, though cash flows from operations may fund current operations,
the debt conversions and additional infusion of capital presently being pursued
are integral to management’s plan to retire past due obligations and be
positioned for growth. No assurance can be given, however, that the Company
could obtain such financing on terms favorable to the Company or at all. Should
the Company be unsuccessful in this financing attempt, material adverse
consequences to the company could occur. 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 $127,000 was recorded in the nine months ended
September 30, 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 $3,000 for each of the three
months ended September 30, 2009 and 2008 and $3,000 and $5,000 for the nine
months ended September 30, 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. During the third quarter
of 2009, the Company’s management prepared a discounted cash flow projection for
the next five years to support the continuing value of the recorded Goodwill. At
September 30, 2009, management does not believe there is any 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 no customer which accounted for more than 10% of net revenue for the
three and nine months ended September 30, 2009 and 2008.
Two and
one customer had an outstanding accounts receivable balance which accounted for
37% and 21% of the total accounts receivable at September 30, 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 potential 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.
Recently Adopted 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”). SFAS No. 160 amends ARB No. 51 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 Company adopted SFAS No. 160 on January 1,
2009. The adoption of SFAS No. 160 did not have any impact on the
Company’s consolidated financial statements.
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.
In
May 2008, the FASB issued Statement of Financial Accounting Standards
No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
No. 162”). SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. SFAS No. 162 became effective on
November 15, 2008. The adoption of SFAS No. 162 did not have any
impact on the Company’s financial statement presentation or
disclosures.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No.
165”). SFAS No. 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued. SFAS No. 165 also sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. SFAS No. 165 is effective for interim or annual financial periods
ending after June 15, 2009, and shall be applied prospectively. The
Company adopted SFAS No. 165 on June 30, 2009. Accordingly,
subsequent events have been evaluated through November 19, 2009.
In June
2009, FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162” (“SFAS No. 168”). SFAS No.168 establishes the “FASB
Accounting Standards Codification, (“Codification”) which will become the source
of authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-SEC accounting literature which is not grandfathered or
not included in the Codification will no longer be authoritative. Once the
Codification is in effect, all of its content will carry the same level of
authority. SFAS No. 168 will be effective for financial statements for interim
or annual reporting periods ending after September 15, 2009. The adoption of
SFAS No. 168 on September 30, 2009 did not have any impact on the Company’s
financial statement presentation or disclosures.
Management
does not believe that any other recently issued, but not yet effective,
accounting standards or pronouncements, if currently adopted, would have a
material effect on the Company’s consolidated financial statements.
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 September 30, 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 full payment
of the contingent consideration. During the third quarter of 2009, the President
of ATI departed from The Company.
3
— Other Current Assets
The
following is a summary of the Company’s other current assets (in
thousands):
|
September
30,
2009
|
December 31,
2008
|
||||||
(unaudited)
|
||||||||
Employee
advances
|
$ | 44 | $ | 40 | ||||
Deferred
loan costs
|
14 | — | ||||||
Prepaid
expenses
|
177 | 61 | ||||||
Other
current assets
|
$ | 235 | $ | 101 |
4
— Property and Equipment
The
following is a summary of the Company’s property and equipment (in
thousands):
|
September
30,
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
|
(3,522 | ) | (3,247 | ) | ||||
Property
and equipment, net
|
$ | 102 | $ | 377 |
Depreciation
expense included in network costs was $88,000 and $111,000 for the three months
ended September 30, 2009 and 2008, respectively and $265,000 and $479,000 for
the nine months ended September 30, 2009 and 2008, respectively. Depreciation
and amortization expense included in general and administrative expenses was
$3,000 and $4,000 for the three months ended September 30, 2009 and 2008,
respectively and $10,000 and $18,000 for the nine months ended September 30,
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 September 30, 2009, the Company had purchased telecommunications equipment
under this agreement totaling $1,439,222, of which approximately $371,000 and
$386,000 remained to be paid at September 30, 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 September 30, 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 10, the
Company was sued by Cantata for breach of contract and lack of
payment. As of September 30, 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 nine months ended September 30,
2009. Approximately $291,000 is outstanding at September 30,
2009.
