VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
VoiceServe, Inc. (“VoiceServe”) was incorporated in the State of Delaware on December 9, 2005 under the name 4306, Inc. On February 20, 2007, VoiceServe acquired 100% of the issued and outstanding stock of VoiceServe Limited (“Limited”), a corporation incorporated in the United Kingdom on March 21, 2002, in exchange for 20,000,000 shares of VoiceServe common stock (representing 100% of the issued and outstanding shares of VoiceServe after the exchange). From October 1, 2006 to February 20, 2007, Limited owned 100% of the issued and outstanding shares of VoiceServe. Accordingly, this acquisition was treated as a combination of entities under common control and was accounted for in a manner similar to pooling of interests accounting.
On January 15, 2008, VoiceServe acquired 100% of the issued and outstanding stock of VoipSwitch Inc. (“VoipSwitch”), a corporation incorporated in the Republic of Seychelles on May 9, 2005 (see Note 3). VoipSwitch licensed software systems (online telephony management applications) to customers online. Generally, the license of a system includes remote installation and initial configuration of the main system, training relating to the use of the system and modules, and 1 year technical support.
VoiceServe has had no operations; VoiceServe is a holding company for its wholly owned subsidiaries, including Limited (since February 20, 2007) and VoipSwitch (since January 15, 2008). In 2010, VoiceServe formed two additional subsidiaries: VoipSwitch Inc., a Delaware corporation, and VoipSwitch AG, a Swiss corporation.
Limited is engaged in the telephone communications business. Limited offers customers through its software voice calls over the internet. The software allows computer users to access the Company’s exchange via the internet and through the exchange and connect with numerous sources of telephone communications at discounted rates. Since January 15, 2008, Limited has also licensed VoipSwitch software systems.
The consolidated financial statements include the accounts of VoiceServe and its wholly owned subsidiaries (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
NOTE 2 – INTERIM FINANCIAL STATEMENTS
The unaudited financial statements as of September 30, 2010 and for the six months ended September 30, 2010 and 2009 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the financial position as of
September 30, 2010 and the results of operations and cash flows for the six months ended September 30, 2010 and 2009. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the six month period ended September 30, 2010 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending March 31, 2011. The balance sheet at March 31, 2010 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended March 31, 2010 as included in our report on Form 10-K/A filed November 10, 2010.
NOTE 3 – ACQUISITION OF VOIPSWITCH INC.
On January 15, 2008, VoiceServe closed an Acquisition Agreement with VoipSwitch Inc. (“VoipSwitch”) whereby VoiceServe acquired all VoipSwitch issued and outstanding ordinary shares as well as all of VoipSwitch’s assets, including customer orders and intangible assets, for
total consideration of $3,000,000 ($450,000 cash, $150,000 notes payable due on demand, $600,000 notes payable in total monthly installments of $50,000 per month for 12 months, and 3,750,000 shares of VoiceServe common stock valued at $0.48 per share or $1,800,000).
Payment of the monthly installments of the $600,000 notes payable is contingent upon and limited each month to the future monthly net income of VoipSwitch. Accordingly, this $600,000 “contingent consideration” portion of the $3,000,000 total purchase price was not included in the initial recorded cost of the acquisition or the recorded notes payable. If and when the contingency is resolved and payments of the $600,000 notes payable are made, such paid amounts are added to goodwill.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
The estimated fair values of the identifiable net assets of VoipSwitch at January 15, 2008 (date of acquisition) consisted of:
Cash and cash equivalents
|
|
$
|
6,682
|
|
Developed software (for licensing to customers)
|
|
|
2,000,000
|
|
In-place contracts and customer list
|
|
|
100,000
|
|
Trade name
|
|
|
100,000
|
|
Accounts payable and accrued expenses
|
|
|
(2,999
|
)
|
Deferred software license fees
|
|
|
(48,474
|
)
|
|
|
|
|
|
Identifiable net assets
|
|
$
|
2,155,209
|
|
Goodwill of $244,791 (excess of the $2,400,000 consideration, excluding the $600,000 contingent consideration, over the $2,155,209 identifiable net assets) was recorded at the acquisition date January 15, 2008. In February and March 2008, $100,000 of the $600,000 “contingent consideration” notes payable was paid and added to goodwill. In the year ended March 31, 2009, an additional $99,000 of the “contingent consideration” notes payable was paid and added to goodwill. In the three months ended June 30, 2009, an additional $88,000 of the “contingent consideration” notes payable was paid and added to goodwill. The balance remaining on the “contingent consideration” notes payable at September 30, 2010 is $313,000.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
NOTE 4 – INTANGIBLE ASSETS, NET
Intangible assets, net consisted of:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2010
|
|
Acquisition of VoipSwitch:
|
|
|
|
|
|
|
Developed software (for licensing to customers)
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
In-place contracts and customer list
|
|
|
100,000
|
|
|
|
100,000
|
|
Trade name
|
|
|
100,000
|
|
|
|
100,000
|
|
Goodwill
|
|
|
531,791
|
|
|
|
531,791
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,731,791
|
|
|
|
2,731,791
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(622,917
|
)
|
|
|
(507,917
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
2,108,874
|
|
|
$
|
2,223,874
|
|
The developed software, in-place contracts and customer list, and trade name are amortized using the straight-line method over their estimated economic lives (ten years for the developed software and trade name; five years for the in-place contracts and customer list). Goodwill is not amortized.
