UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Fiscal Year Ended December 31, 2014, or
¨ |
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: 000-28063
deltathree, Inc.
(Exact
name of registrant as specified in charter)
Delaware |
|
13-4006766 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. employer identification no.) |
|
|
|
1 Bridge Plaza
Fort Lee, New Jersey |
|
07024 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrant's
telephone number, including area code: (212) 500-4850
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act:
Title of Each Class |
|
Name of Each Exchange on
Which the Securities are Registered |
Common Stock, par value $0.001 per share |
|
OTCQB |
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨
No x
Indicate
by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes x
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨ |
Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No x
The
aggregate market value of the Common Stock held by non-affiliates of the Registrant based upon the closing bid of the
Common Stock as reported by the OTCQB on June 30, 2014 (the last business day of the Registrant’s most recently completed
second fiscal quarter) was $1,322,661. Solely for purposes of this calculation, shares beneficially owned by directors and officers
of the Registrant and certain persons owning 10% or more of the Registrant's Common Stock have been excluded, in that such persons
may be deemed to be affiliates of the Registrant. Such exclusion should not be deemed a determination or admission by the Registrant
that such individuals or entities are, in fact, affiliates of the Registrant.
As
of March 18, 2015, the Registrant had outstanding 72,311,025 shares of Common Stock, par value $0.001 per share.
Documents
incorporated by reference: None
DELTATHREE, INC.
2014
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
PART
I
The
statements contained in this Annual Report on Form 10-K, or Annual Report, that are not descriptions of historical facts may be
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates, forecasts
and projections about us, our future performance, the industries in which we operate, our beliefs and our management’s assumptions.
In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words
such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,”
“plans,” “believes,” “seeks,” “estimates,” variations of such words and similar
expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions that are difficult to assess. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking statements. Please see “Item 1A. Risk Factors”
in this Annual Report for detailed information about the uncertainties and other factors that may cause actual results to materially
differ from the views stated in such forward-looking statements. All forward-looking statements and risk factors included in this
Annual Report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation
to update any forward-looking statement or risk factor, whether as a result of new information, future events, changes in assumptions
or otherwise.
Our
fiscal year ends on December 31 of each calendar year. Each reference to a fiscal year in this Annual Report refers to the fiscal
year ending December 31 of the calendar year indicated. Unless the context requires otherwise, references to “we,”
“us,” “our,” “the Company,” and “deltathree” refer to deltathree, Inc. and its
subsidiaries, collectively.
ITEM
1. BUSINESS
Company
Overview
We
are a global provider of integrated video and voice over Internet Protocol, or VoIP, telephony services, products, hosted solutions
and infrastructure. We were founded in 1996 to capitalize on the growth of the Internet as a communications tool by commercially
offering Internet Protocol, or IP, telephony services, or VoIP telephony. VoIP telephony is the real-time transmission
of voice communications in the form of digitized “packets” of information over the Internet or a private network, similar
to the way in which e-mail and other data is transmitted. While we began as primarily a low-cost alternative source of wholesale
minutes for carriers around the world, we have evolved into an international provider of next generation communication services.
Today
we support tens of thousands of active users around the globe through our service provider and reseller channel and our direct-to-consumer
channel. We have built a privately-managed, state-of-the-art global telecommunications platform using IP technology and we offer
a broad suite of private label VoIP products and services as well as a back-office platform. Our operations management tools include,
among others: account provisioning; e-commerce-based payment processing systems; billing and account management; operations management;
web development; network management; and customer care. Based on our customizable VoIP solutions, these customers can offer private
label video and voice-over-IP services to their own customer bases under their own brand name, a “white-label” brand
(in which no brand name is indicated and different customers can offer the same product), or the deltathree brand. At the same
time, our direct-to-consumer channel includes our joip Mobile application (which is a cellular phone application providing low
cost mobile calls over 3G cellular networks as well as WiFi networks) and our iConnectHere offering (which provides VoIP products
and services directly to consumers and small businesses online using the same primary platform). We are able to provide our services
at a cost per user that is generally lower than that charged by traditional service providers because we minimize our network costs
by using efficient packet-switched technology and interconnecting to a wide variety of termination options, which allows us to
benefit from pricing differences between vendors to the same termination points.
Prior
to 1999, we focused on building a privately-managed, global network utilizing IP technology, and our business primarily consisted
of carrying and transmitting traffic for communications carriers over our network. Beginning in 1999, we began to diversify our
offerings by layering enhanced IP telephony services over our network. These enhanced services were targeted at consumers and were
primarily accessible through our consumer website. During 2000, we began offering services on a co-branded or private-label basis
to service providers and other businesses to assist them in diversifying their product offerings to their customer bases. In 2001,
we continued to enhance our unique strengths through our pioneering work with the Session Initiation Protocol, or SIP, an Internet
Engineering Task Force standard that has been embraced by industry leaders such as Microsoft and Cisco. These efforts culminated
in the launch of our state-of-the-art SIP infrastructure, and in doing so we became the first major VoIP service provider to deploy
an end-to-end SIP network and services. In recent years, we have continued our pioneering efforts in SIP and these efforts have
yielded significant new releases.
In
2009 we began the process of expanding the suite of our communications offerings into the global video phone services market. In
the third quarter of 2009 we entered into an agreement with ACN Pacific Pty Ltd., a wholly-owned subsidiary of ACN, Inc., or ACN,
pursuant to which we provide digital video and voice-over-IP services in Australia and New Zealand to ACN Pacific. In December
2010 we entered into an agreement with ACN Korea, a wholly-owned subsidiary of ACN, pursuant to which we provide digital video
and voice-over-IP services in Korea.
In
2010 we continued to update our network by adding a video mail feature to our video phone applications and launching our joip mobile
application in July 2010. Following the launch of the mobile application, in October 2010 we entered into a sales agency
agreement with ACN pursuant to which ACN sells a private label version of joip Mobile under the ACN Mobile World brand in the United
States and Canada (the “Sales Agency Agreement”). In addition, we offer the joip Mobile application on a white-label
basis to other customers. Finally, we entered into affiliate agreements with different third parties pursuant to which such third
parties refer potential subscribers to our joip Mobile application.
In
April 2011 we entered into an introducer agreement with ACN Europe B.V., a wholly-owned subsidiary of ACN, pursuant to which ACN
Europe refers potential customers in different countries in Europe to a private label version of joip Mobile sold under the ACN
Mobile World brand (the “Introducer Agreement”). In November 2011 we entered into a service agreement with Momentis
U.S. Corp., a multi-level marketing company, pursuant to which Momentis refers potential customers in North America to a co-branded
offering of joip Mobile and other consumer VoIP products and services.
On
April 3, 2012, we entered into an amendment to the Sales Agency Agreement and Introducer Agreement (the “Amendment Letter”).
Pursuant to the terms of the Amendment Letter, we are required to pay all then-current commissions on a timely basis as required
under the agreements and a late fee in the amount of one percent per month of any past-due, unpaid commissions (which, as of December
31, 2014, was equal to approximately $1,659,000). In addition, beginning July 15, 2012, we are required to pay down any unpaid
past due amounts in an amount equal to at least $15,000 per month through June 15, 2013, and at least $25,000 per month thereafter
until such time as the unpaid balance is paid in full, and are required to pay in full any unpaid, past due amounts upon 30 days'
notice. In July 2012 we began making the $15,000 monthly payment, however due to our financial condition we suspended making the
monthly payments of the unpaid commissions and the current commissions in April 2013 with the oral consent of ACN and ACN Europe.
On June 12, 2014, each of us and our wholly-owned subsidiaries Delta Three Israel, Ltd., or "Delta Three Israel",
and DME Solutions, Inc., or "DME", and together with us and Delta Three Israel, the "deltathree Entities",
and ACN, ACN Europe, ACN Digital Phone Service, LLC, or "DPS", and together with ACN and ACN Europe, the "ACN Entities", entered
into the Amended and Restated Agreement Concerning Outstanding/Future Commissions and Security Agreement, or the "ACN Forbearance
Agreement". The ACN Forbearance Agreement amends the Amendment Letter, in regards to outstanding commissions due to be paid
by us to ACN and ACN Europe under the Sales Agency Agreement and Introducer Agreement.
The ACN Forbearance Agreement also amends that certain License Assignment entered into on February 7, 2013 between us and DPS and
the outstanding license assignment payment due to be paid by us to DPS.
The terms of the ACN
Forbearance Amendment provide as follows:
| · | commencing with the date of the ACN Forbearance
Agreement, a late fee in the amount of one percent (1%) per month accrues on any unpaid commissions and the license assignment
payment, and commencing on July 15, 2014, and continuing on the 15th day of each month thereafter the deltathree
Entities are obligated to pay to ACN and ACN Europe the interest that accrued during the previous month; |
| · | in addition, commencing on July 15, 2014,
and continuing on the 15th day of each month thereafter, the deltathree Entities are required to (i) pay down any
outstanding obligations, provided that the amount of each monthly payment will be equal to at least $114,000, and (ii) pay all
then-current commissions under the Sales Agency Agreement and Introducer Agreement and any cure periods provided for under
the respective agreements for non-payment will no longer apply; |
| · | so long as the deltathree Entities fulfill
the terms of the ACN Forbearance Agreement, the ACN Entities will forbear from exercising any rights they may have for any breach
by the deltathree Entities under the Sales Agency Agreement and the Introducer Agreement and permit the Company to pay the license
assignment payment over time in accordance with the terms and conditions of the ACN Forbearance Agreement until July 31, 2014,
or the "Initial Forbearance Period". Following the expiration of the Initial Forbearance Period, the ACN Entities' obligation
to forbear automatically renews on a monthly basis unless terminated by either party under the terms of the ACN Forbearance Agreement
until July 15, 2015, following which such the ACN Entities' obligation to forbear will not automatically renew; |
| · | upon the expiration of the Initial Forbearance
Period or any subsequent renewals, unless the ACN Entities' requirement to forbear is renewed, all unpaid obligations will become
immediately due and payable; |
| · | each of Delta Three Israel and DME guaranteed
the payment and performance of the Company's obligations under the license assignment and under the ACN Forbearance Agreement; |
| · | to secure the payment and performance
in full of all of their obligations under the agreement, the deltathree Entities granted to the ACN Entities a continuing security
interest in, and pledged to the ACN Entities, all of their right, title and interest in, to and under the collateral set forth
on Exhibit A of the ACN Forbearance Agreement; and |
| · | in the event of any Event of Default (as
defined in the ACN Forbearance agreement), all unpaid amounts due from the deltathree Entities will become immediately due and
payable and the ACN Entities may in their sole discretion terminate the ACN Forbearance Agreement and exercise their rights and
pursue all remedies available to them as a secured creditor and at law or in equity. |
We
did not make the payments we were required to make to the ACN Entities on July 15, 2014, described in the first and second bullet
points above and is currently in default under the ACN Forbearance Agreement. On September 29, 2014 ACN and we entered into the
Second Amendment to the ACN Forbearance Agreement. The amendment modified the initial due date of July 15, 2014 under the ACN Forbearance
Agreement to December 15, 2014 and provided that we are obligated to pay a fee of $50,000 on or before December 15, 2014. As of
March 18, 2015 we have not paid such amount to the ACN Entities, and pursuant to the terms of the Second Amendment a late payment
penalty fee of one percent (1%) of such amount is accruing on a monthly basis.
We
do not know when we will resume making such payments again, and there is no assurance that we will be able to do so in the near
future (if at all) or that until such time ACN and ACN Europe will continue to consent to our not making any such required payments
and not exercise any rights they may have under our respective agreements with them or under applicable law. In addition, in the
event of certain insolvency-related events defined in the agreements, all unpaid amounts will become immediately due and payable
effective immediately prior to such event. Such events include the filing of any petition or action for relief under law
relating to debtors; application or consent for the appointment of a receiver, trustee, or the like over substantial assets; execution
of a general assignment to creditors; general inability to pay debts as they come due; or the filing of any involuntary petition
against a party that is not dismissed within 60 days of its filing.
As
a complement to the initiatives we have taken to attempt to organically expand our businesses, we have also evaluated opportunities
for growth through strategic relationships. In February 2009 we consummated a transaction with D4 Holdings pursuant to which we
sold to D4 Holdings an aggregate of 39,000,000 shares of our common stock and a warrant to purchase up to an additional 30,000,000
shares of our common stock. D4 Holdings is a private investment fund whose ownership includes owners of ACN, a direct
seller of telecommunications services. As a result of the transactions with D4 Holdings, we expect to continue to seek
opportunities to provide services to ACN and enter into other commercial transactions that give us access to ACN’s international
marketing and distribution capabilities.
From
an operational standpoint, in 2012 we continued to focus our near-term strategy and market initiatives on growing our service provider
and digital next generation communications offerings while still supporting our core VoIP reseller and direct-to-consumer business
segments.
Going
forward, we expect to:
| • | actively market our products and services to those entities that wish to offer white-label digital next generation communications
offerings or sell our products and services on an affiliate basis; |
| • | pursue a targeted strategy of identifying and evaluating appropriate strategic collaborations, such as potentially engaging
in commercial transactions with ACN, that we hope will continue to expand and diversify our customer base; |
| • | market and sell our direct-to-consumer products and services through affiliates and our affiliate program; and |
| • | support and maintain our current reseller base, as we expect our revenue from this key channel will continue to represent a
significant percentage of our total revenue in the foreseeable future. |
Transactions
with D4 Holdings
On
February 10, 2009, we entered into a Securities Purchase Agreement with D4 Holdings LLC, or D4 Holdings, pursuant to which we issued
to D4 Holdings (i) 39,000,000 shares of our common stock, representing approximately 54.3% of the total number of issued and outstanding
shares of common stock following the transaction, for an aggregate purchase price of $1,170,000, paid in cash, and (ii) a warrant,
exercisable for ten years, to purchase up to an additional 30,000,000 shares of our common stock at an exercise price of $0.04
per share. The transaction closed on February 12, 2009.
Upon
the closing of the transaction and pursuant to the terms of the Purchase Agreement, Noam Bardin resigned as a director and the
board of directors appointed Robert Stevanovski and Anthony Cassara to serve on the board. In addition, Lior Samuelson
resigned as Chairman of the Board and remained a director, and Robert Stevanovski was appointed to serve as Chairman. Following
the closing of the transaction, our Board of Directors appointed three additional directors to serve on the Board. The appointments
of the three new directors became effective on March 28, 2009.
In
connection with the transaction, the parties also entered into an Investor Rights Agreement, pursuant to which we have agreed to
file, upon the request of D4 Holdings, a registration statement covering the resale of any shares of our common stock held by D4
Holdings (including the shares of common stock underlying the warrant issued to D4 Holdings). Subject to our ability to suspend
the effectiveness of the registration statement for a limited period of time under certain circumstances, we are required to maintain
the effectiveness of any such registration statement until the earlier of (i) the date on which all shares of common stock covered
by the registration statement have been sold thereunder or (ii) the date on which all such shares of common stock can be sold without
registration pursuant to Rule 144 or another similar exemption under the Securities Act of 1933. Subject to certain
limitations, D4 Holdings will also be entitled to “piggy-back” registration rights on all future registrations by and
any registrations initiated by our other stockholders.
On
March 1, 2010, we and our subsidiaries entered into a Loan and Security Agreement, or the “First Loan Agreement”, with
D4 Holdings pursuant to which D4 Holdings agreed to provide us and our subsidiaries a line of credit in a principal amount of $1,200,000.
On August 10, 2010, we and our subsidiaries entered into the Second Loan and Security Agreement, or the “Second Loan Agreement”,
with D4 Holdings, pursuant to which D4 Holdings agreed to provide us and subsidiaries an additional line of credit in a principal
amount of $1,000,000. In connection with the Second Loan Agreement, we issued to D4 Holdings a warrant to purchase up to 4,000,000
shares of our common stock at an exercise price of $0.1312 per share. We have drawn down all amounts available to be borrowed under
the two lines of credit.
On
March 2, 2011, we and our subsidiaries entered into the Third Loan and Security Agreement, or the “Third Loan Agreement”,
with D4 Holdings, pursuant to which D4 Holdings agreed to provide us and its subsidiaries an additional line of credit in a principal
amount of $1,600,000. Pursuant to the terms of the Convertible Promissory Note, or the “Convertible Note”, issued by
us in connection with the Third Loan Agreement, D4 Holdings may elect to convert all or any portion of the outstanding principal
amount under the Convertible Note into that number of shares of our common stock determined by dividing such principal amount by
$0.08 (as may be adjusted under the terms of the Convertible Note). Simultaneous with our entering into the Third Loan Agreement,
D4 Holdings and we entered into an amendment of the First Loan Agreement, pursuant to which (among other things) the maturity date
for repayment of principal under the First Loan Agreement was extended from March 1, 2011, to March 1, 2012, and subsequently extended
by oral agreement of the parties to July 1, 2012, and then subsequently orally extended again to January 2, 2014, pending the parties
finalizing and entering into a formal amendment. In connection with the Third Loan Agreement, we issued D4 Holdings a warrant to
purchase up to 1,000,000 shares of our common stock at an exercise price of $0.096 per share. We have drawn down the aggregate
principal amount available under the Third Loan Agreement, the principal amount of which can be converted by D4 Holdings into an
aggregate of 20,000,000 shares of our common stock.
On
September 12, 2011, we and our subsidiaries entered into the Fourth Loan and Security Agreement, or the “Fourth Loan Agreement”,
with D4 Holdings, pursuant to which D4 Holdings agreed to provide us and our subsidiaries an additional line of credit in a principal
amount of $300,000. We have drawn down all amounts available to be borrowed under the Fourth Loan Agreement.
On November 13, 2012,
we and our subsidiaries entered into the Third Amendment to Loan and Security Agreements, or the "Third Amendment", and
the Amendment to Warrant Agreements, or the "Warrants Amendment", with D4 Holdings. Pursuant to the Third Amendment and
the Warrants Amendment:
| · | the maturity date for repayment of principal
and interest under the First Loan Agreement was extended to January 2, 2014; |
| · | the maturity date for repayment of principal
and interest under the Second Loan Agreement was extended to January 2, 2015; |
| · | the maturity date for repayment of principal
and interest under each of the Third and Fourth Loan Agreements was extended to January 2, 2016; |
| · | all interest outstanding under each of
the loan agreements was added to the principal amount outstanding under the respective loan agreement and the promissory notes
issued pursuant to each respective loan agreement was increased by such amount; and |
| · | the exercise price under each of the Warrant
Agreements entered into by us and D4 Holdings as of February 12, 2009, August 10, 2010, and March 2, 2011 was amended to $0.02
per share. |
In connection with
the extension of the maturity dates under the Third Amendment, we issued to D4 Holdings a warrant, exercisable for ten years, to
purchase up to 10,000,000 shares of our common stock at an exercise price of $0.02 per share.
On
January 2, 2014, we did not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement, which
constituted an event of default thereunder and a cross-default under all our other loan agreements with D4 Holdings. On March 28,
2014, we and our subsidiaries entered into a Forbearance Agreement with D4 Holdings, or the "Forbearance Agreement".
Pursuant to the terms and conditions of the Forbearance Agreement, D4 Holdings agreed to forbear from taking any action with respect
to the events of default until the earlier of (i) December 31, 2014, (ii) the occurrence of a breach or default by us or our subsidiaries
under the Forbearance Agreement (which, in the event of certain undertakings of ours under the Forbearance Agreement, are not cured
within three days) or (iii) the occurrence of any new or additional event of default under our loan agreements with D4 Holdings.
In addition, to the extent not yet perfected we and our subsidiaries pledged and granted as a security interest to D4 Holdings
all of our right, title and interest in the collateral described in the Forbearance Agreement. In connection with the Forbearance
Agreement we also issued to D4 Holdings a warrant, exercisable for ten years, to purchase up to 10,000,000 shares of our common
stock at an exercise price of $0.02 per share.
On February 25,
2015, D4 Holdings sent a letter to our board of directors that indicated that within three to four weeks of the date of the letter
D4 Holdings intended to initiate a tender offer to purchase all of the outstanding shares of our common stock not owned by D4 Holdings
at a purchase price of $0.01 per share in cash. D4
Holdings stated that it is not willing to enter into further forbearance arrangements with us or to provide us additional financing.
Finally, D4 Holdings indicated that, in its capacity as majority stockholder of our company, it is presently not interested in
either selling its shares or voting in favor of any alternative transaction, including a merger or sale of our assets or business
or similar transaction.
On March 26, 2015 D4 Holdings sent a letter
to our board of directors that indicated that D4 Holdings withdraws its previous offer and instead proposes to acquire us through
a merger of our company with a newly-formed acquisition subsidiary of D4 Holdings. The transaction will be structured as a stock
purchase, pursuant to which D4 Holdings will purchase all of the outstanding shares of our common stock not owned by D4 Holdings.
D4 Holdings restated its previous offer of $0.01 per share, to be paid in cash from its own funds, and accordingly there will be
no financing contingency. In addition, D4 Holdings will assume all of our outstanding debt, currently valued at approximately $7.9
million.
The completion of the transaction will be
conditioned upon, among other things, approval by a special committee of our board of directors consisting of independent directors.
If the transaction is completed, our common stock will no longer be registered under Section 12 of the Exchange Act.
Industry
Background
VoIP
technology translates voice into data packets, transmits the packets over data networks such as the Internet or privately managed
networks (such as our network), and reconverts them into voice at the destination. Unlike traditional telephone networks, VoIP
does not use dedicated circuits for each telephone call; instead, the same VoIP network can be shared by multiple users for voice,
data and video simultaneously. This type of data network is more efficient than a dedicated circuit network because the data network
is not restricted by the one-call, one-line limitation of a traditional telephone network and, as a result, greater traffic can
be transmitted over this data network. This improved efficiency creates cost savings that can be passed on to consumers in the
form of lower rates or retained by the VoIP provider. Significant cost savings are also achieved for international telephone calls
carried over data networks primarily because they bypass the international settlement process, which represents a significant portion
of international long distance tariffs. Additionally, VoIP allows for features that are not available on traditional telephony
networks - particularly at the consumer level - including voice mail to email forwarding, find me/follow me, web-based control
of call forwarding preferences, user account review/revision and a host of other features and functions.
Beyond
cost savings, we believe that VoIP telephony technologies will further the potential for the Internet to become the preferred medium
of communications and commerce. As a result, VoIP has experienced significant growth in recent years due to:
| • | improved quality and reliability of VoIP calls due to technological advances, increased network development and greater bandwidth
capacity; |
| • | new product development that allows VoIP providers to offer services not currently offered by traditional telephone companies; |
| • | greatly improved ease of use, whereby the end-user does not perceive a difference between use of a traditional telephone and
a broadband telephone; |
| • | increasing demand for long distance communication services driven by the increased mobility of the global workforce; and |
| • | increasing demand for lower cost telephone service around the world.. |
As
a result of these growth trends, various service providers, enterprises and consumers are continuing to procure offerings from
VoIP providers such as deltathree. Specifically, consumers in emerging markets are increasingly using VoIP-enabled services, such
as IP telephones, to realize significant cost savings on long distance and international calls, while in markets where a significant
number of consumers have access to broadband internet services these consumers are increasingly viewing VoIP as a viable and more
affordable substitute for their traditional voice telecommunications provider. In addition, as broadband connectivity
has become more available and less expensive around the world, it is now possible for providers like us to offer video as well
as voice services to businesses and residential consumers.
Our
Products and Services
Products
We
have built a privately-managed, global network using IP technology and offer our customers a suite of IP video and voice products.
Our products include:
joip
Mobile Application. Our joip Mobile application is a cellular phone application providing low cost mobile calls
over 3G cellular networks as well as WiFi networks. Cellular operating systems supported by joip Mobile currently include the iPhone,
Google Android, Nokia Symbian and Blackberry.
Digital
Video and Voice-over-IP Services. Through the use of our network we offer a white-label solution in which our customers have
the ability to customize, implement and rapidly launch digital next generation communications offerings with minimal risk and investment. For
our potential partners, we offer a full spectrum of service provider back-end support services, including network management, billing,
provisioning, e-commerce as well as custom web and application development.
Broadband
Phone. Our Broadband Phone product is a phone replacement solution available to business and retail customers over the "last
mile" through broadband connections via cable modem, DSL or fixed wireless. In addition to offering capabilities similar to
those offered by traditional telephony providers and allowing users to use their existing phone, Broadband Phone enables a user
to conveniently operate features and retrieve voice mail through email, web or a phone interface.
PC-to-Phone.
Our PC-to-Phone offering enables a user to conveniently and inexpensively place a call to a standard telephone anywhere in the
world directly from a personal computer while remaining on-line.
Services
We
provide a robust set of value-added services that enables us to address the challenges that have traditionally made the provision
of telecommunications services difficult. These operations management tools include the following:
| • | video mail: we provide a video mail feature for our video phone applications; |
| • | account provisioning: we provide our service provider and reseller customers with a dedicated
Web page through which they can order additional services or accounts, generate and activate PINs and perform other customary implementation
functions; |
| • | payment processing systems: we provide our customers with a fraud detection and prevention
system to permit secure credit card transactions over the Web; |
| • | billing and account management: we provide our customers with real-time, Web-based access
to billing records to check billing and usage information or to increase prepaid accounts; |
| • | customer care: we have moved and consolidated traditional first tier customer care functions
onto the Web for ease and flexibility and support this with second tier customer care; and |
| • | network operations care: we provide a Network Operations Center, or NOC, automated trouble
ticket system, which enables our customers to submit, manage, and follow-up with technical questions and issues online. |
The
provision of VoIP products and services through our service provider and reseller sales channel and our direct-to-consumer channel
accounted for 85.7% and 12.4% of our total revenues in 2013, respectively.
Our
Distribution Channels
We
market, support and distribute our products and services to tens of thousands of active users around the globe through our service
provider and reseller channel and our direct-to-consumer channel.
Service
Provider and Reseller Channel
We
have developed high-value solutions for the large number of service providers and resellers that are focused on providing their
customers with video and voice-over-IP products and services.
Our
Hosted Consumer VoIP Solution leverages our VoIP experience and delivers to our service providers, resellers, and various
corporate customers a customizable, private-label suite of VoIP products and services. Using our infrastructure, we enable these
enterprises to offer their customers different combinations of our basic products and services, accessible through a single account.
Direct-to-Consumer
Channel
Our
direct-to-consumer channel includes our joip Mobile application, which is a cellular phone application providing low cost mobile
calls over 3G cellular networks as well as WiFi networks, and our iConnectHere offering, which provides VoIP products and services
directly to consumers and small businesses online.
joip
Mobile. joip Mobile is our cellular phone application providing low cost mobile calls over 3G cellular networks
as well as WiFi networks. We market and sell joip Mobile directly to consumers as well as through affiliates and our affiliate
program. In addition, ACN sells a private label version of joip Mobile under the ACN Mobile World brand.
iConnectHere.
iConnectHere demonstrates our products, services and hosting capabilities to our reseller customers and service providers. Through
iConnectHere, an account holder can access all of our product offerings, including our mobile application, Broadband Phone and
PC-to-Phone. Additionally, iConnectHere permits us to collect usage information on our products and services and enables us to
provide our service provider and reseller customers with key information and recommendations regarding implementation of our products
and services.
Through
iConnectHere, consumer users can:
| • | sign up for any of our services, including our mobile application, Broadband Phone, PC-to-Phone; |
| • | download our software and/or order IP-based Broadband Phone devices; |
| • | recharge their accounts, either by entering their credit card information or authorizing automatic recharging; |
| • | send a PC-to-Phone call; |
| • | check real-time billing and usage information; |
| • | communicate by e-mail with a customer service representative; and |
| • | view answers to frequently-asked questions. |
Our
Strategy
Our
strategy is to become a leading worldwide next generation service provider and enabler of video and voice-over-IP products and
services, and to either sell our products and services on a white-label basis to other customers (who can then resell these products
and services) or enter into affiliate agreements with different third parties pursuant to which such third parties refer potential
subscribers to our products and services. The following are key elements of our strategy:
Capitalize
on the Growth of the Video and Voice-over-IP Marketplace. We believe we are well positioned to take advantage of the expected
growth of the video and voice-over-IP services markets. We plan to focus our efforts and resources on increasing our
share of the next generation service provider and enabler market while simultaneously maintaining our reseller business. We also
allow our direct consumers to sign up for one account and choose a number of next generation communication services and products
linked to that account.
Offer
Flexible and Modular Deployment Alternatives. We offer our service providers and resellers a choice of deployment alternatives
ranging from full outsourcing to partial outsourcing through our modular offering suite. Depending on the particular needs of each
of our customers, we design our offering to fit within their business objectives, available resources and desired level of participation.
We can develop and integrate specific features and functions into our package, such as various network elements, access components,
fulfillment, and the specific feature/functions the provider can offer to its end-users.
Pursue
Strategic Relationships. In addition to our strategy and actions to grow organically as described above, we also
actively evaluate and pursue appropriate strategic relationships that we believe will continue to expand our customer base and
grow our revenues. As discussed above under “ - Transactions with D4 Holdings”, in February 2009 we consummated a transaction
with D4 Holdings pursuant to which we sold 39,000,000 shares of our common stock and a warrant to purchase up to an additional
30,000,000 shares of our common stock. D4 Holdings is a private investment fund whose ownership includes owners of ACN, a
direct seller of telecommunications services. In October 2010 we entered into a sales agency agreement with ACN pursuant to
which ACN sells a private label version of joip Mobile under the ACN Mobile World brand. In December 2010 we entered into an agreement
with ACN Korea, a wholly-owned subsidiary of ACN, pursuant to which we provide digital video and voice-over-IP services in Korea.
In April 2011 we entered into an introducer agreement with ACN Europe B.V., a wholly-owned subsidiary of ACN, pursuant to which
ACN Europe refers potential customers in different countries in Europe to a private label version of joip Mobile sold under the
ACN Mobile World brand. As a result of the investment in our company by D4 Holdings, we expect to continue to seek opportunities
to provide services to ACN and enter into other commercial transactions that give us access to ACN’s international marketing
and distribution capabilities.
Sales
and Marketing
We
sell and market our products and services through our service provider and reseller channel and our direct-to-consumer channel.
In general, our sales and marketing activities include:
| • | developing, deploying and supporting local-specific product features and services, such as multiple language capabilities,
different currency capabilities, and various payment methods; |
| • | engaging in strategic relationships with customers (including licensed providers); |
| • | entering into relationships with affiliates that sell our products and services, generally as part of our affiliate programs;
and |
| • | using various on-line advertising and search strategies to target and optimize sales efforts. |
Service
Provider and Reseller Channel
Service
Providers. Our experience in deploying sophisticated solutions provides us with leverage as we introduce
these services to other service providers.
Reseller
Program. Through our reseller program, we contract with smaller service providers and resellers around
the world, which in turn sell our products and services under their own brand, a white-label brand or our deltathree brand to retailers,
businesses, Internet cafés and others in their local markets. Our experience in providing differentiated VoIP solutions
in the emerging international telecommunications environment enables us to effectively enter new markets as they open to competition.
Direct-to-Consumer
Channel
joip
Mobile. Our joip Mobile application is provided by us directly to consumers as well as through our affiliate program. In
addition, ACN sells a private label version of joip Mobile under the ACN Mobile World brand through its independent sales representatives.
Finally, we offer the joip Mobile application on a white-label basis to other customers.
iConnectHere.
iConnectHere provides VoIP products and services directly to consumers and small businesses online. Through iConnectHere, an account
holder can access all of our product offerings, including our mobile application, Broadband Phone and PC-to-Phone.
Our
Infrastructure
Network
In
order to deliver our products and services, we operate a privately-managed IP network. By managing our own network, we have the
ability to regulate traffic volumes and to directly control the quality of service from each originating point of presence, or
POP, to the termination point via a variety of termination options. Our ability to interconnect to a wide variety of termination
options increases the diversity and robustness of our network, minimizes and eliminates single points of failure, and simultaneously
allows us to benefit from pricing differences between vendors to the same termination points. In addition, our network allows us
to avoid the significant transmission delays associated with the Internet, which may impede delivery of high quality, reliable
services to our users.
In
2001, we introduced our SIP infrastructure. The SIP protocol is one of the most advanced VoIP protocols and, unlike its predecessors,
which were modeled after traditional telephony protocols, SIP has the ability to scale with a distributed architecture and at a
lower cost. SIP’s superior attributes also include faster and more cost effective development and lower hardware requirements,
which allows us to incur lower capital expenditure costs. Our SIP network currently powers all of our offerings. In
recent years, we have continued our pioneering efforts in SIP and these efforts have yielded significant new releases. For example,
in 2007 we released a next generation SIP-based PC-to-Phone application, certified many new devices which function as access points
to our services, and added new features and new calling plans to our offerings. In 2009 we began the process of expanding
the suite of our communications offerings into the global video phone services market.
Our
network is built around a high availability backbone that connects New Jersey, Atlanta, London, Seoul and Sydney. In
each of, and between, these locations we maintain multiple interconnections or peering arrangements with Internet backbone and
voice providers. These points are strategically located to allow access from our network to and from the Internet with a high level
of performance. While operating as a private extension of the Internet, our backbone has a high level of security designed to isolate
it from security threats found on the public Internet. During 2014 we migrated some
of our services to the "cloud" and intend to shut down our facilities at one or more of these locations during 2015.
Access
to our network is possible through several products and services. A call can originate from a mobile phone using our joip Mobile
application, the PC-to-Phone product using our downloadable software application “soft-phones,” a Web browser, or Broadband
Phone devices. These calls enter our network from the Internet through our interconnection points.