5
— Accrued Expenses
The
following is a summary of the Company’s accrued expenses (in
thousands):
September
30,
2009
|
December 31,
2008
|
|||||||
(unaudited)
|
||||||||
Amounts
due under equipment agreements (in default)
|
$ | 1,155 | $ | 1,170 | ||||
Commissions,
network costs and other general accruals
|
1,225 | 1,798 | ||||||
Deferred
payroll and other payroll related liabilities
|
546 | 503 | ||||||
Interest
due on convertible promissory notes and other debt
|
991 | 315 | ||||||
Payments
due to third party providers
|
256 | 263 | ||||||
Accrued
expenses
|
$ | 4,173 | $ | 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
during the nine months ended September 30, 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. On July 15, 2009, the
Company entered into an Extension Agreement (“July Agreement”) with the advance
lenders. Per the July Agreement, the maturity date of the loans was
extended from July 15, 2009 to July 15, 2010. The notes continue to accrued
interest at 13% per annum. In connection with the extension,
1,920,000 warrants, one warrant per dollar invested were issued. The
warrants were valued at $5,000 at date of grant using the Black-Scholes
valuation model. The July Agreement also lowered the conversion price
of the note from $1.00 to $0.50 per share of the Company’s common
stock. If the Company obtains new investment capital or financing
totaling $5 million prior to July 15, 2010, a portion of the proceeds must be
used to pay any accrued interest on the notes. Furthermore, the term of
1,200,000 previously issued outstanding warrants was extended by one additional
year to expire on February 1, 2015.
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.
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.
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 during the nine
months ended September 30, 2009 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
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 $288,000 of interest expense from the amortization of this debt
discount in the nine months ended September 30, 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-Scholes
formula.
In
November and December 2008, two related party secured note holders advanced an
additional $310,000 and during the nine months ended September 30, 2009 there
were advances of an additional $152,500 from existing note holders, including
$65,000 from related parties, paying 13% interest per annum. On June
12, 2009, the Company entered into a Short Term Loan and Security Agreement
(“June Agreement”) with the advance lenders. Per the June Agreement,
the maturity date of the loans was extended from June 30, 2009 to February 28,
2010. The notes continue to accrued interest at 13% per annum. In
connection with the extension, 925,000 initial warrants, two warrants per dollar
invested and 462,500 additional warrants, one warrant per dollar
invested (collectively, the “Warrants”) were issued. The
warrants were valued at $5,000 at date of grant using the Black-Scholes
valuation model.
As
was the case for the January 16, 2008 secured promissory note warrants discussed
in detail in the preceding paragraphs, the provisions of the Warrants included
reference payments. The Company elected to make the reference
payments by offering one share of common stock per warrant, or 1,387,500 shares
of common stock.
The total
expense recorded by the Company for amortization of the debt discount related to
all warrants was $54,000 and $170,000 for the three months ended September 30,
2009 and 2008, respectively and $682,000 (including additional expense related
to fully amortizing the original debt discount) and $403,000 for the nine months
ended September 30, 2009 and 2008, respectively. As of September 30,
2009, the net amount of the notes was $2,375,000.
At
September 30, 2009, the Company was in default of certain covenants contained
within the secured notes and short term loan and security agreements. Though
these secured notes are not yet due, they are in ‘technical default’ as the
Company is not in compliance with certain covenants related to indebtedness to
vendors. The Company is in the process of negotiating with these
vendors in regards to said past due balances. The Company
and note holders are working constructively and ‘notice of default’ and ‘cure
period’ processes have thus far not been invoked.