For the six months ended September 30, 2010 and 2009, amortization of intangible assets expense was $115,000. $100,000 was included in cost of software license fees and $15,000 was included in selling, general and administrative expenses.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
Expected future amortization expense for acquired intangible assets as of September 30, 2010 follows:
Year ended March 31,
|
|
Amount
|
|
2011
|
|
$
|
115,000
|
|
2012
|
|
|
230,000
|
|
2013
|
|
|
225,833
|
|
2014
|
|
|
210,000
|
|
2015
|
|
|
210,000
|
|
Thereafter
|
|
|
586,250
|
|
|
|
|
|
|
Total
|
|
$
|
1,577,083
|
|
NOTE 5 – DEFERRED SOFTWARE LICENSE FEES
As described in Note 1, the licenses of the VoipSwitch systems generally include certain postcontract customer support (“PCS”). In accordance with Accounting Standards Codification (“ASC”) Topic 985-605-25, “Software Revenue Recognition”, the Company allocates a portion of the license fees to PCS based on the vendor-specific objective evidence of fair value (generally $800 for 1 year technical support) of the PCS and recognizes the PCS revenues ratably over the period of the agreed PCS.
Deferred software license fees (attributable to PCS) for the six months ended September 30, 2010 and 2009 were accounted for as follows:
|
|
Six Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Balance, beginning of period
|
|
$
|
245,666
|
|
|
$
|
121,993
|
|
Additions
|
|
|
197,900
|
|
|
|
187,873
|
|
Recognized as revenue
|
|
|
(167,067
|
)
|
|
|
(97,700
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
276,499
|
|
|
$
|
212,166
|
|
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
NOTE 6 – LOANS PAYABLE TO RELATED PARTIES
Loans payable to related parties consisted of:
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
Due chairman of the board of directors
|
|
$
|
20,129
|
|
|
$
|
19,415
|
|
Due former chief operational officer
|
|
|
15,264
|
|
|
|
14,722
|
|
Due former chief financial officer
|
|
|
78
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,471
|
|
|
$
|
34,212
|
|
The loans payable to related parties are all non-interest bearing, unsecured, and due on demand.
NOTE 7 – DUE SELLERS OF VOIPSWITCH INC.
The $150,000 notes payable due to the sellers of VoipSwitch Inc, (see Note 3) are non-interest bearing and due on demand.
NOTE 8 – LIABILITY FOR COMMON STOCK PURCHASE WARRANTS
As part of the private placement which closed on May 26, 2010 (see Note 9), the Company issued a total of 1,380,000 warrants to certain accredited investors. Each warrant entitles the holder to purchase one share of common stock at a price of $0.50 per share (the “Exercise Price”) to May 26, 2015.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
The Exercise Price of the warrants is to be adjusted in the event of any stock splits or stock dividends or in the event that the Company issues or sells any shares of common stock, options, warrants or any convertible instruments (other than exempted issuances) at an effective price per share which is less than the Exercise Price. Accordingly, in accordance with EITF Issue No. 07-05, "Determining whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock", the Company reflected the $457,608 fair value of the warrants at May 26, 2010 (calculated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.45 per share, exercise price of $0.50 per share, risk-free interest rate of 2.06%, term of five years, and expected
volatility of 100%) as a liability and will remeasure the fair value of the warrants each quarter, adjust the liability balance, and reflect changes in operations as "income( expense) from revaluation of liability for common stock purchase warrants”.