Our
network can terminate calls through our and our termination providers’ POPs. Termination decisions are based on a sophisticated
routing system that applies routing rules based on origination point, termination cost and other factors. These rules are
consistently updated to ensure a high level of quality and economic efficiency. Each termination port is carefully managed with
capacity planning tools and techniques to provide cost-effective service to customers, along with multiple termination options
to ensure the highest possible levels of redundancy.
We
are a party to service agreements with several telecommunications providers, including foreign telephone companies, Internet backbone
providers and others. Pursuant to these agreements, we can transport video and voice data packets to our hubs and terminate calls
throughout the world in a cost effective and efficient manner.
Support
Our
NOC monitors and manages our network from a central location, seven days a week, 24 hours a day. The NOC monitors all aspects
of our network, including the routers, databases, switches, leased lines, Internet connections, gatekeepers and gateways to ensure
that they are functioning at optimal levels. In the event of a failure of any of these network components, NOC personnel are provided
with a real time, systems-generated notification via an instant messaging system consisting of pagers, cellular phones, screen
pop-ups and e-mail that identifies the malfunction so that proper measures can be taken to restore service in a timely fashion.
Our NOC utilizes a combination of industry technologies as well as unique applications developed by us. The NOC serves all of the
different parts of our operations environment, including network nodes, Web servers and specific applications.
We
provide customer support on various levels to different customers. With respect to our service provider and reseller customers,
we provide customer care and technical support directly to these customers and they in turn provide their own support directly
to the end-users. Customers of joip Mobile and iConnectHere receive technical support and customer care through e-mail support.
Our
services are supported by our on-line interactive customer service and billing center, which enables an end-user to set up an account,
receive an account number and a PIN, pay by credit card for services, find answers to frequently asked questions and contact customer
service representatives. Once a user has established an account, the user can prepay for additional usage by credit card as well
as access real-time detailed information such as call logs and transaction records. Through the on-line billing system, a user
can personalize the billing information to select the data most relevant to them. This on-line interactive customer service and
billing center is supported by a human customer care contact center that provides voice, e-mail and instant messaging support to
the customers.
Suppliers
We
outsource to third-party vendors the provisioning of certain of our local telecommunications services, including local phone numbers,
access to the public switched telephone network, or PSTN, operator assistance, directory listings and assistance, E-911 emergency
services and local number portability. We also outsource the development of our applications and certain of the features ancillary
to our services, as well as provisioning of our consumer premises equipment, such as our analog telephone adapters, IP Phones and
gateways, and certain aspects of our customer care services. We do not rely on any one specific vendor for providing these services,
except for E-911 emergency services and certain specific services of customer care. While we believe our relations with our suppliers
are good, we believe that we could replace our suppliers if necessary and that although our ability to provide services to our
customers may be impacted in such a case we do not expect that this would have a material adverse affect on our business, financial
condition and results of operation.
Proprietary
Rights
We
rely and expect to be able to rely on trademark and trade secret laws, confidentiality agreements and other contractual arrangements
with our employees, strategic partners and others to protect our proprietary rights.
We
have registered trademarks for “deltathree”, “deltathree making VoIP work for you”, “the IP Communications
Network”, “iConnectHere”, “joip”, “joipy”, “joip just talk”, “Click
It”, “iconnecthere.com” and other trademarks in the United States and internationally. In connection
with our acquisition of the Go2Call businesses, we acquired the “Go2Call” trademark and a variety of trademarked derivatives
of “Go2Call”. These trademarks may not provide adequate protection against competitive technology and may not be held
valid and enforceable if challenged. We do not own any registered copyrights.
To
further safeguard our intellectual property, we have a policy that requires our employees and contractors to execute confidentiality
and assignment of inventions agreements when they begin their relationships with us.
Regulation
Regulatory
Environment Overview
The
use of the Internet and private IP networks to provide VoIP service is a relatively recent market development. Although the provision
of such services is currently not as regulated as traditional telephony services within the United States, the Federal Communications
Commission, or FCC, has applied some regulation to certain types of VoIP services and is reviewing whether to apply additional
regulations to VoIP services. In addition, several foreign governments have adopted or proposed regulations that could restrict
or prohibit the provision of VoIP services. Regulation of Internet telephony providers and services may materially and adversely
affect our business, financial condition, operating results and future prospects, particularly if increased numbers of governments
impose regulations restricting the use and sale of IP telephony services. In addition, to the extent we become required to contribute
to regulatory funds and collect and remit regulatory fees, taxes and surcharges this will increases our costs, which may result
in either our increasing the retail price of our service offerings or reducing our profitability.
Federal
Regulation
Regulatory
Classification of VoIP Services
Although
there are several regulatory proceedings currently pending before federal authorities, providers of interconnected VoIP services
are lightly regulated compared to providers of traditional telecommunications services. On February 12, 2004, the FCC initiated
a generic rulemaking proceeding concerning the provision of voice and other services using IP technology, including assessing whether
VoIP services should be classified as information services or telecommunications services. The rulemaking is ongoing and we cannot
predict the outcome of this proceeding. In November 2004, the FCC determined that certain interconnected VoIP services (meaning
VoIP services that can be used to send and receive calls to or from the PSTN), including some services that are similar to ours,
should be considered interstate services subject to federal rather than state jurisdiction. Although this ruling was
appealed by several states, on March 21, 2007, the United States Court of Appeals for the Eighth Circuit affirmed the FCC’s
determination.
The
FCC’s generic rulemaking proceeding could result in the FCC determining, for instance, that certain types of Internet telephony
should be regulated like basic telecommunications services. Thus, Internet telephony would no longer be exempt from more onerous
telecommunications-related regulatory obligations, could potentially become subject to state telecommunications regulations, and
could become subject to other economic regulations typically imposed on traditional telecommunications carriers.
VoIP
E-911 Matters
On
June 3, 2005, the FCC released an order and notice of proposed rulemaking concerning VoIP emergency 911 services. The order
set forth two primary requirements for providers of interconnected VoIP services. The order applies to our iConnectHere and joip
customers, or our direct consumers. We do not believe that we are responsible for compliance with this order when we sell our service
wholesale to companies who then offer the service to retail end-users. We cannot predict whether we would be subject to any third-party
litigation in connection with such customers who resell our services or whether the rules will be interpreted as applicable to
those who wholesale interconnected VoIP services.
The
order set forth two primary requirements for providers of interconnected VoIP services. First, the order requires providers of
interconnected VoIP services like us to notify our retail customers of the differences between the emergency services available
through our offerings and those available through traditional telephony providers. We also had to receive affirmative acknowledgment
from some of our retail customers that they understand the nature of the emergency services available through our service. On September 27,
2005, the FCC's Enforcement Bureau released an order stating that the Enforcement Bureau will not pursue enforcement actions against
interconnected VoIP providers that have received affirmative acknowledgement from at least 90% of their subscribers. We received
affirmative acknowledgment from more than 95% of our relevant customers that they understand the nature of the emergency services
available through our service, and thus we believe we are substantially in compliance with the first aspect of the FCC's June 3
order.
Second,
the order required providers of interconnected VoIP services like us to offer enhanced emergency dialing capabilities, or E-911,
to all of our retail customers by November 28, 2005. Under the terms of the order, we are required to use the dedicated wireline
E-911 network to transmit customers' 911 calls, callback number and customer-provided location information to the emergency authority
serving the customer's specified location. On November 7, 2005, the FCC's Enforcement Bureau issued a Public Notice with respect
to that requirement. The Public Notice indicated that providers who have not fully complied with the enhanced emergency dialing
capabilities requirement are not required to discontinue the provision of services to existing customers, but that the FCC expects
that such providers will discontinue marketing their services and accepting new customers in areas in which the providers cannot
offer enhanced emergency dialing capabilities where such capabilities are otherwise available.
Almost
all of our retail customers currently receive E-911 service in conformity with the FCC’s order. Like many interconnected
VoIP providers, we rely on third parties to route emergency calls originated by our customers. In certain instances and for some
of our customers, the third party provider may route 911 calls to an unofficial emergency call center. Such unofficial call centers
may not be able to receive appropriate call back information. To the extent that they are so able or callers provide their location
information the emergency dispatchers in such call centers may not then be able to route such calls to the appropriate public safety
answering point. The FCC could find that routing calls in this manner violates its rules, potentially subjecting us to enforcement
actions including, but not limited to, fines, cease and desist orders, or other penalties. Moreover, some customers who were receiving
service prior to the FCC’s deadline for compliance with the E-911 regulations may not receive such service. The FCC permitted
service providers to continue to provide service to those existing customers rather than disconnect those customers. Pursuant to
the FCC’s requirement, after the implementation of the FCC E-911 requirements, we provide services to our new retail customers
only where we can provide the FCC required E-911 service. We may be required to stop serving those customers to whom we cannot
provide the required enhanced emergency dialing capabilities that were being serviced prior to the issuance of the FCC’s
rules at any time.
The
FCC is considering modifying its VoIP E-911 rules. In June 2007, the FCC released a Notice of Proposed Rulemaking to
consider whether it should impose additional obligations on interconnected VoIP providers. Specifically, the FCC considered
mandating that interconnected VoIP providers implement a solution that will allow for automatically determining the location of
their customers for purposes of E-911 rather than require customers to manually update their existing location information (as
is the case under the current regulations). Moreover, the Notice included a tentative conclusion that interconnected
VoIP providers that allow their service to be used in more than one location, like us, be required to meet the same customer location
accuracy standards applicable to providers of mobile telecommunications services. In September 2010, the FCC released
a Notice of Inquiry again requesting comment on, among other issues, whether interconnected VoIP providers should be required to
provide automatic location information about their customers rather than requiring customers to self-report their location. Additionally,
the Notice of Inquiry sought comment on whether the FCC’s rules concerning the delivery of emergency services should be extended
to non-interconnected VoIP services as well as to mobile VoIP applications used on smartphones, computers and other devices. At
this time we cannot predict the outcome of these proceedings or their potential impact on our business.
See
“State and Local Regulation” below for a discussion of fees we may collect in the future in connection with providing
E-911.
Communications
Assistance for Law Enforcement Act
The
Communications Assistance for Law Enforcement Act, or CALEA, requires certain communications service providers to assist law enforcement
agencies in conducting lawfully authorized electronic surveillance. On September 23, 2005, the FCC released an order concluding
that CALEA applies to interconnected VoIP providers. In May 2006 the FCC released an order finding that broadband Internet access
service providers and interconnected VoIP providers are required to implement the same type of CALEA requirements that have been
applied to wireline telecommunications carriers. These include obligations to (1) ensure that communications equipment, facilities,
and services meet interception assistance capability requirements and (2) develop system security policies and procedures to define
employee supervision and record retention requirements. As a result of the steps we have taken, we believe that we comply with
CALEA.
Universal
Service Fund
The
FCC decided in June 2006 that interconnected VoIP service providers should be required to contribute to the universal service fund,
or USF. The amount of universal service contribution for interconnected VoIP service providers is based on a percentage of revenues
earned from end-user interstate services. The FCC developed three alternatives under which an interconnected VoIP service provider
may elect to calculate its universal service contribution: (1) a safe harbor that assumes 64.9% of the provider’s end-user
revenues are interstate; (2) a traffic study to determine an allocation for interstate end-user revenues; or (3) actual
interstate and international end-user revenues. If an interconnected VoIP service provider calculates its universal service contributions
based on its actual percentage of interstate calls, the FCC suggested that its preemption of state regulation of such services
may no longer apply, in which case the interconnected VoIP service provider could be subject to regulation by each state in which
it operates as well as federal regulation. In addition, the FCC is considering a number of proposals that could alter the way that
the USF is assessed. For instance, the FCC is considering an assessment based on the use of telephone numbers. The U.S. Congress
may also provide the FCC with additional authority to reform USF or mandate a particular methodology. At this time we
cannot predict what impact, if any, USF reform may have on our business.
Numerous
states may attempt to impose state universal service contribution requirements on interconnected VoIP providers such as deltathree.
At this time, various states – including Kansas, Nebraska and New Mexico – claim that they have the right to require
interconnected VoIP providers to contribute to their respective USF funds. On March 3, 2008, the U.S. District Court
for Nebraska issued a preliminary injunction and found that Nebraska's state Public Service Commission does not have jurisdiction
to require Universal Service contributions from VoIP providers. On May 1, 2009, a panel of the U.S. Circuit Court of Appeals for
the Eighth Circuit affirmed the U.S. District court ruling. In response, the Nebraska and New Mexico state commissions filed a
petition with the FCC seeking the authority to impose state USF contribution obligations on interconnected VoIP providers, like
us, and the FCC granted the petition. As a result of this ruling, a number of other states have either stated that
offerings such as ours may be subject to their respective state USF or are considering imposing such obligations on us. We
would likely pass through to our customers in those states any such state USF fees, potentially making our services less competitive
with offerings available from traditional providers of telecommunications services, which may cause us to lose customers in those
states. In addition, in the past some states have attempted to impose retroactive application of any state USF
obligations. Retroactive applicability of any state USF fees would effectively bar us from collecting such fees from our customers,
reducing our future profits.
Customer
Proprietary Network Information
On
April 2, 2007, the FCC issued an order that tightened existing rules on protection and use of Customer Proprietary Network Information,
or CPNI, and extended coverage of the CPNI rules to interconnected VoIP service providers. Among other things, the Order imposes
greater obligations on us and other companies like us to protect CPNI, acquire customer consent prior to engaging in certain kinds
of marketing efforts based on CPNI, train our employees concerning protecting (and the use of) CPNI and to file formal certifications
with the FCC regarding procedures for protecting this information. As a result of the steps we have taken, we believe
that we comply with this Order.
Access
for People with Disabilities
Effective
October 5, 2007, interconnected VoIP providers like us became required to, among other things, make certain that their equipment
and service is accessible to and usable by individuals with disabilities, if readily achievable. In addition, interconnected VoIP
providers like us became obligated to contribute to the Telecommunications Relay Services, or TRS, fund and to offer 711 abbreviated
dialing for access to relay services. Following March 31, 2009, interconnected VoIP providers are required to route such 711 calls
to the appropriate TRS relay center serving the state in which the caller is located or the relay center corresponding to the caller’s
last registered address. As a result of the steps we have taken, we believe that we comply with the applicable requirements.
Regulatory
Fees
Effective
November 2007, the FCC adopted an Order concerning the collection of regulatory fees for Fiscal Year 2007 requiring the collection
of such fees from interconnected VoIP providers like us. Like other interconnected VoIP providers, we now pay regulatory fees based
on interstate and international revenues.
Local
Number Portability
On
November 8, 2007, the FCC released an Order relating to local number portability imposing local number portability, or LNP, and
related obligations on interconnected VoIP Providers like us. The Order requires interconnected VoIP providers to contribute to
shared numbering administration costs. Additionally, the Order mandates that we process certain kinds of telephone number porting
requests within certain timeframes. As a result of the steps we have taken, we believe that we comply with this Order.
Subsequently, on May 13, 2009, the FCC released another order concerning LNP that further reduces the porting timeframe for certain
types of telephone number porting requests that interconnected VoIP providers, like us, have to process. Since we are not a licensed
telecommunications carrier, we must rely on third parties to comply with these porting obligations. If these third parties fail
to comply with these obligations we could be subject to fines, forfeitures and other penalties by the FCC or state public utilities
commissions or we could face legal liability in state or federal court from customers or carriers. The FCC also released a Further
Notice of Proposed Rulemaking to refresh the record on how to further improve the porting process, and how to potentially expand
the new one business day porting timeframe to other kinds of ports. We cannot predict the outcome of this proceeding or its potential
impact on us at this time.
Intercarrier
Compensation
The
FCC is actively considering reform of the intercarrier compensation system, which is a set of FCC rules and regulations by which
telecommunications carriers compensate each other for the use of their respective networks. These rules and regulations affect
the prices we pay to our suppliers for access to the facilities and services that they provide to us, such as termination of calls
by our customers onto the public switched telephone network. At this time we cannot predict what impact, if any, new intercarrier
compensation regulations would have on our business.
Discontinuance
Requirements
In
May 2009, the FCC extended discontinuance rules that apply to non-dominant common carriers to interconnected VoIP providers, like
us. The FCC's rules require non-dominant domestic carriers to provide notice to customers at least 30 days prior to discontinuing
service to a telephone exchange, toll stations serving a community in whole or in part, and other similar activities that affect
a community or part of a community. Carriers must inform certain state authorities of the discontinuation, and obtain prior FCC
approval before undertaking the service disruption. The FCC's rules allow for streamlined treatment for FCC discontinuance approvals
and interconnected VoIP providers will be able to take advantage of the same streamlined procedures afforded to non-dominant carriers.
It is not yet clear how these rules apply to interconnected VoIP providers. But in the event we discontinue one of our
service offerings in its entirety or if we were to exit the market in whole we would likely have to comply with these new rules.
We do not expect these new obligations to have a material impact on our business.
Katrina
Reporting Requirements
In
June 2007, the FCC adopted various recommendations from its Independent Panel Reviewing the Impact of Hurricane Katrina on Communications
Networks Panel, including a requirement that certain interconnected VoIP providers submit reports regarding the reliability and
resiliency of their 9-1-1 systems. At this time, we are not subject to these reporting requirements but may become subject in the
future.
Open
Internet, or “Net Neutrality”, Obligations
We
rely upon providers of broadband Internet access services to offer our services to our customers. The FCC recently adopted “open
Internet” rules that would, among other things, prohibit fixed providers of broadband Internet access services from blocking,
impairing or downgrading such access. Wireless providers of broadband Internet access services would be prohibited from
blocking VoIP applications like ours. The open Internet rules are not yet effective and, as a result of both legislative
efforts to overturn the rules as well as potential appeals of the passage of the rules, it is unclear whether (and when) the rules
will become effective. While we are not aware of any provider of broadband Internet access attempting to interfere with
our Internet access, the lack of enforceable rules could potentially negatively impact our service offerings and impede our ability
to offer new services that require significant Internet bandwidth.
State
and Local Regulation
Some
state and local regulatory authorities believe they retain jurisdiction to regulate the provision of, and impose taxes, fees and
surcharges on, intrastate Internet and VoIP telephony services, and have attempted to impose such taxes, fees and surcharges, such
as a fee for providing E-911 service. Rulings by the state commissions on the regulatory considerations affecting Internet and
IP telephony services could affect our operations and revenues, and we cannot predict whether state commissions will be permitted
to regulate the services we offer in the future.
We
paid approximately $11,000 of state and local taxes and other fees during 2014. To the extent we increase the cost
of services to our customers to recoup some of the costs of compliance this will have the effect of decreasing any price advantage
we may have over traditional telecommunications companies.
In
addition, it is possible that we will be required to collect and remit taxes, fees and surcharges in other states and local jurisdictions
and which such authorities may take the position that we should have collected. If so, they may seek to collect those past taxes,
fees and surcharges from us and impose fines, penalties or interest charges on us. Our payment of these past taxes, fees and surcharges,
as well as penalties and interest charges, could have a material adverse effect on us.
International
Regulation
The
regulatory treatment of Internet and Internet-based voice services, including IP telephony or VoIP, outside of the United States
varies widely from country to country. A number of countries may prohibit Internet and IP telephony, while other countries expressly
permit but regulate Internet and IP telephony. Some countries evaluate proposed Internet and IP telephony service on a case-by-case
basis to determine whether any regulation is necessary or whether it should be regulated as a voice service or as another telecommunications
or data service. Finally, in many countries neither Internet nor IP telephony have been addressed by legislation or regulatory
action as of the date of this filing. Although we strive to comply with applicable international IP telephony regulations, we cannot
be certain that we are in compliance with all of the relevant regulations at any given point in time.
In
2002, the European Commission adopted a set of directives for a new framework (Regulatory Framework) for electronic communications
regulation that, in part, attempts to harmonize the regulations that apply to services regardless of the technology used by the
provider. The Regulatory Framework was further amended in November 2009. Under the Regulatory Framework, there is no distinction
in regulation made based upon technology between switched or packet-based networks. As a result, some types of IP telephony and
VoIP services may be regulated like traditional telephony services while others may be subject to less stringent regulation. The
European Commission has published a staff working paper aimed at clarifying the conditions applicable to providers of IP-based
services. The working paper identifies various issues that may arise in relation to IP-based services including the regulatory
classification of Internet telephony and VoIP under the Regulatory Framework. The European Regulators Group (consisting of regulators
from European Union Member States and the European Commission) has adopted a Common Statement for VoIP regulation. The European
Commission currently is reviewing how IP telephony services fit into the Regulatory Framework and analyzing other issues associated
with IP telephony, such as access to numbering resources and provision of emergency services. Although the European Commission
has recommended that a “light touch” to regulation be taken, we cannot predict what future actions the European Commission,
Member States, and courts reviewing the Regulatory Framework may take regarding IP telephony and related matters, or what impact,
if any, such actions may have on our business.
Based
on the European Commission's current position, we believe that most providers of IP telephony would be subjected to no more than
minimal regulation such as a general authorizations or declaration requirements that may be imposed by the European Union Member
States. Several Member States have issued statements or regulations concerning IP telephony and VoIP while others have issued consultations
requesting industry comments on the applicability of the Regulatory Framework to various IP telephony and VoIP services in their
respective countries. However, since the Commission's findings on IP telephony are not binding on the Member States, we cannot
assure you that the services provided over our network will not be deemed “voice telephony” subject to heightened regulation
by one or more EU Member States. Although Member States are required to adhere to the Regulatory Framework, Member States may not
take a uniform approach in regulating a particular Internet-enabled service including IP telephony. We cannot predict the manner
in which Member States will regulate our particular services.
As
we make our services available in foreign countries, and as we facilitate sales by our network partners to end-users located in
foreign countries, such countries may claim that we are required to qualify to do business in the particular foreign country. Such
countries may also claim that we are subject to regulation, including requirements to obtain authorization for the provision of
voice telephony or other telecommunications services, or for the operation of telecommunications networks. It is also
possible that such countries may claim that we are prohibited in all cases from providing our services or conducting our business
in those countries. Failure to qualify as a foreign corporation in certain jurisdictions, or to comply with foreign laws and regulations,
may adversely affect our business. In addition, we cannot predict how a regulatory or policy change of a particular country might
affect the provision of our services.
Our
network partners may also currently be, or in the future may become, subject to requirements to qualify to do business in a particular
foreign country, comply with regulations (including requirements to obtain authorizations for the provision of voice telephony
or other telecommunications services or for the operation of telecommunications networks) or cease providing services or conducting
their business as conducted in that country. We cannot be certain that our network partners either are currently in compliance
with any such requirements, will be able to comply with any such requirements, and/or will continue in compliance with any such
requirements.
Other
Regulation Affecting the Internet
The
European Union has also enacted several directives relating to the Internet, including regulations that address online commerce
and data protection. International governments are adopting and implementing privacy and data protection regulations that establish
certain requirements with respect to, among other things, the confidentiality, processing and retention of personal subscriber
information. The potential effect, if any, of these data protection rules on the development of our business remains uncertain.
Competition
We
compete primarily in the market for enhanced video and VoIP telephony services, products, hosted solutions and infrastructure,
and specifically in the VoIP service provider and reseller markets. This VoIP market is highly competitive and there are numerous
competing providers. We believe that the primary competitive factors determining our success in the VoIP telephony market are:
quality of service and network capacity; the ability to meet and anticipate customer needs through multiple service offerings and
feature sets; customer services; and price.
Future
competition could come from a variety of companies in the video and voice-over-IP industry. This industry includes major companies
who have greater resources and larger subscriber bases than we have, and have been in operation for many years. In addition, many
companies provide, or are planning to provide, some of the services we offer.
Revenues
and Assets by Geographic Area
For
the year ended December 31, 2014, approximately $13.3 million, or 94%, of our revenue was derived from international customers,
and $0.8 million, or 6%, was derived from customers in the United States. Most of our long-lived assets are located in the United
States. For more detailed information concerning our geographic segments, see Note 14 to our financial statements included elsewhere
in this Annual Report.
Employees
As
of December 31, 2014, we had 20 employees, of which 19 were located in Israel (seven of whom were part-time employees) and
one was located in the United States. We consider our relationship with our employees to be good. None of our employees
is covered by collective bargaining agreements.
Customers
In
2014, two customers accounted for approximately 74.3% of our gross revenues. Any significant decline in our sales to any of
our material customers would likely have a material adverse effect on our business, operating results and financial condition.
Available
Information
Our
Internet address is www.deltathree.com. Through a link at the Investor Relations section of our website we make available, free
of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to
those reports as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the
SEC. The information on our website does not constitute a part of this annual report on Form 10-K.
ITEM
1A. RISK FACTORS
Our
business, financial condition and results of operations and the trading price of our common stock could be materially adversely
affected by any of the following risks as well as the other risks highlighted elsewhere in this Annual Report, particularly the
discussions about regulation, competition and intellectual property. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial also may impair our business operations.
Risks
Related to our Company
We
believe it is probable that we will need additional capital to continue our operations in the near term
We
sustained significant operating losses in years prior to 2014, which led to a significant reduction in our cash reserves. As
of December 31, 2014, we had negative working capital of approximately $8.9 million and negative stockholders’ equity of
approximately $8.8 million. We believe it is probable that we will continue to experience losses and increased negative working
capital and negative stockholders’ equity in the near future, and that we will not be able to return to positive cash flow
before we require additional capital in the near term.
We
believe that, unless we are able to increase our revenues, we will not have sufficient funds to continue our current operations
over the foreseeable future if we do not receive additional financing. We may experience difficulties accessing the
equity and debt markets and raising such capital, and there can be no assurance that we will be able to raise such additional capital
on favorable terms or at all. In addition, as a result of D4 Holdings’ controlling interest in our company, D4 Holdings
will be able to exercise a controlling influence over future issuances of capital stock or other securities by us and a third party
may be deterred from investing in us.
We
have a history of losses and we are uncertain as to our future profitability.
Except
for the year ended December 31, 2012, in which we reported net income from operations of approximately $88,000 but a net loss from
operations of $1.6 million, we have a history of significant, recurring losses since our inception, and we may continue to incur
significant losses for the foreseeable future. We reported net losses of approximately $3.1 million in 2011, $1.6 million in 2012
and $1.8 million in 2013. As of December 31, 2014, our accumulated deficit was approximately $187 million. Our revenues may
not grow or even continue at their current level. Going forward, we will need to increase our revenues and/or lower our current
cost structure to reach profitability. If our revenues do not increase and/or if we are unable to reduce our expenses, we may not
be able to reach profitability again. We cannot assure you that we will be able to reach profitability on a quarterly or annual
basis in the future. These factors raise substantial doubt about our ability to continue as a going concern.
We
may not be able to expand our revenue.
Our
business strategy is to expand our revenue sources and our distribution channels in order to include the provision of video and
VoIP telephony services to different customer groups. We can neither assure you that we will be able to accomplish this nor that
this strategy will be profitable. Currently, our revenues are primarily generated by sales of our video and VoIP telephony products
and services through our service provider and reseller sales channel and our direct-to-consumer channel. VoIP telephony from these
channels generated 96.9%, 98.2% and 99.0% of our total revenues in 2012, 2013 and 2014, respectively.
We
expect that our revenues for the foreseeable future will be dependent on, among other factors:
| • | sales of our video and voice-over-IP products and services; |
| • | the public’s acceptance and use of video and voice-over-IP services; |
| • | expansion of our service offerings; |
| • | the effect of competition, regulatory environment, international long distance rates and access
and transmission costs on our prices; and |
| • | continued improvement of our global network quality. |
Our
business strategy assumes, among other things, that the voice-over-IP market generally and such market as it applies to mobile
devices specifically will expand significantly. If this market does not expand significantly we may not be able to expand our revenues
and successfully carry out our business strategy.
The
global financial crisis may have an impact on our business and financial condition in ways that we currently cannot predict.
The
continued financial crisis and related turmoil in the global financial system may have an impact on our business and our financial
condition, as well as increase the risk of uncollectible accounts receivable from our customers. For example, our ability
to obtain additional financing may be severely restricted at a time when we would like, or need, to do so, which could have an
impact on our flexibility to react to changing economic and business conditions.
We
are substantially dependent upon a few material customers, and any significant decline in our sales to those customers could have
a material adverse effect on our business.
In
2014, two customers accounted for approximately 74.3% of our annual gross revenues. Any significant decline in our sales to any
of our material customers would likely have a material adverse effect on our business, operating results and financial condition.
A
continuing decline in telecommunications prices may cause us to lower our prices to remain competitive, which could prevent our
future profitability.
International
and domestic telecommunications prices have decreased significantly over the last few years in most of the markets in which we
operate, and as a result our margins have decreased materially. We anticipate that prices will continue to be reduced in all of
the markets in which we do business or expect to do business. Users who select our services (or our resellers’ or service
provider customers’ services) to take advantage of the current pricing differential between traditional telecommunications
prices and our (or our customers’) prices may switch to traditional telecommunications carriers as such pricing differentials
diminish or disappear, and we will be unable to use such pricing differentials to attract new customers in the future. Such competition
or continued price decreases may require us to lower our prices to remain competitive, may result in reduced revenue, a loss or
decrease of customers and may prevent our future profitability.
Intense
competition could reduce our market share and decrease our revenue.
The
market for video and voice-over-IP services is extremely competitive. Our competitors include companies in the video and voice-over-IP
industry. Many of our existing competitors and potential competitors have broader portfolios of services, greater financial, management
and operational resources, greater brand-name recognition, larger subscriber bases and more experience than we have. In addition,
our Internet competitors use the Internet instead of a private network to transmit traffic, and the operating and capital costs
of these providers may be less than ours.
If
we are unable to provide competitive service offerings, we may lose existing customers and be unable to attract additional customers.
In addition, many of our competitors enjoy economies of scale that result in a lower cost structure for transmission and related
costs, which cause significant pricing pressures within the industry. To remain competitive, we must continue to invest significant
resources in research and development, sales and marketing, and customer support. We may not have sufficient resources to make
these investments or to make the technical advances necessary to be competitive, which, in turn, will cause our business to suffer.
Fluctuations
in our quarterly financial results may make it difficult for investors to predict our future performance.
Our
quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside
our control. The factors generally within our control include:
| • | the rate at which we are able to attract users to purchase our video and voice-over-IP products and services; |
| • | the amount and timing of expenses to enhance marketing and promotion efforts and to expand our infrastructure; and |
| • | the timing of announcements or introductions of new or enhanced services by us. |
The
factors outside our control include:
| • | the timing of announcements or introductions of new or enhanced services by our competitors; |
| • | regulations in various countries that prohibit us from providing our services cost-effectively or at all; |
| • | technical difficulties or network interruptions in the Internet or our privately-managed network; and |
| • | general economic and competitive conditions specific to our industry. |
We
face a risk of failure of computer and communications systems used in our business.
Our
business depends on the efficient and uninterrupted operation of our computer and communications systems as well as those that
connect to our network. We maintain communications systems in facilities in New Jersey, Atlanta, London, Seoul and Sydney. Although
we have designed our network to reduce the possibility of disruptions or other outages, our systems and those that connect to our
network are subject to damage or interruption from natural disasters, power loss, communications failure, hardware or software
malfunction, network failures, physical or electronic break-ins, sabotage, computer viruses, intentional acts of terrorism or vandalism
and other events that may be or may not be beyond our control. Any system interruptions that cause our services to be unavailable,
including significant or lengthy telephone network failures or difficulties for users in communicating through our network or portal,
could damage our reputation and result in a loss of users.
Our
computer systems and operations may be vulnerable to security breaches.
We
believe that the safety of our network and the secure transmission of confidential information over the Internet are essential
to our operations and maintaining user confidence in our services. Although we have developed systems and processes that are designed
to protect our network, the consumer information stored on our network, unauthorized use of our network and other security breaches,
our computer infrastructure is potentially vulnerable to physical or electronic computer viruses, abuse of use, break-ins and similar
disruptive problems and security breaches that could cause loss (both economic and otherwise), interruptions, delays or loss of
services to our users. We rely on licensed encryption and authentication technology to effect secure transmission of confidential
information, including credit card numbers. It is possible that advances in computer capabilities or new technologies could result
in a compromise or breach of the technology we use to protect user transaction data. A party that is able to circumvent our security
systems could misappropriate proprietary information, cause interruptions in our operations or utilize our network without authorization.
Security breaches also could damage our reputation and expose us to a risk of loss, litigation and possible liability. While we
have experienced isolated instances of unauthorized use of our network, and have responded to such events by taking steps to increase
our network security, we cannot guarantee you that our security measures will prevent security breaches.
Operating
internationally exposes us to additional and unpredictable risks.
We
operate in many international markets, including the Middle East. There are certain risks inherent in doing business on an international
basis, including:
| • | political and economic instability, including the risk of social unrest, war, civil war and armed
conflict in the countries in which we operate; |
| • | uncertainty regarding the ability of our resellers to resell our service in compliance with all
laws, rules and regulations in such markets and actions by foreign governments or foreign telecommunications companies to limit
access to our services; |
| • | fluctuations in exchange rates; |
| • | potentially adverse tax consequences; |
| • | potentially weaker protection of intellectual property rights; and |
| • | uncertain market acceptance and difficulties in marketing efforts due to language and cultural
differences.. |
We
need to retain key personnel to support our products and ongoing operations.