7
— Common and Preferred Stock
Common Stock - As
of September 30, 2009, the total number of authorized shares of
common stock, par value $0.001 per share, was 150,000,000 of which 70,951,401
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. On November 19, 2009, the
Company filed its Certificate of Designation (“C.D.”) and designated a Series A
Preferred stock by resolution of the board of directors. The C.D.
authorized the sale of 250,000 shares of Series A preferred stock at $1.00 per
share, with additional rights, preferences, restrictions and privileges as filed
with the Nevada Secretary of State.
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
September 30, 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 September 30, 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 and an
additional 523,734 expired during the year ended December 31,
2008. 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, 2,772,670 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 nine
months ended September 30, 2009.
The
following presents a summary of activity under the Company’s 2004 and 2007 Plans
for the nine months ended September 30, 2009 (unaudited):
Number
of
Shares
|
Price
per
Share
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||||||||||||
Options
outstanding at December 31, 2008
|
6,600,688 | $ | — | $ | 0.21 | 7.16 | $ | 0.0 | ||||||||||||
Granted
|
— | — | — | |||||||||||||||||
Exercised
|
— | — | — | |||||||||||||||||
Forfeited/expired
|
— | — | — | |||||||||||||||||
Options
outstanding at September 30, 2009
|
6,600,688 | 0.21 | 6.41 | 0.0 | ||||||||||||||||
Options
vested and expected to vest in the future at September 30,
2009
|
6,600,688 | 0.21 | 6.41 | 0.0 | ||||||||||||||||
Options
exercisable at September 30, 2009
|
5,901,912 | 0.21 | 6.23 | 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 nine month period ended September 30, 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
September 30, 2009.
Additional
information with respect to the outstanding options at September 30, 2009 is as
follows:
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
Average
|
Weighted
|
|||||||||||||||||||||
Remaining
|
Average
|
Weighted
|
||||||||||||||||||||
Number
|
Contractual
|
Exercise
|
Number
|
Average
|
||||||||||||||||||
Exercise
Prices
|
of
Shares
|
Life
(in Years)
|
Price
|
of
Shares
|
Exercise
Price
|
|||||||||||||||||
$ | 0.04 | 1,478,748 | 4.25 | $ | 0.04 | 1,478,747 | $ | 0.04 | ||||||||||||||
0.04 | 154,038 | 4.50 | 0.04 | 154,038 | 0.04 | |||||||||||||||||
0.04 | 431,307 | 4.75 | 0.04 | 431,307 | 0.04 | |||||||||||||||||
0.04 | 123,231 | 5.25 | 0.04 | 123,231 | 0.04 | |||||||||||||||||
0.22 | 277,269 | 6.00 | 0.22 | 277,269 | 0.22 | |||||||||||||||||
0.25 | 2,950,000 | 8.00 | 0.25 | 2,278,335 | 0.25 | |||||||||||||||||
0.27 | 338,884 | 6.00 | 0.27 | 338,884 | 0.27 | |||||||||||||||||
0.41 | 643,880 | 6.25 | 0.41 | 623,240 | 0.41 | |||||||||||||||||
0.81 | 110,908 | 6.25 | 0.81 | 104,438 | 0.81 | |||||||||||||||||
0.97 | 92,423 | 6.50 | 0.97 | 92,423 | 0.97 | |||||||||||||||||
6,600,688 | 5,901,912 |
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
September 30, 2009, there was $41,000 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 1.3 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. See Note 6 for
warrants issued in connection with secured promissory notes and Note 9 for
warrants issued in connection with a line of credit. In the nine
months ended September 30, 2009, 500,000 five year warrants with an exercise
price of $0.50 were granted to a consultant and ascribed a value of $1,000 using
the Black-Scholes valuation model. In the nine months ended September
30, 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. Borrowings under these lines of credit amounted to
approximately $197,000 at September 30, 2009.
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, No. 2 and
No. 3 to the Agreements and then was increased to $2,575,000 per an overadvance
in Amendment No. 4. (the “Amendments), $25,000 of the overadvance was due and
payable on July 31, 2009 and has not been paid as of September 30,
2009.
