VOICESERVE INC - FORM 10-Q - February 14, 2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

or

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                            to                                            

Commission File Number: 000-51882

VOICESERVE, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
  
98-0597288
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
   
Grosvenor House, 1 High Street
Middlesex
England
  
HA8, 7TA
(Address of principal executive offices)
  
(Zip Code)

Registrant’s telephone number, including area code: 44 208 136 6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes   x    No   o

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   o    No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions 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
 
There were [44,585,198] shares of the Registrant’s Common Stock outstanding at February 13, 2012.

 
 
 
 
VOICESERVE, INC.

QUARTERLY REPORT ON FORM 10-Q
DECEMBER 31, 2011

TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
  
   
PAGE
Item 1.
Financial Statements (Unaudited)
  F-1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  1
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  4
Item 4.
Controls and Procedures
  4
   
PART II - OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
  5
Item 1A.
Risk Factors
  5
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  5
Item 3.
Defaults Upon Senior Securities
  5
Item 4.
(Removed and Reserved)
  5
Item 5.
Other Information
  5
Item 6.
Exhibits
  5
   
SIGNATURES
  6
 
 
 
 
 
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

CERTAIN TERMS USED IN THIS REPORT

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Voiceserve, Inc.  “SEC” refers to the Securities and Exchange Commission.

 
 
 
 
PART I—FINANCIAL INFORMATION

Item 1.
Financial Statements.
 
VOICESERVE, INC. AND SUBSIDIARIES
 Consolidated Balance Sheets
             
   
December 31,
    
March 31,
  
   
2011
    
2011
  
   
(unaudited)
        
Assets
            
             
Current assets:
            
   Cash and cash equivalents
   $ 344,486     $ 141,739  
   Accounts receivable, net of allowance
                
      for doubtful accounts of $25,004 and $6,735, respectively
     210,424       48,769  
   Prepaid expenses and other current assets
     81,101       82,823  
                 
      Total current assets
     636,011       273,331  
                 
Property and equipment, net of accumulated depreciation
                
   of $66,490 and $66,878 respectively
     7,905       10,045  
Intangible assets, net of  accumulated amortization of
                
   $910,417 and $737,917, respectively
     1,952,624       2,125,124  
                 
Total assets
   $ 2,596,540     $ 2,408,500  
                 
Liabilities and Stockholders' Equity
                
                 
Current liabilities:
                
   Accounts payable
   $ 370,471     $ 348,493  
   Accrued expenses payable
     10,655       11,464  
   Deferred software license fees and support
     189,180       188,197  
   Loans payable to related parties
     37,484       38,236  
                 
      Total current liabilities
     607,790       586,390  
   Liability for common stock purchase warrants
     406,158       152,214  
                 
      Total liabilities
     1,013,948       738,604  
                 
Stockholders' equity:
                
   Preferred stock, $.001 par value; authorized
                
      10,000,000 shares, none issued and outstanding
     -       -  
   Common stock, $.001 par value; authorized
                
      100,000,000 shares, issued and outstanding
                
      44,585,198 and 38,354,429 shares, respectively
     44,585       38,354  
   Additional paid-in capital
     6,307,378       5,482,281  
   Deficit
     (4,756,360 )     (3,766,212 )
   Accumulated other comprehensive loss
     (13,011 )     (84,527 )
                 
      Total stockholders' equity
     1,582,592       1,669,896  
                 
Total liabilities and stockholders' equity
   $ 2,596,540     $ 2,408,500  
                 
See notes to consolidated financial statements.
                
 
 
F-1
 
 
VOICESERVE, INC. AND SUBSIDIARIES
  
Consolidated Statements of Operations
  
(Unaudited)
  
                         
   
Three Months
    
Nine Months
  
   
Ended December 31,
    
Ended December 31,
  
   
2011
    
2010
    
2011
    
2010
  
Operating revenues:
                        
   Software license fees
   $ 1,380,418     $ 1,166,175     $ 3,561,386     $ 3,123,386  
   Revenues from communications air time
     (11 )     97,420       535       248,894  
                                 
   Total operating revenues
     1,380,407       1,263,595       3,561,921       3,372,280  
                                 
Cost of operating revenues:
                                
   Software license fees
     710,717       573,494       1,955,267       1,445,912  
   Communications air time
     (3,370 )     109,616       (3,370 )     244,049  
                                 
   Total cost of operating revenues
     707,347       683,110       1,951,897       1,689,961  
                                 
Gross profit
     673,060       580,485       1,610,024       1,682,319  
                                 
Operating expenses:
                                
   Selling, general and administrative  expenses (including stock-based
                                
compensation of $10,569, $11,166, $589,380, and $319,628, respectively)
     652,796       739,065       2,551,701       2,463,181  
                                 
      Total operating expenses
     652,796       739,065       2,551,701       2,463,181  
                                 
Income (loss) from operations
     20,264       (158,580 )     (941,677 )     (780,862 )
                                 
Income (expense) from revaluation of liability for
                                
common stock purchase warrants
     167,989       116,196       (39,822 )     271,170  
Interest income
     23       19       48       23  
Interest expense
     (31 )     (42 )     (51 )     (652 )
                                 
Income (loss) before income taxes
     188,245       (42,407 )     (981,502 )     (510,321 )
                                 
Income taxes
     8,646       -       8,646       -  
                                 
Net income (loss)
   $ 179,599     $ (42,407 )   $ (990,148 )   $ (510,321 )
                                 
Net income (loss) per share
                                
   - basic and diluted
   $ 0.00     $ (0.00 )   $ (0.02 )   $ (0.01 )
                                 
Weighted average number of shares
                                
   outstanding:
                                
   - Basic
     44,585,198       37,914,212       43,153,274       35,551,646  
   - Diluted
     45,209,775       37,914,212       43,153,274       35,551,646  
                                 
See notes to consolidated financial statements.
                                
 
 
F-2
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
                                     
                           
Accumulated
        
   
Common Stock,
    
Additional
          
Other
    
Total
  
   
$.001 par value
    
Paid-In
          
Comprehensive
    
Stockholders'
  
   
Shares
    
Amount
    
Capital
    
Deficit
    
Income (Loss)
    
Equity
  
                                     
Balances,
                                    
   March 31, 2010
     32,402,935     $ 32,403     $ 4,733,537     $ (2,994,155 )   $ (12,112 )   $ 1,759,673  
                                                 
Private placement of shares
                                                
   and warrants,
                                                
   less $89,499 costs and
                                                
   less $457,608
                                                
   attributable to warrants
                                                
   classified as liabilities
     2,760,000       2,760       140,133       -       -       142,893  
                                                 
Shares issued for services
     941,494       941       157,109       -       -       158,050  
                                                 
Shares issued in satisfaction of debt
                                                
and contingent debt due sellers of
                                                
VoipSwitch Inc.
     2,250,000       2,250       279,000       -       -       281,250  
                                                 
