Nevada
|
|
88-0476779
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(State of Incorporation)
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(IRS Employer Identification No.)
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Part I. Financial Information
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Item 1.
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2
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3
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4
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5
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6
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Item 2.
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19
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Item 3.
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29
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Item 4.
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29
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Part II. Other Information
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Item 1.
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30
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Item 1 A.
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30
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Item 2.
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30
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Item 3.
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30
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Item 4.
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30
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Item 5.
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30
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Item 6.
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31
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32
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September 30, 2011
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December 31, 2010
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|||||||
(unaudited)
|
||||||||
ASSETS
|
|
|||||||
Cash
|
$ | 56 | $ | 428 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,002 and $850 at
September 30, 2011 and December 31, 2010, respectively
|
2,527 | 3,494 | ||||||
Deposits
|
112 | 105 | ||||||
Prepayments and other current assets
|
368 | 259 | ||||||
Total current assets
|
3,063 | 4,286 | ||||||
Property and equipment, net
|
109 | 109 | ||||||
Goodwill
|
450 | 900 | ||||||
Other intangible assets
|
— | 9 | ||||||
Other long-term assets
|
4 | 3 | ||||||
Total Assets
|
$ | 3,626 | $ | 5,307 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
||||||||
Accounts payable net of dispute reserve of $503 and $1,016 at September 30, 2011 and
December 31, 2010, respectively
|
$ | 4,458 | $ | 9,898 | ||||
Accrued expenses
|
4,055 | 3,808 | ||||||
Deferred revenues and customer deposits
|
275 | 323 | ||||||
Borrowings under line of credit facilities net of debt discount of $65 and $82 at
September 30, 2011 and December 31, 2010, respectively
|
2,112 | 2,110 | ||||||
Amount due to former ATI shareholder (in default)
|
75 | 75 | ||||||
Current portion of vendor settlements
|
2,232 | 2,140 | ||||||
Current portion of secured promissory notes, including $875 from related parties net of debt
discount of $6 and $12 at September 30, 2011 and December 31, 2010, respectively
|
2,378 | 1,488 | ||||||
Liability for warrant put feature
|
737 | 717 | ||||||
Total current liabilities
|
16,322 | 20,559 | ||||||
Long-term vendor settlements
|
1,164 | 701 | ||||||
Long-term secured promissory notes
|
— | 883 | ||||||
Total liabilities
|
17,486 | 22,143 | ||||||
Commitments and contingencies (Note 12 )
|
||||||||
Stockholders’ Deficit
|
||||||||
Preferred stock — $0.001 par value; 10,000,000 shares authorized; 25,000 shares issued and
outstanding at September 30, 2011 and December 31, 2010
|
— | — | ||||||
Common stock — $0.001 par value; 150,000,000 shares authorized;
74,352,728 and 72,975,423 shares issued and outstanding at September 30, 2011 and
December 31, 2010, respectively
|
74 | 73 | ||||||
Additional paid-in capital
|
29,207 | 29,145 | ||||||
Accumulated deficit
|
(43,141 | ) | (46,054 | ) | ||||
Total stockholders’ deficit
|
(13,860 | ) | (16,836 | ) | ||||
Total Liabilities and Stockholders’ Deficit
|
$ | 3,626 | $ | 5,307 |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Net revenues
|
$ | 4,940 | $ | 7,593 | $ | 16,556 | $ | 19,282 | ||||||||