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 decreased to 120% of eligible accounts, from January 16, 2009 through May
1, 2009 decreased to 110% of the eligible accounts, from May 1, 2009 to July 31,
2009 increased to 120% of eligible accounts, from August 1, 2009 to September
30, 2009 decreases to 100% and thereafter decreases to
85%. As of June 30, 2009, the Company has borrowed
$2,575,000. 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 beginning in October 2009, 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. Also per the Amendments, the term of the agreements has
been extended from April 30, 2009 to January 31, 2010.
Annual
interest on the credit facility 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 is payable in arrears prior to the maturity date, on the first business
day of each calendar month, and in full on January 31, 2010. (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.
Pursuant
to Amendment No. 4 dated May 22, 2009, effective as of April 30, 2009, Moriah
received 1,000,000 seven year warrants with an exercise price of $0.01. The
warrants were valued using the Black-Scholes option-pricing model using
assumptions in the table below. The value associated with the
1,000,000 warrants was $45,000 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. The put option
liability was increased to $437,500 and the $187,500 increase in the liability
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. In addition, Amendment No. 4 reduced the exercise price
per share of the previous 6,000,000 warrants from $1.00 to $0.25. The
6,000,000 warrants had been fully amortized as of April 30, 2009 and no
additional value was ascribed to them based on the re-pricing at April 30,
2009.
The
expense recognized by the Company in the three months ended September 30, 2009
and 2008 from the amortization of the debt discount was $91,000 and $103,000
respectively and $623,000 and $224,000 for the nine months ended September 30,
2009 and 2008, respectively. The Company calculated the fair value of
the warrants using the following assumptions:
June
30, 2008
|
September
30, 2008
|
December
31, 2008
|
September
30, 2009
|
|||||||||||||
Risk-free
interest rate
|
2.63 | % | 2.42 | % | 1.63 | % | 0.9 | % | ||||||||
Expected
lives (in years)
|
3.5
years
|
3.5
years
|
3.5
years
|
3.5
years
|
||||||||||||
Dividend
yield
|
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Expected
volatility
|
74.0 | % | 74.0 | % | 74.0 | % | 74.0 | % | ||||||||
Forfeiture
rate
|
0 | % | 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
$437,500 at any time during the 30 day period commencing on the earlier of the
prepayment in full of all loans or January 31, 2010. 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 $437,500
as of September 30, 2009.
10
— Commitments and Contingencies
Vendor Agreements – The
Company has entered into agreements with its network 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 September 30,
2009, there were approximately $4.1 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 June 30, 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. The Company has received notice of default dated August 12,
2009 threatening, among other things, a rescission of the $1.4 million
credit. The Company began negotiations towards a new business
relationship and new agreement that is not currently formalized. 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 could cause a cessation of the Company’s
business. Management believes that it will be successful in
retaining the $1.4 million credit.
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 September 30, 2009, is
$300,000 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.
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 September 30,
2009. The Company has filed a counterclaim against Cantata and a
third party claim against its parent company, Dialogic. 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 September 30, 2009, there are approximately $1.2
million of charges that the Company disputes. As of September 30, 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.
The
Company settled separate lawsuits with two former employees during the nine
months ended September 30, 2009 for an aggregate amount of
$382,000. The settlement amount is payable in monthly installments of
approximately $11,000. Included in accrued expense as of September
30, 2009 is $253,000 on account of these settlements.
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 $350,000.
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 and
recently executed an agreement. 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 has not
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 has transfered 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 September 30, 2009 for unpaid amounts.