Stock options expense
     -       -       172,502       -       -       172,502  
                                                 
Foreign currency
                                                
   translation
                                                
   adjustment
     -       -       -       -       (72,415 )     (72,415 )
                                                 
Net loss
     -       -       -       (772,057 )     -       (772,057 )
                                                 
Balances,
                                                
   March 31, 2011
     38,354,429       38,354       5,482,281       (3,766,212 )     (84,527 )     1,669,896  
                                                 
Unaudited:
                                                
                                                 
Private placement of shares
                                                
   and warrants,
                                                
   less $41,930 costs and
                                                
   less $214,122
                                                
   attributable to warrants
                                                
   classified as liabilities
     3,830,769       3,831       238,117       -       -       241,948  
                                                 
Shares issued to the Company's chairman and
                                          
to the Company's chief executive officer
                                                
 for services
     2,400,000       2,400       429,600       -       -       432,000  
                                                 
                                                 
Stock options expense
     -       -       157,380       -       -       157,380  
                                                 
Foreign currency
                                                
   translation
                                                
   adjustment
     -       -       -       -       71,516       71,516  
                                                 
Net loss
     -       -       -       (990,148 )     -       (990,148 )
                                                 
Balances, December 31, 2011
     44,585,198     $ 44,585     $ 6,307,378     $ (4,756,360 )   $ (13,011 )   $ 1,582,592  
                                                 
See notes to consolidated financial statements.
                                          
 
 
F-3
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
             
   
Nine Months Ended December 31,
  
   
2011
    
2010
  
Cash flows from operating activities:
            
   Net loss
   $ (990,148 )   $ (510,321 )
   Adjustments to reconcile net loss to net
                
      cash used in operating activities:
                
      Stock-based compensation
     589,380       319,628  
      Depreciation
     3,100       7,512  
      Amortization
     172,500       172,500  
      Provision for doubtful accounts
     19,945       55,217  
      (Income) expense from revaluation of liability for common stock purchase warrants
     39,822       (271,170 )
   Changes in operating assets and liabilities:
                
      Accounts receivable, net
     (181,600 )     (163,158 )
      Prepaid expenses and other current assets
     1,722       (76,449 )
      Accounts payable
     21,978       30,510  
      Accrued expenses payable
     (809 )     1,095  
      Deferred software license fees
     983       25,325  
                 
   Net cash used in operating activities
     (323,127 )     (409,311 )
                 
Cash flows from investing activities:
                
   Purchases of property and equipment
             (44,585 )
                 
   Net cash used in investing activities
     -       (44,585 )
                 
Cash flows from financing activities:
                
   Proceeds from sales of common stock, net of offering costs of $41,930 and $89,499,
                
   respectively
     456,070       600,501  
   Increase (decrease) in loans payable to related parties
     (752 )     976  
                 
   Net cash provided by financing activities
     455,318       601,477  
                 
Effect of exchange rate changes on cash and cash equivalents
     70,556       (28,786 )
                 
Increase in cash and cash equivalents
     202,747       118,795  
                 
Cash and cash equivalents, beginning of period
     141,739       218,438  
                 
Cash and cash equivalents, end of period
   $ 344,486     $ 337,233  
                 
Supplemental disclosures of cash flow information:
                
                 
   Interest paid
   $ 51     $ 652  
                 
   Income taxes paid
   $ -     $ -  
                 
Non - cash investing and financing activities:
                
   Shares issued in satisfaction of debt and contingent debt
                
   due 3 sellers of VoipSwitch Inc. (See Note 3):
                
      Debts satisfied in exchange for issuance of restricted common stock:
                
          Contingent consideration remaining due to 3 sellers before agreement to
                
           accept restricted common stock
   $ -     $ 313,000  
          Contingent consideration paid added to goodwill by virtue of issuance
                
           of restricted common stock
   $ -     $ 131,250  
           Notes payable to 3 sellers of VoipSwitch outstanding as debt in financial
                
           statements prior to agreement to accept issuance of restricted common stock
     -       150,000  
                 
            Total
   $ -     $ 281,250  
      Fair value of 2,250,000 shares of restricted common stock issued in exchange
                
      for debts satisfied
   $ -     $ 281,250  
                 
See notes to consolidated financial statements.
                
 
 
F-4
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)


NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

VoiceServe, Inc. (“VoiceServe”) was incorporated in the State of Delaware on December 9, 2005 under the name 4306, Inc.  On February 20, 2007, VoiceServe acquired 100% of the issued and outstanding stock of VoiceServe Limited (“Limited”), a corporation incorporated in the United Kingdom on March 21, 2002, in exchange for 20,000,000 shares of VoiceServe common stock (representing 100% of the issued and outstanding shares of VoiceServe after the exchange).  From October 1, 2006 to February 20, 2007, Limited owned 100% of the issued and outstanding shares of VoiceServe.  Accordingly, this acquisition was treated as a combination of entities under common control and was accounted for in a manner similar to pooling of interests accounting.
 
On January 15, 2008, VoiceServe acquired 100% of the issued and outstanding stock of VoipSwitch Inc. (“VoipSwitch”), a corporation incorporated in the Republic of Seychelles on May 9, 2005 (see Note 3).  VoipSwitch licensed software systems (online telephony management applications) to customers online.  Generally, the license of a system includes remote installation and initial configuration of the main system, training relating to the use of the system and modules, and 1 year technical support.
 
VoiceServe has had no operations; VoiceServe is a holding company for its wholly owned subsidiaries Limited (since February 20, 2007) and VoipSwitch (since January 15, 2008). In 2010, Voiceserve formed two additional subsidiaries: VoipSwitch Inc., a Delaware corporation, and VoipSwitch AG, a Swiss corporation. VoipSwitch Inc. was formed to provide a future North American presence and has had no significant operations to date. VoipSwitch AG was formed to coordinate sales and billing activities from Switzerland and commenced operations in the three months ended December 31, 2010.
 
Limited is engaged in the telephone communications business from its London, United Kingdom office.  Limited offers its software to large enterprises and carriers.  The software allows communication through the Company’s exchange via the internet. Since January 15, 2008, Limited has also licensed VoipSwitch software systems.
 
 
F-5
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)

NOTE 2 – INTERIM FINANCIAL STATEMENTS

The unaudited financial statements as of December 31, 2011 and for the three and nine months ended December 31, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q.  In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of December 31, 2011 and the results of operations and cash flows for the three and nine months ended December 31, 2011 and 2010.  The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited.  The results for the nine month period ended December 31, 2011 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending March 31, 2012.  The balance sheet at March 31, 2011 has been derived from the audited financial statements at that date.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations.  These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended March 31, 2011 as included in our report on Form 10-K.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(a)    Principles of Consolidation

The consolidated financial statements include the accounts of VoiceServe and its wholly owned subsidiaries (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
 
(b)    Basis of presentation
 
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
 
 
F-6
 

VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
The financial statements have been prepared on a “going concern” basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  However, as of December 31, 2011, the Company had working capital of $28,221.  Further, since inception, the Company has incurred losses of $4,756,360.  These factors raise substantial doubt as to the Company’s ability to continue as a going concern.  The Company plans to improve its financial condition by raising capital through sales of shares of its common stock.  Also, the Company plans to pursue new customers and certain acquisition prospects to attain profitable operations.  However, there is no assurance that the Company will be successful in accomplishing these objectives.  The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
 
(c)    Use of Estimates
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.
 
