Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization
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. VoipSwitch licensed software systems (online telephony management applications) to customers online. Generally, the license of a system includes remote installation and initial configuration of the main system, training relating to the use of the system and modules, and 1 year technical support.
VoiceServe has had no operations; VoiceServe is a holding company for its wholly owned subsidiaries Limited (since February 20, 2007) and VoipSwitch (since January 15, 2008). In 2010, Voiceserve formed two additional subsidiaries: VoipSwitch Inc., a Delaware corporation, and VoipSwitch AG, a Swiss corporation. VoipSwitch Inc. was formed to provide a future North American presence and has had no significant operations to date. VoipSwitch AG was formed to coordinate sales and billing activities from Switzerland and commenced operations in the three months ended December 31, 2010.
Limited is engaged in the telephone communications business from its London, United Kingdom office. Limited offers its software to large enterprises and carriers. The software allows communication through the Company’s exchange via the internet. Since January 15, 2008, Limited has also licensed VoipSwitch software systems.
Basis of Presentation
The unaudited consolidated financial statements as of September 30, 2012 and for the three and six months ended September 30, 2012 and 2011 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, 2012 and the results of operations and cash flows for the six months ended September 30, 2012 and 2011. 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, 2012 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending March 31, 2013. The balance sheet at March 31, 2012 has been derived from the audited financial statements at that date.
Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the year ended March 31, 2012 as reported in the Form 10K have been omitted.
These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended March 31, 2012 as included in our report on Form 10-K filed July 16, 2012.
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.
Correction of Prior Year Information
During November 2012, the Company identified an error in the accounting for common shares issued for services during June 2011. The Company incorrectly applied a 50% discount to the market price of the Company’s common stock when determining the fair value of the common shares. This resulted in an adjustment to the previously reported amounts in the consolidated financial statements as of March 31, 2012 and for the six months ended September 30, 2011.
In accordance with the SEC's Staff Accounting Bulletin Nos. 99 and 108 (SAB 99 and SAB 108), the Company evaluated this error and, based on an analysis of quantitative and qualitative factors, determined that the error was immaterial to each of the prior reporting periods affected. However, if the adjustments to correct the cumulative effect of the above error had been recorded in the six months ended September 30, 2012, the Company believes the impact would have been significant and would impact comparisons to prior periods. Therefore, as permitted by SAB 108, the Company corrected, in the current filing, previously reported results as of March 31, 2012 and for the six months ended September 30, 2012.
The correction impacts the consolidated balance sheet as of March 31, 2012 and the consolidated statements of operations and cash flows for the six months ended September 30, 2011 which were revised to reflect the cumulative effect of the error described above. The tables below summarize the impact of this correction:
|
|
March 31, 2012
|
|
Consolidated Balance Sheet:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
6,310,662
|
|
|
$
|
432,000
|
|
|
$
|
6,742,662
|
|
Accumulated deficit
|
|
$
|
(5,653,427
|
)
|
|
$
|
(432,000
|
)
|
|
$
|
(6,085,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2011
|
|
Consolidated Statement of Operations and Comprehensive Income (Loss):
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
1,898,905
|
|
|
$
|
432,000
|
|
|
$
|
2,330,905
|
|
Total operating expenses
|
|
|
1,898,905
|
|
|
|
432,000
|
|
|
|
2,330,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(961,941
|
)
|
|
|
(432,000
|
)
|
|
|
(1,393,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,169,747
|
)
|
|
$
|
(432,000
|
)
|
|
$
|
(1,601,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,169,747
|
)
|
|
|
(432,000
|
)
|
|
|
(1,601,747
|
)
|
Foreign exchange translation adjustment
|
|
|
21,290
|
|
|
|
-
|
|
|
|
21,290
|
|
Comprehensive loss
|
|
$
|
(1,148,457
|
)
|
|
$
|
(432,000
|
)
|
|
$
|
(1,580,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2011
|
|
Consolidated Statement of Cash Flows:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,169,747
|
)
|
|
$
|
(432,000
|
)
|
|
$
|
(1,601,747
|
)
|
Adjustments to reconcile net loss to net
|
|
|
|
|
|
|
|
|
|
|
|
|
cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
578,811
|
|
|
|
432,000
|
|
|
|
1,010,811
|
|
Net cash used in operating activities
|
|
$
|
(351,728
|
)
|
|
$
|
-
|
|
|
$
|
(351,728
|
)
|
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis of accounting which contemplates continuity of operations, realization of assets, liabilities, and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has a working capital deficit of $1,684,999 as of September 30, 2012. This raises substantial doubt as to the Company’s ability to continue as a going concern.
Additional capital may be required in order to grow and sustain operations over the next twelve months. In addition, unless the Company becomes profitable and begins generating sufficient cash flow, the Company will need to raise additional capital to continue operations past 12 months, and there is no assurance the Company will be successful in raising the needed capital. Management believes that, if the Company’s operational cash flow is not sufficient to support its operational and/or its marketing strategy, its short-term capital needs could range between $500,000 and $1,500,000 for which it would most probably seek to raise the capital in the equity markets.