The
marketing and operations of our products and services will continue to place a significant strain on our limited personnel, management,
and other resources; this is particularly true following the significant decline in the number of our employees that occurred as
a result of a reduction in force we effected during 2011 and an additional, smaller reduction in force that we instituted during
December 2013, following which we have limited internal redundancy. Our future success depends upon the continued services of our
executive officers and other key employees whom we rely upon to run our operations. Except for Mr. Effi Baruch, our
Chief Executive Officer, President and Senior Vice President of Technology and Operations, none of our officers or key employees
is subject to an employment agreement for any specific term. The loss of the services of any of these officers or key employees
could impact our ability to run our operations and delay the development and introduction of, and negatively impact our ability
to sell, our products, either of which could adversely affect our financial results. We currently do not maintain key person life
insurance policies on any of our employees.
Our
ability to provide our service and to comply with certain regulatory obligations is dependent in part upon third-party providers,
facilities and equipment, the failure of which could cause delays or interruptions of our service, expose us to legal liability,
damage our reputation, cause us to lose customers and limit our growth.
Our
success depends on our ability to provide quality and reliable service, which is in part dependent upon the proper functioning
of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wireline
telephone service or wireless service, our service requires our customers to have an operative broadband Internet connection and
an electrical power supply, which are provided by the customer's Internet service provider and electric utility company, respectively,
and not by us. The quality of some broadband Internet connections may be too poor for customers to use our services properly. In
addition, if there is any interruption to a customer's broadband Internet service or electrical power supply, that customer will
be unable to make or receive calls, including emergency calls, using our service. We also outsource several of our network functions
to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities
at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain
these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. We also
outsource the development of several of our applications and features, and in some cases enter into license and support agreements
with the applicable providers. If those providers seek to terminate our license and support agreements, we would need to find replacement
providers, and our customers may experience service interruptions. In addition, our E-911 service is currently dependent upon a
third-party provider. Interruptions in service from this vendor could cause failures in our customers' access to E-911 services.
Finally, our service offerings that integrate with the public switched telephone network are wholly reliant on third
party network service providers to originate and terminate substantially all of our calls to users of traditional telephone services.
Interruptions in our service caused by third-party facilities or service providers have in the past caused and may in the future
cause us to lose customers, or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability.
If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers and
our brand, reputation and growth will be negatively impacted.
Our
emergency and E-911 calling services may expose us to significant liability.
Our
emergency calling service and E-911 calling service are different from the corresponding services offered by traditional wireline
telephone companies. These differences may lead to failures that would not occur for users of traditional telephony services. For
example, providers of interconnected VoIP services, like us, must use components of both the wireline and wireless infrastructure
in unique ways that can result in failure. Also, emergency services provided over the Internet can be adversely impacted by power
outages and network congestion that do not necessarily have the same adverse impact on users of traditional telephone services.
Emergency call centers may not be equipped with appropriate hardware or software to accurately process and respond to emergency
calls received by consumers of interconnected VoIP services. Finally, users of nomadic interconnected VoIP services must manually
update their location information, and failure to do so can result in dispatching of assistance to the wrong location. For these
reasons, some of our customers do not receive emergency services in full compliance with the FCC rules. Any of these failures could
result in enforcement action by the FCC, significant monetary penalties and restrictions on our ability to offer non-compliant
services.
Third
parties might infringe upon our proprietary technology.
We
cannot assure you that the steps we have taken to protect our intellectual property rights will prevent misappropriation of our
proprietary technology. To protect our rights to our intellectual property, we rely on a combination of trademarks and trade secret
protection, confidentiality agreements and other contractual arrangements with our employees, affiliates, strategic partners and
others. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.
Effective trademark and trade secret protection may not be available in every country in which we offer or intend to offer our
services. Failure to adequately protect our intellectual property could materially harm our brand, devalue our proprietary content
and affect our ability to compete effectively. Further, defending our intellectual property rights could result in significant
financial expenses and managerial resources.
Third
parties may claim that our services infringe upon their intellectual property rights.
Third
parties have asserted and may assert claims that we have violated a patent or infringed a copyright, trademark or other proprietary
right belonging to them and subject us to expensive and disruptive litigation. In addition, we incorporate licensed
third-party technology in some of our products and services. In these license agreements, the licensors have agreed to indemnify
us with respect to any claim by a third party that the licensed software infringes any patent or other proprietary right so long
as we have not made changes to the licensed software. We cannot assure you that these provisions will be adequate to protect us
from infringement claims. Any infringement claims and lawsuits, even if not meritorious, could be expensive and time consuming
to defend; divert management’s attention and resources; require us to redesign our products, if feasible; require us
to pay royalties or enter into licensing agreements in order to obtain the right to use necessary technologies; and/or may materially
disrupt the conduct of our business.
Risks
Related to our Industry
Government
regulation and legal uncertainties relating to IP telephony could harm our business.
Historically,
voice communications services have been provided by regulated telecommunications common carriers. We offer voice communications
to the public for international and domestic calls using IP telephony, and we do not operate as a licensed telecommunications common
carrier in many jurisdictions based on specific regulatory classifications and recent regulatory decisions. However, the growth
of IP telephony has led to close examination of its regulatory treatment in many jurisdictions, making the legal status of our
services uncertain and subject to change as a result of future regulatory action, judicial decisions or legislation in any of the
jurisdictions in which we operate. Established regulated telecommunications carriers have sought and may continue to seek regulatory
actions to restrict the ability of companies such as ours to provide services or to increase the cost of providing such services.
Application
of new regulatory restrictions or requirements to us could increase our costs of doing business and prevent us from delivering
our services through our current arrangements. In such event, we would consider a variety of alternative arrangements for providing
our services, including obtaining appropriate regulatory authorizations for our local network partners or ourselves, changing our
service arrangements for a particular country or limiting our service offerings. Such regulations could limit our service offerings,
raise our costs and restrict our pricing flexibility, and potentially limit our ability to compete effectively. Furthermore, regulations
and laws that affect the growth of the Internet could hinder our ability to provide our services over the Internet.
Our
international operations are also subject to regulatory risks, including the risk that regulations in some jurisdictions will prohibit
us from providing our services (or our resellers from reselling our services) cost-effectively or at all, which could limit our
growth. Currently, there are several countries where regulations prohibit us and our resellers from offering service. We cannot
assure you that these conditions will not have a material effect on our revenues and growth in the future. In addition, because
customers can use our services almost anywhere that a broadband Internet connection is available, including countries where providing
VoIP services is illegal, the governments of those countries may attempt to assert jurisdiction over us, which could expose us
to significant liability and regulation.
We
may not be able to keep pace with rapid technological changes in the communications industry.
Our
industry is subject to rapid technological change, and we cannot predict the effect of technological changes on our business. We
expect that new services and technologies will emerge in the market in which we compete. These new services and technologies may
be superior to the services and technologies that we use and/or may render our services and technologies obsolete.
To
be successful, we must adapt to our rapidly changing market by continually improving and expanding the scope of services we offer
and by developing new services and technologies to meet customer needs. Our success will depend, in part, on our ability to license
leading technologies and respond to technological advances and emerging industry standards on a cost-effective and timely basis.
We will need to spend significant amounts of capital to enhance and expand our services to keep pace with changing technologies.
The
success of our business is affected by customers' unimpeded access to broadband service. Providers of broadband services may be
able to block our services, which could adversely affect our revenue and growth.
A
portion of our customers must have broadband access to the Internet in order to use our service. Some providers of broadband access
have taken measures that affect their customers' ability to use our service, such as downgrading the quality of the data packets
we transmit over their lines, giving those packets low priority, giving other packets higher priority than ours, blocking our packets
entirely or attempting to charge their customers more for also using our services. It is not clear whether suppliers of broadband
access services have a legal obligation to allow their customers to access and use our service without interference. As
a result of recent decisions by the U.S. Supreme Court and the FCC, providers of broadband services are subject to relatively light
regulation by the FCC. Consequently, federal and state regulators might not prohibit broadband providers from limiting their customers'
access to VoIP or otherwise discriminating against VoIP providers. Interference with our service or higher charges for using our
service could cause us to lose existing customers, impair our ability to attract new customers, and harm our revenue and growth.
The
FCC’s “open Internet” rules, which would partially address issues relating to blocking, impairing or downgrading
our service by either fixed or wireless providers of broadband Internet access services, are not yet effective and, as a result
of both legislative efforts to overturn the rules as well as potential appeals of the passage of the rules, it is unclear whether
(and when) the rules will become effective. While we are not aware of any provider of broadband Internet access attempting to interfere
with our Internet access, the lack of enforceable rules could potentially negatively impact our service offerings and impede our
ability to offer new services that require significant Internet bandwidth.
We
are not currently accepting customers in areas where we cannot provide E-911 service in conformity with the FCC’s rules.
This has adversely impacted the ability of iConnectHere to accept new customers and may also have an adverse effect on our sales
to customers who resell our service.
Various
U.S. state and local fees, taxes and surcharges, as well as those for the European Union, may increase our costs and our customers'
cost of using our services.
Some
state and local regulatory authorities claim that they retain jurisdiction to regulate the provision of, and impose taxes, fees
and surcharges on, intrastate Internet and VoIP telephony services, and have attempted to impose such taxes, fees and surcharges,
such as a fee for providing E-911 service. A recent FCC ruling allows states to require providers of interconnected VoIP services,
like us, to contribute to state USF programs. While the decision did not address retroactive liability, there is a possibility
that certain states will seek to impose retroactive application of any state USF obligations. We would likely pass through to our
customers in those states any such state USF fees, potentially making our services less competitive with offerings available from
traditional providers of telecommunications services, which may cause us to lose customers in those states. In addition,
it is possible that we will be required to collect and remit taxes, fees and surcharges in other states and local jurisdictions,
and which such authorities may take the position that we should have collected. If so, they may seek to collect those past taxes,
fees and surcharges from us and impose fines, penalties or interest charges on us. Our payment of these past taxes, fees and surcharges,
as well as penalties and interest charges, could have a material adverse effect on us.
We
paid approximately $11,000 of U.S. state and local taxes and other fees during 2014. To the extent we increase the
cost of services to our customers to recoup some of the costs of compliance this will have the effect of decreasing any price advantage
we may have over traditional telecommunications companies.
There
may be risks associated with our ability to comply with funding requirements of the USF and similar state or federal funds as well
as other FCC-mandated funding requirements or that our customers will cancel service due to the impact of these or other price
increases to their service.
We
began contributing to the USF during the fourth fiscal quarter of 2006 and began charging our customers a USF surcharge fee. In
addition, we are required to collect and remit other FCC-related fees, such as the TRS fund and contributions towards local number
portability, and the FCC and state public utilities commissions are considering subjecting interconnected VoIP providers like us
to additional fees and surcharges. The impact of this price increase on our customers or our inability to recoup the
costs or liabilities in remitting such fees as well as any future fees could have a material adverse effect on our financial position,
results of operations and cash flows, or could cause some customers to cancel our service due to the loss of any price advantage
we may have over traditional telecommunications companies.
Future
legislation or regulation of our service offerings may increase our costs, which may result in either our increasing the retail
price of our service offerings or reducing our profitability.
The
FCC has several ongoing proceedings that could negatively impact us. Specifically, the FCC may reform the system of
payments between companies that connect telephone companies and the methodology for contributing to the federal USF program. Such
reforms may increase the charges we pay to other companies for handling our calls. The FCC may adopt more stringent
E-911 obligations. This could result in us having to deploy new technologies or engage a third party to provide services
in compliance with the new regulations, increasing our costs. The FCC may determine that some or all of our offerings
are properly classified as “telecommunications” services subjecting our offerings to state and federal regulations,
thereby increasing our compliance costs. The U.S. Congress, state legislatures, state regulatory commissions and foreign
regulatory commissions could attempt to impose additional obligations on us at any time or reform existing law concerning the contribution
methodology for regulatory fees and surcharges in a manner that negatively impacts us. We cannot predict the outcome
of pending FCC proceedings or what actions such other governmental and regulatory bodies may take that may affect us.
Risks
Related to our Relationship with D4 Holdings
D4
Holdings controls a majority of our common stock and has the ability to exercise control over all matters submitted to a stockholder
vote.
D4
Holdings currently owns approximately 54.0% of the issued and outstanding shares of our common stock, holds warrants to purchase
an aggregate of 55,000,000 shares of our common stock and can convert the principal outstanding under the Convertible Note into
20,000,000 shares of our common stock. Assuming the exercise of all warrants held by D4 Holdings and the conversion of outstanding
principal under the Convertible Note, D4 Holdings beneficially owns 77.4% of our common stock. As long as D4 Holdings continues
to beneficially own more than 50% of the voting power of our company, D4 Holdings will be able to exercise a controlling influence
over decisions affecting us, including:
| • | composition of our board of directors and, through it, our direction and policies, including the
appointment and removal of our officers; |
| • | potential mergers, acquisitions, sales of assets and other significant corporate transactions; |
| • | future issuances of capital stock or other securities by us; |
| • | incurrence of debt by us; |
| • | amendments, waivers and modifications to any agreements between us and D4 Holdings; |
| • | payment of dividends on our capital stock; and |
| • | approval of our business plans and general business development. |
In
addition, this concentration of ownership may discourage, delay or prevent a change in control of our company, which could
deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or
result in strategic decisions that could negatively impact the value and liquidity of our outstanding stock. As discussed
above under "Item 1. Business – Transactions with D4 Holdings", on February 25, 2015, D4 Holdings announced
that it intends to initiate a tender offer to purchase all of the outstanding shares of our common stock not owned by D4
Holdings, and that in connection therewith D4 Holdings is presently not interested in either selling its shares or voting in
favor of any alternative transaction, including a merger or sale of our assets or business or similar transaction. On March
26, 2015 D4 Holdings announced that it had withdrawn its previous offer and instead intends to acquire us through a merger of
our company with a newly-formed acquisition subsidiary of D4 Holdings. D4 Holdings also has sufficient voting power to
amend our organizational documents. Furthermore, conflicts of interest could arise in the future between us and D4 Holdings
concerning, among other things, potential competitive business activities or business opportunities. D4 Holdings is not
restricted from competitive activities or investments. We cannot provide assurance that the interests of D4 Holdings will
coincide with the interests of other holders of our common stock. Also, four of our seven directors are affiliated
with D4 Holdings. As a result, the ability of any of our other stockholders to influence the management of our company is
limited, which could have an adverse effect on the market price of our stock.
The
ownership of D4 Holdings includes owners of ACN, and we may engage in commercial transactions with ACN and its affiliated entities
in the future.
D4
Holdings is a private investment fund whose ownership includes owners of ACN. Four of the members of our board of directors currently
serve as officers and/or directors of ACN. Because ACN is a direct seller of telecommunications services, we may seek to engage
in commercial transactions to provide services to ACN in the future. During the third quarter of 2009 we entered into an
agreement with ACN Pacific Pty Ltd., a wholly-owned subsidiary of ACN, pursuant to which we provide digital video and voice-over-IP
telecommunications services in Australia and New Zealand to ACN Pacific. In October 2010 we entered into a sales agency agreement
with ACN pursuant to which ACN sells a private label version of joip Mobile under the ACN Mobile World brand. In December 2010
we entered into an agreement with ACN Korea, a wholly-owned subsidiary of ACN, pursuant to which we provide digital video and voice-over-IP
services in Korea. In April 2011 we entered into an introducer agreement with ACN Europe B.V., a wholly-owned subsidiary
of ACN, pursuant to which ACN Europe refers potential customers in different countries in Europe to a private label version of
joip Mobile sold under the ACN Mobile World brand. Although we expect that the terms of any such transactions will be established
based upon negotiations between employees of ACN and us and, when appropriate, subject to the approval of the independent directors
on our board or a committee of disinterested directors, there can be no assurance the terms of any such transactions will be as
favorable to us as might otherwise be obtained in arm’s length negotiations.
As
a result of D4 Holding’s controlling interest in deltathree a third party may be deterred from attempting to acquire our
company.
D4
Holding’s controlling interest in deltathree could delay, deter or prevent a third party from attempting to
acquire control of us. This may have the effect of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of us, even though such a change in ownership would be economically beneficial to us and
our stockholders. As discussed above under "Item 1. Business
– Transactions with D4 Holdings", on February 25, 2015, D4 Holdings announced that it intends to initiate a tender
offer to purchase all of the outstanding shares of our common stock not owned by D4 Holdings, and that in connection
therewith D4 Holdings is presently not interested in either selling its shares or voting in favor of any alternative
transaction, including a merger or sale of our assets or business or similar transaction. On March 26, 2015 D4 Holdings
announced that it had withdrawn its previous offer and instead intends to acquire us through a merger of our company with a
newly-formed acquisition subsidiary of D4 Holdings.
Our
stockholders may suffer dilution in the future in the event that D4 Holdings exercises any of the warrants or its right to convert
outstanding principal amounts under the Convertible Note into shares of our common stock.
D4
Holdings currently holds warrants to purchase an aggregate of 55,000,000 shares of our common stock at exercise prices of $0.02
per share and can convert the principal outstanding under the Convertible Note into 20,000,000 shares of our common stock. In
the event that D4 Holdings exercises any or all of the warrants or converts principal amounts outstanding under the Convertible
Note into shares of our common stock, in full or in part, our existing stockholders may experience significant and immediate dilution.
Risks
Related to our Common Stock
Volatility
of our stock price could adversely affect our stockholders.
From
the time that trading commenced in our common stock in November 1999, the market price of our common stock has been highly
volatile and may continue to be volatile and could be subject to wide fluctuations in response to factors such as:
| • | the market price for the stock of our major competitors; |
| • | variations in our actual or anticipated quarterly operating results or those of our competitors; |
| • | announcements by us or our competitors of technological innovations; |
| • | introduction of new products or services by us or our competitors; |
| • | announcements by us or our competitors of significant acquisitions; |
| • | our entry into strategic partnerships or joint ventures; and |
| • | purchases and sales of our common stock by D4 Holdings. |
All
of these factors are, in whole or part, beyond our control and may materially adversely affect the market price of our common stock
regardless of our performance.
Investors
may not be able to resell their shares of our common stock following periods of volatility because of the market's adverse reaction
to such volatility. In addition, the market price for shares of telecommunications, Internet-related and technology companies has
dramatically decreased. We cannot assure you that our common stock will trade at the same levels of other telecommunications or
Internet stocks.
Our
common stock is quoted on the OTCQB, which may increase the volatility of our stock and make it harder to sell shares of our stock.
Our
common stock is quoted on the OTCQB, which tends to be a highly illiquid market. There is a greater chance of market
volatility for securities that trade on the OTCQB (as opposed to a national exchange or quotation system), as a result of which
stockholders may experience wide fluctuations and a depressed price in the market price of our securities. Thus, stockholders may
be required to either sell our securities at a market price which is lower than their purchase price or to hold our securities
for a longer period of time than they planned. Because our common stock falls under the definition of “penny stock,”
trading in our common stock may be limited because broker-dealers are required to provide their customers with disclosure documents
prior to allowing them to participate in transactions involving our common stock. These rules impose additional sales practice
requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited
investors; and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result,
the ability or willingness of broker-dealers to sell or make a market in our common stock might decline, and stockholders could
find it more difficult to sell their stock.
Risks
Related to our Israel Operations
We
may be negatively impacted by changes in political, military and/or economic conditions.
Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors
and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel.
A peace agreement between Israel and Egypt was signed in 1979 and a peace agreement between Israel and Jordan was signed in 1994.
However, as of the date hereof Israel has not entered into any peace agreement with Syria or Lebanon.
Negotiations between
Israel and representatives of the Palestinian Authority in an effort to resolve the state of conflict have been sporadic and have
failed to result in peace. The establishment in 2006 of a government in the Gaza territory by representatives of the Hamas militant
group has created additional unrest and uncertainty in the region, and in each of December 2008, November 2012 and July 2014 Hamas
engaged in an armed conflict with Israel.
The recent political
instability and civil unrest in the Middle East and North Africa (including the ongoing civil war in Syria) as well as the ongoing
conflict between Iran and Israel have raised new concerns regarding security in the region and the potential for armed conflict
or other hostilities involving Israel. We could be adversely affected by any such hostilities, the interruption or curtailment
of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel.
In
addition, certain countries, companies and organizations continue to participate in a boycott of Israeli firms. We do not believe
that the boycott has had a material adverse effect on us, but there can be no assurance that restrictive laws, policies or practices
directed towards Israel or Israeli-based businesses will not have an adverse impact on our business or financial condition in the
future.
Our
costs of operations have at times been affected by changes in the cost of our operations in Israel resulting from changes in the
value of the Israeli shekel relative to the U.S. dollar. Recently, the weakening of the dollar relative to the shekel has significantly
increased the costs of our Israeli operations, stated in U.S. dollars.
Israel’s
economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early- to mid-l980s,
low foreign exchange reserves, fluctuations in world commodity prices and military conflicts. The Israeli Government has, for these
and other reasons, intervened in the economy by utilizing, among other means, fiscal and monetary policies, import duties, foreign
currency restrictions and control of wages, prices and exchange rates. The Israeli Government has periodically changed its policies
in all these areas. Although we derive most of our revenues outside of Israel, a substantial portion of our expenses are incurred
in Israel and are affected by economic conditions in the country.
All
of these factors are, in whole or part, beyond our control and may materially adversely affect on our business, financial condition
and operating results, or market price of our common stock regardless of our performance.
We
may be negatively impacted by employees being called for army service.
Generally,
all male adult citizens and permanent residents of Israel under the age of 45 are, unless exempt, obligated to perform up to 36 days
of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under
emergency circumstances. Furthermore, some of our officers and employees are currently obligated to perform annual reserve duty.
While we have operated effectively under these requirements since we began operations, no assessment can be made as to the full
impact of such requirements on our workforce or business if conditions should change, and no prediction can be made as to the effect
on us of any expansion of such obligations. In addition, in the event of a military conflict or other attack on Israel, including
the ongoing conflict with the Palestinians, these persons could be required to serve in the military for extended periods of time
and on very short notice. The absence of a number of our officers and employees for significant periods could disrupt our operations
and harm our business.
ITEM
2. PROPERTIES
We
lease our executive offices at 1 Bridge Plaza Suite, Fort Lee, New Jersey, and storage and equipment space at 117 Central Avenue,
Hackensack, New Jersey. We lease each of these facilities on a month-to-month basis. The aggregate rent expense, net, for the two
locations for 2014 was $7,000.
Delta
Three Israel Ltd., a wholly-owned subsidiary of the Company, or the "Subsidiary", leases an office that houses the Company’s
research and development facilities in Jerusalem, Israel. The term of the lease is until June 30, 2015. Rent expense, net,
for our subsidiary, for 2014 was $125,000.
ITEM
3. LEGAL PROCEEDINGS
On
July 5, 2011, we received a notice from the New York City Department of Finance that claimed that we had not paid commercial rent
tax required under the New York City Administrative Code from June 1998 through May 2008 for the two offices that we had leased
during that time. The notice stated that we are obligated to pay the outstanding tax amounts, as well as significant interest and
penalties that were assessed on the unpaid amounts as well as for the failure to file the applicable tax returns. We engaged outside
counsel, which began discussions with the Department of Finance, and contested the assessment and simultaneously attempted to negotiate
a significant reduction in the amounts to be paid. Our appeal was rejected in July 2012 by an examiner in the Department of Finance,
and the Company has subsequently engaged and begun discussions with a manager in the Department of Finance and submitted additional
supporting materials. The final outcome of this assessment and our negotiations with the New York City Department of Finance cannot
be determined at this time. In the event that we are required to pay all or most of the amounts claimed by the New York City Department
of Finance this would have a material adverse effect on our financial condition and liquidity. During 2011 we recorded $300,000
as a provision for commercial rent tax. We have determined that $300,000 is the minimum amount that would settle the claim according
to ASC 450-20. The amount claimed by the Department of Finance was approximately $912,000; as a result, there is a reasonable possibility
that a loss in excess of the $300,000 would be incurred.
We
are not a party to any other material pending legal proceedings, other than ordinary routine litigation incidental to the business,
to which we are a party or of which any of our property is subject.
ITEM
4. (REMOVED AND RESERVED)
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our
common stock is currently quoted and traded on the OTCQB under the symbol “DDDC”. The following table sets forth the
high and low bid prices of our common stock for the periods indicated:
| |
High | | |
Low | |
Year ended December 31, 2013 | |
| | | |
| | |
First quarter | |
| 0.07 | | |
| 0.02 | |
Second quarter | |
| 0.58 | | |
| 0.02 | |
Third quarter | |
| 0.17 | | |
| 0.01 | |
Fourth quarter | |
| 0.07 | | |
| 0.04 | |
| |
| | | |
| | |
Year ending December 31, 2014 | |
| | | |
| | |
First quarter | |
| 0.11 | | |
| 0.03 | |
Second quarter | |
| 0.05 | | |
| 0.04 | |
Third quarter | |
| 0.08 | | |
| 0.03 | |
Fourth quarter | |
| 0.04 | | |
| 0.01 | |
| |
| | | |
| | |
Year ending December 31, 2015 | |
| | | |
| | |
First quarter (through March 27, 2015) | |
$ | 0.04 | | |
$ | 0.01 | |
Holders
As of March 18, 2015,
we had 119 holders of record of the 72,311,025 outstanding shares of our common stock. This does not reflect persons or entities
that hold their stock in nominee or "street" name through various brokerage firms.
Dividend
Policy
We
have never declared or paid any cash dividends on our capital stock, and do not anticipate paying any cash dividends on our capital
stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and to expand
our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent
upon our financial condition, operating results, capital requirements and other factors that our board of directors considers appropriate.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM
6. SELECTED FINANCIAL DATA
You
should read the selected consolidated financial data together with our consolidated financial statements and related notes and
the section of this Annual Report entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
The selected financial data for each of the years in the three-year period ended December 31, 2014, and as of December 31, 2013
and 2012 is derived from our audited financial statements that have been included in this Annual Report. The selected financial
data as of December 31, 2010, 2011 and 2012 and for the years ended December 31, 2010 and 2011 is derived from consolidated financial
statements that have not been included in this Annual Report.
| |
Year Ended December 31, | |
| |
2010 | | |
2011 | | |
2012 | | |
2013 | | |
2014 | |
| |
(In thousands) | |
Statement of Operations Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 14,200 | | |
$ | 10,535 | | |
$ | 13,684 | | |
$ | 16,085 | | |
$ | 14,099 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Costs and operating expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| (11,220 | ) | |
| (7,288 | ) | |
| (8,812 | ) | |
| (12,926 | ) | |
| (11,670 | ) |
Research and development expenses | |
| (1,483 | ) | |
| (1,492 | ) | |
| (1,194 | ) | |
| (1,200 | ) | |
| (890 | ) |
Selling and marketing expenses | |
| (958 | ) | |
| (1,970 | ) | |
| (2,030 | ) | |
| (1,278 | ) | |
| (658 | ) |
General and administrative expenses | |
| (2,322 | ) | |
| (1,213 | ) | |
| (1,411 | ) | |
| (1,421 | ) | |
| (1,291 | ) |
Depreciation and amortization | |
| (345 | ) | |
| (180 | ) | |
| (149 | ) | |
| (145 | ) | |
| (86 | ) |
(Accrual for) recovery of contingency | |
| (176 | ) | |
| 53 | | |
| - | | |
| - | | |
| - | |
Accrual for commercial rent tax | |
| - | | |
| (300 | ) | |
| - | | |
| - | | |
| - | |
Total costs and operating expenses | |
| (16,504 | ) | |
| (12,390 | ) | |
| (13,596 | ) | |
| (16,970 | ) | |
| (14,595 | ) |
(Loss) income from operations | |
| (2,305 | ) | |
| (1,855 | ) | |
| 88 | | |
| (885 | ) | |
| (496 | ) |
Capital gain | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Other non-operating income | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Interest income, (expense) net | |
| (162 | ) | |
| (1,185 | ) | |
| (1,656 | ) | |
| (898 | ) | |
| (1,456 | ) |
Income taxes | |
| (29 | ) | |
| (11 | ) | |
| (11 | ) | |
| (35 | ) | |
| (11 | ) |
Net loss | |
$ | (2,495 | ) | |
$ | (3,051 | ) | |
$ | (1,579 | ) | |
$ | (1,818 | ) | |
$ | (1,963 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) per share – basic and diluted | |
$ | (0.03 | ) | |
$ | (0.04 | ) | |
$ | (0.02 | ) | |
$ | (0.03 | ) | |
$ | (0.03 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding – basic and diluted | |
| 72,232 | | |
| 72,273 | | |
| 72,273 | | |
| 72,273 | | |
| 72,303 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
December 31, | |
| |
2010 | | |
2011 | | |
2012 | | |
2013 | | |
2014 | |
| |
(In thousands) | |
Balance Sheet Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
$ | 308 | | |
$ | 214 | | |
$ | 362 | | |
$ | 158 | | |
$ | 286 | |
Short-term investments | |
| 167 | | |
| 352 | | |
| 56 | | |
| 34 | | |
| 4 | |
Working capital (deficit) | |
| (3,886 | ) | |
| (1,570 | ) | |
| (2,273 | ) | |
| (7,523 | ) | |
| (8,868 | ) |
Long-term investments | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total assets | |
| 2,196 | | |
| 1,664 | | |
| 1,582 | | |
| 1,277 | | |
| 785 | |
Total stockholders’ equity | |
| (3,560 | ) | |
| (4,402 | ) | |
| (5,647 | ) | |
| (7,377 | ) | |
| (8,794 | ) |
(*)
reclassified
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should be read together with our consolidated financial
statements and the related notes thereto included elsewhere in this Annual Report. This discussion contains certain forward-looking
statements that involve substantial risks and uncertainties. When used in this report, words such as “anticipate,”
“believe,” “estimate,” “expect,” “target,” “goal,” “project,”
“intend,” “plan,” “believe,” “seek,” variations of such words and similar expressions
as they relate to our management or us are intended to identify such forward-looking statements. Our actual results, performance
or achievements could differ materially from those expressed in, or implied by, these forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed in “Risk Factors” and other risks referenced
from time to time in our filings with the SEC. Historical operating results are not necessarily indicative of the trends in operating
results for any future period.
Overview
We
are a global provider of integrated video and voice over Internet Protocol, or VoIP, telephony services, products, hosted solutions
and infrastructure. We were founded in 1996 to capitalize on the growth of the Internet as a communications tool by commercially
offering Internet Protocol, or IP, telephony services, or VoIP telephony. VoIP telephony is the real-time transmission
of voice communications in the form of digitized “packets” of information over the Internet or a private network, similar
to the way in which e-mail and other data is transmitted. While we began as primarily a low-cost alternative source of wholesale
minutes for carriers around the world, we have evolved into an international provider of next generation communication services.
Today
we support tens of thousands of active users around the globe through our service provider and reseller channel and our direct-to-consumer
channel. We have built a privately-managed, state-of-the-art global telecommunications platform using IP technology and we offer
a broad suite of private label VoIP products and services as well as a back-office platform. Our operations management tools include,
among others: account provisioning; e-commerce-based payment processing systems; billing and account management; operations management;
web development; network management; and customer care. Based on our customizable VoIP solutions, these customers can offer private
label video and voice-over-IP services to their own customer bases under their own brand name, a “white-label” brand
(in which no brand name is indicated and different customers can offer the same product), or the deltathree brand. At the same
time, our direct-to-consumer channel includes our joip Mobile application (which is a cellular phone application providing low
cost mobile calls over 3G cellular networks as well as WiFi networks) and our iConnectHere offering (which provides VoIP products
and services directly to consumers and small businesses online using the same primary platform). We are able to provide our services
at a cost per user that is generally lower than that charged by traditional service providers because we minimize our network costs
by using efficient packet-switched technology and interconnecting to a wide variety of termination options, which allows us to
benefit from pricing differences between vendors to the same termination points.
Prior
to 1999, we focused on building a privately-managed, global network utilizing IP technology, and our business primarily consisted
of carrying and transmitting traffic for communications carriers over our network. Beginning in 1999, we began to diversify our
offerings by layering enhanced IP telephony services over our network. These enhanced services were targeted at consumers and were
primarily accessible through our consumer website. During 2000, we began offering services on a co-branded or private-label basis
to service providers and other businesses to assist them in diversifying their product offerings to their customer bases. In 2001,
we continued to enhance our unique strengths through our pioneering work with the Session Initiation Protocol, or SIP, an Internet
Engineering Task Force standard that has been embraced by industry leaders such as Microsoft and Cisco. These efforts culminated
in the launch of our state-of-the-art SIP infrastructure, and in doing so we became the first major VoIP service provider to deploy
an end-to-end SIP network and services. In recent years, we have continued our pioneering efforts in SIP and these efforts have
yielded significant new releases.
In
2009 we began the process of expanding the suite of our communications offerings into the global video phone services market. In
the third quarter of 2009 we entered into an agreement with ACN Pacific Pty Ltd., a wholly-owned subsidiary of ACN, Inc., or ACN,
pursuant to which we provide digital video and voice-over-IP services in Australia and New Zealand to ACN Pacific. In December
2010 we entered into an agreement with ACN Korea, a wholly-owned subsidiary of ACN, pursuant to which we provide digital video
and voice-over-IP services in Korea.
In
2010 we continued to update our network by adding a video mail feature to our video phone applications and launching our joip mobile
application in July 2010. Following the launch of the mobile application, in October 2010 we entered into a sales agency
agreement with ACN pursuant to which ACN sells a private label version of joip Mobile under the ACN Mobile World brand in the United
States and Canada (the “Sales Agency Agreement”). In addition, we offer the joip Mobile application on a white-label
basis to other customers. Finally, we entered into affiliate agreements with different third parties pursuant to which such third
parties refer potential subscribers to our joip Mobile application.