Network costs
|
4,126 | 5,312 | 12,727 | 13,635 | ||||||||||||
Gross profit
|
814 | 2,281 | 3,829 | 5,647 | ||||||||||||
Operating expenses
|
||||||||||||||||
Sales and marketing
|
166 | 402 | 603 | 1,197 | ||||||||||||
General and administrative
|
954 | 890 | 2,830 | 2,687 | ||||||||||||
Impairment of goodwill
|
450 | — | 450 | — | ||||||||||||
Total operating expenses
|
1,570 | 1,292 | 3,883 | 3,884 | ||||||||||||
Operating income (loss)
|
(756 | ) | 989 | (54 | ) | 1,763 | ||||||||||
Interest expense, net (includes amortization of debt discount of $102 and $137 for the three months ended September 30, 2011 and 2010, respectively and $188 and $190 for the nine months ended September 30, 2011 and 2010, respectively)
|
317 | 500 | 907 | 1,365 | ||||||||||||
Accounts payable write-off
|
(527 | ) | — | (865 | ) | (685 | ) | |||||||||
Gain on forgiveness of debt
|
(1,087 | ) | (261 | ) | (3,009 | ) | (907 | ) | ||||||||
Net income
|
$ | 541 | $ | 750 | $ | 2,913 | $ | 1,990 | ||||||||
Basic net income per common share
|
$ | 0.01 | $ | 0.01 | $ | 0.04 | $ | 0.03 | ||||||||
Diluted net income per common share
|
$ | 0.01 | $ | 0.01 | $ | 0.03 | $ | 0.03 | ||||||||
Shares used to calculate basic net income per common share (in thousands)
|
74,296 | 72,903 | 73,971 | 72,090 | ||||||||||||
Shares used to calculate diluted net income per common share (in thousands)
|
88,270 | 72,903 | 87,660 | 72,090 |
Preferred Stock
|
Common Stock
|
Additional
|
Total
|
||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Paid-In
Capital
|
Accumulated
Deficit
|
Stockholders’
Deficit
|
|||||||||||||
Balance at January 1, 2011
|
25,000
|
$
|
—
|
72,975,423
|
$
|
73
|
$
|
29,145
|
$
|
(46,054
|
)
|
$
|
(16,836
|
)
|
|||||
Warrants exercised
|
—
|
—
|
1,232,305
|
1
|
9
|
—
|
10
|
||||||||||||
Stock issued for debt
|
—
|
—
|
145,000
|
—
|
6
|
—
|
6
|
||||||||||||
Warrants issued for forgiveness of debt
|
—
|
—
|
—
|
—
|
2
|
—
|
2
|
||||||||||||
Warrants issued in connection with line of credit financing
|
—
|
—
|
—
|
—
|
45
|
—
|
45
|
||||||||||||
Net income for the nine months ended September 30, 2011
|
—
|
—
|
—
|
—
|
—
|
2,913
|
2,913
|
||||||||||||
Balance at September 30, 2011
|
25,000
|
$
|
—
|
74,352,728
|
$
|
74
|
$
|
29,207
|
$
|
(43,141
|
)
|
$
|
(13,860
|
)
|
Nine Months Ended September 30,
|
||||||||
2011
|
2010
|
|||||||
Cash flows from operating activities:
|
|
|
||||||
Net income
|
$ | 2,913 | $ | 1,990 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
||||||||
Depreciation and amortization
|
37 | 45 | ||||||
Stock based compensation
|
— | 20 | ||||||
Amortization of debt discount
|
188 | 190 | ||||||
Provision for doubtful accounts
|
152 | 63 | ||||||
Impairment of goodwill
|
450 | — | ||||||
Accounts payable write-off
|
(865 | ) | (685 | ) | ||||
Gain on forgiveness of debt
|
(3009 | ) | (907 | ) | ||||
(Increase) decrease in operating assets:
|
||||||||
Accounts receivable
|
814 | (1,402 | ) | |||||
Other current assets
|
(113 | ) | (304 | ) | ||||
Increase (decrease) in operating liabilities:
|
||||||||
Accounts payable
|
(242 | ) | 1,526 | |||||
Accrued expenses
|
340 | 809 | ||||||
Vendor settlements
|
(854 | ) | (309 | ) | ||||
Deferred revenues and customer deposits
|
(48 | ) | (147 | ) | ||||
Net cash (used in) provided by operating activities
|
(237 | ) | 889 | |||||
Cash flows from investing activities:
|
||||||||
Purchase of property and equipment
|
(30 | ) | (50 | ) | ||||
Cash flows from financing activities:
|
||||||||
Principal payments on lines of credit
|
(15 | ) | (50 | ) | ||||
Proceeds from exercise of warrants
|
10 | — | ||||||
Payment for put stock repurchase
|
(100 | ) | — | |||||
Bank overdraft
|
— | (177 | ) | |||||
Principal payments on capital lease note payable
|
— | (201 | ) | |||||
Net cash used in financing activities
|
(105 | ) | (428 | ) | ||||
Net (decrease) increase in cash
|
(372 | ) | 411 | |||||
Cash at beginning of period
|
428 | 99 | ||||||
Cash at end of period
|
$ | 56 | $ | 510 |
Telecommunications equipment
|
|
2-3 years
|
Telecommunications software
|
18 months to 2 years
|
|
Computer equipment
|
2 years
|
|
Office equipment and furniture
|
3 years
|
|
Leasehold improvements
|
Useful life or remaining lease term, which ever is shorter
|
·
|
significant underperformance relative to expected historical or projected future operating results;
|
·
|
significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business; and
|
·
|
significant negative industry or economic trends.