(d)    Fair Value of Financial Instruments
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, net, accounts payable, accrued expenses payable, and loans payable to related parties.  The fair value of these financial instruments approximate their carrying amounts reported in the balance sheets due to the short term maturity of these instruments.
 
(e)    Foreign Currency Translation
 
The functional currency of VoiceServe is the United States dollar.  The functional currency of Limited is the United Kingdom pound sterling (“£”).  The functional currency of VoipSwitch is the United States dollar.  The functional currency of VoipSwitch AG is the Swiss Franc (“chf”). The reporting currency of the Company is the United States dollar.  Limited’s assets and liabilities are translated into United States dollars at period-end exchange rates ($1.552350 and $1.605445 at December 31, 2011 and March 31, 2011, respectively).  Limited’s revenue and expenses are translated at weighted average exchange rates ($1.605026 and $1.538799 for the nine months ended December 31, 2011 and 2010, respectively). VoipSwitch AG’s assets and liabilities are translated into United States dollars
 
 
F-7
 

VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)

at the period end exchange rates ($ 1.065473 and 1.091716 at December 31, 2011 and March 31, 2011, respectively). VoipSwitch AG’s revenue and expenses  are translated into United States dollars at the weighted average exchange rate ($1.152847 for the nine months ended December 31, 2011 and $1.027095 for the three months ended December 31, 2010, which was the first period of operations for Voipswitch AG). Translation adjustments are included in accumulated other comprehensive income (loss) in the stockholders’ equity section of the balance sheets.
 
(f)     Cash and Cash Equivalents
 
The Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents.
 
(g)    Property and Equipment, Net
 
Property and equipment, net is stated at cost less accumulated depreciation.  Depreciation is calculated using an accelerated declining balance method over the estimated useful lives of the respective assets.
 
(h)    Intangible Assets
 
 
Intangible assets, net are stated at their estimated fair values at date of acquisition less accumulated amortization.  Amortization is calculated using the straight-line method over the estimated economic lives of the respective assets.
 
(i)
Goodwill and Intangible Assets with Indefinite Lives
   
 
The Company does not amortize goodwill and intangible assets with indefinite useful lives, but instead tests for impairment at least annually.  When conducting the annual impairment test for goodwill, the Company compares the estimated fair value of a reporting unit containing goodwill to its carrying value.  If the estimated fair value of the reporting unit is determined to be less than its carrying value, goodwill is reduced and an impairment loss is recorded.
 
 
F-8
 

VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)

(j)  
Long-lived Assets

 
The Company reviews long-lived assets held and used, intangible assets with finite useful lives and assets held for sale for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If an evaluation of  recoverability is required, the estimated undiscounted future cash flows associated with the asset is compared to the asset’s carrying amount to determine if a write-down is required.  If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded to the extent that the carrying amount exceeds the fair value.
 
(k) 
Revenue Recognition
 
 
Revenue from licenses of software are recognized upon delivery of the software when persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectibility is probable.  The portion of the fee allocated to post contract customer support and services is recognized ratably over the period of the agreed support and services.
 
(l) 
Advertising
 
 
Advertising costs, which include sales promotion costs, are expensed as incurred and amounted to $295,673 and $598,231 for the nine months ended December 31, 2011 and 2010, respectively.
 
(m) 
Stock-Based Compensation
 
 
Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation”.
 
 
In addition to requiring supplemental disclosures, ASC 718, Compensation – Stock Compensation, addresses the accounting for share-based payment transactions in which a company receives goods in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FASB ASC 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions.
 
 
F-9
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)

 
References to the issuances of restricted stock refer to stock of a public company issued in private placement transactions to individuals who are eligible to sell all or some of their shares of restricted Common Stock pursuant to Rule 144 promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain limitations.  In general, pursuant to Rule 144, a stockholder who is not an affiliate and has satisfied a six-month holding period may sell all of his restricted stock without restriction, provided that the Company has current information publicly available. Rule 144 also permits, under certain circumstances, the sale of restricted stock, without any limitations, by a non-affiliate of the Company that has satisfied a one- year holding period.

(n)
Income Taxes
 
Income taxes are accounted for under the assets and liability method.  Current income taxes are provided in accordance with the laws of the respective taxing authorities.  Deferred income taxes are provided for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.   Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not more likely than not that some portion or all of the deferred tax assets will be realized.
 
(o)
Net Income (Loss) per Share

 
Basic net income (loss) per share is computed on the basis of the weighted average   number of common shares outstanding during the period.
 
Diluted net income (loss) per share is computed on the basis of the weighted average number of common shares and dilutive securities (such as stock options and convertible securities) outstanding.  Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation. For the nine months ended December 31, 2011 and 2010, the diluted net loss per share calculation excluded the effect of stock options outstanding and exercisable into a total of 1,903,000 and 1,403,000 shares of common stock, respectively, and warrants outstanding and exercisable into a total of 3,295,385 and 1,380,000 shares of common stock, respectively.
 
 
 
F-10
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
NOTE 4 – ACQUISITION OF VOIPSWITCH INC.
 
On January 15, 2008, VoiceServe closed an Acquisition Agreement with VoipSwitch Inc. (“VoipSwitch”) whereby VoiceServe acquired all VoipSwitch issued and outstanding ordinary shares as well as all of VoipSwitch’s assets, including customer orders and intangible assets, for total consideration of $3,000,000 ($450,000 cash, $150,000 notes payable due on demand, $600,000 notes payable in total monthly installments of $50,000 per month for 12 months, and 3,750,000 shares of VoiceServe common stock valued at $0.48 per share or $1,800,000).
 
Payment of the monthly installments of the $600,000 notes payable was contingent upon and limited each month to the future monthly net income of VoipSwitch.  Accordingly, pursuant to SFAS No. 141, this $600,000 “contingent consideration” portion of the $3,000,000 total purchase price was not included in the initial recorded cost of the acquisition or the recorded notes payable.  As payments of the $600,000 notes payable were made, such paid amounts were added to goodwill.
 
The estimated fair values of the identifiable net assets of VoipSwitch at January 15, 2008 (date of acquisition) consisted of :
 
   Cash and cash equivalents
   $ 6,682  
   Developed software (for licensing to customers)
     2,000,000  
   In-place contracts and customer list
     100,000  
   Trade name
     100,000  
   Accounts payable and accrued expenses
     (2,999 )
   Deferred software license fees
     (48,474 )
         
   Identifiable net assets
   $ 2,155,209  
         
 
Goodwill of $244,791 (excess of the $2,400,000 consideration, excluding the $600,000 contingent consideration, over the $2,155,209 identifiable net assets) was recorded at the acquisition date January 15, 2008.  In February and March 2008, $100,000 of the $600,000 “contingent consideration” notes payable was paid and added to goodwill.  In the year ended March 31, 2009, an additional $99,000 of the $600,000 “contingent consideration” notes payable was paid and added to goodwill. In the three months ended June 30, 2009, an additional $88,000 of the $600,000 “contingent consideration” notes payable was paid and added to goodwill.
 