In
April 2011 we entered into an introducer agreement with ACN Europe B.V., a wholly-owned subsidiary of ACN, pursuant to which ACN
Europe refers potential customers in different countries in Europe to a private label version of joip Mobile sold under the ACN
Mobile World brand (the “Introducer Agreement”). In November 2011 we entered into a service agreement with Momentis
U.S. Corp., a multi-level marketing company, pursuant to which Momentis refers potential customers in North America to a co-branded
offering of joip Mobile and other consumer VoIP products and services.
On
April 3, 2012, we entered into an amendment to the Sales Agency Agreement and Introducer Agreement (the “Amendment Letter”).
Pursuant to the terms of the Amendment Letter, we are required to pay all then-current commissions on a timely basis as required
under the agreements and a late fee in the amount of one percent per month of any past-due, unpaid commissions (which, as of December
31, 2014, was equal to approximately $1,659,000). In addition, beginning July 15, 2012, we were required to pay down any unpaid
past due amounts in an amount equal to at least $15,000 per month through June 15, 2013, and at least $25,000 per month thereafter
until such time as the unpaid balance is paid in full, and are required to pay in full any unpaid, past due amounts upon 30 days'
notice. In addition, in the event of certain insolvency-related events defined in the agreements, all unpaid amounts will become
immediately due and payable effective immediately prior to such event. Such events include the filing of any petition or
action for relief under law relating to debtors; application or consent for the appointment of a receiver, trustee, or the like
over substantial assets; execution of a general assignment to creditors; general inability to pay debts as they come due; or the
filing of any involuntary petition against a party that is not dismissed within 60 days of its filing.
In
July 2012 we began making the $15,000 monthly payment of unpaid commissions, however due to our financial condition we suspended
making the monthly payments of the unpaid commissions and the current commissions in April 2013 with the oral consent of ACN and
ACN Europe. On June 12, 2014, each of us and our wholly-owned subsidiaries Delta Three Israel, Ltd., or "Delta Three Israel",
and DME Solutions, Inc., or "DME", and together with us and Delta Three Israel, the "deltathree Entities",
and ACN, ACN Europe, ACN Digital Phone Service, LLC, or "DPS", and together with ACN and ACN Europe, the "ACN Entities", entered
into the Amended and Restated Agreement Concerning Outstanding/Future Commissions and Security Agreement, or the "ACN Forbearance
Agreement". The ACN Forbearance Agreement amends the Amendment Letter, in regards to outstanding commissions due to be paid
by us to ACN and ACN Europe under the Sales Agency Agreement and Introducer Agreement.
The ACN Forbearance Agreement also amends that certain License Assignment entered into on February 7, 2013 between us and DPS and
the outstanding license assignment payment due to be paid by us to DPS.
The terms of the ACN
Forbearance Amendment provide as follows:
| · | commencing with the date of the ACN Forbearance
Agreement, a late fee in the amount of one percent (1%) per month accrues on any unpaid commissions and the license assignment
payment, and commencing on July 15, 2014, and continuing on the 15th day of each month thereafter the deltathree
Entities are obligated to pay to ACN and ACN Europe the interest that accrued during the previous month; |
| · | in addition, commencing on July 15, 2014,
and continuing on the 15th day of each month thereafter, the deltathree Entities are required to (i) pay down any
outstanding obligations, provided that the amount of each monthly payment will be equal to at least $114,000, and (ii) pay all
then-current commissions under the Sales Agency Agreement and Introducer Agreement and any cure periods provided for under
the respective agreements for non-payment will no longer apply; |
| · | so long as the deltathree Entities fulfill
the terms of the ACN Forbearance Agreement, the ACN Entities will forbear from exercising any rights they may have for any breach
by the deltathree Entities under the Sales Agency Agreement and the Introducer Agreement and permit the Company to pay the license
assignment payment over time in accordance with the terms and conditions of the ACN Forbearance Agreement until July 31, 2014,
or the "Initial Forbearance Period". Following the expiration of the Initial Forbearance Period, the ACN Entities' obligation
to forbear automatically renews on a monthly basis unless terminated by either party under the terms of the ACN Forbearance Agreement
until July 15, 2015, following which such the ACN Entities' obligation to forbear will not automatically renew; |
| · | upon the expiration of the Initial Forbearance
Period or any subsequent renewals, unless the ACN Entities' requirement to forbear is renewed, all unpaid obligations will become
immediately due and payable; |
| · | each of Delta Three Israel and DME guaranteed
the payment and performance of the Company's obligations under the license assignment and under the ACN Forbearance Agreement; |
| · | to secure the payment and performance
in full of all of their obligations under the agreement, the deltathree Entities granted to the ACN Entities a continuing security
interest in, and pledged to the ACN Entities, all of their right, title and interest in, to and under the collateral set forth
on Exhibit A of the ACN Forbearance Agreement; and |
| · | in the event of any Event of Default (as
defined in the ACN Forbearance agreement), all unpaid amounts due from the deltathree Entities will become immediately due and
payable and the ACN Entities may in their sole discretion terminate the ACN Forbearance Agreement and exercise their rights and
pursue all remedies available to them as a secured creditor and at law or in equity. |
We
did not make the payments we were required to make to the ACN Entities on July 15, 2014, described in the first and second bullet
points above and is currently in default under the ACN Forbearance Agreement. On September 29, 2014 ACN and we entered into the
Second Amendment to the ACN Forbearance Agreement. The amendment modified the initial due date of July 15, 2014 under the ACN Forbearance
Agreement to December 15, 2014 and provided that we are obligated to pay a fee of $50,000 on or before December 15, 2014. As of
March 18, 2015 we have not paid such amount to the ACN Entities, and pursuant to the terms of the Second Amendment a late payment
penalty fee of one percent (1%) of such amount is accruing on a monthly basis.
We
do not know when we will resume making such payments again, and there is no assurance that we will be able to do so in the near
future (if at all) or that until such time ACN and ACN Europe will continue to consent to our not making any such required payments
and not exercise any rights they may have under our respective agreements with them or under applicable law. In
addition, in the event of certain insolvency-related events defined in the agreements, all unpaid amounts will become immediately
due and payable effective immediately prior to such event.
As
a complement to the initiatives we have taken to attempt to organically expand our businesses, we have also evaluated opportunities
for growth through strategic relationships. In February 2009 we consummated a transaction with D4 Holdings pursuant to which we
sold to D4 Holdings an aggregate of 39,000,000 shares of our common stock and a warrant to purchase up to an additional 30,000,000
shares of our common stock. D4 Holdings is a private investment fund whose ownership includes owners of ACN, a direct
seller of telecommunications services. As a result of the transactions with D4 Holdings, we expect to continue to seek
opportunities to provide services to ACN and enter into other commercial transactions that give us access to ACN’s international
marketing and distribution capabilities.
From
an operational standpoint, in 2012 we continued to focus our near-term strategy and market initiatives on growing our service provider
and digital next generation communications offerings while still supporting our core VoIP reseller and direct-to-consumer business
segments.
Going
forward, we expect to:
| • | actively market our products and services to those entities that wish to offer white-label digital
next generation communications offerings; |
| • | pursue a targeted strategy of identifying and evaluating appropriate strategic collaborations,
such as potentially engaging in commercial transactions with ACN, that we hope will continue to expand and diversify our customer
base; |
| • | market and sell our direct-to-consumer products and services through affiliates and our affiliate
program; and |
| • | support and maintain our current reseller base, as we expect our revenue from this key channel
will continue to represent a significant percentage of our total revenue in the foreseeable future. |
On February 25,
2015, D4 Holdings sent a letter to our board of directors that indicated that within three to four weeks of the date of the letter
D4 Holdings intended to initiate a tender offer to purchase all of the outstanding shares of our common stock not owned by D4 Holdings
at a purchase price of $0.01 per share in cash.
D4 Holdings stated that it is not willing
to enter into further forbearance arrangements with us or to provide us additional financing. Finally, D4 Holdings indicated that,
in its capacity as majority stockholder of our company, it is presently not interested in either selling its shares or voting in
favor of any alternative transaction, including a merger of sale of our assets or business or similar transaction.
On March 26, 2015 D4 Holdings sent a letter
to our board of directors that indicated that D4 Holdings withdraws its previous offer and instead proposes to acquire us through
a merger of our company with a newly-formed acquisition subsidiary of D4 Holdings. The transaction will be structured as a stock
purchase, pursuant to which D4 Holdings will purchase all of the outstanding shares of our common stock not owned by D4 Holdings.
D4 Holdings restated its previous offer of $0.01 per share, to be paid in cash from its own funds, and accordingly there will be
no financing contingency. In addition, D4 Holdings will assume all of our outstanding debt, currently valued at approximately $7.9
million.
The completion of the transaction will be
conditioned upon, among other things, approval by a special committee of our board of directors consisting of independent directors.
If the transaction is completed, our common stock will no longer be registered under Section 12 of the Exchange Act.
Trends
in Our Industry and Business
A
number of factors in our industry and business have a significant effect on our results of operations and are important to an understanding
of our financial statements. These trends include:
Overall
Economic Factors: Our operations and earnings are affected by local, regional and global events or conditions that affect supply
and demand for telecommunications products and services. These events or conditions are generally not predictable and include,
among other things, general economic growth rates and the occurrence of economic recessions; changes in demographics, including
population growth rates; and consumer preferences. Our strategy and execution focus is predicated on an assumption that these factors
will continue to promote strong desire for the utilization of telephony products and services and that the cost and feature advantages
of VoIP alternatives will not be negatively impacted by unforeseen changes in these factors.
Industry: The
telecommunications industry is highly competitive. In recent years we have seen new sources of supply for our underlying infrastructure
that have reduced our overall costs of operation, including both advances in telecommunications technology and advances in technology
relating to telecommunications usage, and have enjoyed the benefits of competition among these suppliers for a relatively limited
amount of viable customers. A key component of our competitive position, particularly given the number and range of competing communications
products, is our ability to manage operating expenses successfully, which requires continuous management focus on reducing unit
costs and improving efficiency.
Consumer
Demand: There is significant competition within the traditional telecommunications marketplaces (landline and wireless) and
also with other emerging next generation telecommunications providers, including IP telecommunications providers, in supplying
the overall telecommunications needs of businesses and individual consumers.
A
key component of our competitive position, particularly given the commodity-based nature of many of our products, is our ability
to sell to a growing demand base for alternative communications products, in both the developed and developing global marketplace. Within
the developed global marketplace, our ability to sell broadband video and voice-over-IP products and services is directly linked
to the significant growth rate of broadband adoption, and we expect this trend to continue. We benefit from this trend because
our service requires a broadband Internet connection and our potential addressable market increases as broadband adoption increases. Within
the developing areas of the world, our ability to sell alternative telephony products and services is linked to both the increasing
baseline economic trends within these countries as well as the growing desire for individuals and businesses to communicate and
do business outside of their own countries. We expect these trends to continue, and benefit from them because both the ability
to afford long distance calls and the desire to make them increase as a result.
Political
Factors: Our operations and earnings have been, and may in the future be, affected from time to time in varying degree by political
instability, social unrest (including the recent social unrest in the Middle East) and by other political developments and laws
and regulations, such as: telecommunications regulations; war, civil war, armed conflict, terrorism and other international conflicts;
restrictions on production, imports and exports; price controls; tax increases and retroactive tax claims; expropriation of property;
and cancellation of contract rights. Both the likelihood of such occurrences and their overall effect upon us vary greatly from
country to country and are not predictable. At the same time, VoIP is becoming legal in more countries as governments seek to increase
competition, and this helps us as service providers and resellers seek to meet their customers’ telecommunications needs
with newly available solutions. Both the likelihood of VoIP legalization and its overall effect upon us vary greatly from country
to country and are not predictable.
Regulatory
Factors: Our business has developed in an environment largely free from regulation. However, the United States and
other countries have begun to examine how VoIP services should be regulated and to begin instituting such regulation, and a number
of initiatives could have an impact on our business. These initiatives include the assertion of state regulatory and taxing authorities
over us, FCC rulemaking regarding emergency calling services, the imposition of law-enforcement obligations like the Communications
Assistance for Law Enforcement Act, referred to as “CALEA”, marketing restrictions and data protection rules for Customer
Proprietary Network Information, referred to as “CPNI”, access to relay services for people with disabilities, local
number portability, proposed reforms for the inter-carrier compensation system, and an ongoing generic rulemaking considering the
classification of interconnected VoIP services under federal law. Complying with regulatory developments will 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 we pay. We may impose additional fees on our customers in response to these increased expenses. This
would have the effect of increasing our revenues per customer, but not our profitability, and increasing the cost of our services
to our customers, which would have the effect of decreasing any price advantage we may have over traditional telecommunications
companies.
Project
Factors: In addition to the factors cited above, the advancement, cost and results of particular projects depend on the outcome
of: negotiations with potential partners, governments, suppliers, customers or others; changes in operating conditions or costs;
and the occurrence of unforeseen technical difficulties or enhancements. The likelihood of these items occurring and its overall
positive or negative effect upon us vary greatly from project to project and are not predictable.
Risk
Factors: See “Item 1A. Risk Factors” for a discussion of the impact of market risks, financial risks and other
risks and uncertainties that we face.
Revenues
Our
revenues are derived mainly from resellers, service providers, and direct consumers of our video and voice-over-IP products and
services. Revenue is recognized from these products and services as follows:
| · | postpaid minutes: revenue from the sale
of minutes on a postpaid basis (primarily sold to our wholesale resellers) is recognized at the time such minutes are used; |
| · | prepaid minutes: prepayments for communications
services and the sale of minutes are deferred and recognized as revenue at the time communications services are provided and at
the time the minutes are utilized, service charges are levied or remaining balances expire. We conduct evaluations of outstanding
prepaid balances that do not have expiration dates or service fees associated with them to determine, based on terms and condition
of agreements and historical data, whether such balances are likely to be utilized. If we determine that balances are unlikely
to be used, the deferred revenue liability is reduced accordingly and other revenue is recognized. The outstanding prepaid balances
likely to be utilized are reconciled to our deferred revenue account and deferred revenue is increased or decreased accordingly
to properly reflect our estimated liability; |
| · | monthly recurring charges: revenue from
fees such as set monthly recurring charges based on the level of service or calling plans that the subscriber subscribes for is
recognized as the applicable service is provided; and |
| · | other revenues: these revenues include,
but are not limited to, prepaid balances with no services fees or expiration dates that are unlikely to be utilized. |
The following sets
forth our revenues per sales channel for each of the years ended December 31, 2014 and 2013:
| |
Year Ended December 31, | |
Sales Channel | |
2014 | | |
2013 | |
| |
($ in thousands) | |
Reseller | |
$ | 11,782 | | |
$ | 12,696 | |
Direct-to-consumer | |
| 1,006 | | |
| 2,003 | |
Service provider | |
| 1,165 | | |
| 1,091 | |
Other | |
| 146 | | |
| 295 | |
Total Revenues | |
$ | 14,099 | | |
$ | 16,085 | |
The
provision of video and voice-over-IP products and services through our service provider and reseller channel accounted for approximately
85.7% and 91.8% of our total revenues in 2013 and 2014, respectively, while the provision of VoIP telephony through our direct-to-consumer
channel accounted for approximately 12.4% and 7.1% of our total revenues in 2013 and 2014, respectively.
Costs
and Operating Expenses
Costs
and operating expenses consist of the following: cost of revenues; research and development expenses; selling and marketing expenses;
general and administrative expenses; and depreciation and amortization.
Cost
of revenues consist primarily of network, access, termination and transmission costs paid to carriers that we incur when providing
services and fixed costs associated with leased transmission lines. The term of our contracts for leased transmission lines is
generally one year or less, and either party can terminate with prior notice.
The following sets
forth our cost of revenues per component for each of the years ended December 31, 2014 and 2013:
| |
Year Ended December 31, | |
Cost Component
| |
2014 | | |
2013 | |
| |
($ in thousands) | |
Termination of minutes | |
$ | 10,409 | | |
$ | 11,365 | |
Infrastructure | |
| 410 | | |
| 531 | |
Internet access | |
| 358 | | |
| 396 | |
Licenses fees and support | |
| 122 | | |
| - | |
Other | |
| 371 | | |
| 634 | |
Total Cost of
Revenues | |
$ | 11,670 | | |
$ | 12,926 | |
Research
and development expenses consist primarily of costs associated with establishing our network and the initial testing of our services
and compensation expenses of software developers involved in new product development and software maintenance. Since our inception,
we have expensed all research and development costs in each of the periods in which they were incurred.
Selling
and marketing expenses consist primarily of expenses associated with our direct sales force incurred to attract potential service
provider, reseller, and corporate customers and advertising and promotional expenses incurred to attract potential consumer users
to our direct-to-consumer divisions.
General
and administrative expenses consist primarily of compensation and benefits for management, finance and administrative personnel,
insurance premiums, occupancy costs, legal and accounting fees and other professional fees. Additionally, we incur expenses associated
with our being a public company, including the costs of directors’ and officers’ insurance.
Depreciation
and amortization consists of the depreciation calculated on our fixed assets for the fiscal year ended December 31, 2014.
We
have not recorded any income tax benefit for net losses and credits incurred for any period from inception to December 31, 2014. The
utilization of these losses and credits depends on our ability to generate taxable income in the future. Because of the uncertainty
of our generating taxable income going forward, we have recorded a full valuation allowance with respect to these deferred assets.
Net
Operating Losses
As
of December 31, 2014, we had net operating losses, or NOLs, generated in the U.S. of approximately $23.6 million and our Subsidiary
had NOLs of approximately $3.9 million. Our issuance of common stock to D4 Holdings in February 2009 constituted an “ownership
change” as defined in Section 382 of the Internal Revenue Code. As a result, under Section 382 our ability to utilize NOLs
generated in the U.S. prior to February 2009 (equal to approximately $156 million) to offset any income we may generate in the
future will be limited to approximately $600,000 per year from February 2009. The NOLs began to expire in 2011 and will continue
to expire at various dates until 2029 if not utilized. Our ability to utilize our remaining NOLs could be additionally reduced
if we experience any further “ownership change,” as defined under Section 382.
Critical
Accounting Policies
The
SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of a company's
financial condition and results of operations and most demanding on their calls on judgment, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We believe our most critical
accounting policies relate to:
Use
of estimates: Our consolidated financial statements are prepared in conformity with accounting principles generally
accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and
disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these
estimates.
On
an ongoing basis, we evaluate our estimates, including those related to allowances for doubtful accounts receivable, the amortization
of deferred revenue associated with customer accounts, the useful lives of property and equipment and the value of common stock,
common stock options, and restricted stock for the purpose of determining stock-based compensation. We base our estimates on historical
experience, available market information, appropriate valuation methodologies, including the Black Scholes option model and on
various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the
carrying values of assets and liabilities.
Revenue
recognition and deferred revenue: We record revenue from VoIP telephony services based on minutes (or fractions
thereof) of customer usage. We record revenue from related services based on completion of the specific activities associated with
the services. We record payments received in advance for prepaid services and services to be supplied under contractual agreements
as deferred revenue until such related services are provided. We estimate the allowance for doubtful accounts by reviewing the
status of significant past due receivables and analyzing historical bad debt trends and we then reduce accounts receivables by
such allowance for doubtful accounts to expected net realizable value.
Restructured
long-term debt. We regard the restructured long-term debt to D4 Holdings, under the criteria of, and have accounted
for the restructured long-term debt as, a troubled debt restructuring in accordance with ASC Subtopic 470-60, “Debt - Troubled
Debt Restructurings by Debtors”, or ASC 470-60, which requires that the gross future cash flows of principal and interest
be reflected in the balance sheet. The long-term debt is secured by substantially all of our assets.
Results
of Operations
The
following table sets forth the statement of operations data presented as a percentage of revenues for the periods indicated:
| |
Year Ended December 31, | |
| |
2012 | | |
2013 | | |
2014 | |
Revenues: | |
| | | |
| | | |
| | |
Total revenues | |
| 100 | % | |
| 100 | % | |
| 100 | % |
Costs and operating expenses: | |
| | | |
| | | |
| | |
Cost of revenues | |
| 64.4 | | |
| 80.2 | | |
| 82.8 | |
Research and development expenses | |
| 8.7 | | |
| 7.4 | | |
| 6.3 | |
Selling and marketing expenses | |
| 14.8 | | |
| 7.9 | | |
| 4.7 | |
General and administrative expenses | |
| 10.3 | | |
| 8.7 | | |
| 9.1 | |
Depreciation and amortization | |
| 1.1 | | |
| 1.1 | | |
| 0.6 | |
| |
| | | |
| | | |
| | |
Total costs and operating expenses | |
| 99.3 | | |
| 105.3 | | |
| 103.5 | |
| |
| | | |
| | | |
| | |
(Loss) income from operations | |
| 0.7 | | |
| (5.3 | ) | |
| (3.5 | ) |
Interest expense, net | |
| (12.1 | ) | |
| (5.6 | ) | |
| (10.4 | ) |
Income taxes | |
| (0.0 | ) | |
| (0.0 | ) | |
| (0.0 | ) |
| |
| | | |
| | | |
| | |
Net income (loss) | |
| (11.4 | )% | |
| (10.9 | )% | |
| (13.9 | )% |
Year
Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenues
Revenues
overall for 2014 decreased by approximately $2.0 million, or 12.4%, to approximately $14.1 million from approximately $16.1 million
in 2013. This was caused, in large part, by a decrease of approximately 20 million minutes utilized by our largest reseller during
2014, compared to the number of minutes utilized by such reseller during 2013, due to political instability and unrest in areas
in which this reseller operates.
Revenues
generated by our reseller division decreased by approximately $0.9 million, or 7.1%, to approximately $11.8 million for 2014 from
approximately $12.7 million in 2013. This was primarily due to a decrease in revenues generated by our largest reseller during
2014. In 2013, this customer generated revenues of approximately $11.1 million, which accounted for approximately 68.7% of
our annual gross revenues, and in 2014 this customer generated revenues of approximately $9.5 million, which accounted for
approximately 67.4% of our annual gross revenues. This decrease was offset by an increase in the revenues generated by our second
largest reseller. In 2013, this customer generated revenues of approximately $0.4 million, which accounted for approximately 2.4%
of our annual gross revenues and in 2014 this customer generated revenues of approximately $1.0 million, which accounted for
approximately 6.8% of our annual gross revenues.
Our
two largest resellers accounted for approximately $10.5 million, or approximately 88.9%, of the revenues generated from our reseller
division in 2014, which represented approximately 74.3% of our total revenues for 2014. By comparison, in 2013 our two
largest resellers accounted for approximately $11.4 million, or approximately 90.2%, of the revenues generated from our reseller
division, or approximately 71.2% of our total revenues for 2013.
Revenues
generated by our service provider division slightly increased by approximately $0.1 million or 9.1%, to $1.2 million for 2014 from
$1.1 million in 2013. This was primarily due to an increase in revenues generated by our service agreement with ACN Korea offset
by a decline in revenues generated from our service agreement with ACN Pacific as a result of the expiration of the applicable
service agreement in October 2014.
Sales
to direct consumers sharply decreased by approximately $1.0 million, or 50%, to approximately $1.0 million in 2014 from approximately
$2.0 million in 2013. Revenues generated through our iConnectHere offering declined by approximately $93,000 from approximately
$410,000 in 2013 to approximately $317,000 in 2014, in addition to a decline in revenues generated by our joip Mobile offering,
which decreased from approximately $1.4 million in 2013 to approximately $0.6 million in 2014.
Costs
and Operating Expenses
Cost
of revenues. Cost of revenues decreased by approximately $1.2 million, or 9.3%, from approximately $12.9 million
in 2013 to approximately $11.7 million in 2014. Our network rent cost decreased by approximately $0.2 million, or 22.3%, and
our termination costs decreased by 8.8% from $11.4 million in 2013 to $10.4 million in 2014. This was due to a sharp decline
in minutes utilized by our largest reseller caused by the political instability and unrest in areas in which this reseller operates.
Cost of revenues also includes software cost as licenses paid for reselling them to our service providers. For 2014 we recorded
approximately $122,000 as licenses fees and support.
Research
and development expenses Research and development expenses decreased by approximately $0.3 million, or 25%, to $0.9 million
in 2014 from $1.2 million in 2013.
Selling
and marketing expenses. Selling and marketing expenses decreased by approximately $0.6 million, or 46.2%, to $0.7
million in 2014 from $1.3 million in 2013. The main reason for the decrease was a decrease in sales of our joip Mobile application
by ACN, ACN Europe and Momentis, as a result of which we recorded lower commissions for 2014.
General
and administrative expenses. General and administrative expenses decreased by approximately $0.1 million, or 7.1%,
to $1.3 million in 2014 from $1.4 million in 2013.
Depreciation
and amortization. Depreciation and amortization decreased by $59,000, or 40.7%, from $145,000 in 2013 to $86,000
in 2014.
(Loss)
income from operations
We
reported a loss from operations of approximately $496,000 in 2014 compared to a loss from operations of approximately $885,000
in 2013.
Interest
Expense, Net
We
recorded interest expense of approximately $1.5 million in 2014 compared to $0.9 million in 2013. This was due primarily to (i)
interest accrued to be paid to D4 Holdings under our loan agreements with D4 Holdings in an amount equal to $683,000, (ii) the
expense recorded for the warrant we issued to D4 Holdings in connection with the Second Loan Agreement and the warrant and Convertible
Note we issued to D4 Holdings in connection with the Third Loan Agreement in an aggregate amount equal to $464,000 and (iii) interest
accrued to be paid to ACN Inc. for un-paid commission as described above in " – Overview" in an amount equal to
$277,000.
Income
Taxes, Net
We
recorded net income taxes of $11,000 in 2014.
Net
Loss
Net
loss increased by approximately $0.2 million, or 11.1%, from approximately $1.8 million in 2013 to $2.0 million in 2014, due to
the foregoing factors.
Year
Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenues
Revenues
overall for 2013 increased by approximately $2.4 million, or 17.5%, to approximately $16.1 million from approximately $13.7 million
in 2012. Revenues increased even though the number of minutes carried by our network decreased by approximately 13.5%
from approximately 333 million minutes in 2012 to approximately 288 million minutes
in 2013. The increase in revenues was due to a change in the relative mix of the destinations of the calls placed over
our network, with a larger percentage of calls being made during 2013 compared to 2012 to destinations for which we charge significantly
higher rates.
Revenues
generated by our reseller division increased by approximately $4.8 million, or 60.9%, to approximately $12.7 million for 2013 from
approximately $7.9 million in 2012. This was primarily due to an increase in revenues generated by our largest reseller during
2013. In 2012, this customer generated revenues of approximately $5.4 million, which accounted for approximately 39.5% of
our annual gross revenues, and in 2013 this customer generated revenues of approximately $11.1 million, which accounted for
approximately 68.7% of our annual gross revenues. This increase was offset by a sharp decline in the revenues generated by our
second largest reseller, primarily due to a reduction of more than 50% in rates we charge for specific destinations we effected
during 2013 in order to remain competitive. . In 2012, this customer generated revenues of approximately $1.3 million, which accounted
for approximately 9.3% of our annual gross revenues and in 2013 this customer generated revenues of approximately $0.6 million,
which accounted for approximately 3.7% of our annual gross revenues.
Our
two largest resellers accounted for approximately $11.7 million, or approximately 91.8%, of the revenues generated from our reseller
division in 2013, which represented approximately 72.4% of our total revenues for 2013. By comparison, in 2012 our two
largest resellers accounted for approximately $6.7 million, or approximately 84.5%, of the revenues generated from our reseller
division, or approximately 48.8% of our total revenues for 2012.
Revenues
generated by our service provider division decreased by approximately $56,000 or 4.9%, to $1,091,000 for 2013 from $1,147,000 in
2012. This was primarily due to a decline in revenues generated from our service agreement with ACN Pacific offset by an increase
in revenues generated by our service agreement with ACN Korea.
Sales
to direct consumers sharply decreased by approximately $2.2 million, or 52.4%, to approximately $2.0 million in 2013 from approximately
$4.2 million in 2012. Revenues generated through our iConnectHere offering declined by approximately $150,000 from approximately
$560,000 in 2012 to approximately $410,000 in 2013, in addition to a decline in revenues generated by our joip Mobile offering,
which decreased from approximately $3.6 million in 2012 to approximately $1.4 million in 2013.
Costs
and Operating Expenses
Cost
of revenues. Cost of revenues increased by approximately $4.1 million, or 46.6%, from approximately $8.8 million
in 2012 to approximately $12.9 million in 2013. Our network rent cost decreased slightly by approximately $22,000, while our
termination costs increased by 56.2% from $7.3 million in 2012 to $11.4 million in 2013. This was due to a change in
the relative mix of the destinations of the calls placed over our network, with a larger percentage of calls being purchased during
2013 to destinations for which we pay significantly higher rates than during 2012.
Our access costs decreased by 21.6%, from $550,000 in 2013 to $431,000 in 2014, and our transmission costs decreased by 27.8%,
from $212,000 in 2013 to approximately $153,000 in 2014.
Research
and development expenses Research and development expenses remained constant at approximately $1.2 million for each of
2012 and 2013.
Selling
and marketing expenses. Selling and marketing expenses decreased by approximately $0.7 million, or 35%, to $1.3
million in 2013 from $2.0 million in 2012. The main reason for the decrease was a decrease in sales of our joip Mobile application
by ACN, ACN Europe and Momentis, as a result of which we recorded lower commissions for 2013.
General
and administrative expenses. General and administrative expenses remained constant at approximately $1.4 million
for each of 2012 and 2013.
Depreciation
and amortization. Depreciation and amortization increased by $3,000, or 2.0%, from $148,000 in 2012 to $145,000
in 2013.
(Loss)
income from operations
We
reported a loss from operations of approximately $885,000 in 2013 compared to income from operations of approximately $88,000 in
2012.
Interest
Expense, Net
We
recorded interest expense of approximately $0.9 million in 2013 compared to $1.7 million in 2012. This was due primarily to (i)
interest accrued to be paid to D4 Holdings under our loan agreements with D4 Holdings in an amount equal to $590,000, (ii) the
expense recorded for the warrant we issued to D4 Holdings in connection with the Second Loan Agreement and the warrant and Convertible
Note we issued to D4 Holdings in connection with the Third Loan Agreement in an aggregate amount equal to $169,000 and (iii) interest
accrued to be paid to ACN Inc. for un-paid commission as described above in " – Overview" in an amount equal to
$85,000.
Income
Taxes, Net
We
recorded net income taxes of $35,000 in 2013.
Net
Loss
Net
loss increased by approximately $0.2 million, or 12.5%, from approximately $1.6 million in 2012 to $1.8 million in 2013, due to
the foregoing factors.
Liquidity
and Capital Resources
Since
our inception in June 1996, we have incurred significant operating and net losses due in large part to the start-up and development
of our operations and losses from operations. For the year ended December 31, 2014, we reported a loss from operations of approximately
$0.5 million compared to a loss from operations of approximately $0.9 million in 2013. To date, we have an accumulated deficit
of approximately $186.7 million.
As
of December 31, 2014, we had cash and cash equivalents of approximately $286,000 and restricted cash and short-term investments
of approximately $3,000, or a total of cash, cash equivalents and restricted cash of $289,000, an increase of approximately $98,000
from December 31, 2013. The increase in cash was primarily caused by the net cash provided by operating activities during the year
ended December 31, 2014, of approximately $60,000. Our cash management is influenced by fluctuations in collections from our clients,
which in turn affects the timing of our payments to our vendors and suppliers. However, we estimate our monthly cash burn ranges
between $20,000 and $50,000, based on the assumption that our revenues remain at their current level. We expect our cash and cash
on hand will be sufficient to support our operations for the period of between four and ten months, unless we receive additional
funding or raise additional capital.
Cash
used in or provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.
We had positive cash flow from operating activities of approximately $60,000 during 2014 compared with negative cash flow from
operating activities of approximately $262,000 million during 2013. The increase in our cash used in operating
activities was primarily driven by accumulated interest on short-term loan of approximately $683,000 and increase in accounts payable
of approximately $236,000.
Net
cash used in investing activities is generally driven by our capital expenditures and changes in our short and long-term investments. In
2014 and 2013 we expensed approximately $14,000 and $64,000, respectively, for the purchase of new equipment. In addition,
during the year ended December 31, 2014, restricted cash equal to $30,000 that was held by some of our credit card processors was
released. During 2013 we have succeeded to release $22,000 held by these credit card processors. In addition, since we are now
leasing smaller offices for our subsidiary at Jerusalem than we leased previously, as per our new agreement with the landlord of
the officers approximately $48,000 was released from a deposit with the landlord and on the amount of the outstanding deposit is
$45,000.
Net
cash used in or provided by financing activities is generally driven by drawing down amounts available under lines of credit available
to us, issuing shares of our capital stock and receiving cash that we had previously pledged or otherwise deposited as security
for our lenders and creditors.