|
|
September 30, 2011
|
December 31, 2010
|
||||||
(unaudited)
|
||||||||
Employee advances
|
$ | 69 | $ | 63 | ||||
Deferred loan costs
|
24 | 96 | ||||||
Prepaid expenses
|
275 | 100 | ||||||
Other current assets
|
$ | 368 | $ | 259 |
|
September 30, 2011
|
December 31, 2010
|
||||||
(unaudited)
|
||||||||
Telecommunications equipment
|
$ | 3,327 | $ | 3,327 | ||||
Computer equipment
|
204 | 174 | ||||||
Telecommunications software
|
107 | 107 | ||||||
Leasehold improvements, office equipment and furniture
|
86 | 86 | ||||||
Total property and equipment
|
3,724 | 3,694 | ||||||
Less: accumulated depreciation and amortization
|
(3,615 | ) | (3,585 | ) | ||||
Property and equipment, net
|
$ | 109 | $ | 109 |
September 30, 2011
|
December 31, 2010
|
|||||||
(unaudited)
|
||||||||
Commissions, network costs and other general accruals
|
$ | 992 | $ | 1,136 | ||||
Accrued USF and sales tax
|
893 | 762 | ||||||
Deferred payroll and other payroll related liabilities
|
540 | 560 | ||||||
Interest due on convertible promissory notes and other debt
|
1,169 | 1,000 | ||||||
Payments due to third party providers
|
461 | 350 | ||||||
Accrued expenses
|
$ | 4,055 | $ | 3,808 |
September 30, 2011
|
December 31, 2010
|
|||||||
(unaudited)
|
||||||||
Vendor settlements
|
$ | 3,396 | $ | 2,841 | ||||
Secured promissory notes
|
2,378 | 2,371 | ||||||
Less: Current portion of long-term debt
|
(4,610 | ) | (3,628 | ) | ||||
Long-term debt
|
$ | 1,164 | $ | 1,584 |
2012
|
$ 4,610
|
2013
|
833
|
2014
|
330
|
2015
|
1
|
$ 5,774
|
Number
of
Shares
|
Price
per
Share
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Term
|
Aggregate
Intrinsic
Value
|
||||||||||||||||
Options outstanding at December 31, 2010
|
6,600,688 | $ | — | $ | 0.12 | 5.16 | $ | 182,534 | ||||||||||||
Granted
|
— | — | — | |||||||||||||||||
Exercised
|
— | — | — | |||||||||||||||||
Forfeited/expired
|
— | — | — | |||||||||||||||||
Options outstanding at September 30, 2011
|
6,600,688 | $ | $ | 0.12 | 4.41 | $ | 146,028 | |||||||||||||
Options vested and expected to vest in the future at September 30, 2011
|
6,600,688 | $ | $ | 0.12 | 4.41 | $ | 146,028 | |||||||||||||
Options exercisable at September 30, 2011
|
6,600,688 | $ | $ | 0.12 | 4.41 | $ | 146,028 |
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||
Exercise Prices
|
Number
of Shares
|
Average
Remaining
Contractual
Life
(in Years)
|
Weighted
Average
Exercise
Price
|
Number
of Shares
|
Weighted
Average
Exercise Price
|
|||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
$ | 0.01 | 1,478,748 | 2.25 | $ | 0.01 | 1,478,748 | $ | 0.01 | ||||||||||||||
0.01 | 154,039 | 2.50 | 0.01 | 154,039 | 0.01 | |||||||||||||||||
0.01 | 431,307 | 2.75 | 0.01 | 431,307 | 0.01 | |||||||||||||||||
0.01 | 123,231 | 3.25 | 0.01 | 123,231 | 0.01 | |||||||||||||||||
0.01 | 277,269 | 4.00 | 0.01 | 277,269 | 0.01 | |||||||||||||||||
0.25 | 2,950,000 | 6.00 | 0.25 | 2,950,000 | 0.25 | |||||||||||||||||
0.01 | 338,884 | 4.00 | 0.01 | 338,884 | 0.01 | |||||||||||||||||
0.01 | 643,880 | 4.25 | 0.01 | 643,880 | 0.01 | |||||||||||||||||
0.01 | 110,907 | 4.25 | 0.01 | 110,907 | 0.01 | |||||||||||||||||
0.01 | 92,423 | 4.50 | 0.01 | 92,423 | 0.01 | |||||||||||||||||
6,600,688 | 6,600,688 |
September 30,