NOTE 2 – INTANGIBLE ASSETS, NET
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2012
|
|
Intangible assets, net, consisted of:
|
|
|
|
|
|
|
Developed software (for licensing to customers)
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
In-place contracts and customer list
|
|
|
100,000
|
|
|
|
100,000
|
|
Trade name
|
|
|
100,000
|
|
|
|
100,000
|
|
Goodwill
|
|
|
663,041
|
|
|
|
663,041
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,863,041
|
|
|
|
2,863,041
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(1,082,917
|
)
|
|
|
(967,917
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
1,780,124
|
|
|
$
|
1,895,124
|
|
The developed software, in-place contracts and customer list, and trade name are amortized using the straight-line method over their estimated economic lives (ten years for the developed software and trade name; five years for the in-place contracts and customer list). Goodwill is not amortized.
For the six months ended September 30, 2012 and 2011, amortization of intangible assets expense was $115,000. $50,000 was included in cost of software license fees and $7,500 was included in selling, general and administrative expenses.
NOTE 3 – DEFERRED SOFTWARE LICENSE FEES AND SUPPORT
The licenses of the VoipSwitch systems generally include certain post contract 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 $1000 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) totaled $229,893 and $181,503 as of September 30, 2012 and March 31, 2012, respectively.
NOTE 4 – LOANS PAYABLE TO RELATED PARTIES
Loans payable to related parties consisted of the following as of September 30, 2012 and March 31, 2012:
|
|
September 30, 2012
|
|
|
March 31,
2012
|
|
Due chairman of the board of directors
|
|
$
|
23,696
|
|
|
$
|
22,840
|
|
Due chief operational officer
|
|
|
15,107
|
|
|
|
15,389
|
|
Due former chief financial officer
|
|
|
79
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,882
|
|
|
$
|
38,308
|
|
The loans payable to related parties are all non-interest bearing, unsecured, and due on demand.
NOTE 5 – DERIVATIVE LIABILITIES
As part of the private placement which closed on May 26, 2010, 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 through May 26, 2015.
As part of the private placement which closed on June 6, 2011, the Company issued a total of 1,915,385 warrants to certain accredited investors. Each warrant entitles the holder to purchase one share of common stock at a price of $0.30 per share through June 6, 2014.
The exercise price of these warrants is to be adjusted 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 of these warrants. Accordingly, in accordance with FASB ASC 815, the Company has accounted for these warrants as derivative liabilities. The fair value of thewarrants was determined to be $1,540,740 as of September 30, 2012 resulting in a loss on the change in the fair value of derivative liabilities of $473,932 during the six months ended September 30, 2012. The fair value of the warrants was determined using a lattice option pricing model and the following key assumptions:
●
|
The stock price would fluctuate with the Company’s projected volatility. The projected volatility curve was based on historical volatilities of the Company for the valuation periods. The projected volatility curve was as follows:
|
|
1 year
|
2 year
|
3 year
|
4 year
|
5 year
|
September 30, 2012
|
194%
|
269%
|
335%
|
384%
|
489%
|
●
|
The holder would not exercise the warrant as they become exercisable.
|
●
|
The holder would exercise the warrant at maturity if the stock price was above the project reset price.
|
●
|
A 10% probability of a reset event and a projected financing each year in December (starting in 2013) at prices approximating 110% of the market.
|
●
|
The May 26, 2011 warrants’ $0.50 exercise price is projected to reset to $0.085 at maturity and the June 6, 2011 warrants’ $0.30 exercise price is projected to reset to $0.11 at maturity.
|
●
|
No warrants have been exercised or expired.
|
Fair Value Measurements
FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The Company uses Level 3 to determine the fair value of its derivative financial instruments.
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of September 30, 2012:
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets and
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance as of
|
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
September 30,
|
|
Description
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2012
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,540,740
|
|
|
$
|
1,540,740
|
|
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of March 31, 2012:
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets and
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance as of
|
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
March 31,
|
|
Description
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2012
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,066,808
|
|
|
$
|
1,066,808
|
|
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments measured at fair value under level 3 on a recurring basis using significant unobservable inputs during the six months ended September 30, 2012.
Fair value at March 31, 2012
|
|
$
|
1,066,808
|
|
Additions during the period
|
|
|
-
|
|
Transfer in (out) of Level 3
|
|
|
-
|
|
Change in the fair value
|
|
|
473,932
|
|
Fair value at September 30, 2012
|
|
$
|
1,540,740
|
|
NOTE 6 – STOCKHOLDERS’ EQUITY
Common stock
On April 20, 2012, the Company granted a total of 2,400,000 common shares (1,200,000 shares each) to the Company’s Chief Executive Officer and the Company’s President and Chairman of the Board of Directors for prior services rendered. The fair value of the stock of $626,400 was expensed during the six months ended September 30, 2012.