 
F-11
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
On December 7, 2010, pursuant to a verbal agreement on October 19, 2010, Voiceserve issued a total of 2,250,000 SEC Rule 144 restricted shares of its common stock to the three sellers of VoipSwitch in full and final satisfaction of debt totaling $463,000, consisting of the $150,000 demand note payable and the remaining $313,000 “contingent consideration” potential amount due the three sellers.  The $131,250 excess of the $281,250 estimated fair value of the shares, which was calculated based on the October 19, 2010 nearest day closing trading price of $0.25 per share and a 50% restricted stock discount (2,250,000 shares x $0.125 [50% discount applied to $0.25 per share price] per share = $281,250), over the $150,000 demand note payable was added to goodwill.
 
NOTE 5 – INTANGIBLE ASSETS, NET
 
Intangible assets, net, consisted of:
 
   
December 31
    
March 31,
  
   
2011
    
2011
  
   Acquisition of VoipSwitch:
            
      Developed software (for licensing to customers)
   $ 2,000,000     $ 2,000,000  
      In-place contracts and customer list
     100,000       100,000  
      Trade name
     100,000       100,000  
      Goodwill
     663,041       663,041  
                 
     Total
     2,863,041       2,863,041  
                 
   Accumulated amortization
     (910,417 )     (737,917 )
                 
   Intangible assets, net
   $ 1,952,624     $ 2,125,124  
 
The developed software, in-place contracts and customer list, and trade name are amortized using the straight-line method over their estimated economic lives (ten years for the developed software and trade name; five years for the in-place contracts and customer list).  Goodwill is not amortized.
 
For the nine months ended December 31, 2011 and 2010, amortization of intangible assets expense was $172,500.  $150,000 was included in cost of software license fees and $22,500 was included in selling, general and administrative expenses.
 
Expected future amortization expense for acquired intangible assets as of December 31, 2011 follows:
 
 
F-12
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
   Year ending March 31,
  
Amount
  
   2012
     57,500  
   2013
     225,833  
   2014
     210,000  
   2015
     210,000  
   2016
     210,000  
   Thereafter
     376,250  
         
   Total
   $ 1,289,583  
 
NOTE 6 – DEFERRED SOFTWARE LICENSE FEES AND SUPPORT
 
The licenses of the VoipSwitch systems generally include certain postcontract customer support (“PCS”).  In accordance with Accounting Standards Codification (“ASC”) Topic 985-605-25, “Software Revenue Recognition”, the Company allocates a portion of the license fees to PCS based on the vendor-specific objective evidence of fair value (generally $1,000 for 1 year technical support) of the PCS and recognizes the PCS revenues ratably over the period of the agreed PCS.
 
Deferred software license fees (attributable to PCS) for the nine months ended December 31, 2011 and 2010 were accounted for as follows:
 
   
Nine Months Ended December 31,
  
   
2011
    
2010
  
   Balance, beginning of period
   $ 188,197     $ 245,666  
   Additions
     232,119       311,500  
   Recognized as revenue
     (231,136 )     (286,175 )
                 
   Balance, end of period
   $ 189,180     $ 270,991  
 
 
F-13
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
NOTE 7 – LOANS PAYABLE TO RELATED PARTIES
 
Loans payable to related parties consisted of:
 
   
December 31, 2011
    
March 31, 2011
  
   Due chairman of the board of directors
   $ 22,348     $ 22,582  
   Due former chief operational officer
     15,059       15,574  
   Due former chief financial officer
     77       80  
                 
   Total
   $ 37,484     $ 38,236  
 
The loans payable to related parties are all non-interest bearing, unsecured, and due on demand.
 
NOTE 8 – LIABILITY FOR COMMON STOCK PURCHASE WARRANTS
 
As part of the private placement which closed on May 26, 2010 (see Note 9), the Company issued a total of 1,380,000 warrants to certain accredited investors.  Each warrant entitles the holder to purchase one share of common stock at a price of $0.50 per share (the “Exercise Price”) to May 26, 2015.
 
As part of the private placement which closed on June 6, 2011 (see Note 9), the Company issued a total of 1,915,385 warrants to certain accredited investors. Each warrant entitles the holder to purchase one share of common stock at a price of $0.30 per share (the “Exercise Price”) to June 6, 2014.
 
 
F-14
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
The Exercise Price of the warrants is to be adjusted in the event of any stock splits or stock dividends or in the event that the Company issues or sells any shares of common stock, options, warrants or any convertible instruments (other than exempted issuances) at an effective price per share which is less than the Exercise Price. Accordingly, in accordance with EITF Issue No. 07-05, "Determining whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock", the Company reflected the $457,608 fair value of the warrants issued on May 26, 2010 (calculated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.45 per share, exercise price of $0.50 per share, risk-free interest rate of 2.06%, term of five years, and expected volatility of 100%) and the $214,122 fair value of the warrants issued on June 6, 2011 (calculated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.15 per share for the 1,311,539 warrants sold May 6, 2011 and $0.318 per share for the 603,846 warrants sold June 6, 2011, exercise price of $0.30 per share, risk-free interest rate of 0.96% for the 1,311,539 warrants sold May 6, 2011 and 0.74% for the 603,846 warrants sold June 6, 2011, term of 3 years, and expected volatility of 100%) as a liability and remeasures the fair value of the warrants each quarter, adjusts the liability balance, and reflects changes in operations as "income (expense) from revaluation of liability for common stock purchase warrants”.
 
At December 30, 2011 and March 31, 2011, the fair values of the warrants (calculated using the Black-Scholes option pricing model with a 100% expected volatility assumption regarding the trading price of the Company’s common stock) consisted of:
 
   
December 31, 2011
    
March 31, 2011
  
   
Common
          
Common
        
   
Shares
    
Fair
    
Shares
    
Fair
  
   
Equivalent
    
Value
    
Equivalent
    
Value
  
Warrants issued May 26, 2010,
                        
   exercise price of $0.50 per share, expiration
                        
   date May 26, 2015.
     1,380,000     $ 167,118       1,380,000     $ 152,214  
                                 
Warrants issued June 6, 2011,
                                
   exercise price of $0.30 per share, expiration
                                
   date June 6, 2014.
     1,915,385       239,040       -       -  
                                 
Totals
     3,295,385     $ 406,158       1,380,000     $ 152,214  
 
 
F-15
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
Below is a reconciliation of the change in the fair values of the warrants from May 26, 2010 to December 31, 2011.
 