11
— Income Taxes
At
September 30, 2009, the Company had net operating loss carryforwards to offset
future taxable income, if any, of approximately $20.3 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):
September
30,
2009
|
December 31,
2008
|
|||||||
(unaudited)
|
||||||||
Current
assets and liabilities:
|
|
|
||||||
Current
assets and liabilities:
|
|
|
||||||
Deferred
revenue
|
$ | (8 | ) | $ | 20 | |||
Bad
Debt
|
127 | — | ||||||
Accrued
expenses
|
123 | 335 | ||||||
242 | 355 | |||||||
Valuation
allowance
|
(242 | ) | (355 | ) | ||||
Net
current deferred tax asset
|
$ | — | $ | — | ||||
Non-current
assets and liabilities:
|
||||||||
Depreciation
and amortization
|
$ | 28 | $ | 31 | ||||
Net
operating loss carryforward
|
19,591 | 17,736 | ||||||
19,619 | 17,767 | |||||||
Valuation
allowance
|
(19,619 | ) | (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 Nine Months Ended
September
30,
|
||||||||
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 September 30, 2009.
12
— Cash Flow Disclosures
The table
following presents a summary of the Company’s supplemental cash flow information
(in thousands):
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Cash
paid:
|
||||||||
Interest
|
$ | 310 | $ | 168 | ||||
Non-cash
information:
|
||||||||
Issuance
of common stock for cashless exercise of warrants
|
$ | 5 | $ | 165 | ||||
Note
payable replacing equipment capital leases
|
$ | 329 | $ | — | ||||
Cancellation
of debt due to loan modification
|
$ | — | $ | 600 | ||||
Fair
value of debt discount (net of put liability)
|
$ | 361 | $ | 1,214 | ||||
Reclassification
of warrants put liability to equity
|
$ | 78 | $ | — | ||||
Stock
issued on cashless exercise of common stock purchase
options
|
$ | — | $ | 100 |
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 June 30, 2009, 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 September 30, 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
September
30,
|
||||||||
2009
|
2008
|
|||||||
Net
revenues
|
100 | % | 100 | % | ||||
Network
costs
|
81 | 91 | ||||||
Gross
profit
|
19 | 9 | ||||||
Operating
expenses:
|
||||||||
Sales
and marketing
|
10 | 6 | ||||||
General
and administrative
|
25 | 21 | ||||||
Total
operating expenses
|
35 | 27 | ||||||
Operating
loss
|
(16 | ) | (18 | ) | ||||
Interest
expense
|
11 | 10 | ||||||
Net
loss
|
(27 | )% | (28 | )% |
Net Revenues. Net revenues
decreased $1.2 million, or 19.4%, to $5.2 million for the three months ended
September 30, 2009 from $6.4 million for the three months ended September 30,
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 $1.6 million, or 27.8%, to $4.2 million for the three months ended
September 30, 2009 from $5.8 million for the three months ended September 30,
2008. Included within total network costs, variable network costs
decreased by $1.5 million to $3.7 million (72.8% of revenues) for the three
months ended September 30,2009 from $5.2 million (81.9% of revenues) for the
three months ended September 30, 2008, even as revenues decreased by 19.4% as a
result of increased efficiency in network utilization. Fixed network
costs decreased by $126,000 to $426,000 for the three months ended September 30,
2009 from $552,000 for the three months ended September 30, 2008, with the
decrease coming primarily from the elimination of underutilized network
components that were in operation during three months ended September 30,
2008. There were no significant fixed network expenses added during
the three months ended September 30, 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 18.9% for the three months ended September 30, 2009 from a
gross margin of 9.4% for the three months ended September 30, 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 September 30,
2009 was $88,000 (1.7% of net revenues) as compared to $111,000 (1.7% of net
revenues) for the three months ended September 30, 2008.
Sales and Marketing. Sales
and marketing expenses increased $102,000, or 23.3% to $540,000 for the three
months ended September 30, 2009 from $438,000 for the three months ended
September 30, 2008. Sales and marketing expenses as a percentage of net revenues
were 10.5% and 6.8% for the three months ended September 30, 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 September 30, 2009 and 2008.
General and Administrative.
General and administrative expenses decreased $69,000 or 5.2% and was
approximately $1.3 million for the three months ended September 30, 2009 and
2008. General and administrative expenses as a percentage of net revenues were
24.6% and 20.9% for the three months ended September 30, 2009 and 2008,
respectively. General and administrative expenses included stock-based charges
related to warrants and stock options of $54,000 and $74,000 for the three
months ended September 30, 2009 and 2008, respectively. The company
instituted cost cutting measures during the three months ending September 30,
2009 that have begun to reduce general and administrative expense.