2011
|
December 31,
2010
|
|||||||
(unaudited)
|
||||||||
Current assets and liabilities:
|
|
|
||||||
Current assets and liabilities:
|
|
|
||||||
Deferred revenue
|
$ | (72 | ) | $ | (88 | ) | ||
Bad Debt
|
401 | 340 | ||||||
Accrued expenses
|
1,622 | 1,523 | ||||||
1,951 | 1,775 | |||||||
Valuation allowance
|
(1,951 | ) | (1,775 | ) | ||||
Net current deferred tax asset
|
$ | — | $ | — | ||||
Non-current assets and liabilities:
|
||||||||
Impairment of goodwill
|
(180 | ) | — | |||||
Depreciation and amortization
|
$ | (20 | ) | $ | (23 | ) | ||
Net operating loss carryforward
|
17,256 | 18,421 | ||||||
17,056 | 18,398 | |||||||
Valuation allowance
|
(17,056 | ) | (18,398 | ) | ||||
Net non-current deferred tax asset
|
$ | — | $ | — |
For the Nine months Ended
September 30,
|
|||||
2011
|
2010
|
||||
(unaudited)
|
|||||
Federal statutory tax rate
|
(34
|
)%
|
(34
|
)%
|
|
State and local taxes
|
(6
|
)
|
(6
|
)
|
|
Valuation reserve for income taxes
|
40
|
40
|
|||
Effective tax rate
|
—
|
%
|
—
|
%
|
Nine months Ended September 30,
|
||||||||
2011
|
2010
|
|||||||
(unaudited)
|
||||||||
Cash paid:
|
|
|
||||||
Interest
|
$ | 420 | $ | 386 | ||||
Non-cash information:
|
||||||||
Liability for warrant put feature
|
$ | 120 | $ | 280 | ||||
Stock and warrants issued for debt
|
$ | 8 | $ | 72 | ||||
Reclassification of shares and warrants put liability to equity
|
$ | — | $ | 53 | ||||
(a)
|
our success in renegotiating and settling the terms of our indebtedness and other liabilities;
|
(b)
|
Our ability to raise additional financing to the extent necessary to continue to operate our business;
|
(c)
|
volatility or decline of our stock price;
|
(d)
|
potential fluctuation in quarterly results;
|
(e)
|
our failure to earn revenues or profits;
|
(f)
|
inadequate capital and barriers to raising capital or to obtaining the financing needed to implement our business plans;
|
(g)
|
changes in demand for our products and services;
|
(h)
|
rapid and significant changes in markets;
|
(i)
|
litigation with or legal claims and allegations by outside parties;
|
(j)
|
insufficient revenues to cover operating costs;
|
(k)
|
the possibility we may be unable to manage our growth;
|
(l)
|
extensive competition;
|
(m)
|
loss of members of our senior management;
|
(n)
|
our dependence on local exchange carriers;
|
(o)
|
our need to effectively integrate businesses we acquire;
|
(p)
|
risks related to acceptance, changes in, and failure and security of, technology; and
|
(q)
|
regulatory interpretations and changes.
|
·
|
Changes in the average rate per minute that we charge our customers.
|
·
|
Increasing the net number of customers utilizing our VoIP services.
|
·
|
Increasing the average revenue we generate per customer.
|
·
|
Acquisitions.
|
·
|
SS-7 based interconnection costs.
|
·
|
Other fixed costs.
|
·
|
Off-net costs.
|
·
|
SS-7 based interconnections with local carriers.
|
·
|
Efficient utilization of fixed-cost network components.
|
·
|
Strategic purchase of fixed-cost network components.
|
·
|
Fluctuations in per minute rates of off-net service providers.
|
·
|
Sales mix of our VoIP infrastructure capacity versus off-net services.
|
·
|
Acquisitions of telecommunications businesses.