   
Common
        
   
Shares
    
Fair
  
   
Equivalent
    
Value
  
   Issuance to accredited investors in
            
   conjuction with common stock in private
            
   placement on May 26, 2010 (see Note 9)
     1,380,000     $ 457,608  
   Revaluation credited to operations
     -       (121,854 )
   Balance, June 30, 2010
     1,380,000       335,754  
   Revaluation credited to operations
     -       (33,120 )
   Balance, September 30, 2010
     1,380,000       302,634  
   Revaluation credited to operations
     -       (116,196 )
   Balance, December 31, 2010
     1,380,000       186,438  
   Revaluation credited to operations
     -       (34,224 )
   Balance, March 31, 2011
     1,380,000       152,214  
   Issuance to accredited investors in
                
   conjuction with common stock in private
                
   placement which closed June 6, 2011
                
   (see Note 9)
     1,915,385       214,122  
   Revaluation charged to operations
     -       450,954  
   Balance, June 30, 2011
     3,295,385       817,290  
   Revaluation credited to operations
     -       (243,143 )
   Balance, September 30, 2011
     3,295,385       574,147  
   Revaluation credited to operations
     -       (167,989 )
   Balance, December 31, 2011
     3,295,385     $ 406,158  
 
NOTE 9 – STOCKHOLDERS’ EQUITY
 
Common stock issuances
 
Effective April 2010, VoiceServe issued 41,494 shares of its common stock to a consultant for services rendered.  The $10,000 estimated fair value of the shares was included in selling, general and administrative expenses in the three months ended June 30, 2010.
 
 
F-16
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
On May 26, 2010, VoiceServe closed on the sale to certain accredited investors of a total of 2,760,000 shares of common stock at a price of $0.25 per share and 1,380,000 warrants to purchase 1,380,000 shares of common stock, for $690,000 gross proceeds ($600,501 net proceeds after deducting costs of the private placement). Each warrant (see Note 8) entitles the holder to purchase one share of common stock at a price of $0.50 per share (the "Exercise Price") to May 26, 2015.
 
Effective September 30, 2010, VoiceServe issued a total of 900,000 shares of its common stock to its new chief financial officer (300,000 shares) and to two new members of the Board of Directors (300,000 shares each) pursuant to the employment agreement and director agreements discussed in Note 12.  The $148,050 estimated fair value of the shares, which was calculated based on the closing trading price of $0.329 per share and a 50% restricted stock discount, was included in selling, general and administrative expenses in the three months ended September 30, 2010.
 
On December 7, 2010, pursuant to a verbal agreement on October 19, 2010, VoiceServe issued a total of 2,250,000 SEC Rule 144 restricted shares of its common stock to the three sellers of VoipSwitch (see Note 3) in full and final satisfaction of debt totaling $463,000, consisting of the $150,000 demand note payable (see Note 7) and the remaining $313,000 “contingent consideration” potential amount due the three sellers.  The $131,250 excess of the $281,250 estimated fair value of the shares, which was calculated based on the October 19, 2010 nearest day closing trading price of $0.25 per share and a 50% restricted stock discount (2,250,000 shares x $0.125 [50% discount applied to $0.25 per share price] per share = $281,250), over the $150,000 demand note payable was added to goodwill.
 
On May 6, 2011, the Company closed on the sale to certain accredited investors of a total of 2,623,077 shares of common stock at a price of $0.13 per share and 1,311,539 warrants to purchase 1,311,539 shares of common stock, for $341,000. Net proceeds, after deducting $27,280 in commissions and $20 in other expenses, were $313,700. Each warrant entitles the holder to purchase one share of common stock at a price of $0.30 per share (the “Exercise Price”) to June 6, 2014.
 
On June 6, 2011, the Company closed on the sale to certain accredited investors of a total of an additional 1,207,692 shares of common stock at a price of $0.13 per share and 603,846 warrants to purchase 603,846 shares of common stock for $157,000. Net proceeds, after deducting $12,560 in commissions and $2,070 in other expenses, were $142,370. Each warrant entitles the holder to purchase one share of common stock at a price of $0.30 per share to June 6, 2014.
 
 
F-17
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
On June 21, 2011, the Company’s Board of Directors authorized the issuance of a total of 2,400,000 shares (1,200,000 shares each) of common stock to the Company’s Chief Executive Officer and the Company’s President and Chairman of the Board of Directors for prior services rendered. The $432,000 estimated fair value of the shares, based on the nearest day closing trading price of $0.36 per share and a 50% restricted stock discount, was included in selling, general and administrative expenses in the three months ended June 30, 2011.
 
Stock options
 
Effective May 12, 2009, VoiceServe granted non-qualified stock options to 4 service providers exercisable into a total of up to 703,000 shares of common stock at an exercise price of $0.13 per share to December 23, 2013. The options vest 2/3 on December 23, 2010 and 1/3 on December 23, 2011. The $81,618 estimated fair value of the options (calculated using the Black-Scholes option pricing model and the following assumptions: (i) $0.15 share price, (ii) 5 year term, (iii) 100% expected volatility, and (iv) 3% risk free interest rate) was expensed ratably over the requisite service period from May 12, 2009 to December 23, 2011. To date, none of the options which vested December 23, 2010 have been exercised.
 
On January 4, 2010, VoiceServe granted non-qualified stock options to 2 service providers exercisable into a total of up to 200,000 shares of common stock at an exercise price of $0.13 per share to January 4, 2015.  The options vest 2/3 on January 4, 2012 and 1/3 on January 4, 2013. The $39,520 estimated fair value of the options (calculated using the Black-Scholes option pricing model and the following assumptions: (i) $0.24 share [rice. (ii) 5 year term, (iii) 100% expected volatility, and (iv) 2.65% risk free interest rate) is being expensed ratably over the three year requisite service period.
 
Effective July 26, 2010, VoiceServe committed to grant non-qualified stock options exercisable into up to a total of 500,000 shares of common stock at an exercise price of $0.25 per share to its president and chairman (250,000 options) and chief executive officer (250,000 options) pursuant to the employment agreements discussed in Note 12.  The $128,200 estimated fair value of the options (calculated using the Black-Scholes option pricing model and the following assumptions:  (i) $0.33 share price, (ii) term of 1773 days, (iii) 100% expected volatility, and (iv) 1.7037% risk free interest rate) was expensed and included in selling, general and administrative expenses in the three months ended September 30, 2010.
 
 
F-18
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
On June 4, 2011, pursuant to employment agreements with its (1) President and Chairman and (2) Chief Executive Officer (See Note 12), the Company became obligated to issue a total of 500,000 common stock options exercisable at a 25% discount from the common stock closing price on that date. The $124,600 estimated fair value of the options at June 4, 2011 (calculated using the Black-Scholes option pricing model and the following assumptions: (i) $0.318 share price, (ii) $0.2385 exercise price, (iii) term of 5 years, (iv) 100% expected volatility, and (v) 1.6% risk free interest rate) was included in selling, general and administrative expenses in the three months ended June 30, 2011.
 