Interest Expense, net.
Interest expense, net decreased $105,000, or 16.2%, to $543,000 for the three
months ended September 30, 2009 from $648,000 for the three months ended
September 30, 2008. Interest expense for the three months ended
September 30, 2009 includes $145,000 from the amortization of debt discount
related to the warrants issued in connection with secured debt as compared to
$273,000 for the three months ended September 30,
2008.
Results
of Operations for the Nine Months Ended September 30, 2009 and 2008
The
following table sets forth, for the periods indicated, the results of our
operations expressed as a percentage of revenue:
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Net
revenues
|
100 | % | 100 | % | ||||
Network
costs
|
80 | 93 | ||||||
Gross
profit
|
20 | 7 | ||||||
Operating
expenses:
|
||||||||
Sales
and marketing
|
10 | 7 | ||||||
General
and administrative
|
23 | 22 | ||||||
Total
operating expenses
|
33 | 29 | ||||||
Operating
loss
|
(13 | ) | (22 | ) | ||||
Interest
expense
|
15 | 8 | ||||||
Net
loss
|
(28 | )% | (30 | )% |
Net Revenues. Net revenues
decreased $2.1 million, or 11.4%, to $16.8 million for the nine months ended
September 30, 2009 from $18.9 million for the nine months ended September 30,
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. In addition, certain technical issues
with network routing caused a temporary drop in revenues in the three months
ended September 30, 2009. The addition of new customers contributed
approximately $1.6 million to revenue in the nine months ended September 30,
2009 with an additional $4.6 million attributable to increasing revenues from
existing customers. These gains were offset by an approximate $8.3 million
decrease in revenue attributable to the loss of customers or decreased revenue
from existing customers.
Network Costs. Network costs
decreased $4.1 million, or 23.3%, to $13.5 million for the nine months ended
September 30, 2009 from $17.6 million for the nine months ended September 30,
2008. Included within total network costs, variable network costs
decreased by $3.6 million to $12.0 million (71.5% of revenues) for the nine
months ended September 30, 2009 from $15.6 million (82.4% of revenues) for the
nine months ended September 30, 2008, even as revenues decreased by 11.4% as a
result of increased efficiency in network utilization. Fixed network
costs decreased by $498,000 to $1.4 million for the nine months ended September
30, 2009 from $1.9 million for the nine months ended September 30, 2008, with
the decrease coming primarily from the elimination of underutilized network
components that were in operation during nine months ended September 30,
2008. There were no significant fixed network expenses added during
the nine months ended September 30, 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 19.8% for the nine months ended September 30, 2009 from a
gross margin of 7.3% for the nine months ended September 30, 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 nine months ended September 30,
2009 was $265,000 (1.6% of net revenues) as compared to $479,000 (2.5% of net
revenues) for the nine months ended September 30, 2008.
Sales and Marketing. Sales
and marketing expenses increased $329,000, or 25.0% to $1.6 million for the nine
months ended September 30, 2009 from $1.3 million for the nine months ended
September 30, 2008. Sales and marketing expenses as a percentage of net revenues
were 9.8% and 7.0% for the nine months ended September 30, 2009 and 2008,
respectively. The increase is attributable to commission programs for
higher margin services.
General and Administrative.
General and administrative expenses decreased $308,000 or 7.4% to $3.9 million
for the nine months ended September 30, 2009 from $4.2 million for the nine
months ended September 30, 2008. General and administrative expenses as a
percentage of net revenues were 23.1% and 22.1% for the nine months ended
September 30, 2009 and 2008, respectively. General and administrative expenses
included stock-based charges related to warrants and stock options of $153,000
and $233,000 for the nine months ended September 30, 2009 and 2008,
respectively. The additional decrease in general and administrative
expenses for the nine months ended September 30, 2009 is primarily attributable
to a reduction in professional service fees and to cost cutting measures the
Company instituted in the three months ended September 30,2009.