Below is a reconciliation of the change in the fair values of the warrants from May 26, 2010 to September 30, 2010.
|
|
Shares
|
|
Fair
|
|
|
|
Equivalent
|
|
Value
|
|
Balance, May 26, 2010
|
|
|
1,380,000
|
|
$
|
457,608
|
|
Revaluation credited to operations
|
|
|
—
|
|
|
(121,854
|
)
|
Balance, June 30, 2010
|
|
|
1,380,000
|
|
|
335,754
|
|
Revaluation credited to operations
|
|
|
—
|
|
|
(33,120
|
)
|
Balance, September 30, 2010
|
|
|
1,380,000
|
|
$
|
302,634
|
|
NOTE 9 – STOCKHOLDERS’ EQUITY
Common stock issuances
On May 21, 2009, VoiceServe issued a total of 3,000,000 shares of its common stock to the three sellers of VoipSwitch for services rendered. The $375,000 estimated fair value of the shares, which was calculated based on the nearest day trading price of $0.25 per share and a 50% restricted stock discount, is included in selling, general and administrative expenses in the three months ended September 30, 2009.
Effective April 2010, VoiceServe issued 41,494 shares of its common stock to a consultant for services rendered. The $10,000 estimated fair value of the shares is included in selling, general and administrative expenses in the three months ended September 30, 2010.
On May 26, 2010, VoiceServe closed on the sale to certain accredited investors of a total of 2,760,000 shares of common stock at a price of $0.25 per share and 1,380,000 warrants to purchase 1,380,000 shares of common stock, for $690,000 gross proceeds ($600,501 net proceeds after deducting costs of the private placement). Each warrant (see Note 8) entitles the holder to purchase one share of common stock at a price of $0.50 per share (the "Exercise Price") to May 26, 2015
.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September
30, 2010
(Unaudited)
On September 30, 2010, VoiceServe committed to issue a total of 900,000 shares of its common stock to its new chief financial officer (300,000 shares) and to two new members of the Board of Directors (300,000 shares each) pursuant to the employment agreement and director agreements discussed in Note 12. The $148,050 estimated fair value of the shares, which was calculated based on the closing trading price of $0.329 per share and a 50% restricted stock discount, is included in selling, general and administrative expenses in the three months ended September 30, 2010.
Stock options
Effective May 12, 2009, VoiceServe granted non-qualified stock options to 4 service providers exercisable into a total of up to 703,000 shares of common stock at an exercise price of $0.13 per share to December 23, 2013. The options vest 2/3 on December 23, 2010 and 1/3 on December 23, 2011. The $81,618 estimated fair value of the options (calculated using the Black-Scholes option pricing model and the following assumptions:
(i)
$0.15 share price, (ii) 5 year term,
(iii)
100% expected volatility, and (iv) 3% risk free interest rate) is being expensed ratably over the requisite service period from May 12, 2009 to December 23, 2011.
On January 4, 2010, VoiceServe granted non-qualified stock options to 2 service providers exercisable into a total of up to 200,000 shares of common stock at an exercise price of $0.13 per share to January 4, 2015. The options vest 2/3 on January 4, 2012 and 1/3 on January 4, 2013.
The $39,520 estimated fair value of the options (calculated using the Black-Scholes option pricing model and the following assumptions: (i) $0.24 share price, (ii) 5 year term, (iii) 100% expected volatility, and (iv) 2.65% risk free interest rate) is being expensed ratably over the three year requisite service period.
Effective July 26, 2010, VoiceServe committed to grant non-qualified stock options exercisable into up to a total of 500,000 shares of common stock at an exercise price of $0.25 per share to its president and chairman (250,000 options) and chief executive officer (250,000 options) pursuant to the employment agreements discussed in Note 12. The $128,200 estimated fair value of the options (calculated using the Black-Scholes option pricing model and the following assumptions: (i) $0.33 share price, (ii) term of 1773 days, (iii) 100% expected volatility, and (iv) 1.7037% risk free interest rate) was expensed and is included in selling, general and administrative expenses in the three months ended September 30, 2010.
Stock options expense for the six months ended September 30, 2010 and 2009 was $150,412 and
$12,110, respectively. As of September 30, 2010, there was $68,154 of total unrecognized compensation cost relating to unexpired stock options. That cost is expected to be recognized in the years ending March 31 2011, 2012, and 2013 in the amounts of $22,090, $36,030, and $10,034, respectively.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
NOTE 10 – INCOME TAXES
No provisions for income taxes were recorded in the six months ended September 30, 2010 and 2009 since the Company didn’t have any income subject to income tax (after taking into account available net operating loss carryforwards in the respective tax jurisdictions) in those periods.
Based on management‘s present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset attributable to the future utilization of net operating loss carryforwards as of September 30, 2010 will be realized. Accordingly, the Company has maintained a 100% allowance against the deferred tax asset in the financial statements at September 30, 2010. The Company will continue to review this valuation allowance and make adjustments as appropriate.