Financing
cash flows have historically consisted primarily of payments of capital leases and proceeds from the exercise of options we have
granted to our employees and directors. As discussed above under “Item 1. Business - Transactions with D4 Holdings”,
in February 2009 we consummated a transaction with D4 Holdings pursuant to which we sold to D4 Holdings an aggregate of 39,000,000
shares of our common stock and a warrant to purchase up to an additional 30,000,000 shares of our common stock for an aggregate
purchase price of $1.2 million. In addition, on March 1, 2010, we and our subsidiaries entered into the First Loan Agreement
with D4 Holdings pursuant to which D4 Holdings agreed to provide us and our subsidiaries a line of credit in a principal amount
of $1,200,000. On August 10, 2010, we and our subsidiaries entered into the Second Loan Agreement with D4 Holdings,
pursuant to which D4 Holdings agreed to provide us and subsidiaries an additional line of credit in a principal amount of $1,000,000.
In connection with the Second Loan Agreement, we issued to D4 Holdings a warrant to purchase up to 4,000,000 shares of our common
stock at an exercise price of $0.1312 per share. We have drawn down all amounts available to be borrowed under the two lines of
credit.
On
March 2, 2011, we and our subsidiaries entered into the Third Loan Agreement with D4 Holdings, pursuant to which D4 Holdings agreed
to provide us and its subsidiaries an additional line of credit in a principal amount of $1,600,000. Pursuant to the terms of the
Convertible Note issued by us in connection with the Third Loan Agreement, D4 Holdings may elect to convert all or any portion
of the outstanding principal amount under the Convertible Note into that number of shares of our common stock determined by dividing
such principal amount by $0.08 (as may be adjusted under the terms of the Convertible Note). Simultaneous with our entering into
the Third Loan Agreement, D4 Holdings and we entered into an amendment of the First Loan Agreement, pursuant to which (among other
things) the maturity date for repayment of principal under the First Loan Agreement was extended from March 1, 2011, to March 1,
2012, and then subsequently extended by oral agreement of the parties to July 1, 2012, and then subsequently orally extended again
to January 2, 2014, pending the parties’ finalizing and entering into a formal amendment. In connection with the Third Loan
Agreement, we issued D4 Holdings a warrant to purchase up to 1,000,000 shares of our common stock at an exercise price of $0.096
per share. We have drawn down the aggregate principal amount available under the Third Loan Agreement, the principal amount of
which can be converted by D4 Holdings into an aggregate of 20,000,000 shares of our common stock.
On
September 12, 2011, we and our subsidiaries entered into the Fourth Loan Agreement with D4 Holdings, pursuant to which D4 Holdings
agreed to provide us and our subsidiaries an additional line of credit in a principal amount of $300,000. As of December 31, 2013,
we have drawn down all amounts available to be borrowed under the Fourth Loan Agreement.
On November 13, 2012, we and our subsidiaries
entered into the Third Amendment to Loan and Security Agreements, or the "Third Amendment", and the Amendment to Warrant
Agreements, or the "Warrants Amendment", with D4 Holdings. Pursuant to the Third Amendment and the Warrants Amendment:
| · | the maturity date for repayment of principal and interest under the
First Loan Agreement was extended to January 2, 2014; |
| · | the maturity date for repayment of principal and interest under the
Second Loan Agreement was extended to January 2, 2015; |
| · | the maturity date for repayment of principal and interest under each
of the Third and Fourth Loan Agreements was extended to January 2, 2016; |
| · | all interest outstanding under each of the loan agreements was added
to the principal amount outstanding under the respective loan agreement and the promissory notes issued pursuant to each respective
loan agreement was increased by such amount; and |
| · | the exercise price under each of the Warrant Agreements entered into
by us and D4 Holdings as of February 12, 2009, August 10, 2010, and March 2, 2011 was amended to $0.02 per share. |
In connection with
the extension of the maturity dates under the Third Amendment, we issued to D4 Holdings a warrant, exercisable for ten years, to
purchase up to 10,000,000 shares of our common stock at an exercise price of $0.02 per share.
There
were no options exercised by our employees or directors during the year ended December 31, 2013.
On
January 2, 2014, we did not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement, which
constituted an event of default thereunder and a cross-default under all our other loan agreements with D4 Holdings. On March 28,
2014, we and our subsidiaries entered into the Forbearance Agreement with D4 Holdings. Pursuant to the terms and conditions of
the Forbearance Agreement, D4 Holdings agreed to forbear from taking any action with respect to the events of default until the
earlier of (i) December 31, 2014, (ii) the occurrence of a breach or default by us or our subsidiaries under the Forbearance Agreement
(which, in the event of certain undertakings of ours under the Forbearance Agreement, are not cured within three days) or (iii)
the occurrence of any new or additional event of default under our loan agreements with D4 Holdings. In addition, to the
extent not yet perfected we and our subsidiaries pledged and granted as a security interest to D4 Holdings all of our right, title
and interest in the collateral described in the Forbearance Agreement. In connection with the Forbearance Agreement we also issued
to D4 Holdings a warrant, exercisable for ten years, to purchase up to 10,000,000 shares of our common stock at an exercise price
of $0.02 per share.
On
July 5, 2011, we received a notice from the New York City Department of Finance that claimed that we had not paid commercial rent
tax required under the New York City Administrative Code from June 1998 through May 2008 for the two offices that we had leased
during that time. The notice stated that we are obligated to pay the outstanding tax amounts, as well as significant interest and
penalties that were assessed on the unpaid amounts as well as for the failure to file the applicable tax returns. We engaged outside
counsel, which began discussions with the Department of Finance, and contested the assessment and simultaneously attempted to negotiate
a significant reduction in the amounts to be paid. Our appeal was rejected in July 2012 by an examiner in the Department of Finance,
and we have subsequently engaged and begun discussions with a manager in the Department of Finance and submitted additional supporting
materials. The final outcome of this assessment and our negotiations with the New York City Department of Finance cannot be determined
at this time. In the event that we are required to pay all or most of the amounts claimed by the New York City Department of Finance
this would have a material adverse effect on our financial condition and liquidity. During 2011 we recorded $300,000 as a provision
for commercial rent tax. We have determined that $300,000 is the minimum amount that would settle the claim according to ASC 450-20.
The amount claimed by the Department of Finance was approximately $912,000; as a result, there is a reasonable possibility that
a loss in excess of the $300,000 would be incurred.
We
experience fluctuations in our cash cycle, as we generally make payments to our termination suppliers more frequently (often on
a weekly basis) than we receive payments from our customers (often on a monthly basis). In the event one of our customers
did not pay us, we would experience a direct loss of the amounts we had already paid to our termination suppliers. We
maintain our free cash in accounts with major banks located in the United States, and generally do not invest such cash in short
or long-term investments. As a way to try to offset our declining cash position we generally seek to extend payment
terms to our suppliers other than our termination providers.
We
have historically obtained our funding from our utilization of the remaining proceeds from our initial public offering, offset
by positive or negative cash flow from our operations, and most recently from the sale of shares of our common stock to D4 Holdings
in February 2009 and borrowings under our loan agreements with D4 Holdings. These proceeds are maintained as cash, restricted cash,
and short and long term investments. We have sustained significant operating losses in recent periods, which have led to a significant
reduction in our cash reserves.
On
April 3, 2012, we entered into an amendment to the Sales Agency Agreement and Introducer Agreement (the “Amendment Letter”).
Pursuant to the terms of the Amendment Letter, we are required to pay all then-current commissions on a timely basis as required
under the agreements and a late fee in the amount of one percent per month of any past-due, unpaid commissions (which, as of September
30, 2014, was equal to approximately $1,658,000). In addition, beginning July 15,
2012, we were required to pay down any unpaid past due amounts in an amount equal to at least $15,000 per month through June 15,
2013, and at least $25,000 per month thereafter until such time as the unpaid balance is paid in full, and are required to pay
in full any unpaid, past due amounts upon 30 days' notice. In addition, in the event of certain insolvency-related events defined
in the agreements, all unpaid amounts will become immediately due and payable effective immediately prior to such event.
In
July 2012 we began making the $15,000 monthly payment of unpaid commissions, however due to our financial condition we suspended
making the monthly payments of the unpaid commissions and the current commissions in April 2013 with the oral consent of ACN and
ACN Europe. On June 12, 2014, each of us and our wholly-owned subsidiaries Delta Three Israel, Ltd., or "Delta Three Israel",
and DME Solutions, Inc., or "DME", and together with us and Delta Three Israel, the "deltathree Entities",
and ACN, ACN Europe, ACN Digital Phone Service, LLC, or "DPS", and together with ACN and ACN Europe, the "ACN Entities", entered
into the Amended and Restated Agreement Concerning Outstanding/Future Commissions and Security Agreement, or the "ACN Forbearance
Agreement". The ACN Forbearance Agreement amends the Amendment Letter, in regards to outstanding commissions due to be paid
by us to ACN and ACN Europe under the Sales Agency Agreement and Introducer Agreement.
The ACN Forbearance Agreement also amends that certain License Assignment entered into on February 7, 2013 between us and DPS and
the outstanding license assignment payment due to be paid by us to DPS.
The terms of the ACN
Forbearance Amendment provide as follows:
| · | commencing with the date of the ACN Forbearance
Agreement, a late fee in the amount of one percent (1%) per month accrues on any unpaid commissions and the license assignment
payment, and commencing on July 15, 2014, and continuing on the 15th day of each month thereafter the deltathree
Entities are obligated to pay to ACN and ACN Europe the interest that accrued during the previous month; |
| · | in addition, commencing on July 15, 2014,
and continuing on the 15th day of each month thereafter, the deltathree Entities are required to (i) pay down any
outstanding obligations, provided that the amount of each monthly payment will be equal to at least $114,000, and (ii) pay all
then-current commissions under the Sales Agency Agreement and Introducer Agreement and any cure periods provided for under
the respective agreements for non-payment will no longer apply; |
| · | so long as the deltathree Entities fulfill
the terms of the ACN Forbearance Agreement, the ACN Entities will forbear from exercising any rights they may have for any breach
by the deltathree Entities under the Sales Agency Agreement and the Introducer Agreement and permit the Company to pay the license
assignment payment over time in accordance with the terms and conditions of the ACN Forbearance Agreement until July 31, 2014,
or the "Initial Forbearance Period". Following the expiration of the Initial Forbearance Period, the ACN Entities' obligation
to forbear automatically renews on a monthly basis unless terminated by either party under the terms of the ACN Forbearance Agreement
until July 15, 2015, following which such the ACN Entities' obligation to forbear will not automatically renew; |
| · | upon the expiration of the Initial Forbearance
Period or any subsequent renewals, unless the ACN Entities' requirement to forbear is renewed, all unpaid obligations will become
immediately due and payable; |
| · | each of Delta Three Israel and DME guaranteed
the payment and performance of the Company's obligations under the license assignment and under the ACN Forbearance Agreement; |
| · | to secure the payment and performance
in full of all of their obligations under the agreement, the deltathree Entities granted to the ACN Entities a continuing security
interest in, and pledged to the ACN Entities, all of their right, title and interest in, to and under the collateral set forth
on Exhibit A of the ACN Forbearance Agreement; and |
| · | in the event of any Event of Default (as
defined in the ACN Forbearance agreement), all unpaid amounts due from the deltathree Entities will become immediately due and
payable and the ACN Entities may in their sole discretion terminate the ACN Forbearance Agreement and exercise their rights and
pursue all remedies available to them as a secured creditor and at law or in equity. |
We
did not make the payments we were required to make to the ACN Entities on July 15, 2014, described in the first and second bullet
points above and is currently in default under the ACN Forbearance Agreement. On September 29, 2014 ACN and we entered into the
Second Amendment to the ACN Forbearance Agreement. The amendment modified the initial due date of July 15, 2014 under the ACN Forbearance
Agreement to December 15, 2014 and provided that we are obligated to pay a fee of $50,000 on or before December 15, 2014. As of
March 18, 2015 we have not paid such amount to the ACN Entities, and pursuant to the terms of the Second Amendment a late payment
penalty fee of one percent (1%) of such amount is accruing on a monthly basis
We
do not know when we will resume making such payments again, and there is no assurance that we will be able to do so in the near
future (if at all) or that until such time ACN and ACN Europe will continue to consent to our not making any such required payments
and not exercise any rights they may have under our respective agreements with them or under applicable law. In
addition, in the event of certain insolvency-related events defined in the agreements, all unpaid amounts will become immediately
due and payable effective immediately prior to such event.
As
of December 31, 2014, we had negative working capital equal to approximately $8.9 million as well as negative stockholders’
equity equal to approximately $8.8 million. We believe it is probable that we will continue to experience losses and increased
negative working capital and negative stockholders’ equity in the near future and will not be able to return to positive
cash flow before we require additional cash in the near term.
We
believe that, unless we are able to increase revenues and generate additional cash, our current cash and cash equivalents will
not satisfy our current projected cash requirements beyond the foreseeable future. As a result, there is substantial doubt about
our ability to continue as a going concern.
In
addition, unless we are able to increase revenues and generate additional cash, based on currently projected cash flows we believe
that we will be unable to pay future scheduled interest and/or principal payments under the various loan agreements with D4 Holdings
as these obligations become due, and beginning January 2013 we suspended making scheduled interest payments with the oral consent
of D4 Holdings. On January 2, 2014, we did not repay to D4 Holdings the outstanding principal
and interest due under the First Loan Agreement, which constituted an event of default thereunder and a cross-default under all
our other loan agreements with D4 Holdings, following which we and our subsidiaries entered into the Forbearance Agreement with
D4 Holdings. In the event we are unable to resume making interest payments and to pay the outstanding principal when due
following the termination of the Forbearance Agreement, if D4 Holdings is not willing to waive compliance or otherwise modify our
obligations such that we are able to avoid defaulting on such obligations, because D4 Holdings has a lien on all of our assets
to secure our obligations under the loan agreements it could take actions under the loan agreements and seek to take possession
of or sell our assets to satisfy our obligations thereunder. Any of these actions would likely have an immediate material adverse
effect on our business, financial condition or results of operations.
Due
to our ongoing losses and reduction in cash, we initiated restructuring activities beginning in the second quarter of 2011 in an
effort to cut operating costs significantly and better align our operations with our current business model. In accordance
with the restructuring, we instituted a reduction in force and decreased the number of full time employees from approximately 53
to 32, reduced the salaries of all remaining employees by five percent, and decreased non-material expenses as well as payments
to be made to vendors and other third parties. In addition, in December 2013 we instituted an additional, smaller reduction in
force. As of December 31, 2014, we had 13 full time employees.
In
view of our current cash resources, nondiscretionary expenses, debt and near term debt service obligations, we may begin to explore
all strategic alternatives available to us, including, but not limited to, a sale or merger of our company, a sale of our assets,
recapitalization, partnership, debt or equity financing, voluntary deregistration of our securities, financial reorganization,
liquidation and/or ceasing operations. In the event that we require but are unable to secure additional funding, we may determine
that it is in our best interests to voluntarily seek relief under Chapter 11 of the U.S. Bankruptcy Code. Seeking relief under
the U.S. Bankruptcy Code, even if we are able to emerge quickly from Chapter 11 protection, could have a material adverse effect
on the relationships between us and our existing and potential customers, employees, and others. Further, if we were unable to
implement a successful plan of reorganization, we might be forced to liquidate under Chapter 7 of the U.S. Bankruptcy Code. There
can be no assurance that exploration of strategic alternatives will result in our pursuing any particular transaction or, if we
pursue any such transaction, that it will be completed.
Obligations
and Commercial Commitments
The
following table sets forth our future contractual obligations and commercial commitments in total, for each of the next five years
and thereafter:
| |
Payments due by period (in thousands of dollars) | |
Contractual obligations | |
Total | | |
Less than 1 year | | |
1-3 years | | |
3-5 years | | |
More than 5 years | |
Real estate leases | |
| 378 | | |
| 76 | | |
| 151 | | |
| 151 | | |
| - | |
Auto leases | |
| 53 | | |
| 38 | | |
| 15 | | |
| - | | |
| - | |
Unpaid commission to a related party | |
| 1,609 | | |
| 1,609 | | |
| - | | |
| - | | |
| - | |
Re-payment of Short-term loan | |
| 5,925 | | |
| 5,925 | | |
| - | | |
| - | | |
| - | |
Total | |
| 7,965 | | |
| 7,648 | | |
| 166 | | |
| 151 | | |
| - | |
Off-Balance
Sheet Arrangements
None.
Certain
Factors That May Affect Future Results of Operations
The
SEC encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects
and make informed investment decisions. This Annual Report contains such "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, as amended.
Words
such as "may," "anticipate," "estimate," "expects," "projects," "intends,"
"plans," "believes" and words and terms of similar substance used in connection with any discussion of future
operating or financial performance, identify forward-looking statements. All forward-looking statements are management's present
expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ
materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to, those
set forth under the heading "Risk Factors" contained in Item 1A of this Annual Report.
In
light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained
in this Annual Report or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date of this Annual Report. We are not under any obligation,
and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information,
future events or otherwise. All subsequent forward-looking statements attributable to deltathree or to any person acting on our
behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
Company's Consolidated Financial Statements required by this Item are set forth in Item 15 of this Annual Report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures. Each of our principal executive officer and principal financial officer,
after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of the end of the period
covered by this Annual Report, has concluded that, based on such evaluation, our disclosure controls and procedures were adequate
and effective to ensure that material information required to be disclosed by us in the reports that we file and submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b)
Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing
and maintaining adequate internal control over financial reporting of the Company. We maintain internal control over financial
reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, internal control over
financial reporting determined to be effective provides only reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under
the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated
internal control over financial reporting by the Company using the framework for effective internal control established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2013.
Based
on this assessment, management concluded that internal controls over financial reporting were effective as of December 31, 2013. In
connection with this assessment, no material weaknesses in the Company’s internal control over financial reporting were identified
by management. This Annual Report does not include an attestation report of our registered public accounting firm regarding internal
control over financial reporting, as management's report is not subject to attestation by our registered public accounting firm
pursuant to the rules of the SEC that permit us to provide only management's report in this Annual Report.
(c)
Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred
during the fourth quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Our
Amended and Restated Certificate of Incorporation provides that a director shall hold office until the annual meeting for the year
in which his or her term expires except in the case of elections to fill vacancies or newly created directorships. Each director
is elected for a one-year term. Set forth below are the name, age and the positions and offices held by each of our current directors,
his or her principal occupation, business experience and public company board experience during at least the past five years, and
the experience, qualifications, attributes or skills that qualify such person to serve on our Board of Directors.
Robert
Stevanovski, 51. Mr. Stevanovski has served as a director and Chairman of the Board since February 2009. He
is one of the co-founders of ACN and has served as Chairman of ACN since its founding in 1993. Mr. Stevanovski has served as a
director of WorldGate since April 2009. He is the brother of David Stevanovski, also a member of the Board. Mr.
Robert Stevanovski’s areas of relevant experience, qualifications, attributes or skills include sales and marketing expertise
generally, extensive knowledge of the telecommunications and multi-level marketing industries, outside board experience with WorldGate
and extensive business and management experience as co-founder and Chairman of ACN.
Anthony
J. Cassara, 60. Mr. Cassara has served as a director since February 2009. Mr. Cassara founded and has served
as President of Cassara Management Group, Inc., a privately held business counseling practice focused on the telecommunications
industry, since October 2000. Prior to founding Cassara Management Group, Mr. Cassara was President of the Carrier Services division
at Frontier Corporation and later at Global Crossing Ltd. from October 1999 to December 2000. Mr. Cassara served as a member of
the board of directors of MPower Holding Corporation from May 2002 to August 2006; Teleglobe International Holdings Ltd. from February
2004 to February 2006; Eschelon Telecom Inc. from November 2002 to December 2004; and has served as a director of WorldGate since
April 2009. Mr. Cassara’s areas of relevant experience, qualifications, attributes or skills include telecommunications
and information services; senior leadership roles in global telecommunications companies; public company board experience, corporate
finance, and financial reporting.
David
Stevanovski, 48. Mr. Stevanovski has served as a director since March 2009. He has served in a number
of positions at ACN, and currently serves as Vice President. Mr. Stevanovski has served as a director of WorldGate since April
2009. Mr. Stevanovski is the brother of Robert Stevanovski. Mr. David Stevanovski’s areas of relevant experience,
qualifications, attributes or skills include sales and marketing expertise generally, extensive knowledge of the telecommunications
and multi-level marketing industries, outside board experience with WorldGate, and extensive business and management experience
at ACN.
Charles
"Chip" Barker Mr. Barker has served as the Chief Executive Officer of ACN, Inc. since 2001. Prior to joining
ACN, Mr. Barker was with the telecommunications auditing practice of Price Waterhouse, followed by a tenure at Frontier Communications
and Global Crossing from 1996 to 2001, in which he held various finance positions including serving as CFO of its billion-dollar
plus worldwide carrier business. In addition, he has significant mergers and acquisitions and SEC experience. Currently
Mr. Barker is an active member on the ACN Board of Directors, while also serving on the CEO Council for CompTel.
Lior
Samuelson, 66. Mr. Samuelson served as Chairman of the Board from January 2008 until February 2009, and has
served as a director of deltathree since August 2001. Mr. Samuelson has served as the Chairman of the Board of Commtouch Software
Ltd., a provider of internet security technology, since January 1, 2011, and as a director at Commtouch since August 2, 2010. Since
August 1999, Mr. Samuelson has served as a Co-Founder and Principal of Mercator Capital, and served as a director of Mercator Partners
Acquisition Corp. from January 2005 to December 2007. His experience includes advising clients in the technology, communications
and consumer sectors on mergers, acquisitions and private placements. From March 1997 to August 1999, Mr. Samuelson was the President
and Chief Executive Officer of PricewaterhouseCoopers Securities. Prior to that, he was the President and Chief Executive Officer
of The Barents Group, a merchant bank specializing in advising and investing in companies in emerging markets. Mr. Samuelson was
also the Co-Chairman of Peloton Holdings, a private equity management company. Before that, he was a managing partner with KPMG
and a senior consultant at Booz, Allen & Hamilton. Mr. Samuelson’s areas of relevant experience, qualifications,
attributes or skills include extensive experience in finance and investment banking, public company board experience, financial
reporting, and his long history of service to deltathree and knowledge of its operations.
J.
Lyle Patrick, 62. Mr. Patrick has served as a director since March 2009. Mr. Patrick is currently a financial
consultant and has served as chief financial officer of a number of telecommunications companies, including, most recently, First
Communications, Inc., a provider of high-capacity metro and long-haul fiber network services as well as voice and data services
across the Midwest and Mid-Atlantic United States, from March 2009 to December 2011, US LEC, a competitive telecommunications company,
from June 2005 to March 2007, and MetroPCS, a wireless communications provider, from May 2004 to March 2005. Mr.
Patrick is a Certified Public Accountant. Mr. Patrick’s areas of relevant experience, qualifications, attributes
or skills include extensive accounting for public companies, with particular experience in the telecommunications industry, and
financial reporting.
Donna
Reeves-Collins, 54. Ms. Reeves-Collins has served as a director since October 2012. Ms. Reeves-Collins has served as Managing
Director at Rich Products Corporation since December 2007, and as the Chairwoman of the Board of Directors of Axcess Ontario since
February 2013. She joined Rich Products following its signing of a joint venture development agreement with Cole & Parks, a
bakery café restaurant which develops unique food products that was founded by Ms. Reeves-Collins in November 2003 and where
Ms. Reeves-Collins has served as CEO since its inception. Prior to founding Cole & Parks, Ms. Reeves-Collins served in a number
of positions at Frontier Corporation, including Senior Vice President of Sales, President of Sales for the Western Region and President
and COO of a joint venture with Verizon Wireless. Following Frontier's acquisition by Global Crossing in 1999, Ms. Reeves-Collins
served as the Senior Vice President of Sales – Media & Entertainment for Global Crossing through 2001.
Executive
Officers and Key Employees
Set
forth below is a brief description of the present and past business experience of each of the persons who currently serve as our
executive officers or key employees.
Efraim
Baruch, 39, Chief Executive Officer, President and Senior Vice President of Operations and Technology. In October 2010,
Mr. Baruch became our Chief Executive Officer and President, having been named our interim Chief Executive Officer and President
in December 2008. In January 2007, Mr. Baruch became our Senior Vice President of Operations and Technology. Mr. Baruch has been
with deltathree since 1998. Mr. Baruch began working in deltathree as an engineer in the Network Operations Center, and soon after
specialized in the management of data networks and security in our Wide Area Network department.
Yochai
Ozeri, 38, Director of Finance and Treasurer. Prior to assuming the positions
of Director of Finance and Treasurer in January 2012, Mr. Ozeri served as our Assistant Controller from July 2007 to March 2008,
as Finance Manager from April 2008 to July 2009 and as Controller from August 2009 until the December 2011. Prior to joining our
company, Mr. Ozeri served as a senior auditor at Kost, Forer, Gabbay & Kasierer, a member firm of Ernst & Young International,
in its technology practice group. Mr. Ozeri is a Certified Public Accountant.
Board
of Directors and Committees of the Board
Our
Amended and Restated Certificate of Incorporation provides that the number of members of our Board of Directors shall be not less
than three and not more than thirteen. There are currently seven directors on the Board. At each annual meeting of stockholders,
directors are elected to hold office for a term of one year and until their respective successors are elected and qualified.
The
Board had four regular meetings during 2014. Each incumbent member of the Board participated in at least 75% of the aggregate of
all Board and committee (for such committees on which the director served) meetings held during the period for which he was a director
or member of such committee. None of our directors attended our 2014 Annual Stockholder Meeting. The Board has established an Audit
Committee and a Compensation Committee. The functions of the committees and their current members are set forth below.
Director
Nominations. Due to a decrease in the number of members of the Board after our 2006 Annual Stockholders Meeting,
our Board members determined that it is efficient and important for each member to actively participate in all matters that were
previously the responsibility of the Nominating and Governance Committee and dissolved the Nominating and Governance Committee
as of September 11, 2006. As such, each of our Board members is expected to take part in, among other matters, the following nominating
and governance-related matters:
| • | identifying and recommending qualified candidates for director, and recommending the director nominees for our annual meetings
of stockholders; |
| • | conducting an annual review of the Board’s performance; |
| • | recommending the director nominees for each of the Board committees; and |
| • | developing and recommending our company’s corporate governance guidelines. |
Furthermore,
our Board adopted a nominating and governance policy that was based on the former Nominating and Governance Committee Charter.
This policy outlines our Board’s goals, responsibilities, and procedures related to nominating and governance matters. In
this regard, our Board may consider candidates recommended by stockholders as well as from other sources such as other directors
or officers, third party search firms or other appropriate sources.
For
all potential candidates, the Board considers a number of factors, such as the extent to which the candidate’s knowledge
and experience would fill a need in the Board and help complement the other directors, a candidate’s personal integrity and
sound judgment, independence, knowledge of the industry in which we operate, possible conflicts of interest, and concern for the
long-term interests of our stockholders. In addition, although the Company does not have a formal policy regarding the consideration
of diversity in identifying and evaluating potential director candidates, the Board will consider diversity in the context of the
Board as a whole and takes into account the personal characteristics (gender, ethnicity and age), skills and experience, qualifications
and background of current and prospective directors diversity as one factor in identifying and evaluating potential director candidates. In
general, persons recommended by stockholders will be considered on the same basis as candidates from other sources. If a stockholder
wishes to nominate a candidate to be considered for election as a director at our 2015 Annual Meeting of Stockholders using the
procedures set forth in the Company's Amended and Restated By-laws, it must follow the procedures described under “Nomination
of Directors” in our Amended and Restated By-laws. If a stockholder wishes simply to propose a candidate for consideration
as a nominee by our Board, it should submit any pertinent information regarding the candidate to the Chairman of the Board by mail
care of our Secretary at 1 Bridge Plaza Suite #275, Fort Lee, NJ 07024.
Compensation
Committee. The Compensation Committee is responsible for:
| • | evaluating our compensation policies; |
| • | determining executive compensation, and establishing executive compensation policies and guidelines;
and |
| • | administering our stock option and compensation plans. |
As
part of these responsibilities, the Compensation Committee determines the compensation of our Chief Executive Officer, and conducts
its decision making process with respect to this issue without the presence of the Chief Executive Officer. The Compensation Committee
had one formal meeting and additional informal meetings and discussions during 2014. The Compensation Committee has
a charter, a copy of which is available to our stockholders at the Corporate Governance section of our website located at www.deltathree.com.
The Compensation Committee is composed of Lior Samuelson (Chairman), J. Lyle Patrick and Donna Reeves-Collins.
Audit
Committee. The Audit Committee is responsible for:
| • | recommending to the Board the appointment of the firm selected to serve as our independent auditors
and monitoring the performance of such firm; |
| • | reviewing and approving the scope of the annual audit and evaluating with the independent auditors
our annual audit and annual financial statements; |
| • | reviewing with management the status of internal accounting controls;; |
| • | evaluating issues having a potential financial impact on us which may be brought to the Audit Committee’s
attention by management, the independent auditors or the Board; |
| • | evaluating our public financial reporting documents; and |
| • | reviewing the non-audit services to be performed by the independent auditors, if any, and considering
the effect of such performance on the auditor's independence. |
The
Audit Committee had four meetings during 2014. The Audit Committee has a charter, a copy of which is available to our
stockholders at the Corporate Governance section of our website located at www.deltathree.com. The Audit Committee is composed
of J. Lyle Patrick (Chairman), Lior Samuelson and Donna Reeves-Collins. The Board
of Directors has determined that each of Mr. Patrick, Mr. Samuelson and Ms. Reeves-Collins meets the requirements of the applicable
Securities and Exchange Commission rules for membership on the Audit Committee, including Rule 10A-3(b) under the Exchange Act
and is “independent” as defined in Rule 5605(a)(2) of the Nasdaq Marketplace Rules. The Board has also determined
that Mr. Patrick qualifies as an “audit committee financial expert” as defined in Item 407 of Regulation S-K.
Board
Leadership Structure
The
Board has no policy regarding the need to separate or combine the offices of Chairman of the Board and Chief Executive Officer
and remains free to make this determination from time to time in a manner that the Board deems most appropriate for our company.
Currently, we have separated the positions of CEO and Chairman of the Board in recognition of the differences between the two roles.
The CEO is responsible for the day to day leadership and performance of the Company, while the Chairman of the Board (in collaboration
with other members of the Board) sets the strategic direction of the Company, provides guidance to the management, sets the agenda
for the Board meetings (in collaboration with the other members of the Board) and presides over meetings of the Board. We
believe that separating these positions allows the Chairman of the Board to lead the board in its fundamental role of providing
direction and guidance to management, while allowing our Chief Executive Officer to focus on our day-to-day operations. In addition,
we believe that the current separation provides a more effective monitoring and objective evaluation of the performance of the
CEO.
Risk
Management
The
Board is actively involved in the oversight and management of risks that could affect our company. This oversight and management
is conducted primarily through committees of the Board, as disclosed in the descriptions of each of the committees above and in
the charters of each of the committees, but the full Board has retained responsibility for general oversight of risks. The Board
regularly receives reports from members of senior management on areas of material risk to the company, including operational, financial,
regulatory and legal. The Audit Committee oversees management of financial risks (including liquidity and credit) and approves
all transactions with related persons. The Compensation Committee is responsible for overseeing the management of risks relating
to the Company’s executive compensation plans and arrangements. The Board satisfies its oversight responsibility through
full reports by each committee chair regarding the committee’s considerations and actions, as well as through regular reports
directly from officers responsible for oversight of particular risks within the Company.
Legal
Proceedings
None.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires that the Company’s directors, executive officers and persons who own more than 10% of
the outstanding common stock of the Company file initial reports of ownership and reports of changes in ownership in such common
stock with the SEC. Officers, directors and stockholders who own more than 10% of the outstanding common stock are required by
the SEC to furnish the Company with copies of all Section 16(a) reports they file.
To
our knowledge, based solely upon our review of the copies of such reports furnished to us, we believe that all of our directors,
officers and holders of more than 10% of any class of our equity securities have complied with the applicable Section 16(a) reporting
requirements.
Code
of Conduct and Ethics
On
March 25, 2004, we adopted a Corporate Code of Conduct and Ethics applicable to all employees and directors of deltathree, including
our principal executive officer, principal financial and accounting officer and controller. There were no changes made to the Corporate
Code of Conduct and Ethics during 2013. The text of the Corporate Code of Conduct and Ethics is posted on the Corporate Governance
section of our website at www.deltathree.com and will be made available to stockholders without charge, upon request, in writing
to the Secretary at 1 Bridge Plaza, Fort Lee, New Jersey 07024. We intend to post on our website any amendments to, or waivers
from, our Code of Conduct and Ethics that apply to our principal executive officer, principal financial and accounting officer
and controller. We have all of our new employees certify that they have read and understand our Corporate Code of Conduct and Ethics,
and, periodically, we also ask our existing employees to certify that they have reviewed our Corporate Code of Conduct and Ethics.
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table shows the total compensation accrued during the fiscal years ended December 31, 2013 and 2014 to (1) all individuals
who served as our Chief Executive Officer during any part of 2013 and (2) one executive officer whose total compensation exceeded
$100,000 during the fiscal year ended December 31, 2014. These executive officers are referred to in this Annual Report as our
“named executive officers”. We did not have any other executive officer whose total compensation exceeded
$100,000 during the fiscal year ended December 31, 2014.