Also on April 20, 2012, the Company renewed the director agreements with Michael Taylor and Andrew Millet and granted a total of 600,000 common shares (300,000 shares each). The fair value of the stock of $156,600 was expensed during the six months ended September 30, 2012.
On April 26, 2012, the Company granted a total of 1,800,000common shares (600,000 shares each) to a member of the Company’s Board of Directors and to two consultants for prior services rendered. The fair value of the stock of $383,400 was expensed during the six months ended September 30, 2012.
During August 2012, the Company granted 150,000 common shares to a consultant for prior services rendered. The fair value of the stock of $37,500 was expensed during the six months ended September 30, 2012.
Stock options
On June 4, 2012, pursuant to employment agreements with its (1) President and Chairman and (2) Chief Executive Officer, the Company granted a total of 500,000 common stock options exercisable at $0.1215 per share. The fair value of the options was determined to be $76,000 using the Black-Scholes option pricing model and the following assumptions: (i) $0.162 share price, (ii) $0.1215 exercise price, (iii) term of 5 years, (iv) 161% expected volatility, and (v) 0.68% risk free interest rate. The entire fair value was expensed during the six months ended September 30, 2012.
Total option expense was $79,345 during the six months ended September 30, 2012 consisting of the $76,000 fair value of the options granted on June 4, 2012 and $3,345 from options granted on January 4, 2010. As of September 30, 2012, there was $6,689 of unamortized stock option expense from the options granted on January 4, 2010 that will be expensed through January 4, 2013.
A summary of stock options activity for the six months ended September 30, 2012 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding - March 31, 2012
|
|
|
1,903,000
|
|
|
$
|
0.19
|
|
Granted
|
|
|
500,000
|
|
|
|
0.12
|
|
Forfeited/canceled
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding - September 30, 2012
|
|
|
2,403,000
|
|
|
$
|
0.18
|
|
Exercisable – September 30, 2012
|
|
|
2,336,333
|
|
|
$
|
0.18
|
|
The weighted average remaining life of the outstanding options as of September 30, 2012 was 2.86 years and the intrinsic value of the exercisable options as of September 30, 2012 was $514,780.
At September 30, 2012, stock options consisted of the following:
|
|
Number of
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
Expiration
|
Date of Grant
|
|
Options
|
|
|
Exercise Price
|
|
Date
|
May 12, 2009
|
|
|
703,000
|
|
|
$
|
0.1300
|
|
December 23, 2013
|
January 4, 2010
|
|
|
200,000
|
|
|
|
0.1300
|
|
January 4, 2015
|
June26, 2010
|
|
|
500,000
|
|
|
|
0.2500
|
|
June 26, 2015
|
June 4, 2011
|
|
|
500,000
|
|
|
|
0.2385
|
|
June 4, 2016
|
June 4, 2012
|
|
|
500,000
|
|
|
$
|
0.1215
|
|
June 4, 2017
|
Total
|
|
|
2,403,000
|
|
|
|
|
|
|
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Registration Rights Agreements
In connection with a private placement which closed May 26, 2010, the Company and the investors executed a Securities Purchase Agreement and a Registration Rights Agreement. Among other things, the Registration Rights Agreement provides that the Company will prepare and file with the SEC a Registration Statement covering the resale of the Registrable Securities and use its commercially reasonable efforts to cause it to be declared effective. If the Registration Statement is not filed by July 30, 2010 or if the Registration Statement filed is not declared effective by the SEC within certain time periods (by December 27, 2010 in the event of a "full review" by the SEC) and the Company has not exercised its reasonable best efforts to secure the Registration Statement's effectiveness with the SEC, the Registration Agreement provides that the Company will pay monthly (until cured) partial liquidated damages to the investors equal to 1% of the purchase price paid by the investors, subject to a maximum of 10% of the purchase price paid by the investors. The Registration Statement was declared effective by the SEC on April 25, 2011.
Potential claims for liquidated damages relating to this Registration Rights Agreement, which the Company does not believe are probable of assertion, approximate $41,400 at September 30, 2012 and March 31, 2012.
In connection with the private placement which closed May 6, 2011 and June 6, 2011, 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 6, 2011 or if the Registration Statement filed is not declared effective by the SEC within certain time periods (by December 2, 2011 in the event of a "full review" by the SEC) and the Company has not exercised its reasonable best efforts to secure the Registration Statement's effectiveness with the SEC, the Registration Agreement provides that the Company will pay monthly (until cured) partial liquidated damages to the investors equal to 1% of the purchase price paid by the investors, subject to a maximum of 10% of the purchase price paid by the investors. The Registration Statement has not yet been filed.
Potential claims for liquidated damages relating to this Registration Rights Agreement, which the Company does not believe are probably of assertion, approximate $49,800 and $44,820 at September 30, 2012 and March 31, 2012, respectively.