Interest Expense, net.
Interest expense, net increased $907,000, or 58.5%, to $2.5 million for the nine
months ended September 30, 2009 from $1.6 million for the nine months ended
September 30, 2008. Interest expense for the nine months ended
September 30, 2009 includes $623,000 from the amortization of debt discount
related to the Moriah credit facility that was not present in the nine month
period ending September 30, 2008. Total interest expense related to
the amortization of debt discount on all secured debt was $1.3 million in the
nine months ended September 30, 2009.
Liquidity
and Capital Resources
At
September 30, 2009, we had $70,000 in cash and a bank overdraft of
$256,000. The Company’s working capital position, defined as current
assets less current liabilities, has historically been negative and was negative
$21.3 million at September 30, 2009 and negative $17.3 million at December 31,
2008. Included in current liabilities at September 30, 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 September 30, 2009 as compared to September 30,
2008:
Net cash
used by operating activities was $88,000 for the nine months ended September 30,
2009 as compared to net cash used in operating activities of $2.3 million for
the nine months ended September 30, 2008. The most significant use of cash in
operating activities was our net loss for the nine months ended September 30,
2009 of approximately $4.6 million. Significant adjustments
increasing cash from operating activities in 2009 were amortization of debt
discount of $1.3 million, an increase in accounts payable and accrued expenses
from December 31, 2008 of $3.4 million and the add-back of non-cash depreciation
and amortization of $303,000. The primary offset that decreased cash provided by
operating activities was an increase in accounts receivable from December 31,
2008 of $688,000.
There
were no purchases of property and equipment in the nine months ended September
30, 2009 as compared to $33,000 in the nine months ended September 30,
2008.
Net cash
used in financing activities for the nine months ended September 30, 2009 was
$13,000 as compared to cash provided by financing activities of $3.1 million for
the nine months ended September 30, 2008. Net cash used in financing activities
for the nine months ended September 30, 2009 included a 306,000 bank overdraft
as a use of funds and $152,000 borrowings from related parties and a $175,000
increase in a line of credit as a source of funds. Net cash provided by
financing activities for the nine months ended September 30, 2008 was primarily
attributable to the receipt of $1.3 million from the issuance of secured notes
and $1.9 million from a new line of credit. This was partially offset
by payments made for capital lease obligations.
The
Company incurred net losses of $4,637,000 and $5,578,000 for the nine months
ended September 30, 2009 and 2008, respectively. In addition, the
Company had total shareholders’ deficit of $20,247,000 and a working capital
deficit of $21,306,000 as of September 30, 2009. The Company
anticipates it will not have sufficient cash flows to fund its operations
through early 2010 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 $2,575,000. At
September 30, 2009, the Company had borrowed $2,575,000. These
agreements include financial and other covenants that the Company will need to
maintain beginning in October 2009. 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. In regards to vendor disputes
and lawsuits, the Company is actively engaging to settle disputes and legal
cases when appropriate and believes substantial progress will be made in early
2010 toward resolution of outstanding issues with vendors.
Management
believes that the 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 in the period from November 2008 to
February 2009 an additional $462,500 pursuant to short-term loan and security
agreement with individual investors. The terms of the secured notes are 18
months maturity (beginning in February 28, 2010 and July 15, 2010 for the
short-term loan and security agreement) 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. Though not yet due, the secured notes are
technically in default as the Company is not in compliance with certain
covenants. The Company and note holders are working constructively
and no “notice of default” or “cure period” processes have thus far been
invoked. In addition, the Company entered into a revolving credit agreement with
Moriah, effective on April 30, 2008 (See Note 9) and expiring on January 31,
2010, pursuant to which the Company could access funds up to
$2,575,000. Management does not expect additional increases to this
line of credit will be available. There can be no assurance that the Company
will be successful in completing any required financings or that it will
continue to expand its revenue. Should the Company be unsuccessful in
this financing attempt or other financings, material adverse consequences to the
Company could occur.