Name and Principal Position | |
Year | | |
Salary
($) | | |
Bonus
($) | | |
Stock
Awards ($)(1) | | |
Option
Awards ($)(1) | | |
Total
($) | |
Effi Baruch, | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Chief Executive Officer, President
and Senior Vice | |
| 2014 | | |
| 199,284 | | |
| - | | |
| 31,229 | | |
| 283,950 | | |
| 540,463 | |
President of Operations and Technology (principal
executive officer) | |
| 2013 | | |
| 187,723 | | |
| - | | |
| 31,229 | | |
| 261,242 | | |
| 480,194 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Yochai Ozeri, | |
| 2014 | | |
| 83,312 | | |
| - | | |
| 2,167 | | |
| 59,787 | | |
| 145,266 | |
Director of Finance and Treasurer | |
| 2013 | | |
| 93,345 | | |
| - | | |
| 2,167 | | |
| 53,017 | | |
| 148,529 | |
| (1) | Represents the aggregate grant date fair value calculated in accordance with ASC 718-10 in connection with the issuance
of the applicable restricted stock or restricted unit award or option award. For a detailed discussion of the assumptions
made in the valuation of stock awards, please see the Notes to the Consolidated Financial Statements included in this Annual Report. |
Employment
Agreement with Mr. Effi Baruch
We
currently have an employment agreement with Mr. Baruch, our Chief Executive Officer, President and Senior Vice President of Operations
and Technology. The agreement became effective on December 9, 2008, and was amended as of March 17, 2009, October 20,
2009, October 27, 2010, and August 17, 2011. Mr. Baruch receives a base salary of $186,000 per year, which is adjusted
as of January 15 each year by the percentage change in the Cost of Price Index during the preceding year. Mr. Baruch is entitled
to receive an annual bonus under our then-applicable bonus plan equal to up to three (3) months’ salary based on performance
criteria that will be agreed upon by him and the Board of Directors. In the event of termination of the agreement, the terminating
party is required to provide the other party 90 days’ written notice unless the Company terminates the agreement for cause,
in which case the Company is required to provide such written notice required by applicable law. In the event the Company
terminates the agreement without cause, Mr. Baruch shall be entitled to receive a lump sum payment equal to his then-current monthly
base salary multiplied by three, subject to Mr. Baruch executing a general release of all claims to the maximum extent permitted
by law. However, if Mr. Baruch is offered and accepts employment in any other position with our company or any subsidiary or affiliate,
we will not be required to make any such severance payment.
Outstanding
Equity Awards at Fiscal Year-End
The
following table shows certain information with respect to stock options and unvested stock awards outstanding as of December 31,
2014, for each of the named executive officers.
Name | |
Grant Date (1) | |
Number of Securities Underlying Unexercised Options (#) Exercisable | |
Number of Securities Underlying Unexercised Options (#) Unexercisable | | |
Option Exercise Price ($) | | |
Option Expiration Date |
Effi Baruch | |
3/30/2008 | |
250,000 | |
| - | | |
| 0.15 | | |
3/30/2018 |
| |
5/6/2009 | |
100,000 | |
| - | | |
| 0.14 | | |
5/6/2019 |
| |
9/15/2009 | |
500,000 | (2) |
| - | | |
| 0.41 | | |
9/15/2019 |
| |
10/19/2010 | |
325,000 | (3) |
| - | | |
| 0.27 | | |
10/19/2020 |
| |
9/26/2011 | |
375,000 | |
| 125,000 | (4) | |
| 0.03 | | |
9/26/2021 |
| |
5/24/2012 | |
250,000 | |
| 250,000 | (5) | |
| 0.03 | | |
5/24/2022 |
| |
9/03/2014 | |
- | |
| 1,000,000 | (6) | |
| 0.04 | | |
9/03/2024 |
| |
| |
| |
| | | |
| | | |
|
Yochai Ozeri | |
3/30/2008 | |
20,000 | |
| - | | |
| 0.15 | | |
3/30/2018 |
| |
5/6/2009 | |
15,000 | |
| - | | |
| 0.14 | | |
5/6/2019 |
| |
9/15/2009 | |
150,000 | (7) |
| - | | |
| 0.41 | | |
9/15/2019 |
| |
10/19/2010 | |
100,000 | (8) |
| - | | |
| 0.27 | | |
10/19/2020 |
| |
9/26/2011 | |
112,500 | |
| 37,500 | (9) | |
| 0.03 | | |
9/26/2021 |
| |
5/24/2012 | |
75,000 | |
| 75,000 | (10) | |
| 0.03 | | |
5/24/2022 |
| |
9/03/2014 | |
- | |
| 300,000 | (11) | |
| 0.04 | | |
9/03/2024 |
| (1) | For a better understanding of this table, we have included an additional column showing the grant
date of the stock options. Subject to the terms and conditions contained in any award agreement between the Company
and the holder of any such award, in the event of a change of control of the Company the outstanding stock options granted
under our 2009 Stock Incentive Plan or our Amended and Restated 2004 Stock Incentive Plan, as applicable, will not accelerate and
become immediately vested and exercisable unless otherwise determined by the Compensation Committee. |
| (2) | Options to purchase 125,000 shares vested and became exercisable on each of September 15, 2010,
2011, 2012 and 2013. |
| (3) | Options to purchase 81,250 shares vested and became exercisable on each of October 19, 2011, 2012,
2013 and 2014. |
| (4) | Options to purchase 125,000 shares vested and became exercisable on each of September 15, 2012,
2013 and 2014, and options to purchase 125,000 shares vest and become exercisable on September 15, 2015. |
| (5) | Options to purchase 125,000 shares vested and became exercisable on each of May 24, 2013 and 2014,
and options to purchase 125,000 shares vest and become exercisable on each of May 24, 2015 and 2016. |
| (6) | Options to purchase 1,000,000 shares vest and become exercisable on September 3, 2015, 2016, 2017
and 2018. |
| (7) | Options to purchase 37,500 shares vested and became exercisable on each of September 15, 2010,
2011, 2012 and 2013. |
| (8) | Options to purchase 25,000 shares vested and became exercisable on each of October 19, 2011, 2012,
2013 and 2014. |
| (9) | Options to purchase 37,500 shares vested and became exercisable on each of September 26, 2012,
2013 and 2014, and options to purchase 37,500 shares vest and become exercisable on each of September 26, 2015. |
| (10) | Options to purchase 37,500 shares vested and became exercisable on May 24, 2013 and 2014, and options
to purchase 37,500 shares vest and become exercisable on each of May 24, 2015 and 2016. |
| (11) | Options to purchase 300,000 shares vest and become exercisable on September 3, 2015, 2016, 2017
and 2018. |
Director
Compensation
The
following table shows the total compensation earned for services performed for us by each member of our Board of Directors during
the fiscal year ended December 31, 2014.
Name | |
Fees Earned in Cash ($) | | |
Stock Awards ($)(1) | | |
All Other Compensation ($) | | |
Total ($) | |
Robert Stevanovski | |
| - | (2) | |
| - | | |
| - | | |
| - | |
Anthony Cassara | |
| 20,000 | (3) | |
| 27,470 | | |
| - | | |
| 47,470 | |
David Stevanovski | |
| - | (2) | |
| - | | |
| - | | |
| - | |
Lior Samuelson | |
| 40,000 | (4) | |
| 140,755 | | |
| - | | |
| 180,755 | |
J. Lyle Patrick | |
| 45,000 | (5) | |
| 27,635 | | |
| - | | |
| 72,635 | |
Colleen Jones | |
| 20,000 | (3) | |
| 11,369 | | |
| - | | |
| 31,369 | |
Donna Reeves-Collins | |
| 30,000 | (6) | |
| 13,490 | | |
| - | | |
| 43,490 | |
Charles (Chip) Barker | |
| - | (7) | |
| - | | |
| - | | |
| - | |
| (1) | Represents the aggregate grant date fair value, calculated in accordance with ASC 718-10, of options to purchase shares of
the Common Stock that were granted in prior years to each of Lior Samuelson, Anthony Cassara, J. Lyle Patrick, Colleen Jones and
Donna Reeves-Collins. The grants were made pursuant to the 2009 Stock Incentive Plan. Each of Robert Stevanovski and
David Stevanovski elected to waive their right to receive such grant. For a detailed discussion of the assumptions made in the
valuation of stock awards, please see the Notes to the Consolidated Financial Statements included in this Annual Report. |
| (2) | Each of Robert Stevanovski and David Stevanovski elected to waive their right to receive compensation for their services to
the Company. This election is revocable by each of Messrs. R. Stevanovski and D. Stevanovski at any time. |
| (3) | Represents $20,000 earned by each of Mr. Cassara, Ms. Jones for their respective service as a director. |
| (4) | Represents $20,000 earned by Mr. Samuelson for his services as a director, $5,000 for his services as a member of the Audit
Committee and, $15,000 for his services as the Chairman of the Compensation Committee. |
| (5) | Represents $20,000 earned by Mr. Patrick for his services as a director, $20,000 for his services as Chairman of the Audit
Committee and $5,000 for his services as a member of the Compensation Committee |
| (6) | Represents $20,000 earned by Ms. Reeves-Collins for her services as a director, $5,000 for her services as member of the Audit
Committee and $5,000 for her services as a member of the Compensation Committee. |
| (7) | Mr. Barker is entitled to receive an annual compensation of $20,000 for his service as a director. Mr. Barker was appointed
as a board member in January 2015. |
Director
Compensation Policy
In
May 2009, the Board of Directors approved the following annual cash compensation for our directors effective as of April 1, 2009:
| • | each director receives cash compensation of $20,000; |
| • | the Chairman of the Audit Committee receives additional cash compensation of $20,000; |
| • | the Chairman of the Compensation Committee receives additional cash compensation of $15,000 and |
| • | each non-Chairman committee member receives additional cash compensation of $5,000. |
We
reimburse each member of our Board of Directors for reasonable travel and other expenses in connection with attending meetings
of the Board of Directors.
Each
of our directors has the right to elect to convert the total cash compensation that such director is eligible to receive into shares
of our common stock at the then-applicable market price. Directors have the right to make this election only during
such times as the employees and directors of the company are not in a black-out period in trading in securities of the company
and such director is not in possession of material, non-public information about the company. Any such shares so acquired
by a director are restricted and vest only after a period of one year from the date of grant, following which the director is able
to sell such shares in accordance with Rule 144 under the Securities Act of 1933.
At
this time each of Robert Stevanovski and David Stevanovski has elected to waive their right to receive compensation for their services
to the company. This election is revocable by each of Messrs. R. Stevanovski and D. Stevanovski at any time.
On
December 31, 2013, each of our directors who have not elected to waive their right
to receive compensation for their services to the company executed a letter agreement with us. Pursuant to the letter agreement
each of those directors agreed, effective January 1, 2014, to defer receipt of payment of fifty percent of the amounts otherwise
payable to them in cash by us in connection with their respective service as a member of our Board of Directors and chairmanship
or membership fees otherwise payable in connection with their respective service on the committees of our Board during the period
covered by the agreement. The deferred payments do not include stock-based compensation paid or payable to them or reimbursement
for expenses incurred by them, and are to be paid by us to them in a lump sum by December 31, 2014. In the event of a Change of
Control (as defined in our 2009 Stock Incentive Plan), we are required to pay the deferred payments in a lump sum within 30 days
thereafter. Each of the letter agreements is terminable by either us or the respective directors upon 30 days written notice.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As
of March 18, 2015, there were 72,311,025
shares of our common stock issued and outstanding. Each share of common stock entitles the holder thereof to one vote
with respect to each item to be voted on by holders of the shares of common stock. We have no other securities, voting or
nonvoting, outstanding.
The
following table sets forth information with respect to the beneficial ownership of shares of our common stock as of March 18,
2015, by:
| • | each person whom we know beneficially owns more than 5% of the common stock; |
| • | each of our directors individually; |
| • | each of our named executive officers individually; and |
| • | all of our current directors and executive officers as a group. |
Unless
otherwise indicated, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares
of common stock. Each person listed below disclaims beneficial ownership of their shares, except to the extent of their pecuniary
interests therein. Shares of common stock that an individual or group has the right to acquire within 60 days of March 12, 2014,
pursuant to the exercise of options or the vesting of restricted stock or restricted units are deemed to be outstanding for the
purpose of computing the percentage ownership of such person or group, but are not deemed outstanding for the purpose of calculating
the percentage owned by any other person listed.
| |
Number | | |
Percentage (1) | |
| |
Shares of Common Stock Beneficially Owned | |
Principal Stockholders: | |
| | | |
| | |
D4 Holdings, LLC (2) | |
| 114,000,000 | | |
| 77.4 | % |
| |
| | | |
| | |
Abraham Ziv-Tal (3) | |
| 9,954,100 | | |
| 13.8 | % |
4 Hanurit Street | |
| | | |
| | |
Rishpon, Israel 49615 | |
| | | |
| | |
| |
| | | |
| | |
Executive Officers and Directors: | |
| | | |
| | |
Effi Baruch (4) | |
| 1,523,750 | | |
| * | |
Yochai Ozeri (5) | |
| 378,500 | | |
| * | |
Robert Stevanovski (2) | |
| 114,000,000 | | |
| 77.4 | % |
Anthony Cassara (6) (7) | |
| 114,250,000 | | |
| 77.6 | % |
Lior Samuelson (8) | |
| 762,000 | | |
| 1.0 | |
David Stevanovski (6) | |
| 114,000,000 | | |
| 77.4 | % |
J. Lyle Patrick (7) | |
| 250,000 | | |
| * | |
Charles (Chip) Barker (9) | |
| - | | |
| * | |
Donna Reeves-Collins (10) | |
| 50,000 | | |
| | |
All directors and executive officers as a group (10 persons) (10) | |
| 117,063,250 | | |
| 80.0 | % |
| (1) | Percentage of beneficial ownership is based on 72,273,525 shares of common stock outstanding as of March 12, 2014. |
| (2) | Ownership is based on a Schedule 13D/A filed November 19, 2012, by D4 Holdings, Manna Holdings, Praescient, LLC (“Praescient”)
and Robert Stevanovski and includes (a) 39,000,000 shares of common stock, (b) 55,000,000 shares of common stock issuable under
warrants held by D4 Holdings and (c) 20,000,000 shares of common stock issuable upon conversion of outstanding principal under
the Convertible Note held by D4 Holdings. For a description of the Convertible Note, see Part I, Item 1. “Business
– Transactions with D4 Holdings.” Robert Stevanovski is the manager of Praescient, which serves as the sole
manager of D4 Holdings and as the managing member of Manna Holdings. Manna Holdings is the sole member of D4 Holdings. As
such, Mr. Stevanovski, Praescient and Manna Holdings may be deemed to beneficially own the securities reported in the table. Each
of Mr. Stevanovski, Praescient and Manna Holdings disclaims beneficial ownership of such securities, and the information reported
herein shall not be deemed an admission that such reporting person is the beneficial owner of the securities for any purpose, except
to the extent of such person’s pecuniary interest therein. |
| (3) | Ownership is based on a Form 4 filed April 1, 2011. |
| (4) | Includes (a) options to purchase 1,468,750 shares of common stock and (b) 55,000 shares of common stock. |
| (5) | Includes (a) options to purchase 372,500 shares of common stock and (b) 6,000 shares of common stock. |
| (6) | Includes the following securities: (a) 39,000,000 shares of common stock, (b) warrants to purchase 55,000,000 shares of common
stock and (c) 20,000,000 shares of common stock issuable upon conversion of outstanding principal under the Convertible Note. Each
of Anthony Cassara and David Stevanovski beneficially owns a membership interest in Manna Holdings, which is the sole member of
D4 Holdings. As such, each of Messrs. Cassara and Stevanovski may be deemed to beneficially own the securities reported herein
and owned directly by D4 Holdings. Each of Messrs. Cassara and Stevanovski disclaims beneficial ownership of such securities,
and the information reported herein shall not be deemed an admission that such reporting person is the beneficial owner of the
securities for any purpose, except to the extent of his pecuniary interest therein. |
| (7) | Includes options to purchase 250,000 shares of common stock. |
| (8) | Includes (a) options to purchase 590,000 shares of common stock and (b) 152,000 shares of common stock. |
| (9) | Mr. Barker was appointed as a board member in January 2015. |
| (10) | Includes options to purchase 50,000 shares of common stock. |
| (11) | Includes (a) 39,207,000 shares of common stock, (b) options to purchase 2,856,250 shares of common stock, (c)
warrants to purchase 55,000,000 shares of common stock and (d) 20,000,000 shares of common stock issuable upon conversion of outstanding
principal under the Convertible Note held directly (or deemed to be beneficially owned) by all of our current directors and executive
officers as a group. |
Equity
Compensation Plan Information
The
following table provides certain aggregate information with respect to shares of our common stock that may be issued under our
equity compensation plans in effect as of December 31, 2014.
Plan Category | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights | | |
Weighted-average exercise price of outstanding options, warrants and rights | | |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) | |
Equity compensation plans approved by security holders (1) | |
| 11,325,000 | | |
$ | 0.157 | | |
| 8,675,000 | |
Equity compensation plans not approved by security holders | |
| N/A | | |
| N/A | | |
| N/A | |
Total | |
| 11,325,000 | | |
$ | 0.157 | | |
| 8,675,000 | |
| (1) | These plans consist of our Amended and Restated 2004 Stock Incentive Plan and Amended and Restated
2006 Non-Employee Director Stock Plan, which were terminated except with respect to outstanding options previously granted thereunder,
and our 2009 Stock Incentive Plan. |
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain
Relationships and Related Transactions
As
described above under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”,
D4 Holdings beneficially owns an aggregate of approximately 77.4% of our common stock (which includes 39,000,000 shares of common
stock, warrants to purchase 55,000,000 shares of our common stock, and 20,000,000 shares of common stock issuable upon conversion
of outstanding principal under the Convertible Note. The ultimate ownership of D4 Holdings includes owners of ACN, Inc. Each
of Robert Stevanovski, Anthony Cassara and David Stevanovski, members of the Company’s Board of Directors, is a principal
of D4 Holdings. As a result, each of these individuals and D4 Holdings may be deemed to have a direct or indirect interest
in the transactions contemplated by the Purchase Agreement and the Investor Rights Agreement, and the Loan Agreements, described
above under “Item 1. Business - Transactions with D4 Holdings”.
During
the third quarter of 2009 we entered into an agreement with ACN Pacific Pty Ltd., a wholly-owned subsidiary of ACN, pursuant to
which we provide digital video and voice-over-IP telecommunications services in Australia and New Zealand to ACN Pacific. In October
2010 we entered into a sales agency agreement with ACN pursuant to which ACN sells a private label version of joip Mobile under
the ACN Mobile World brand. In December 2010 we entered into an agreement with ACN Korea, a wholly-owned subsidiary of ACN, pursuant
to which we provide digital video and voice-over-IP services in Korea. In April 2011 we entered into an introducer agreement
with ACN Europe B.V., a wholly-owned subsidiary of ACN, pursuant to which ACN Europe refers potential customers in different countries
in Europe to a private label version of joip Mobile sold under the ACN Mobile World brand.
The
following table sets forth the revenue we recognized from the agreements described above, for the periods presented:
| |
2014 | | |
20132 | |
ACN Korea | |
$ | 758,000 | | |
$ | 491,000 | |
The
following table details the commission paid and accrued to our affiliates in connection with our sales agreements, for the periods
presented:
| |
2014 | | |
2015 | |
ACN Mobile World | |
$ | 172,000 | | |
$ | 315,000 | |
ACN Europe | |
| 72,000 | | |
| 221,000 | |
Total | |
$ | 244,000 | | |
$ | 536,000 | |
Each
of Robert Stevanovski, Anthony Cassara and David Stevanovski has an ownership interest in, and a director, officer and/or advisory
position with, ACN. As a result of their relationship with ACN, each of these individuals may be deemed to have a direct
or indirect interest in the transactions contemplated by our agreements with ACN and ACN Korea.
All
transactions between us and our officers, directors, principal stockholders and affiliates must be reviewed and approved in advance
by the Audit Committee. To the extent that any member of the Audit Committee has an interest in any such transaction, the member
will recuse himself from considering and voting on the matter.
Director
Independence
Our
common stock is currently quoted on the OTCQB and is not listed on the Nasdaq Stock Market or any other national securities exchange.
Accordingly, we are not currently subject to the Nasdaq continued listing requirements or the requirements of any other national
securities exchange. Nevertheless, in determining whether a director or nominee for director should be considered “independent”
the board utilizes the definition of independence set forth in Rule 5605(a)(2) of the Nasdaq Marketplace Rules. The board has determined
that J. Lyle Patrick qualifies as “independent” under this rule.
Our
company also would qualify as a “controlled company” under Rule 5615(c)(2) of the Nasdaq Marketplace Rules because
D4 Holdings holds more than 50% of the voting power of our company. Accordingly, we would have the option to be exempt from the
requirements under Rule 5605 to have:
| • | a majority of independent directors; |
| • | a compensation committee composed solely of independent directors; |
| • | compensation of our executive officers determined by a majority of independent directors or a compensation
committee composed solely of independent directors; |
| • | a nominating committee composed solely of independent directors; and |
| • | director nominees selected, or recommended for the Board's selection, either by a majority of the
independent directors or a nominating committee composed solely of independent directors. |
Because
we are not currently subject to the Nasdaq continued listing requirements we have not determined to what extent we would rely on
the “controlled company” exemption from any of the foregoing requirements if we were subject to these requirements.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following table presents fees for professional audit services rendered by Brightman Almagor Zohar & Co. for the audit of the
Company's annual financial statements for the years ended December 31, 2014 and 2013, and fees billed for other services rendered
by Brightman Almagor Zohar & Co. during those periods.
| |
2014 | | |
2013 | |
Audit fees | |
$ | 66,000 | | |
$ | 66,000 | |
Audit-related fees | |
| - | | |
| - | |
Tax fees | |
| - | | |
| 8,000 | |
All other fees | |
| - | | |
| - | |
Total | |
$ | 66,000 | | |
$ | 74,000 | |
In
the above table, in accordance with the SEC’s definitions and rules, “audit fees” are fees we paid Brightman
Almagor Zohar & Co. for professional services for the audit of our annual financial statements and review of financial statements
included in our quarterly reports filed with the SEC, as well as for work generally only the independent auditor can reasonably
be expected to provide, such as statutory audits and consultation regarding financial accounting and/or reporting standards; “audit-related
fees” are fees billed by Brightman Almagor Zohar & Co. for assurance and related services that are reasonably related
to the performance of the audit or review of our financial statements; “tax fees” are fees for tax compliance, tax
advice and tax planning; and “all other fees” are fees billed by Brightman Almagor Zohar & Co. for any services
not included in the first three categories.
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
Consistent
with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and
overseeing the work of the independent auditor. In recognition of this responsibility, the Audit Committee has established a policy
to pre-approve all audit and permissible non-audit services provided by the independent auditor.
Prior
to engagement of the independent auditor for the next year's audit, management will submit an aggregate of services expected to
be rendered during that year for each of four categories of services to the Audit Committee for approval.
1.
Audit services include audit work performed in the preparation of financial statements, as well as work that generally
only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services
and consultation regarding financial accounting and/or reporting standards.
2.
Audit-related services are for assurance and related services that are traditionally performed by the independent
auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required
to meet certain regulatory requirements.
3.
Tax services include all services performed by the independent auditor's tax personnel except those services specifically
related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
4.
Other services are those associated with services not captured in the other categories. The Company generally does
not request such services from the independent auditor.
Prior
to engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee
requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category
of service. During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional
services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval
before engaging the independent auditor.
The
Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated
must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements.
The
Consolidated Financial Statements filed as part of this Annual Report are identified in the Index to Consolidated Financial Statements
on page F-1 hereto.
(a)(2)
Financial Statement Schedules.
Financial
Statement Schedules have been omitted because the information required to be set forth therein is not applicable or is shown on
the financial statements or notes thereto.
(a)(3)
Exhibits.
We
hereby file, as exhibits to this Annual Report, those exhibits listed on the Exhibit Index immediately following the signature
page hereto.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2015.
|
DELTATHREE, INC. |
|
|
|
By: |
/s/ Effi Baruch |
|
|
Effi Baruch |
|
|
Chief Executive Officer, President and Senior Vice |
|
|
President of Operations and Technology |
|
|
(Principal Executive Officer) |
KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Effi Baruch his true and lawful
attorney-in-fact, acting alone, with full power of substitution, for and in the name, place and stead of the undersigned, in any
and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact
and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully
to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact
and agent or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons
on behalf of the registrant and in the capacities and on the dates indicated:
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Effi Baruch |
|
Chief Executive Officer, President and Senior |
|
March 31, 2015 |
Effi Baruch |
|
Vice President of Operations and Technology
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Yochai Ozeri |
|
Director of Finance and Treasurer (Principal |
|
March 31, 2015 |
Yochai Ozeri |
|
Financial Officer and Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/ Robert Stevanovski |
|
Chairman of the Board of Directors |
|
March 31, 2015 |
Robert Stevanovski |
|
|
|
|
|
|
|
|
|
/s/ Anthony Cassara |
|
Director |
|
March 31, 2015 |
Anthony Cassara |
|
|
|
|
|
|
|
|
|
/s/ David Stevanovski |
|
Director |
|
March 31, 2015 |
David Stevanovski |
|
|
|
|
|
|
|
|
|
/s/ Charles Baker |
|
Director |
|
March 31, 2015 |
Charles Barker |
|
|
|
|
|
|
|
|
|
/s/ Lior Samuelson |
|
Director |
|
March 31, 2015 |
Lior Samuelson |
|
|
|
|
|
|
|
|
|
/s/ J. Lyle Patrick |
|
Director |
|
March 31, 2015 |
J. Lyle Patrick |
|
|
|
|
|
|
|
|
|
/s/ Donna Reeves-Collins |
|
Director |
|
March 31, 2015 |
Donna Reeves-Collins |
|
|
|
|
EXHIBIT
INDEX
The
following documents are filed as exhibits to this Annual Report on Form 10-K or incorporated by reference to exhibits previously
filed with the Securities and Exchange Commission.
Exhibit
Number |
|
Description |
3.1 |
|
Form of the Company’s Amended and Restated Certificate of Incorporation (incorporated by reference from our Annual Report on Schedule 14A filed on April 30, 2002). |
|
|
|
3.2 |
|
Form of the Company’s Amended and Restated By-laws (incorporated by reference from our registration statement on Form S-1 (Registration No. 333-122242)). |
|
|
|
3.3 |
|
Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 14, 2009). |
|
|
|
4.1 |
|
Specimen Certificate of Common Stock (incorporated by reference from our registration statement on Form S-1 (Registration No. 333-122242)). |
|
|
|
4.2 |
|
Convertible Promissory Note, dated March 2, 2011, by deltathree, Inc., Delta Three Israel, Ltd. and DME Solutions, Inc. in favor of D4 Holdings, LLC in a principal amount of $1,600,000 (incorporated by reference from our Current Report on Form 8-K filed on March 3, 2011). |
|
|
|
4.3 |
|
Promissory Note, dated September 12, 2011, by deltathree, Inc., Delta Three Israel, Ltd. and DME Solutions, Inc. in favor of D4 Holdings, LLC in a principal amount of $300,000 (incorporated by reference from our Current Report on Form 8-K filed on September 12, 2011). |
|
|
|
10.1 |
|
2004 Non-Employee Director Stock Option Plan (incorporated by reference from our registration statement on Form S-8 (Registration No. 333-122242)).+ |
|
|
|
10.2 |
|
First Amendment to the deltathree, Inc. 2004 Non-Employee Director Stock Option Plan, dated as of December 20, 2005 (incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K filed on December 21, 2005).+ |
|
|
|
10.3 |
|
Form of Option Agreement Pursuant to 2004 Non-Employee Director Stock Option Plan (incorporated by reference from our Annual Report on Form 10-K filed on March 31, 2005).+ |
|
|
|
10.4 |
|
deltathree, Inc. Amended and Restated 2004 Stock Incentive Plan (incorporated by reference from our Definitive Proxy Statement on Schedule 14A filed on June 19, 2008).+ |
|
|
|
10.5 |
|
deltathree, Inc. Amended and Restated 2006 Non-Employee Director Stock Plan (incorporated by reference from our Definitive Proxy Statement on Schedule 14A filed on June 19, 2008).+ |
|
|
|
10.6 |
|
Form of Option Agreement Pursuant to 2004 Stock Incentive Plan (incorporated by reference from our Annual Report on Form 10-K filed on March 31, 2005).+ |
|
|
|
10.7 |
|
Form of Restricted Unit Agreement Pursuant to 2004 Stock Incentive Plan (incorporated by reference from our Annual Report on Form 10-K filed on March 31, 2008).+ |
|
|
|
10.8 |
|
deltathree, Inc. 2009 Stock Incentive Plan (incorporated by reference from our Definitive Proxy Statement on Schedule 14A filed on June 22, 2009).+ |
|
|
|
10.9 |
|
Form of deltathree, Inc. 2009 Stock Incentive Plan Incentive Stock Option Grant Agreement (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 14, 2009). |
10.10 |
|
Form of deltathree, Inc. 2009 Stock Incentive Plan Nonstatutory Stock Option Grant Agreement (for U.S. taxpayers) (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 14, 2009).+ |
|
|
|
10.11 |
|
Form of deltathree, Inc. 2009 Stock Incentive Plan Nonstatutory Stock Option Grant Agreement under Section 102(b)(2) of the Israeli Income Tax Ordinance (for Israeli taxpayers) (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 14, 2009).+ |
|
|
|
10.12 |
|
Form of deltathree, Inc. 2009 Stock Incentive Plan Nonstatutory Stock Option Grant Agreement under Section 3(i) of the Israeli Income Tax Ordinance (for Israel taxpayers) (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 14, 2009).+ |
|
|
|
10.13 |
|
Form of deltathree, Inc. 2009 Stock Incentive Plan Restricted Stock Award Agreement (for U.S. taxpayers) (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 14, 2009).+ |
|
|
|
10.14 |
|
Form of deltathree, Inc. 2009 Stock Incentive Plan Restricted Stock Award Agreement (for Israeli taxpayers) (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 14, 2009).+ |
|
|
|
10.15 |
|
Letter Amendment, dated as of April 1, 2012, between deltathree, Inc., Delta Three Israel, Ltd. and DME Solutions, Inc. and LKN Communications, Inc., doing business as ACN, Inc. (incorporated by reference from our Current Report on Form 8-K filed on April 4, 2012). |
|
|
|
10.16 |
|
Third Amendment to Loan and Security Agreements, dated as of November 13, 2012, by and among deltathree, Inc., Delta Three Israel, Ltd., DME Solutions, Inc. and D4 Holdings, LLC. (incorporated by reference from our Quarterly Report on Form 10-Q filed on November 14, 2012). |
|
|
|
10.17 |
|
Amendment to Warrant Agreements, dated as of November 13, 2012, by and among deltathree, Inc. and D4 Holdings, LLC. (incorporated by reference from our Quarterly Report on Form 10-Q filed on November 14, 2012). |
|
|
|
10.18 |
|
Warrant, dated November 13, 2012, between deltathree, Inc., and D4 Holdings, LLC. (incorporated by reference from our Quarterly Report on Form 10-Q filed on November 14, 2012). |
|
|
|
10.19 |
|
Assignment and Assumption of Rights, Duties and Interests Agreement, dated as of February 7, 2013 between deltathree, Inc. and ACN Digital Phone Services, Inc. (incorporated by reference from our Annual Report on Form 10-K filed on March 31, 2014). |
|
|
|
10.20 |
|
Form of Letter Agreement regarding deferral of certain cash compensation between deltathree, Inc. and certain of its directors. (incorporated by reference from our Annual Report on Form 10-K filed on March 31, 2014). |
|
|
|
10.21 |
|
Forbearance Agreement, dated as of March 28, 2014, by and among deltathree, Inc., Delta Three Israel, Ltd., DME Solutions, Inc. and D4 Holdings, LLC. (incorporated by reference from our Annual Report on Form 10-K filed on March 31, 2014). |
|
|
|
10.22 |
|
Warrant, dated March 28, 2014, between deltathree, Inc., and D4 Holdings, LLC. (incorporated by reference from our Annual Report on Form 10-K filed on March 31, 2014). |
|
|
|
10.23 |
|
Amended and Restated Agreement Concerning Outstanding/Future Commissions and Security Agreement , dated as of June 12, 2014, among deltathree, Inc., Delta Three Israel, Ltd., DME Solutions, Inc., ACN, Inc., ACN Europe B.V. and ACN Digital Phone Service, LLC (incorporated by reference from our Current Report on Form 8-K filed on June 12, 2014). |
21.1* |
|
Subsidiaries of deltathree, Inc. |
|
|
|
23.1* |
|
Consent of Brightman Almagor Zohar & Co. |
|
|
|
31.1* |
|
Certification of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2* |
|
Certification of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1* |
|
Certification of the 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 the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99.1 |
|
Letter from D4 Holdings, LLC to the Board of Directors of the Company dated February 25, 2015 (incorporated by reference from our Current Report on Form 8-K filed on March 2, 2015). |
|
|
|
101.INS* |
|
XBRL Instance Document. |
|
|
|
101.SCH* |
|
XBRL Taxonomy Extension Schema Document. |
|
|
|
101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
|
101.LAB* |
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
|
|
101.PRE* |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
| + | Indicates management contract or compensatory plan, contract
or arrangement. |
Index
to Consolidated Financial Statements
|
Brightman Almagor Zohar
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593,
Tel Aviv 61164
Israel
Tel: +972 (3) 608 5555
Fax: +972 (3) 609 4022
info@deloitte.co.il
www.deloitte.co.il |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Shareholders
of deltathree, Inc.