NOTE 11 – RELATED PARTY TRANSACTIONS
For the six months ended September 30, 2010 and 2009, consulting fees paid to officers, directors, and their affiliates totaled $322,519 and $339,484, respectively. These fees are included in selling, general, and administrative expenses in the accompanying statements of operations.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Registration Rights Agreement
In connection with the private placement which closed May 26, 2010 (see Note 9), the Company and the investors executed a Securities Purchase Agreement and a Registration Rights Agreement. Among other things, the Registration Rights Agreement provides that the Company will prepare and file with the SEC a Registration Statement covering the resale of the Registrable Securities and use its commercially reasonable efforts to cause it to be declared effective. If the Registration Statement is not filed by July 30, 2010 or if the Registration Statement filed is not declared effective by the SEC within certain time periods (by December 27, 2010 in the event of a "full review" by the SEC) and the Company has not exercised its reasonable best efforts to secure the Registration Statement's effectiveness with the SEC, the Registration Agreement provides that the Company will pay monthly (until cured) partial liquidated damages to the investors equal to 1% of the purchase price paid by the investors, subject to a maximum of 10% of the purchase price paid by the investors
.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
Employment and Director Agreements
On June 4, 2010, VoiceServe, Inc. executed employment agreements with (i) its President and Chairman, Alexander Ellinson, and (ii) its Chief Executive Officer, Michael Bibelman. Each agreement has a term of five (5) years and each provides for (i) an annual base salary of $240,000, (ii) an annual bonus of up to 100% of the base salary as determined in the sole discretion of the Board of Directors, and (iii) annual grants of stock options under the Company's Equity Incentive Stock Plan to purchase 250,000 shares of common stock at $0.25 per share for the first year, which shall occur on or before July 26, 2010, and at a 25% discount off the price on each June 4 thereafter in 2011, 2012, 2013, and 2014 (which vest at such time as approved by the Board of Directors). The Board has not yet approved the initial grant of the 250,000 common stock share options, which was to occur on or before July 26, 2010, for either Mr. Ellison or Mr. Bibelman.
Both employment agreements also provide for other employee benefits, such as an allowance for leasing a car for the Company or the Company providing one, healthcare insurance, vacation and other benefits provided in accordance with Company policy. In addition, each agreement contains provisions concerning early termination of the executive for death, disability, or with or without cause by the executive. In the event of death or disability, the Company is obligated to pay three months base salary plus accrued benefits. In the event of a termination of the executive "without cause," the Company is obligated to pay each executive, in lieu of "severance payments," his base pay and bonus, including percentage of profits, for the term in which the termination occurs for 36 months after the termination date in accordance with Company payroll practices, and maintain other benefits for that executive also for that 36 month period. Finally, the Company is obligated to pay the exercise price for the stock options to be granted as described in the preceding paragraph and the Company is required to issue 250,000 shares of common stock to the terminated executive with demand registration rights.
On September 30, 2010, VoiceServe, Inc. executed an employment agreement with Alfred Stefansky, its concurrently appointed Chief Financial Officer. The agreement has a term of five (5) years and provides for (i) a monthly base salary of $8,000, (ii) an annual bonus of up to 100% of the base salary as determined in the sole discretion of the Board of Directors, and (iii) a one-time issuance of 300,000 restricted shares of Company common stock. Additionally, the agreement provides that the Company shall provide standard health insurance coverage for the executive and each individual family member and the Executive shall be eligible to participate in any employee benefit plans of the Company. Either party may terminate the agreement without cause upon 60 days prior written notice. In the event of death or disability, the Company is obligated to pay three months base salary plus accrued benefits.
VOICESERVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2010
(Unaudited)
Also on September 30, 2010, VoiceServe, Inc, executed director agreements with Michael Taylor and Andrew Millet, concurrently appointed members of the Board of Directors. Both agreements have terms of one year, subject to a one year renewal term upon reelection by a majority of the Company stockholders. Both agreements provide for (i) a monthly retainer of $1,000 and (ii) a one-time issuance of 300,000 restricted shares of Company common stock. Additionally, the agreements provide that the Company shall provide reimbursements for all reasonable out-of- pocket expenses incurred.
Service agreements
In connection with the acquisition of VoipSwitch, VoiceServe entered into service agreements with the three sellers. The agreements have a three year term (to January 15, 2011) and provide for monthly compensation of $6,000 for each of the three individuals, or $18,000 per month total.
Rental agreement
Limited rents office space at monthly rentals of £710 (or $1,117 translated at the September 30, 2010 exchange rate). For the six months ended September 30, 2010 and 2009, rent expense was $6,480 and $6,772, respectively.