Stock options expense for the nine months ended December 31, 2011 and 2010 was $157,380 and $161,578, respectively. As of December 31, 2011, there was $13,284 of total unrecognized compensation cost relating to unexpired stock options. That cost is expected to be recognized in the years ending March 31, 2012 and 2013 in the amounts of  $3,250 and $10,034, respectively.
 
NOTE 10 – INCOME TAXES
 
The provision for income taxes consisted of:
 
   
Nine Months Ended
  
   
December 31,
        
   
2011
    
2010
  
             
Current:
            
   Switzerland
   $ 8,646     $ -  
   United States
     -       -  
   United Kingdom
     -       -  
   Total Current
     8,646       -  
                 
Deferred
     -       -  
Totals
   $ 8,646       -  
 
Based on management‘s present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset attributable to the future utilization of net operating loss carryforwards of VoiceServe and Limited as of December 31, 2011 will be realized.  Accordingly, the Company has maintained a 100% allowance against the deferred tax asset in the financial statements at December 31, 2011. The Company will continue to review this valuation allowance and make adjustments as appropriate.
 
 
F-19
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
NOTE 11 – RELATED PARTY TRANSACTIONS
 
For the nine months ended December 31, 2011 and 2010, consulting fees paid to officers, directors, and their affiliates totaled $1,259,039 and $1,193,722, respectively.  These fees were included in cost of software license fees and support ($697,231 and $605,779 for the nine months ended December 31, 2011 and 2010, respectively) and selling, general, and administrative expenses ($561,808 and $587,943 for the nine months December 31, 2011 and 2010, respectively) in the accompanying statements of operations.
 
NOTE 12 – COMMITMENTS AND CONTINGENCIES
 
Registration Rights Agreements
 
In connection with the private placement which closed May 26, 2010 (see Note 9), the Company and the investors executed a Securities Purchase Agreement and a Registration Rights Agreement. Among other things, the Registration Rights Agreement provides that the Company will prepare and file with the SEC a Registration Statement covering the resale of the Registrable Securities and use its commercially reasonable efforts to cause it to be declared effective. If the Registration Statement is not filed by July 30, 2010 or if the Registration Statement filed is not declared effective by the SEC within certain time periods (by December 27, 2010 in the event of a "full review" by the SEC) and the Company has not exercised its reasonable best efforts to secure the Registration Statement's effectiveness with the SEC, the Registration Agreement provides that the Company will pay monthly (until cured) partial liquidated damages to the investors equal to 1% of the purchase price paid by the investors, subject to a maximum of 10% of the purchase price paid by the investors. The Registration Statement was declared effective by the SEC on April 25, 2011.
 
Potential claims for liquidated damages relating to this Registration Rights Agreement, which the Company does not believe are probable of assertion, approximate $41,400 at March 31, 2011 and December 31, 2011.
 
In connection with the private placement which closed May 6, 2011 and June 6, 2011 (see Note 9), the Company and the investors executed a Securities Purchase Agreement and a Registration Rights Agreement. Among other things, the Registration Rights Agreement provides that the Company will prepare and file with the SEC a Registration Statement covering the resale of the Registrable Securities and use its commercially reasonable efforts to cause it to be declared effective.
 
 
F-20
 
 
 VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
If the Registration Statement is not filed by July 6, 2011 or if the Registration Statement filed is not declared effective by the SEC within certain time periods (by December 2, 2011 in the event of a "full review" by the SEC) and the Company has not exercised its reasonable best efforts to secure the Registration Statement's effectiveness with the SEC, the Registration Agreement provides that the Company will pay monthly (until cured) partial liquidated damages to the investors equal to 1% of the purchase price paid by the investors, subject to a maximum of 10% of the purchase price paid by the investors. The Registration Statement has not yet been filed.
 
Potential claims for liquidated damages relating to this Registration Rights Agreement, which the Company does not believe are probable of assertion, approximate $29,880 at December 31, 2011.
 
Employment and Director Agreements
 
On June 4, 2010, VoiceServe, Inc. executed employment agreements with (i) its President and Chairman, Alexander Ellinson, and (ii) its Chief Executive Officer, Michael Bibelman. Each agreement has a term of five (5) years and each provides for (i) an annual base salary of $240,000, (ii) an annual bonus of up to 100% of the base salary as determined in the sole discretion of the Board of Directors, and (iii) annual grants of stock options under the Company's Equity Incentive Stock Plan to purchase 250,000 shares of common stock at $0.25 per share for the first year, which shall occur on or before July 26, 2010, and at a 25% discount off the price on each June 4 thereafter in 2011, 2012, 2013, and 2014 (which vest at such time as approved by the Board of Directors). The Board has not yet approved the initial grant of the 250,000 common stock options, which was to occur on or before July 26, 2010, nor the grant of an additional 250,000 common stock options, which was to occur on June 4, 2011, for either Mr. Ellinson or Mr. Bibelman.
 
Both employment agreements also provide for other employee benefits, such as an allowance for leasing a car for the Company or the Company providing one, healthcare insurance, vacation and other benefits provided in accordance with Company policy. In addition, each agreement contains provisions concerning early termination of the executive for death, disability, or with or without cause by the executive. In the event of death or disability, the Company is obligated to pay three months base salary plus accrued benefits. In the event of a termination of the executive "without cause," the Company is obligated to pay each executive, in lieu of "severance payments," his base pay and bonus, including percentage of profits, for the term in which the termination occurs for 36 months after the termination date in accordance with Company payroll practices, and maintain other benefits for that executive also for that 36 month period.
 
 
F-21
 
 
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011
(Unaudited)
 
Finally, the Company is obligated to pay the exercise price for the stock options to be granted as described in the preceding paragraph and the Company is required to issue 250,000 shares of common stock to the terminated executive with demand registration rights.
 
On September 30, 2010, VoiceServe, Inc. executed an employment agreement with Alfred Stefansky, its concurrently appointed Chief Financial Officer. The agreement has a term of five (5) years and provides for (i) a monthly base salary of $8,000, (ii) an annual bonus of up to 100% of the base salary as determined in the sole discretion of the Board of Directors, and (iii) a one-time issuance of 300,000 restricted shares of Company common stock (which was issued as discussed in Note 9). Additionally, the agreement provides that the Company shall provide standard health insurance coverage for the executive and each individual family member and the Executive shall be eligible to participate in any employee benefit plans of the Company. Either party may terminate the agreement without cause upon 60 days prior written notice. In the event of death or disability, the Company is obligated to pay three months base salary plus accrued benefits.
 
Also on September 30, 2010, VoiceServe, Inc. executed director agreements with Michael Taylor and Andrew Millet, concurrently appointed members of the Board of Directors. Both agreements had terms of one year, subject to a one year renewal term upon reelection by a majority of the Company stockholders). Both agreements provide for (i) a monthly retainer of $1,000 and (ii) a one-time issuance of 300,000 restricted shares of Company common stock (which was issued as discussed in Note 9. Additionally, the agreements provide that the Company shall provide reimbursements for all reasonable out-of- pocket expenses incurred.
 