We
have audited the accompanying consolidated balance sheets of deltathree, Inc. ("the Company") and its subsidiary as of
December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders' deficiency and cash
flows for each of the three years in the period ended December 31, 2014. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements, present fairly, in all material respects, the financial position
of the Company and its subsidiary as of December 31, 2014 and 2013 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company's recurring losses from operations and deficiency in stockholders' equity
raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters
are also discussed in Note 1 to the financial statements. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Brightman Almagor Zohar & Co. |
|
|
Brightman
Almagor Zohar & Co.
Certified
Public Accountants
A
member firm of Deloitte Touche Tohmatsu Limited
Tel
Aviv, Israel
March
31, 2015
DELTATHREE,
INC.
CONSOLIDATED
BALANCE SHEETS
($ in
thousands)
| |
December 31, | |
| |
2014 | | |
2013 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 286 | | |
$ | 158 | |
Restricted cash and short-term investments (Note 3) | |
| 4 | | |
| 34 | |
Accounts receivable, net (Note 4) | |
| 229 | | |
| 541 | |
Prepaid expenses and other current assets (Note 5) | |
| 118 | | |
| 271 | |
Inventory | |
| 11 | | |
| 22 | |
Total current assets | |
| 648 | | |
| 1,026 | |
| |
| | | |
| | |
Property and equipment, net (Note 6) | |
| 92 | | |
| 164 | |
Deposits | |
| 45 | | |
| 87 | |
| |
| | | |
| | |
Total assets | |
$ | 785 | | |
$ | 1,277 | |
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable – trade | |
| 734 | | |
| 984 | |
Accounts payable – related party | |
| 1,772 | | |
| 1,286 | |
Deferred revenues | |
| 295 | | |
| 203 | |
Short-term loan from a related party | |
| 5,609 | | |
| 4,960 | |
Other current liabilities (Note 7) | |
| 1,106 | | |
| 1,116 | |
Total current liabilities | |
| 9,516 | | |
| 8,549 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Severance pay obligations (Note 8) | |
| 63 | | |
| 105 | |
Total long-term liabilities | |
| 63 | | |
| 105 | |
Total liabilities | |
| 9,579 | | |
| 8,654 | |
| |
| | | |
| | |
Commitments and contingencies (Note 9) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ deficiency (Note 10): | |
| | | |
| | |
Share capital: | |
| | | |
| | |
Common stock, par value $0.001 per share; authorized 225,000,000 shares; issued and outstanding: 72,311,025 at December 31, 2014 and 72,273,525 at December 31, 2013, respectively. | |
| 72 | | |
| 72 | |
Additional paid-in capital | |
| 177,861 | | |
| 177,315 | |
Accumulated deficit | |
| (186,727 | ) | |
| (184,764 | ) |
Total stockholders’ deficiency | |
| (8,794 | ) | |
| (7,377 | ) |
| |
| | | |
| | |
Total liabilities and stockholders’ deficiency | |
$ | 785 | | |
$ | 1,277 | |
The
accompanying notes are an integral part of these consolidated financial statements.
DELTATHREE,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
($ in
thousands, except share and per share data)
| |
2014 | | |
2013 | | |
2012 | |
Revenues: | |
$ | 14,099 | | |
$ | 16,085 | | |
$ | 13,684 | |
| |
| | | |
| | | |
| | |
Costs and operating expenses: | |
| | | |
| | | |
| | |
Cost of revenues (exclusive of $66, $111 and $96 depreciation included in a separate line below, respectively) | |
| 11,670 | | |
| 12,926 | | |
| 8,812 | |
Research and development expenses (Note 11) | |
| 890 | | |
| 1,200 | | |
| 1,194 | |
Selling and marketing expenses | |
| 658 | | |
| 1,278 | | |
| 2,031 | |
General and administrative expenses | |
| 1,291 | | |
| 1,421 | | |
| 1,411 | |
Depreciation and amortization | |
| 86 | | |
| 145 | | |
| 148 | |
| |
| | | |
| | | |
| | |
Total costs and operating expenses | |
| 14,595 | | |
| 16,970 | | |
| 13,596 | |
| |
| | | |
| | | |
| | |
(Loss) income from operations | |
| (496 | ) | |
| (885 | ) | |
| 88 | |
Interest expense, net (Note 12) | |
| (1,456 | ) | |
| (898 | ) | |
| (1,656 | ) |
Loss before income taxes | |
| (1,952 | ) | |
| (1,783 | ) | |
| (1,568 | ) |
Income taxes (Note 13) | |
| (11 | ) | |
| (35 | ) | |
| (11 | ) |
Net loss | |
$ | (1,963 | ) | |
$ | (1,818 | ) | |
$ | (1,579 | ) |
Net loss per share-basic and diluted | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.02 | ) |
| |
| | | |
| | | |
| | |
Basic and diluted weighted average number of shares outstanding | |
| 72,303,213 | | |
| 72,273,525 | | |
| 72,273,525 | |
The accompanying notes are an integral
part of these consolidated financial statements.
DELTATHREE,
INC.
STATEMENTS
OF STOCKHOLDERS’ DEFICIENCY
($ in
thousands, except share data)
| |
Common Stock | | |
| | |
| | |
| |
| |
Number of Outstanding Shares | | |
Amount | | |
Additional Paid-in Capital | | |
Accumulated Deficit | | |
Total Stockholders' Deficiency | |
Balance at January 1, 2012 | |
| 72,273,525 | | |
| 72 | | |
| 176,893 | | |
| (181,367 | ) | |
| (4,402 | ) |
Issuance of a warrant containing beneficial conversion feature | |
| | | |
| | | |
| 207 | | |
| | | |
| 207 | |
Stock-based compensation | |
| | | |
| | | |
| 127 | | |
| | | |
| 127 | |
Loss for the year | |
| | | |
| | | |
| | | |
| (1,579 | ) | |
| (1,579 | ) |
Balance at December 31, 2012 | |
| 72,273,525 | | |
| 72 | | |
| 177,227 | | |
| (182,946 | ) | |
| (5,647 | ) |
Stock-based compensation | |
| | | |
| | | |
| 88 | | |
| | | |
| 88 | |
Loss for the year | |
| | | |
| | | |
| | | |
| (1,818 | ) | |
| (1,818 | ) |
Balance at December 31, 2013 | |
| 72,273,525 | | |
| 72 | | |
| 177,315 | | |
| (184,764 | ) | |
| (7,377 | ) |
Stock-based compensation | |
| | | |
| | | |
| 44 | | |
| | | |
| 44 | |
Issuance of a warrant containing beneficial conversion feature | |
| | | |
| | | |
| 501 | | |
| | | |
| 501 | |
Exercise of employee options | |
| 37,500 | | |
| – | * | |
| 1 | | |
| | | |
| 1 | |
Loss for the year | |
| | | |
| | | |
| | | |
| (1,963 | ) | |
| (1,963 | ) |
Balance at December 31, 2014 | |
| 72,311,025 | | |
| 72 | | |
| 177,861 | | |
| (186,727 | ) | |
| (8,794 | ) |
* Less
than $1.
The
accompanying notes are an integral part of these consolidated financial statements.
DELTATHREE,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
($ in
thousands)
| |
Year ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
Cash flows from operating activities: | |
| | | |
| | | |
| | |
Net loss | |
$ | (1,963 | ) | |
$ | (1,818 | ) | |
$ | (1,579 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
| | |
Accumulated interest on short-term loan | |
| 683 | | |
| 590 | | |
| 288 | |
Depreciation and amortization | |
| 86 | | |
| 145 | | |
| 148 | |
Amortization related to convertible notes | |
| 464 | | |
| 169 | | |
| 887 | |
Stock-based compensation | |
| 44 | | |
| 88 | | |
| 127 | |
Liability for severance pay, net | |
| (42 | ) | |
| 8 | | |
| (15 | ) |
Provision for losses on accounts receivable | |
| - | | |
| - | | |
| (31 | ) |
Exchange rates differences on deposits, net | |
| (4 | ) | |
| (7 | ) | |
| (2 | ) |
| |
| | | |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | | |
| | |
Decrease (increase) in accounts receivable | |
| 312 | | |
| 58 | | |
| (153 | ) |
Decrease (increase) in prepaid expenses other current assets | |
| 153 | | |
| (78 | ) | |
| 31 | |
Decrease (increase) in inventory | |
| 11 | | |
| 25 | | |
| (1 | ) |
Increase in accounts payable | |
| 236 | | |
| 697 | | |
| 104 | |
Increase (decrease) in deferred revenues | |
| 92 | | |
| (291 | ) | |
| (28 | ) |
(Decrease) increase in other current liabilities | |
| (10 | ) | |
| 152 | | |
| 134 | |
| |
| 2,025 | | |
| 1,556 | | |
| 1,489 | |
Net cash provided by (used in) operating activities | |
| 62 | | |
| (262 | ) | |
| (90 | ) |
| |
| | | |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | | |
| | |
Purchase of property and equipment | |
| (14 | ) | |
| (64 | ) | |
| (58 | ) |
Release of restricted cash and short-term investments, net | |
| 79 | | |
| 22 | | |
| 296 | |
Net cash provided by (used in) investing activities | |
| 65 | | |
| (42 | ) | |
| 238 | |
| |
| | | |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | | |
| | |
Proceeds from exercise of employee options | |
| 1 | | |
| - | | |
| - | |
Short-term loan from a related party | |
| - | | |
| 100 | | |
| - | |
Net cash provided by financing activities | |
| 1 | | |
| 100 | | |
| - | |
| |
| | | |
| | | |
| | |
Increase (decrease) in cash and cash equivalents | |
| 128 | | |
| (204 | ) | |
| 148 | |
Cash and cash equivalents at beginning of year | |
| 158 | | |
| 362 | | |
| 214 | |
Cash and cash equivalents at end of year | |
| 286 | | |
| 158 | | |
| 362 | |
| |
| | | |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | | |
| | |
Cash paid for: | |
| | | |
| | | |
| | |
Taxes | |
| 11 | | |
| 35 | | |
| 316 | |
Interest on long-term loan from a related party | |
| - | | |
| - | | |
| 278 | |
Total payments | |
| 11 | | |
| 35 | | |
| 594 | |
The
accompanying notes are an integral part of these consolidated financial statements.
DELTATHREE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - The Company
deltathree,
Inc. (the “Company”) is a global provider of integrated Voice over Internet Protocol, or VoIP, digital video and voice-over-IP
services, products, hosted solutions and infrastructure. The Company was founded in 1996 to capitalize on the growth of the Internet
as a communications tool by commercially offering Internet Protocol, or IP, telephony services, or VoIP telephony. While
the Company began as primarily a low-cost alternative source of wholesale minutes for carriers around the world, it has evolved
into an international provider of next generation communication services.
Going
Concern
The
Company has sustained significant operating losses in recent periods, which has resulted in a significant reduction in its cash
reserves. The Company and its subsidiaries have entered into four loan agreements with D4 Holdings, LLC, its majority
stockholder, pursuant to which D4 Holdings has agreed to provide the Company with loans in the aggregate principal amount of $4,100,000. The
initial Loan and Security Agreement was entered into on March 1, 2010, and the Company has drawn the maximum principal amount available
under the initial Loan and Security Agreement. On August 10, 2010, the Company and its subsidiaries entered into the
Second Loan and Security Agreement, or the “Second Loan Agreement”, with D4 Holdings with a maximum principal amount
of $1,000,000, and the Company has drawn the maximum principal amount available under the Second Loan Agreement. In
connection with the Second Loan Agreement, the Company issued D4 Holdings a warrant to purchase up to 4,000,000 shares of the Company's
common stock at an exercise price of $0.1312 per share. On March 2, 2011, the Company and its subsidiaries entered into the Third
Loan and Security Agreement, or the “Third Loan Agreement”, with D4 Holdings, pursuant to which D4 Holdings agreed
to provide the Company and its subsidiaries an additional line of credit in a principal amount of $1,600,000. Pursuant to the terms
of the Convertible Promissory Note, or the “Convertible Note”, issued by the Company in connection with the Third Loan
Agreement, D4 Holdings may elect to convert all or any portion of the outstanding principal amount under the Convertible Note into
that number of shares of the Company’s common stock determined by dividing such principal amount by $0.08 (as may be adjusted
under the terms of the Convertible Note). Simultaneous with the Company’s entering into the Third Loan Agreement, D4 Holdings
and the Company entered into an amendment of the First Loan Agreement, pursuant to which (among other things) the maturity date
for repayment of principal under the First Loan Agreement was extended from March 1, 2011, to March 1, 2012, and then subsequently
extended by oral agreement of the parties to July 1, 2012, and subsequently orally extended again to January 2, 2014, pending the
parties finalizing and entering into a formal amendment.. In connection with the Third Loan Agreement, the Company issued D4 Holdings
a warrant to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $0.096 per share. The
Company has drawn the aggregate principal amount available under the Third Loan Agreement, the principal amount of which can be
converted by D4 Holdings into an aggregate of 20,000,000 shares of the Company’s common stock. On September 12, 2011, the
Company and its subsidiaries entered into the Fourth Loan and Security Agreement, or the “Fourth Loan Agreement”, with
D4 Holdings, pursuant to which D4 Holdings agreed to provide the Company and its subsidiaries an additional line of credit in a
principal amount of $300,000. As of December 31, 2014, the Company had received advances in the aggregate amount of $300,000 from
D4 Holdings pursuant to notices of borrowing under the Fourth Loan Agreement.
On November 13, 2012,
the Company and its subsidiaries entered into the Third Amendment to Loan and Security Agreements, or the "Third Amendment",
and the Amendment to Warrant Agreements, or the "Warrants Amendment", with D4 Holdings. Pursuant to the Third Amendment
and the Warrants Amendment:
| · | the maturity date for repayment of principal
and interest under the First Loan Agreement was extended to January 2, 2014; |
| · | the maturity date for repayment of principal
and interest under the Second Loan Agreement was extended to January 2, 2015; |
| · | the maturity date for repayment of principal
and interest under each of the Third and Fourth Loan Agreements was extended to January 2, 2016; |
| · | all interest outstanding under each of
the loan agreements was added to the principal amount outstanding under the respective loan agreement and the promissory notes
issued pursuant to each respective loan agreement was increased by such amount; and |
| · | the exercise price under each of the Warrant
Agreements entered into by us and D4 Holdings as of February 12, 2009, August 10, 2010, and March 2, 2011 was amended to $0.02
per share. |
In connection with the extension of the
maturity dates under the Third Amendment, the Company issued to D4 Holdings a warrant, exercisable for ten years, to purchase up
to 10,000,000 shares of the Company's common stock at an exercise price of $0.02 per share.
On
January 2, 2014, the Company did not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement,
which constituted an event of default thereunder and a cross-default under all our other loan agreements with D4 Holdings. On March
28, 2014, the Company and its subsidiaries entered into a Forbearance Agreement with D4 Holdings, or the "Forbearance Agreement".
Pursuant to the terms and conditions of the Forbearance Agreement, D4 Holdings agreed to forbear from taking any action with respect
to the events of default until the earlier of (i) December 31, 2014, (ii) the occurrence of a breach or default by the Company
or its subsidiaries under the Forbearance Agreement (which, in the event of certain undertakings of ours under the Forbearance
Agreement, are not cured within three days) or (iii) the occurrence of any new or additional event of default under the Company's
loan agreements with D4 Holdings. In addition, to the extent not yet perfected the Company and its subsidiaries pledged
and granted as a security interest to D4 Holdings all of its right, title and interest in the collateral described in the Forbearance
Agreement. In connection with the Forbearance Agreement the Company also issued to D4 Holdings a warrant, exercisable for ten years,
to purchase up to 10,000,000 shares of the Company's common stock at an exercise price of $0.02 per share.
As
of December 31, 2014, the Company had negative working capital equal to approximately $8.9 million as well as negative stockholders’
equity equal to approximately $8.8 million. The Company believes it is probable that it will continue to experience losses and
increased negative working capital and negative stockholders’ equity in the near future and will not be able to return to
positive cash flow before it requires additional cash in the near term. The Company may experience difficulties accessing the equity
and debt markets and raising additional capital, and there can be no assurance that the Company will be able to raise such additional
capital on favorable terms or at all. If additional funds are raised through the issuance of equity securities, the
Company’s existing stockholders will experience significant further dilution. Because of the Company’s significant
losses to date and the Company’s limited tangible assets, the Company does not fit traditional credit lending criteria, which
could make it difficult for the Company to obtain loans or to access the capital markets. If the Company issues additional equity
or convertible debt securities to raise funds, the ownership percentage of the Company’s existing stockholders would be reduced
and they may experience significant dilution. New investors may demand rights, preferences or privileges senior to those of existing
holders of the Company’s common stock.
The
Company believes that, unless it is able to increase revenues and generate additional cash flows, its current cash and cash equivalents
will not satisfy its current projected cash requirements beyond the foreseeable future. As a result, there is substantial doubt
about the Company’s ability to continue as a going concern.
In
addition, unless the Company is able to increase revenues and generate additional cash flows, based on currently projected cash
flows the Company believes that it will be unable to pay future scheduled interest and/or principal payments under the various
loan agreements with D4 Holdings as these obligations become due, and beginning January 2013 the Company suspended making scheduled
interest payments with the oral consent of D4 Holdings. On January 2, 2014, the Company did
not repay to D4 Holdings the outstanding principal and interest due under the First Loan Agreement, which constituted an event
of default thereunder and a cross-default under all our other loan agreements with D4 Holdings, following which the Company and
its subsidiaries entered into the Forbearance Agreement with D4 Holdings. In the event the Company is unable to resume making
interest payments and to pay the outstanding principal when due following the termination of the Forbearance Agreement, if D4 Holdings
is not willing to waive compliance or otherwise modify the Company’s obligations such that the Company is able to avoid defaulting
on such obligations, because D4 Holdings has a lien on all of the Company’s assets to secure the Company’s obligations
under the loan agreements it could take actions under the loan agreements and seek to take possession of or sell the Company’s
assets to satisfy the Company’s obligations thereunder. Any of these actions would likely have an immediate material adverse
effect on the Company’s business, financial condition or results of operations.
Due
to the Company’s ongoing losses and reduction in cash, the Company initiated restructuring activities beginning in the second
quarter of 2011 in an effort to cut operating costs significantly and better align the Company’s operations with its current
business model. In accordance with the restructuring, the Company instituted a reduction in force and decreased the
number of full time employees from approximately 53 to 32, reduced the salaries of all remaining employees by five percent, and
decreased non-material expenses as well as payments to be made to vendors and other third parties. In addition, in December 2013
the Company instituted an additional, smaller reduction in force. As of December 31, 2014, the Company had 13 full-time employees
In
view of the Company’s current cash resources, nondiscretionary expenses, debt and near term debt service obligations, the
Company may begin to explore all strategic alternatives available to it, including, but not limited to, a sale or merger of the
Company, a sale of its assets, recapitalization, partnership, debt or equity financing, voluntary deregistration of its securities,
financial reorganization, liquidation and/or ceasing operations. In the event that the Company requires but is unable to secure
additional funding, the Company may determine that it is in its best interests to voluntarily seek relief under Chapter 11 of the
U.S. Bankruptcy Code. Seeking relief under the U.S. Bankruptcy Code, even if the Company is able to emerge quickly from Chapter
11 protection, could have a material adverse effect on the relationships between the Company and its existing and potential customers,
employees, and others. Further, if the Company was unable to implement a successful plan of reorganization, the Company might be
forced to liquidate under Chapter 7 of the U.S. Bankruptcy Code. There can be no assurance that exploration of strategic alternatives
will result in the Company pursuing any particular transaction or, if the Company pursues any such transaction, that it will be
completed.
Note
2 - Summary of significant accounting policies
The
financial statements have been prepared in conformity with U.S. generally accepted accounting principles.
| b. | Principles of
consolidation |
The
consolidated financial statements include the accounts of the Company and Delta Three Israel Ltd., the Company's Israeli subsidiary
(the “Subsidiary”). All significant inter-company accounts and transactions have been eliminated.
| c. | Financial statements
in U.S. dollars |
The
reporting currency of the Company is the U.S. dollar ("dollar"). The dollar is the functional currency of the Company
and its subsidiary. Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar
transactions and balances are re-measured into dollars in accordance with the principles set forth in “Foreign Currency Matters”
[ASC 830]. All exchange gains and losses from translation of monetary balance sheet items resulting from transactions in non-dollar
currencies are recorded in the statement of operations as they arise.
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported and disclosed in the consolidated financial statement and the accompanying notes.
Actual results could differ from those estimates.
| e. | Cash and cash
equivalents |
Cash
held in U.S. banks are subject to U.S. Federal Depository Insurance Corporation (“FDIC”) limits of $250,000 and cash
held in foreign accounts are unprotected. Due to the Company’s cash needs, management has generally held and continues to
hold the majority of its cash in U.S. banks that are insured under the FDIC.
Restricted
cash represents amounts held in cash, money market funds and certificates of deposit to support stand-by-letters of credit used
as security for third party vendors, as well as amounts deposited as guarantees for the Company’s office in Jerusalem and
for currency hedging transactions in which the Company engages.
Inventory
consists of the cost of customer equipment and is at the lower of cost (principally on a standard cost basis that approximates
the “first-in-first-out”, or FIFO, standard) or market.
Property
and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of
the depreciable assets, which range from two to five years. Leasehold improvements are amortized based on the straight-line method
over the shorter of the term of the lease, or the estimated useful life of the improvements.
The
Company recognizes revenues from VoIP telephony services based on minutes (or fractions thereof) of customer usage. The Company
records payments received in advance for prepaid services and services to be supplied under contractual agreements as deferred
revenue until such related services are provided.
Cost
of revenues consists primarily of direct costs that the Company pays to third parties in order to provide telephony services. These
costs include access, transmission and interconnection charges that the Company pays to other access providers to terminate domestic
and international phone calls on the public switched telephone network. In addition, these costs include the cost to lease phone
numbers and to co-locate in other telephone companies' facilities, as well as to purchase equipment. These costs also include taxes
that the Company pays on telecommunications services from its suppliers.
The
following table sets forth the different cost and expenses of our products and services per sales component for each of the years
ended December 31, 2014 and 2013:
| |
2014 | | |
2013 | |
Sales Channel | |
Termination | | |
Network & Access | | |
Termination | | |
Network & Access | |
Resellers | |
| 10,256 | | |
| 418 | | |
| 11,042 | | |
| 478 | |
Direct to Consumers | |
| 82 | | |
| 620 | | |
| 209 | | |
| 673 | |
Service Providers | |
| 71 | | |
| 156 | | |
| 114 | | |
| 345 | |
Other | |
| - | | |
| 67 | | |
| - | | |
| 65 | |
Total Costs of Revenues | |
| 10,409 | | |
| 1,261 | | |
| 11,365 | | |
| 1,561 | |
| k. | Research and
development expenses |
Research
and development expenses are expensed as incurred and consist primarily of payroll and facilities charges associated with the research
and development of our current and future products.
The
Company provides for income taxes using the liability approach defined by “Accounting for Income Taxes” [ASC 740-10].
Deferred tax assets and liabilities are recognized for the expected tax consequences between the tax bases of the assets and liabilities
and their reported amounts. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized and are reversed at such time that realization is believed to be more likely than not.
| m. | Stock-based
compensation |
The
following assumptions were used for the fiscal year 2014: dividend yield of 0.00% for all periods; risk-free interest rate of 1.2%;
an expected life of 3-4 years for all periods; and a volatility rate of 200%.
| n. | Restricted shares
and restricted units |
The
Company has granted restricted shares and restricted units to purchase shares of the Company’s common stock to retain, reward
and motivate those employees who are deemed critical to the future success of the Company. The stock incentive plan under which
the Company grants restricted share and restricted units was approved by the Board of Directors. The Company values restricted
shares and restricted units to purchase shares of its common stock at the aggregate grant date fair value in accordance with ASC
718-10.
| o. | Net income (loss) per
share |
Basic
and diluted net income (loss) per share have been computed in accordance with “Earnings Per Share” [ASC 260-10] using
the weighted average number of shares of common stock outstanding. Diluted earnings per share give effect to all potential dilutive
issuances of shares of common stock that were outstanding during the period.
| p. | Concentration
of credit and business risk |
The
Company is subject to concentrations of credit risk, which consist principally of cash and cash equivalents, short-term investments
and trade accounts receivable.
The
Company maintains its cash balances at various financial institutions. The Company performs periodic evaluations of the relative
credit standing of these institutions.
The
majority of the Company's non-carrier customers prepay for their services. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of customers, historical trends and other information.
Sales
to material customers representing ten percent or more of total revenues for each of the twelve months ended December 31, 2014
and 2013, and accounts receivable as of December 31, 2014, and December 31, 2013, were as follows:
| |
Revenues | | |
Accounts Receivable | |
Customer | |
For the Year Ended December 31, 2014 | | |
For the Year Ended December 31, 2013 | | |
As of December 31, 2014 | | |
As of December 31, 2013 | |
Reseller A | |
| 67.4 | % | |
| 68.7 | % | |
| - | | |
| 34.4 | % |
Reseller B | |
| 6.8 | % | |
| 2.4 | % | |
| - | | |
| - | |
Affiliate A | |
| 2.5 | % | |
| 4.3 | % | |
| - | | |
| - | |
Service Provider A | |
| 5.4 | % | |
| 3.1 | % | |
| 27.9 | % | |
| 17.4 | % |
| q. | Fair value of
financial instruments |
The
financial instruments of the Company consist mainly of cash and cash equivalents, short-term investments, current accounts receivable,
accounts payable and long-term liabilities. In view of their nature, the fair value of the financial instruments included
in working capital of the Company is usually identical or close to their carrying amounts.
The
Company applies the provisions of “Accounting for Derivative Instruments and Hedging Activities,” [ASC 815-10], as
amended. The standard requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through the statement of operations. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings, or recognized in other comprehensive income (loss) until the hedged item is recognized
in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The
Company use of derivatives is immaterial.
| s. | Long-term loan
from a related party |
The
Second Loan Agreement and the Third Loan Agreement as described in Note 1 above are accounted for in accordance with "Debt
with Conversion and Other Options" [ASC 470-20-25].
The
Second Loan Agreement was accounted as a debt instrument with stock warrants. Under ASC 470-20-25, issuers of certain debt instruments
with stock purchase warrants are required to separately account for the liability components and the equity components, based on
the relative fair value of the debt instrument without the warrants and of the warrants themselves at time of issuance. The Company
separated it accordingly.
The
Third Loan Agreement was accounted as a convertible debt instrument with stock warrants and a beneficial conversion features. Under
ASC 470-20-25, as a first step the Company separated the debt instruments and the warrants based on their relative fair value for
the liability components and for the equity components. In addition, as a second step the Company concluded that the liability
component includes beneficial conversion features. Under ASC 470-20-25, issuers of certain debt instruments with beneficial conversion
features need to allocate to an equity component an amount based on the amount the feature is in-the-money at the commitment date.
The Company separated it accordingly.
On November 13, 2012,
we and our subsidiaries entered into the Third Amendment to Loan and Security Agreements, or the "Third Amendment", and
the Amendment to Warrant Agreements, or the "Warrants Amendment", with D4 Holdings. Pursuant to the Third Amendment and
the Warrants Amendment, we have regarded the restructured long-term debt to D4 Holdings, under the criteria of, and have accounted
for the restructured long-term debt as, a troubled debt restructuring in accordance with ASC Subtopic 470-60, “Debt - Troubled
Debt Restructurings by Debtors”, which requires that the gross future cash flows of principal and interest be reflected in
the balance sheet.
The
interest expenses relating to both the contractual interest coupon and amortization of the discount on the liability component
are as follows:
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
($ in thousands) | |
Contractual interest coupon | |
| 683 | | |
| 590 | |
Amortization of the discount on the liability components | |
| 464 | | |
| 169 | |
Total interest expense on short-term loans | |
| 1,147 | | |
| 759 | |
Note
3 - Restricted cash and short-term investments
As
of December 31, 2014 and 2013, our total restricted cash and short-term investments was approximately $4,000 and $34,000, respectively.
Restricted cash represents amounts held in certificates of deposit and money market funds to support stand-by letters of credit
used as security for third party vendors as well as amounts deposited as guarantees for the Subsidiary’s office in Jerusalem
and for currency hedging transactions in which the Company engages.
Note
4 - Accounts receivable, net
Accounts
receivable are stated net of an allowance for doubtful accounts of approximately $508,000 at December 31, 2014 and $508,000 at
December 31, 2013. Accounts receivable, net includes $64,000 and $142,000 as of December 31, 2014 and 2013, respectively,
for related parties.
Note
5 - Prepaid expenses and other current assets
Prepaid
expenses and other current assets consist of the following:
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
($ in thousands) | |
Related party licenses, net | |
$ | 31 | | |
$ | 72 | |
Government of Israel (VAT refund and other) | |
| 3 | | |
| 25 | |
Deposits with suppliers | |
| 11 | | |
| 26 | |
Prepaid expenses | |
| 73 | | |
| 125 | |
Other | |
| - | | |
| 23 | |
Total prepaid expenses and other current assets | |
$ | 118 | | |
$ | 271 | |
Note
6 – Property and equipment, net
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
($ in thousands) | |
Telecommunications equipment | |
$ | 17,205 | | |
$ | 17,205 | |
Furniture, fixtures and other | |
| 630 | | |
| 630 | |
Leasehold improvements | |
| 797 | | |
| 797 | |
Capital leases | |
| 422 | | |
| 422 | |
Computers, hardware and software | |
| 9,381 | | |
| 9,367 | |
| |
| 28,435 | | |
| 28,421 | |
| |
| | | |
| | |
Less - accumulated depreciation | |
| (28,343 | ) | |
| (28,257 | ) |
Total property and equipment, net | |
$ | 92 | | |
$ | 164 | |
Note
7 - Other current liabilities
Other
current liabilities consist of the following:
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
($ in thousands) | |
Accrued expenses | |
$ | 250 | | |
$ | 147 | |
Employees and related expenses | |
| 87 | | |
| 192 | |
Commercial rent tax provision | |
| 300 | | |
| 300 | |
Tax liabilities | |
| 469 | | |
| 477 | |
Total other current liabilities | |
$ | 1,106 | | |
$ | 1,116 | |
Note
8 - Severance pay obligations
The
Subsidiary is subject to certain Israeli laws and labor agreements that determine the obligations of the Subsidiary to make severance
payments to employees who have been terminated and who are leaving the employment of the Subsidiary under certain other circumstances.
The amount of severance pay benefits requirement to be paid is determined based upon the employee’s length of service and
the employee's salary at the time of termination. This obligation is partially funded through regular deposits made by the Subsidiary
into accounts maintained by unaffiliated third party insurance company funds for managers' insurance policies. Amounts deposited
are controlled by the fund trustees and insurance companies and are not under the control and management of the Subsidiary.
Expenses
relating to employee termination benefits were $92,132, 113,745, and $107,689 for the years ended December 31, 2014, 2013 and 2012,
respectively.
The
aggregate value of the insurance policies as of December 31, 2014 and 2013 was $580,133 and $901,362, respectively.
Note
9 - Commitments and contingencies
We
lease our executive offices at 1 Bridge Plaza, Suite #275, Fort Lee, New Jersey, and storage and equipment space at 117 Central
Avenue, Hackensack, New Jersey. We lease each of these facilities on a month-to-month basis. The aggregate rent expense, net, for
the two locations for 2014 was $7,000.
The
Subsidiary, leases an office that houses our research and development facilities in Jerusalem, Israel. The term of the lease is
until June 30, 2015. Rent expense, net, for our subsidiary, for 2014 was $125,000.
On
July 5, 2011, the Company received a notice from the New York City Department of Finance that claimed that the Company had not
paid commercial rent tax required under the New York City Administrative Code from June 1998 through May 2008 for the two offices
that the Company had leased during that time. The notice stated that the Company is obligated to pay the outstanding tax amounts,
as well as significant interest and penalties that were assessed on the unpaid amounts as well as for the failure to file the applicable
tax returns. The Company engaged outside counsel, which began discussions with the Department of Finance, and contested assessment
and simultaneously attempted to negotiate a significant reduction in the amounts to be paid. The Company’s appeal was rejected
in July 2012 by an examiner in the Department of Finance, and the Company has subsequently engaged and begun discussions with a
manager in the Department of Finance and submitted additional supporting materials. The final outcome of this assessment and the
Company’s negotiations with the New York City Department of Finance cannot be determined at this time. In the event that
the Company is required to pay all or most of the amounts claimed by the New York City Department of Finance this would have a
material adverse effect on the Company’s financial condition and liquidity. During 2011 the Company recorded $300,000 as
a provision for commercial rent tax. The Company has determined that $300,000 is the minimum amount that would settle the claim
according to ASC 450-20. The amount claimed by the Department of Finance was approximately $912,000; as a result, there is a reasonable
possibility that a loss in excess of the $300,000 would be incurred.
In
addition, from time to time the Company is a party to legal proceedings, much of which is ordinary routine litigation incidental
to the business, and is regularly required to expend time and resources in connection with such proceedings. Accordingly, the Company,
in consultation with its legal advisors, accrues amounts that management believes it is probable the Company will be required to
expend in connection with all legal proceedings to which it is a party.
c.
Regulation
Although
there are several regulatory proceedings currently pending before federal authorities, providers of interconnected VoIP services
are lightly regulated compared to providers of traditional telecommunications services. On February 12, 2004, the FCC initiated
a generic rulemaking proceeding concerning the provision of voice and other services using IP technology, including assessing whether
VoIP services should be classified as information services or telecommunications services. The rulemaking is ongoing and we cannot
predict the outcome of this proceeding. In November 2004, the FCC determined that certain interconnected VoIP services (meaning
VoIP services that can be used to send and receive calls to or from the PSTN), including some services that are similar to ours,
should be considered interstate services subject to federal rather than state jurisdiction. Although this ruling was
appealed by several states, on March 21, 2007, the United States Court of Appeals for the Eighth Circuit affirmed the FCC’s
determination.