The
Company will be required to obtain other financing 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. The Company is working
through a debt and obligations restructuring plan which includes
negotiations with certain vendors that may result in the issuance of shares of
the Company’s common stock and/or extended installment payments as consideration
for cancellation or reduction of some of the outstanding
obligations. As part of this plan, the Company is working with
existing shareholders and potential new investors on a modest round of
equity-based financing available to accredited investors and contingent upon a
series of successful debt reduction negotiations. The Company has developed this
plan regarding proposed debt to equity conversions and use of proceeds for the
potential infusion of capital which is being disseminated among the Company’s
shareholders and other prospective investors. Management is working with its
historical vendors in order to secure the continued extension of the credit
required to operate until such time that management’s working capital plan can
be executed. Management believes that, though cash flows from operations may
fund current operations, the debt conversions and additional infusion of capital
presently being pursued are integral to management’s plan to retire past due
obligations and be positioned for growth. No assurance can be given, however,
that the Company could obtain such financing on terms favorable to the Company
or at all. Should the Company be unsuccessful in this financing
attempt, material adverse consequences to the Company could
occur. 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, in
November 2008 the Company entered into Amendment No 2 to the agreement which
increased the access to $2.4 million and in May 2009 Amendments No. 3 and No. 4
increased the access to $2.575 million. As of September 30, 2009, the
Company is permitted to borrow an amount not to exceed 100% of its eligible
accounts receivable. As of September 30, 2009, the Company has borrowed
$2.575 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 January 31, 2010. 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 January
31, 2010. Management does not
expect additional increases to this line of credit will be
available. In addition, failure to renew to revolving credit
agreement at January 31, 2010 could have material adverse consequences to the
Company. (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:
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· Significant
underperformance relative to expected historical or projected future
operating results;
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· Significant
changes in the manner of use of the acquired assets or the strategy for
our overall business; and
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· Significant
negative industry or economic
trends.
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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. During the third quarter of 2009, the Company’s
management prepared a discounted cash flow projection for the next five years to
support the continuing value of the recorded Goodwill. As of
September 30, 2009, management does not believe there is any impairment in the
value of Goodwill and intangible assets with indefinite useful
lives.
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 September 30, 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
September 30, 2009 and December 31, 2008, our net operating loss carryforwards
for federal tax purposes were approximately $20.3 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 September 30, 2009, there is
approximately $4.1 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. See Note 10 for information about
contingencies and litigation.
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 September 30, 2009 and an extension on the operating lease for
our corporate offices expired September 30, 2009 and is being renegotiated for a
further extension. 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.
On
September 1, 2009, Mr. Joshua Touber, a member of the Company’s board of
directors, accepted a consulting position with the Company. As a
result, he is no longer considered an “independent” member of the board of
directors and has, consequently, resigned from the audit committee but will
remain as a director on the board.
Though
not yet due, secured notes totaling $2.4 million are technically in default as
the Company is not in compliance with certain covenants. The Company
and note holders are working constructively and notice of default and cure
period processes have not been invoked. The Company does not expect
demand for immediate repayment from the note holders.
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 September 30, 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 September 30, 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
See Note
10 for information about legal proceedings.
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
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3.1*
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Amended
and Restated Articles of Incorporation
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3.3**
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Amended
and Restated Bylaws
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31.1
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31.2
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32.1
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32.2
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*
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Incorporated
by reference to the Schedule 14C Information Statement filed with the
Securities and Exchange Commission dated May 9,
2007.
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**
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Incorporated
by reference to the Form 8K filed with the Securities and Exchange
Commission dated June 28, 2007.
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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.
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Dated:
January 20, 2010
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By:
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\s\
Charles Rice
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Charles
Rice, Chairman of the Board,
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Chief
Executive Officer, and President
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Dated:
January 20, 2010
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By:
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\s\
David Olert
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David
Olert
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Chief
Financial Officer and Director
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