Rental Agreements
 
Limited rents office space at monthly rentals of £710 (or $1,102 translated at the December 31, 2011 exchange rate).  For the nine months ended December 31, 2011 and 2010, rent expense was $10,256 and $9,833, respectively.
 
VoipSwitch AG rents office space at quarterly rentals of CHF 6,000 (or $6,393 translated at the December 31, 2011 exchange rate).  For the nine months ended December 31, 2011 and 2010, rent expense was $20,751 and $8,217, respectively.
 
Product and Services Contract
 
On April 25, 2011, the Company signed a contract with Emirates Telecommunications Corporation (“Etisalat”) to provide certain services for Etisalat for compensation totaling $214,500.  The contract provides for our installation of hardware and software in addition to 12 months of technical support from the Ready For Service (“RFS”) date.   As of  February 14, 2012, the RFS notice has not yet been issued by Etisalat.
 
 
F-22
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Report. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements. See “Cautionary Statement on Forward-Looking Information.”

Our mission is to enable VoIP business and entrepreneurs to offer a full array of VoIP services globally. Since the company was founded, we have worked to achieve this mission by creating technology that addresses the principal communication needs through the economical use of VoIP. We develop and market software, services and solutions that we believe empowers our customers to communicate more efficiently and economically through the Internet throughout the world. VoIPSwitch’s software enables communications providers, businesses, enterprises, hotels and cruise liners VOIP & TDM communication. Our customers purchase a license from us. The VoIPSwitch license is a central medium in a telecommunications network that connects telephone calls from one phone line to another entirely by means of software running on a computerized system. This work was formerly carried out by hardware with physical switchboards to route the calls. VoIPSwitch has created an environment whereby the VoIPSwitch license purchaser can control all its clients’ activity via the Internet. VoIPSwitch controls connections at the junction point between circuit and packet networks. The end user can make calls from a computer, mobile phone, land line or SIP device. End users can manage their account online via their specific user names and passwords, with all the basic features available with landline communication systems plus many more convenient parameters. These include for example, call forwarding voice mail SMS and most basic PPX standard features. We do not have any patents. Capital devoted to research and development is used towards expanding the possibility of communication and its features.

We generate revenue by developing, manufacturing, licensing, and supporting a wide range of VoIP software products and services for many different types of communication devices. Our focus is to build on this foundation through ongoing innovation in our integrated software platforms, by delivering compelling value propositions to customers, by responding effectively to customer and partner needs, and by continuing to emphasize the importance of product excellence, business efficacy, and accountability.

Company History

The Company was incorporated as 4306, Inc. on December 9, 2005 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. On February 20, 2007, the Company entered into a share exchange agreement with Voiceserve Limited, a United Kingdom corporation whose principal place of business at the time of purchase was located at Cavendish House, 369 Burnt Oak Broadway, Edgware, Middlesex HA8 5AW (“Voiceserve Limited”) and the shareholders of Voiceserve Limited. Pursuant to the purchase agreement, we acquired all of the outstanding capital stock of Voiceserve Limited in exchange for the issuance of 20,000,000 shares of our common stock to the Voiceserve Limited shareholders. In addition, the shareholders of Voiceserve Limited, agreed to cancel their 100,000 shares of the outstanding common stock of the Company. As a result of the foregoing, Voiceserve Limited became our wholly-owned subsidiary through which we now operate our business in the global telecommunications industry. We changed our name to “Voiceserve, Inc.” to reflect our new business plan.
On January 15, 2008, we acquired all of the issued and outstanding ordinary shares of VoIPSwitch, Inc. (“VoIPSwitch”) as well as all of VoipSwitch’s assets, including customer orders and intangible assets, for total consideration of $3,000,000 ($450,000 cash, $150,000 notes payable due on demand, $600,000 notes payable in total monthly installments of $50,000 per month for 12 months, and 3,750,000 shares of our common stock valued at $0.48 per share or $1,800,000).

Overview

Our wholly owned subsidiary, VoIPSwitch Inc., develops and implements various types of Class 5 softswitch software that facilitate the deployment of VoIP services globally. To-date, the company has successfully implemented over approximately 16,000 VoIPSwitch licenses around the world.

VoIPSwitch is a complete IP telephony licensed softswitch offering a variety of services including wholesale VoIP termination, device to phone technology, PC to phone/web to phone features, calling cards, SMS/ANI/PIN/DID/WEB callback, DIDs’ mapping, call shops and application creating a SIP environment for most mobile phone handsets in a WiFi, 3G or Edge environment. Unlike competitive systems composed of many different parts, the VoipSwitch platform is fully integrated in one application which makes it exceptionally easy to manage. All elements that are necessary for successful VoIP implementation are already built in. All the features are integrated in one multiple server based application.

 
1
 
 
Results of Operations

For the third quarter of fiscal years 2011 and 2010 ended December 31, 2011 and December 31, 2010, respectively.

The following table presents the statement of operations for the nine month periods ended December 31, 2011 and December 31, 2010. The discussion following the table is based on these results.
 
   
Three Months
    
Nine Months
  
   
Ended December 31,
    
Ended December 31,
  
   
2011
    
2010
    
2011
    
2010
  
Operating revenues:
                        
   Software license fees
   $ 1,380,418     $ 1,166,175     $ 3,561,386     $ 3,123,386  
   Revenues from communications air time
     (11 )     97,420       535       248,894  
                                 
   Total operating revenues
     1,380,407       1,263,595       3,561,921       3,372,280  
                                 
Cost of operating revenues:
                                
   Software license fees
     710,717       573,494       1,955,267       1,445,912  
   Communications air time
     (3,370 )     109,616       (3,370 )     244,049  
                                 
   Total cost of operating revenues
     707,347       683,110       1,951,897       1,689,961  
                                 
Gross profit
     673,060       580,485       1,610,024       1,682,319  
                                 
Operating expenses:
                                
Selling, general and administrative expenses (including stock-based
                        
compensation of $10,569, $11,166, $589,380, and $319,628, respectively)
     652,796       739,065       2,551,701       2,463,181  
                                 
      Total operating expenses
     652,796       739,065       2,551,701       2,463,181  
                                 
Income (loss) from operations
     20,264       (158,580 )     (941,677 )     (780,862 )
                                 
Income (expense) from revaluation of liability for
                                
common stock purchase warrants
     167,989       116,196       (39,822 )     271,170  
Interest income
     23       19       48       23  
Interest expense
     (31 )     (42 )     (51 )     (652 )
                                 
Income (loss) before income taxes
     188,245       (42,407 )     (981,502 )     (510,321 )
                                 
Income taxes
     8,646       -       8,646       -  
                                 
Net income (loss)
   $ 179,599     $ (42,407 )   $ (990,148 )   $ (510,321 )
                                 
Net income (loss) per share
                                
   - basic and diluted
   $ 0.00     $ (0.00 )   $ (0.02 )   $ (0.01 )
                                 
Weighted average number of shares
                                
   outstanding:
                                
   - Basic
     44,585,198       37,914,212       43,153,274       35,551,646  
   - Diluted
     45,209,775       37,914,212       43,153,274       35,551,646  
 
 
2
 
 
Total Revenue. Revenues were $3,561,921 for the nine month period ended December 31, 2011 and $3,372,280 for the nine month period ended December 31, 2010, an increase of $189,641 or 6%. The revenue increase is attributed to the exposure of the company’s products through exhibitions.