The
FCC’s generic rulemaking proceeding could result in the FCC determining, for instance, that certain types of Internet telephony
should be regulated like basic telecommunications services. Thus, Internet telephony would no longer be exempt from more onerous
telecommunications-related regulatory obligations, could potentially become subject to state telecommunications regulations, and
could become subject to other economic regulations typically imposed on traditional telecommunications carriers.
On
June 3, 2005, the FCC released an order and notice of proposed rulemaking concerning VoIP emergency 911 services. The order
set forth two primary requirements for providers of interconnected VoIP services. The order applies to our iConnectHere and joip
customers, or our “direct customers”. We do not believe that we are responsible for compliance with this order when
we sell our service wholesale to companies who then offer the service to retail end-users. We cannot predict whether we would be
subject to any third-party litigation in connection with such customers who resell our services or whether the rules will be interpreted
as applicable to those who wholesale interconnected VoIP services.
The
order set forth two primary requirements for providers of interconnected VoIP services. First, the order requires providers of
interconnected VoIP services like us to notify our retail customers of the differences between the emergency services available
through our offerings and those available through traditional telephony providers. We also had to receive affirmative acknowledgment
from some of our retail customers that they understand the nature of the emergency services available through our service. On September 27,
2005, the FCC's Enforcement Bureau released an order stating that the Enforcement Bureau will not pursue enforcement actions against
interconnected VoIP providers that have received affirmative acknowledgement from at least 90% of their subscribers. We received
affirmative acknowledgment from more than 95% of our relevant customers that they understand the nature of the emergency services
available through our service, and thus we believe we are substantially in compliance with the first aspect of the FCC's June 3
order.
Second,
the order required providers of interconnected VoIP services like us to offer enhanced emergency dialing capabilities, or E-911,
to all of our retail customers by November 28, 2005. Under the terms of the order, we are required to use the dedicated wireline
E-911 network to transmit customers' 911 calls, callback number and customer-provided location information to the emergency authority
serving the customer's specified location. On November 7, 2005, the FCC's Enforcement Bureau issued a Public Notice with respect
to that requirement. The Public Notice indicated that providers who have not fully complied with the enhanced emergency dialing
capabilities requirement are not required to discontinue the provision of services to existing customers, but that the FCC expects
that such providers will discontinue marketing their services and accepting new customers in areas in which the providers cannot
offer enhanced emergency dialing capabilities where such capabilities are otherwise available.
Almost
all of our retail customers currently receive E-911 service in conformity with the FCC’s order. Like many interconnected
VoIP providers, we rely on third parties to route emergency calls originated by our customers. In certain instances and for some
of our customers, the third party provider may route 911 calls to an unofficial emergency call center. Such unofficial call centers
may not be able to receive appropriate call back information. To the extent that they are so able or callers provide their location
information the emergency dispatchers in such call centers may not then be able to route such calls to the appropriate public safety
answering point. The FCC could find that routing calls routed in this manner violates its rules, potentially subjecting us to enforcement
actions including, but not limited to, fines, cease and desist orders, or other penalties. Moreover, some customers who were receiving
service prior to the FCC’s deadline for compliance with the E-911 regulations may not receive such service. The FCC permitted
service providers to continue to provide service to those existing customers rather than disconnect those customers. Pursuant to
the FCC’s requirement, after the implementation of the FCC E-911 requirements, we provide services to our new retail customers
only where we can provide the FCC required E-911 service. We may be required to stop serving those customers to whom we cannot
provide the required enhanced emergency dialing capabilities that were being serviced prior to the issuance of the FCC’s
rules at any time.
The
FCC is considering modifying its VoIP E-911 rules. In June, 2007, the FCC released a Notice of Proposed Rulemaking to
consider whether it should impose additional obligations on interconnected VoIP providers. Specifically, the FCC considered
mandating that interconnected VoIP providers implement a solution that will allow for automatically determining the location of
their customers for purposes of E-911 rather than require customers to manually update their existing location information (as
is the case under the current regulations). Moreover, the Notice included a tentative conclusion that interconnected
VoIP providers that allow their service to be used in more than one location, like us, be required to meet the same customer location
accuracy standards applicable to providers of mobile telecommunications services. In September 2010, the FCC released
a Notice of Inquiry again requesting comment on, among other issues, whether interconnected VoIP providers should be required to
provide automatic location information about their customers rather than requiring customers to self-report their location. Additionally,
the Notice of Inquiry sought comment on whether the FCC’s rules concerning the delivery of emergency services should be extended
to non-interconnected VoIP services as well as to mobile VoIP applications used on smartphones, computers and other devices. At
this time we cannot predict the outcome of these proceedings or their potential impact on our business.
The
Communications Assistance for Law Enforcement Act, or CALEA, requires certain communications service providers to assist law enforcement
agencies in conducting lawfully authorized electronic surveillance. On September 23, 2005, the FCC released an order concluding
that CALEA applies to interconnected VoIP providers. In May 2006 the FCC released an order finding that broadband Internet
access service providers and interconnected VoIP providers are required to implement the same type of CALEA requirements that have
been applied to wireline telecommunications carriers. These include obligations to (1) ensure that communications equipment, facilities,
and services meet interception assistance capability requirements and (2) develop system security policies and procedures to define
employee supervision and record retention requirements. As a result of the steps the Company has taken, we believe that
we comply with CALEA.
The
FCC decided in June 2006 that interconnected VoIP service providers should be required to contribute to the universal service fund,
or USF. The amount of universal service contribution for interconnected VoIP service providers is based on a percentage of revenues
earned from end-user interstate services. The FCC developed three alternatives under which an interconnected VoIP service provider
may elect to calculate its universal service contribution: (1) a safe harbor that assumes 64.9% of the provider’s end-user
revenues are interstate; (2) a traffic study to determine an allocation for interstate end-user revenues; or (3) actual
interstate and international end-user revenues. If an interconnected VoIP service provider calculates its universal service contributions
based on its actual percentage of interstate calls, the FCC suggested that its preemption of state regulation of such services
may no longer apply, in which case the interconnected VoIP service provider could be subject to regulation by each state in which
it operates as well as federal regulation. In addition, the FCC is considering a number of proposals that could alter the way that
the USF is assessed. For instance, the FCC is considering an assessment based on the use of telephone numbers. The U.S. Congress
may also provide the FCC with additional authority to reform USF or mandate a particular methodology. At this time we
cannot predict time what impact, if any, USF reform, may have on our business.
Numerous
states may attempt to impose state universal service contribution requirements on interconnected VoIP providers such as deltathree.
At this time, various states – including Kansas, Nebraska and New Mexico – claim that they have the right to require
interconnected VoIP providers to contribute to their respective USF funds. On March 3, 2008, the U.S. District Court
for Nebraska issued a preliminary injunction and found that Nebraska's state Public Service Commission does not have jurisdiction
to require Universal Service contributions from VoIP providers. On May 1, 2009, a panel of the U.S. Circuit Court of Appeals for
the Eighth Circuit affirmed the U.S. District court ruling. In response, the Nebraska and New Mexico state commissions filed a
petition with the FCC seeking the authority to impose state USF contribution obligations on interconnected VoIP providers, like
us, and the FCC granted the petition. As a result of this ruling, a number of other states have either stated that
offerings such as ours may be subject to their respective state USF or are considering imposing such obligations on us. We
would likely pass through to our customers in those states any such state USF fees, potentially making our services less competitive
with offerings available from traditional providers of telecommunications services, which may cause us to lose customers in those
states. In addition, in the past some states have attempted to impose retroactive application of any state USF
obligations. Retroactive applicability of any state USF fees would effectively bar us from collecting such fees from our customers,
s reducing our future profits.
On
April 2, 2007, the FCC issued an order that tightened existing rules on protection and use of Customer Proprietary Network Information,
or CPNI, and extended coverage of the CPNI rules to interconnected VoIP service providers. Among other things, the Order imposes
greater obligations on us and other companies like us to protect CPNI, acquire customer consent prior to engaging in certain kinds
of marketing efforts based on CPNI, train our employees concerning protecting (and the use of) CPNI and to file formal certifications
with the FCC regarding procedures for protecting this information. As a result of the steps we have taken, we believe
that we comply with this Order.
On
June 15, 2007, and effective October 5, 2007, interconnected VoIP providers, like us, became required to, among other things, make
certain that their equipment and service is accessible to and usable by individuals with disabilities, if readily achievable. In
addition, interconnected VoIP providers like us became obligated to contribute to the Telecommunications Relay Services, or TRS,
fund and to offer 711 abbreviated dialing for access to relay services. Following March 31, 2009, interconnected VoIP providers
are required to route such 711 calls to the appropriate TRS relay center serving the state in which the caller is located or the
relay center corresponding to the caller’s last registered address. As a result of the steps we have taken, we
believe that we comply with the applicable requirements.
On
August 6, 2007 and effective November 2007, the FCC adopted an Order concerning the collection of regulatory fees for Fiscal Year
2007 requiring the collection of such fees from interconnected VoIP providers like us. Like other interconnected VoIP providers,
we now pay regulatory fees based on interstate and international revenues.
On
November 8, 2007, the FCC released an Order relating to local number portability imposing local number portability, or LNP, and
related obligations on interconnected VoIP Providers like us. The Order requires interconnected VoIP providers to contribute to
shared numbering administration costs. Additionally, the Order mandates that we process certain kinds of telephone number porting
requests within certain timeframes. As a result of the steps we have taken, we believe that we comply with this Order.
Subsequently, on May 13, 2009, the FCC released another order concerning LNP that further reduces the porting timeframe for certain
types of telephone number porting requests that interconnected VoIP providers, like us, have to process. Since we are not a licensed
telecommunications carrier, we must rely on third parties to comply with these porting obligations. If these third parties fail
to comply with these obligations we could be subject to fines, forfeitures and other penalties by the FCC or state public utilities
commissions or we could face legal liability in state or federal court from customers or carriers. The FCC also released a Further
Notice of Proposed Rulemaking to refresh the record on how to further improve the porting process, and how to potentially expand
the new one business day porting timeframe to other kinds of ports. We cannot predict the outcome of this proceeding or its potential
impact on us at this time.
The
FCC is actively considering reform of the intercarrier compensation system, which is a set of FCC rules and regulations by which
telecommunications carriers compensate each other for the use of their respective networks. These rules and regulations affect
the prices we pay to our suppliers for access to the facilities and services that they provide to us, such as termination of calls
by our customers onto the public switched telephone network. At this time we cannot predict what impact, if any, new intercarrier
compensation regulations would have on our business.
In
May 2009, the FCC extended to interconnected VoIP providers like us the discontinuance rules that previously applied only to non-dominant
common carriers. The FCC's rules require non-dominant domestic carriers to provide notice to customers at least 30 days prior to
discontinuing service to a telephone exchange, toll stations serving a community in whole or in part, and other similar activities
that affect a community or part of a community. Carriers must inform certain state authorities of the discontinuation, and obtain
prior FCC approval before undertaking the service disruption. The FCC's rules allow for streamlined treatment for FCC discontinuance
approvals and interconnected VoIP providers will be able to take advantage of the same streamlined procedures afforded to non-dominant
carriers. It is not yet clear how these rules apply to interconnected VoIP providers. But in the event we discontinue one of our
service offerings in its entirety or if we were to exit the market in whole we would likely have to comply with these new rules.
We do not expect these new obligations to have a material impact on our business.
In
June 2007, the FCC adopted various recommendations from its Independent Panel Reviewing the Impact of Hurricane Katrina on Communications
Networks Panel, including a requirement that certain interconnected VoIP providers submit reports regarding the reliability and
resiliency of their 9-1-1 systems. At this time, we are not subject to these reporting requirements but may become subject in the
future.
We
rely upon providers of broadband Internet access services to offer our services to our customers. The FCC recently adopted “open
Internet” rules that would, among other things, prohibit fixed providers of broadband Internet access services from blocking,
impairing or downgrading such access. Wireless providers of broadband Internet access services would be prohibited from
blocking VoIP applications like ours. The open Internet rules are not yet effective and, as a result of both legislative
efforts to overturn the rules as well as potential appeals of the passage of the rules, it is unclear whether (and when) the rules
will become effective. While we are not aware of any provider of broadband Internet access attempting to interfere with
our Internet access, the lack of enforceable rules could potentially negatively impact our service offerings and impede our ability
to offer new services that require significant Internet bandwidth.
In
addition, some state and local regulatory authorities believe they retain jurisdiction to regulate the provision of, and impose
taxes, fees and surcharges on, intrastate Internet and VoIP telephony services, and have attempted to impose such taxes, fees and
surcharges, such as a fee for providing E-911 service. Rulings by the state commissions on the regulatory considerations affecting
Internet and IP telephony services could affect our operations and revenues, and we cannot predict whether state commissions will
be permitted to regulate the services we offer in the future.
The
Company paid approximately $11,000 of state and local taxes and other fees during 2014. To the extent
we increase the cost of services to its customers to recoup some of the costs of compliance; this will have the effect of decreasing
any price advantage we may have over traditional telecommunications companies.
In
addition, it is possible that we will be required to collect and remit taxes, fees and surcharges in other states and local jurisdictions
where we have not done so, and which such authorities may take the position that we should have collected. If so, they may seek
to collect those past taxes, fees and surcharges from us and impose fines, penalties or interest charges on us. Our payment of
these past taxes, fees and surcharges, as well as penalties and interest charges, could have a material adverse effect on us.
Note
10 - Stockholders' equity
The
Company’s common stock is currently listed on the OTCQB under the symbol “DDDC”.
On
February 10, 2009, the Company entered into the Purchase Agreement with D4 Holdings pursuant to which the Company issued to D4
Holdings the Shares, representing approximately 54.3% of the total number of issued and outstanding shares of Common Stock following
the transaction, for an aggregate purchase price of $1,170,000, payable in cash, and the Warrant, exercisable for ten years, to
purchase up to an additional 30,000,000 shares of Common Stock at an exercise price of $0.04 per share. The transaction
closed on February 12, 2009.
In
connection with the closing of the transaction and pursuant to the terms of the Purchase Agreement, Noam Bardin resigned as a director
and the board of directors appointed Robert Stevanovski and Anthony Cassara to serve on the board. In addition, Lior
Samuelson resigned as Chairman of the Board and remained a director, and Robert Stevanovski was appointed to serve as Chairman. Under
the terms of the Purchase Agreement, D4 Holdings had the right to nominate for appointment by the board one director in addition
to Messrs. Stevanovski and Cassara, and it nominated David Stevanovski. In addition, on March 4, 2009, the Board of
Directors of the Company increased the size of the board from five to seven members and filled the two vacancies remaining on the
board by appointing Gregory Provenzano and J. Lyle Patrick as directors. The appointments of the three new directors
to serve on the board became effective on March 28, 2009.
As
a result of the transaction between the Company and D4 Holdings, D4 Holdings obtained a controlling interest in the Company.
At
our Annual Meeting on August 6, 2009, upon the recommendation of our Board of Directors our stockholders approved the adoption
of our 2009 Stock Incentive Plan (the “2009 Plan”). Upon the adoption of the 2009 Plan, our 2004 Stock Incentive Plan
and 2006 Non-Employee Director Stock Plan were terminated except with respect to outstanding awards previously granted under those
plans and no additional awards will be made under those plans. Under the 2009 Plan, the Compensation Committee is authorized
to grant awards, either in the form of incentive or non-incentive stock options or restricted stock.
As
of December 31, 2014, options to purchase 6,936,250 shares of Common Stock granted under the Company’s stock incentive
plans were exercisable with exercise prices ranging between $0.02 and $3.20 per share.
A
summary of the status of the Company’s stock incentive plans as of December 31, 2014, 2013 and 2012 and changes during the
years then-ended is presented below:
| |
December 31, 2014 | | |
December 31, 2013 | | |
December 31, 2012 | |
| |
Number of Options | | |
Weighted average Exercise price | | |
Number of Options | | |
Weighted average Exercise price | | |
Number of Options | | |
Weighted average Exercise price | |
Options outstanding at beginning of year | |
| 11,010,000 | | |
| 0.16 | | |
| 11,334,500 | | |
$ | 0.17 | | |
| 8,869,500 | | |
$ | 0.21 | |
Granted during the year | |
| 3,140,000 | | |
| 0.04 | | |
| - | | |
| - | | |
| 2,570,000 | | |
| 0.03 | |
Exercised during the year | |
| 37,500 | | |
| 0.03 | | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited during the year | |
| 2,787,500 | | |
| 0.12 | | |
| 324,500 | | |
| 0.09 | | |
| 105,000 | | |
| 0.03 | |
Outstanding at end of year | |
| 11,325,000 | | |
| 0.15 | | |
| 11,010,000 | | |
$ | 0.16 | | |
| 11,334,500 | | |
$ | 0.17 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted average fair value of options granted during the year | |
$ | 0.03 | | |
| | | |
$ | - | | |
| | | |
$ | 0.03 | | |
| | |
Additional
information regarding options outstanding as of December 31, 2014, is as follows:
| | |
Options Outstanding | | |
Options Exercisable | |
Range of Exercise Prices | | |
Number of Outstanding | | |
Weighted average Remaining Contractual Life (Years) | | |
Weighted Average Exercise Price | | |
Number of Exercisable Options | | |
Weighted Average Exercise Price | |
$ | 0.02 | | |
| 500,000 | | |
| 7.8 | | |
| 0.02 | | |
| 250,000 | | |
| 0.02 | |
$ | 0.03 | | |
| 3,845,000 | | |
| 7.1 | | |
| 0.03 | | |
| 2,883,750 | | |
| 0.03 | |
$ | 0.04 | | |
| 3,140,000 | | |
| 9.7 | | |
| 0.04 | | |
| - | | |
| 0.04 | |
$ | 0.11 – 0.14 | | |
| 380,000 | | |
| 4.0 | | |
| 0.14 | | |
| 355,000 | | |
| 0.14 | |
$ | 0.15 | | |
| 440,000 | | |
| 3.3 | | |
| 0.15 | | |
| 440,000 | | |
| 0.15 | |
$ | 0.16 | | |
| 50,000 | | |
| 6.8 | | |
| 0.16 | | |
| 37,500 | | |
| 0.16 | |
$ | 0.18 – 0.22 | | |
| 600,000 | | |
| 5.8 | | |
| 0.20 | | |
| 600,000 | | |
| 0.20 | |
$ | 0.27 | | |
| 870,000 | | |
| 5.8 | | |
| 0.27 | | |
| 870,000 | | |
| 0.27 | |
$ | 0.32
– 0.386 | | |
| 300,000 | | |
| 0.8 | | |
| 0.376 | | |
| 300,000 | | |
| 0.376 | |
$ | 0.41 | | |
| 1,180,000 | | |
| 4.8 | | |
| 0.41 | | |
| 1,180,000 | | |
| 0.41 | |
$ | 2.88
– 3.20 | | |
| 20,000 | | |
| 0.3 | | |
| 3.00 | | |
| 20,000 | | |
| 3.00 | |
| | | |
| 11,325,000 | | |
| | | |
| 0.16 | | |
| 6,936,250 | | |
| 0.21 | |
As of December
31, 2014, no outstanding options to purchase shares of Common Stock or options to purchase shares of Common Stock exercisable were
“in-the-money".
The unrecognized compensation
expense calculated under the fair value method for stock options expected to vest as of December 31, 2014, was approximately
$103,000 and is expected to be recognized over a weighted-average period of four years.
c.
Restricted shares of the Company’s Common Stock
During
the year ended December 31, 2014, the Company did not grant restricted shares of the Company’s common stock or restricted
units to purchase shares of the Company’s common stock.
Note
11 - Research and development expenses
Research
and development expenses consist of the following:
| |
Year ended December 31, | |
| |
($ in thousands) | |
| |
2014 | | |
2013 | | |
2012 | |
Salaries and related expenses | |
$ | 696 | | |
$ | 876 | | |
$ | 844 | |
Consulting and advisory fees | |
| 26 | | |
| 15 | | |
| 13 | |
Travel | |
| - | | |
| - | | |
| 2 | |
Other | |
| 168 | | |
| 309 | | |
| 335 | |
Total research and development expenses | |
$ | 890 | | |
$ | 1,200 | | |
$ | 1,194 | |
Note
12 – Interest expense, net
Interest
expense consists of the following:
| |
Year ended December 31, | |
| |
| | |
($ in thousands) | | |
| |
| |
2014 | | |
2013 | | |
2012 | |
Discount of convertible notes | |
$ | 464 | | |
$ | 169 | | |
$ | 887 | |
Interest paid and accrued on loan from related party | |
| 930 | | |
| 694 | | |
| 640 | |
Bank charges | |
| 30 | | |
| 29 | | |
| 31 | |
Foreign exchange differences | |
| 32 | | |
| 6 | | |
| 98 | |
Total interest expense | |
$ | 1,456 | | |
$ | 898 | | |
$ | 1,656 | |
Note
13 - Income taxes
| a. | Provision for
income taxes |
No
provision for income taxes was required for the years ended December 31, 2014, 2013 and 2012 due to net losses in these periods.
As
of December 31, 2014, the Company had net operating losses generated in the U.S. and Israel of approximately $23.6 million and
$3.9 million, respectively.
The
Company’s issuance of common stock to D4 Holdings in February 2009 constituted an “ownership change” as defined
in Section 382 of the Internal Revenue Code. As a result, under Section 382 the Company’s ability to utilize NOLs generated
in the U.S. prior to February 2009 (equal to approximately $156 million) to offset any income it may generate in the future will
be limited to approximately $600,000 per year from February 2009. The NOLs began expiring in 2011 and will expire at various
dates until 2029 if not utilized. The Company’s ability to utilize its remaining NOLs could be additionally reduced if it
experiences any further “ownership change,” as defined under Section 382.
The
Company's net operating losses generated in Israel may be carried forward indefinitely. The Subsidiary received final tax assessments
through the tax year ended December 31, 2008.
| c. | In accordance
with ASC 740-10, the components of deferred income taxes are as follows: |
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
($ in thousands) | |
Net operating losses carryforwards | |
$ | 9,273 | | |
$ | 9,386 | |
Less valuation allowance | |
| (9,273 | ) | |
| (9,386 | ) |
Net deferred tax assets | |
$ | - | | |
$ | - | |
A
valuation allowance of $9.3 million and $9.4 million is provided as of December 31, 2014 and 2013, respectively, as the realization
of the deferred tax assets are not assured.
| d. | Income/(Loss) before income tax for each entity: |
| |
Year ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
(US$ in thousands) | |
Domestic | |
$ | (2,094 | ) | |
$ | (1,976 | ) | |
$ | (1,727 | ) |
Foreign | |
| 131 | | |
| 158 | | |
| 148 | |
Total | |
$ | (1,963 | ) | |
$ | (1,818 | ) | |
$ | (1,579 | ) |
Note
14 - Segment reporting, geographical information and major customers
The
Company operates in one business segment, VoIP Telephony services, and makes business decisions and allocates resources accordingly.
The
following table summarizes the Company’s revenues and long-lived assets by country. Revenue is attributed to geographic region
based on the location of the customers. Long-lived assets are attributed to geographic region based on the country in which the
assets are located.
| |
Year ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
($ in thousands) | |
Revenues: | |
| | | |
| | | |
| | |
North America | |
$ | 785 | | |
$ | 1,442 | | |
$ | 3,163 | |
Europe | |
| 170 | | |
| 479 | | |
| 997 | |
South America | |
| 578 | | |
| 431 | | |
| 788 | |
Far East | |
| 1,149 | | |
| 1,100 | | |
| 1,592 | |
Asia and Africa | |
| 9,668 | | |
| 11,557 | | |
| 6,710 | |
Middle East | |
| 1,749 | | |
| 1,076 | | |
| 434 | |
Total revenues | |
$ | 14,099 | | |
$ | 16,085 | | |
$ | 13,684 | |
| |
| | | |
| | | |
| | |
Revenues from major customers exceeding 10% of revenues: | |
| | | |
| | | |
| | |
Master Reseller A | |
| 67.4 | % | |
| 68.7 | % | |
| 39.5 | % |
Master Reseller B | |
| 6.8 | % | |
| 2.4 | % | |
| - | % |
Affiliate A | |
| 2.5 | % | |
| 4.3 | % | |
| 7.8 | % |
Service Provider A | |
| 5.4 | % | |
| 2.6 | % | |
| 2.4 | % |
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
($ in thousands) | |
Long-lived assets: | |
| | | |
| | |
United States | |
| 72 | | |
| 148 | |
Israel | |
| 20 | | |
| 11 | |
Australia | |
| - | | |
| 5 | |
Total long-lived assets | |
| 92 | | |
| 164 | |
Note
15 – Related Party Transaction
The following tables below
summarize our related party transactions, in thousands of dollars:
| |
2014 | | |
2013 | |
Revenues generated from a related party | |
$ | 758 | | |
$ | 491 | |
| |
| | | |
| | |
Fees and service expenses | |
| 244 | | |
| 536 | |
Interest expenses | |
| 930 | | |
| 694 | |
Amortization related to convertible notes | |
| 464 | | |
| 169 | |
| |
As of December 31, | |
| |
2014 | | |
2013 | |
Accounts receivable | |
$ | 64 | | |
$ | 142 | |
Accounts payable | |
| 1,772 | | |
| 1,286 | |
Short-term loan from a related party | |
| 5,609 | | |
| 4,960 | |
Related parties involved
in these transactions:
| · | Affiliates of D4 Holdings, LLC. |
Note 16 – Subsequent
Events
On
February 25, 2015, D4 Holdings sent a letter to our board of directors that indicated that within three to four weeks of
the date of the letter D4 Holdings intended to initiate a tender offer to purchase all of the outstanding shares of our
common stock not owned by D4 Holdings at a purchase price of $0.01 per share in cash. D4 Holdings stated that it is not
willing to enter into further forbearance arrangements with us or to provide us additional financing. Finally, D4 Holdings
indicated that, in its capacity as majority stockholder of our company, it is presently not interested in either selling its
shares or voting in favor of any alternative transaction, including a merger of sale of our assets or business or similar
transaction.
On March 26, 2015 D4 Holdings sent a letter
to our board of directors that indicated that D4 Holdings withdraws its previous offer and instead proposes to acquire us through
a merger of our company with a newly-formed acquisition subsidiary of D4 Holdings. The transaction will be structured as a stock
purchase, pursuant to which D4 Holdings will purchase all of the outstanding shares of our common stock not owned by D4 Holdings.
D4 Holdings restated its previous offer of $0.01 per share, to be paid in cash from its own funds, and accordingly there will be
no financing contingency. In addition, D4 Holdings will assume all of our outstanding debt, currently valued at approximately $7.9
million.
The completion of the transaction will be
conditioned upon, among other things, approval by a special committee of our board of directors consisting of independent directors.
If the transaction is completed, our common stock will no longer be registered under Section 12 of the Exchange Act.
Selected
Quarterly Financial Information (Unaudited)
| |
Three Months Ended, | |
| |
March 31 | | |
June 30 | | |
September 30 | | |
December 31 | |
| |
($ in thousands, except per share data) | |
2014 | |
| | | |
| | | |
| | | |
| | |
Total revenues | |
$ | 4,319 | | |
$ | 4,391 | | |
$ | 2,959 | | |
$ | 2,430 | |
Costs and operating expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| 3,548 | | |
| 3,688 | | |
| 2,450 | | |
| 1,984 | |
Research and development expenses | |
| 275 | | |
| 235 | | |
| 193 | | |
| 187 | |
Selling and marketing expenses | |
| 224 | | |
| 175 | | |
| 143 | | |
| 116 | |
General and administrative expenses | |
| 330 | | |
| 350 | | |
| 279 | | |
| 332 | |
Depreciation and amortization | |
| 25 | | |
| 25 | | |
| 18 | | |
| 18 | |
Total costs and operating expenses | |
| 4,402 | | |
| 4,473 | | |
| 3,083 | | |
| 2,637 | |
Loss from operations | |
| (83 | ) | |
| (82 | ) | |
| (124 | ) | |
| (207 | ) |
Interest expense, net | |
| (242 | ) | |
| (379 | ) | |
| (416 | ) | |
| (419 | ) |
Loss before income taxes | |
| (325 | ) | |
| (461 | ) | |
| (540 | ) | |
| (626 | ) |
Income taxes | |
| 6 | | |
| 5 | | |
| 1 | | |
| (1 | ) |
Net loss | |
$ | (331 | ) | |
$ | (466 | ) | |
$ | (541 | ) | |
$ | (625 | ) |
Net loss per share - basic and diluted | |
$ | (0.00 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted weighted average number of shares outstanding | |
| 72,279,775 | | |
| 72,311,025 | | |
| 72,311,025 | | |
| 72,311,025 | |
| |
Three Months Ended, | |
| |
March 31 | | |
June 30 | | |
September 30 | | |
December 31 | |
| |
($ in thousands, except per share data) | |
2013 | |
| | | |
| | | |
| | | |
| | |
Total revenues | |
$ | 3,730 | | |
$ | 4,216 | | |
$ | 4,041 | | |
$ | 4,098 | |
Costs and operating expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| 2,793 | | |
| 3,425 | | |
| 3,311 | | |
| 3,397 | |
Research and development expenses | |
| 293 | | |
| 295 | | |
| 303 | | |
| 309 | |
Selling and marketing expenses | |
| 393 | | |
| 319 | | |
| 291 | | |
| 275 | |
General and administrative expenses | |
| 351 | | |
| 350 | | |
| 322 | | |
| 398 | |
Depreciation and amortization | |
| 38 | | |
| 37 | | |
| 42 | | |
| 28 | |
Total costs and operating expenses | |
| 3,868 | | |
| 4,426 | | |
| 4,269 | | |
| 4,407 | |
Loss from operations | |
| (138 | ) | |
| (210 | ) | |
| (228 | ) | |
| (309 | ) |
Interest expense, net | |
| (207 | ) | |
| (198 | ) | |
| (279 | ) | |
| (214 | ) |
Loss before income taxes | |
| (345 | ) | |
| (408 | ) | |
| (507 | ) | |
| (523 | ) |
Income taxes | |
| 11 | | |
| 6 | | |
| 3 | | |
| 15 | |
Net loss | |
$ | (356 | ) | |
$ | (414 | ) | |
$ | (510 | ) | |
$ | (538 | ) |
Net loss per share - basic and diluted | |
$ | (0.00 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted weighted average number of shares outstanding | |
| 72,273,525 | | |
| 72,273,525 | | |
| 72,273,525 | | |
| 72,273,525 | |
Exhibit
21.1
SUBSIDIARIES
Name of Subsidiary |
|
Jurisdiction |
Delta Three Israel, Ltd. |
|
Israel |
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent
to the incorporation by reference in the Registration Statements Nos. 333-109495 and 333-143292 on Form S-3 and Nos. 333-34156,
333-122242 ,333-137379, 333-153670, 333-161312 and 333-185952 on Form S-8 of our report, dated March 31, 2015, relating to
the financial statements of deltathree, Inc. (which report expresses an unqualified opinion and includes an explanatory paragraph
regarding the Company's ability to continue as going concern) appearing in this Annual Report on Form 10-K of deltathree,
Inc. for the year ended December 31, 2014.
/s/ Brightman Almagor Zohar & Co. |
|
|
Brightman
Almagor Zohar & Co.
Certified
Public Accountants,
A
member firm of Deloitte Touche Tohmatsu Limited
Tel
Aviv, Israel
March
31, 2015
Exhibit
31.1
CERTIFICATION
UNDER SECTION 302
I,
Effi Baruch, certify that:
1.
I have reviewed this annual report on Form 10-K of deltathree, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 31, 2015 |
|
|
|
/s/ Effi Baruch |
|
Effi Baruch, Principal Executive Officer |
|
Exhibit
31.2
CERTIFICATION
UNDER SECTION 302
I,
Yochai Ozeri, certify that:
1.
I have reviewed this annual report on Form 10-K of deltathree, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 31, 2015 |
|
|
|
/s/ Yochai Ozeri |
|
Yochai Ozeri, Principal Financial Officer |
|
Exhibit
32.1
CERTIFICATION
UNDER SECTION 906
Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States
Code), the undersigned officer of deltathree, Inc., a Delaware corporation (the "Company"), does hereby certify, to such
officer's knowledge, that:
The
Annual Report for the year ended December 31, 2013 (the "Form 10-K") of the Company fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents,
in all material respects, the financial condition and results of operations of the Company.
Dated: March 31, 2015 |
/s/ Effi Baruch |
|
Effi Baruch, Chief Executive Officer, President and Senior Vice President of Operations and Technology (Principal Executive Officer) |
A
signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit
32.2
CERTIFICATION
UNDER SECTION 906
Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States
Code), the undersigned officer of deltathree, Inc., a Delaware corporation (the "Company"), does hereby certify, to such
officer's knowledge, that:
The
Annual Report for the year ended December 31, 2013 (the "Form 10-K") of the Company fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents,
in all material respects, the financial condition and results of operations of the Company.
Dated: March 31, 2015 |
/s/ Yochai Ozeri |
|
Yochai Ozeri, Director of Finance and Treasurer (Principal Financial Officer) |
A
signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.