Cost of Revenues. Cost of revenues for the nine month period ended December 31, 2011 was $1,951,897 compared to $1,689,961 for the same period in 2010, an increase of $261,936 or 15%. The cost of revenues increased due to higher configuration and support labor costs as a result of the increase in customers and prospective customers. Gross margin averaged 49% during the third quarter of fiscal year 2012 (ended December 31, 2011) compared to 46% during the third quarter of fiscal year 2011. The increase in gross margins is due to the absence of revenues and costs from communications air time in 2011 which had negative gross margin in 2010. Also included in cost of revenues is amortization of intangible assets of 150,000 for both the nine months ended Decenber 31, 2011 and 2010.
 
Sales, General and Administrative Costs. SG&A for the nine month period December 31, 2011 was $2,551,701 compared to $2,463,181 for the same period of the prior year, an increase of $88,520 or 4%. The increase in SG&A for the nine months ended December 31, 2011 compared to the prior year period was primarily due to a $269,752 increase in stock-based compensation and an increase in office expenses resulting from the opening of our Swiss office in the three months ended December 31, 2010, offset by lower advertising and sales promotion expenses in 2011. Also included in SG&A is amortization of intangible assets of $22,500 for both the nine months ended December 31, 2011 and 2010.

Net Income (Loss). The Company generated net loss for the nine month period ended December 31, 2011 of $990,148 compared to net loss of $510,321 for the nine month period ended December 31, 2010. The increase in net loss is due primarily to the $269,752 increase in stock-based compensation and the $310,992 negative change in income (expense) from revaluation of liability for common stock purchase warrants ($271,170 income in 2010; $39,822 expense in 2011).

Liquidity and Capital Resources

As of December 31, 2011 we had $344,486 in cash and cash equivalents. At December 31, 2011 the Company had liabilities of $1,013,948 comprised of accounts payable of $370,471, accrued expenses payable of $10,655 deferred software license fees and support of $189,180, loans payable to related parties totaling $37,484, as well as liability for common stock purchase warrants totaling $406,158. Comparatively at March 31, 2011, we had $738,604 in liabilities comprised of accounts payable of $348,493, accrued expenses payable of $11,464, deferred software license fees and support of $188,197, loans payable to related partiess totaling $38,236, as well as liability for common stock purchase warrants totaling $152,214.

Net cash used in operating activities during the nine months ended December 31, 2011 was $323,127 compared to $409,311 in the comparable period in 2010. Net cash provided by financing activities during the nine months ended December 31, 2011 was $455,318 due to the sale of shares of our common stock, as compared to $601,477 in the comparable period in 2010.

On May 6, 2011, the Company raised $313,700 in net proceeds through the sale of shares of its common stock. In addition, on June 6, 2011 the Company raised $142,370 in net proceeds through the sale of shares of the Company stock, which was accomplished through advice and support of professional investment consultants.

Additional capital may be required in order to grow and sustain operations over the next twelve months. In addition, unless the Company becomes profitable and begins generating sufficient cash flow, we will need to raise additional capital to continue our operations past 12 months, and there is no assurance we will be successful in raising the needed capital. Management believes that, if the Company’s operational cash flow is not sufficient to support its operational and/or its marketing strategy, its short-term capital needs could range between $500,000 and $1,500,000 for which it would most probably seek to raise the capital in the equity markets.

Long term capital needs of the company highly depend upon the amount of time it takes for us to achieve market penetration. If we are successful in growing market share and developing new markets around the world, it will be necessary for us to hire additional employees to support an expanding client base. If additional working capital is needed to support an expanded operation, we will seek such capital in the form of debt and/or equity. Management believes that the Company’s long term capital needs could potentially range between $1,500,000 and $3,000,000.

Currently, we have no material commitments for capital expenditures. Management believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern. In the short term, should the release of our new features and modules take longer than we anticipate capital will be required to finance the engineers working on these products. Long term, once the products are fully developed and enhanced, capital will be required to expand the marketing prospects into different regions and markets.
 
 
3
 
 
Significant Accounting Policies

Our significant accounting policies are summarized in Note 3 of our financial statements included in Item 1 of this Report.

Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would have materially affected our results of operations, financial position or liquidity for the periods presented in this report.

Off Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
Smaller reporting companies are not required to provide the information required by this item.

Item 4.
Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CAO concluded that the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CAO, as appropriate, to allow timely decisions regarding required disclosure.

Based upon their evaluation, the Company’s CEO and CAO concluded that the Company’s disclosure controls and procedures were not effective as they principally relate to the disclosure of compensation amounts as reported in the Company’s Management’s Discussion and Analysis section of its Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed on July 6, 2011.It was determined that the cause for the misstatement was due to a lack of multiple levels of internal review prior to the filing that report with the SEC.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the nine months ended December 31, 2011, or are reasonably likely to materially affect, our internal control over financial reporting.

Our management has been actively engaged in the planning for, and implementation of, remediation measures to address our control deficiencies and to enhance our overall financial control environment. This is necessary for us to maintain a strong control environment, high ethical standards, and financial reporting integrity.

We have continued to monitor the results of our remediation efforts and related testing as part of our year-end 2011 assessment of the effectiveness of our internal control over financial reporting.
 
 
4
 
 
PART II— OTHER INFORMATION

Item 1.
Legal Proceedings.
 
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A.
Risk Factors

Smaller reporting companies are not required to provide the information required by this item.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.
Defaults Upon Senior Securities.

None.

Item 4.
(Removed and Reserved).

Item 5.
Other Information.

None.

Item 6.
Exhibits.

Exhibit Number
  
Descriptions
     
31.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1+
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2+
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**
XBRL Instance Document
   
101.SCH **
XBRL Taxonomy Schema
   
101.CAL **
XBRL Taxonomy Calculation Linkbase
   
101.DEF **
XBRL Taxonomy Definition Linkbase
   
101.LAB **
XBRL Taxonomy Label Linkbase
   
101.PRE **
XBRL Taxonomy Presentation Linkbase
 
** Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

+ In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.1 is furnished and not filed.
 
 
5
 
 
SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
 
 
VOICESERVE, INC.
     
Date: February 14, 2012
By:
/s/  Michael Bibelman
   
Michael Bibelman
   
Chief Executive Officer
 
Date: February 14, 2012
By:
/s/  Alex Ellinson
   
Chief Financial Officer and Principal
   
Accounting Officer
 
 
6

VOICESERVE INC Reports

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