|
Three Months Ended
September 30,
|
||||||||
2011
|
2010
|
|||||||
Net revenues
|
100 | % | 100 | % | ||||
Network costs
|
83 | 70 | ||||||
Gross profit
|
17 | 30 | ||||||
Operating expenses:
|
||||||||
Sales and marketing
|
4 | 5 | ||||||
General and administrative
|
19 | 12 | ||||||
Impairment of goodwill
|
9 | — | ||||||
Total operating expenses
|
32 | 17 | ||||||
Operating income (loss)
|
(15 | ) | 13 | |||||
Accounts payable write-off and gain on forgiveness of debt
|
32 | 3 | ||||||
Interest expense
|
(6 | ) | (6 | ) | ||||
Net income
|
11 | % | 10 | % |
Nine months Ended
September 30,
|
||||||||
2011
|
2010
|
|||||||
Net revenues
|
100 | % | 100 | % | ||||
Network costs
|
77 | 71 | ||||||
Gross profit
|
23 | 29 | ||||||
Operating expenses:
|
||||||||
Sales and marketing
|
4 | 6 | ||||||
General and administrative
|
17 | 14 | ||||||
Impairment of goodwill
|
3 | — | ||||||
Total operating expenses
|
24 | 20 | ||||||
Operating income
|
(1 | ) | 9 | |||||
Accounts payable write-off and gain on forgiveness of debt
|
23 | 8 | ||||||
Interest expense
|
(5 | ) | (7 | ) | ||||
Net income
|
17 | % | 10 | % |
|
· Significant underperformance relative to expected historical or projected future operating results;
|
|
· Significant changes in the manner of use of the acquired assets or the strategy for our overall business; and
|
|
· Significant negative industry or economic trends.
|
Payments Due by Period
(Dollars in Thousands)
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less Than
1 Year
|
1-3 Years
|
3-5 Years
|
More Than
5 Years
|
|||||||||||||||
Operating lease obligations
|
84 | 84 | — | — | — | |||||||||||||||
Total
|
$ | 84 | $ | 84 | $ | — | $ | — | $ | — |
Exhibit
Number
|
Description of Exhibits
|
|
31.1
|
||
31.2
|
||
32.1
|
||
32.2
|
INTERMETRO COMMUNICATIONS, INC.
|
||
Dated: November 14, 2011
|
By:
|
\s\ Charles Rice
|
Charles Rice, Chairman of the Board,
|
||
Chief Executive Officer, and President | ||
Dated: November 14, 2011
|
By:
|
\s\ David Olert
|
David Olert
|
||
Chief Financial Officer |
1.
|
I have reviewed this report on Form 10-Q of InterMetro Communications, 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 small business issuer’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.
|
5.
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants 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.
|
1.
|
I have reviewed this report on Form 10-Q of InterMetro Communications, 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 small business issuer’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.
|
5.
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants 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.
|
CONDENSED CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $) In Thousands, except Share data | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Allowance for doubtful accounts (in Dollars) | $ 1,002 | $ 850 |
Dispute reserve (in Dollars) | 503 | 1,016 |
Debt discount (in Dollars) | 65 | 82 |
Debt discount (in Dollars) | 6 | 12 |
Related party promissory notes (in Dollars) | $ 875 | $ 875 |
Preferred stock, par value (in Dollars per share) | $ 0.001 | $ 0.001 |
Preferred stock , shares authorized | 10,000,000 | 10,000,000 |
Preferred stock, shares issued | 25,000 | 25,000 |
Preferred stock, shares outstanding | 25,000 | 25,000 |
Common stock, par value (in Dollars per share) | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 150,000,000 | 150,000,000 |
Common stock, shares issued | 74,352,728 | 72,975,423 |
Common stock, shares outstanding | 74,352,728 | 72,975,423 |
Document And Entity Information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Aug. 05, 2011 | |
Document and Entity Information [Abstract] | ||
Entity Registrant Name | InterMetro Communications, Inc. | |
Document Type | 10-Q | |
Current Fiscal Year End Date | --12-31 | |
Entity Common Stock, Shares Outstanding | 74,352,728 | |
Amendment Flag | false | |
Entity Central Index Key | 0001160142 | |
Entity Current Reporting Status | Yes | |
Entity Voluntary Filers | No | |
Entity Filer Category | Smaller Reporting Company | |
Entity Well-known Seasoned Issuer | No | |
Document Period End Date | Sep. 30, 2011 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 |
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Accounts Payable and Accrued Liabilities Disclosure [Text Block] |
5
— Accrued Expenses
The
following is a summary of the Company’s accrued
expenses (in thousands):
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Stockholders' Equity Note Disclosure [Text Block] |
10 —
Stock Options and Warrants
2004 Stock
Option Plan - Effective January 1, 2004, the
Company’s Board of Directors adopted the 2004 Stock
Option Plan for Directors, Officers, and Employees of and
Consultants to InterMetro Communications, Inc. (the
“2004 Plan”). A total of 5,730,222
shares of the Company’s common stock had been reserved
for issuance under the 2004 Plan. Upon shareholder
ratification of the 2004 Plan pursuant to the definitive
Information Statement on Schedule 14C filed with the
Securities and Exchange Commission on March 6, 2007, the
Company froze any further grants of stock options under the
2004 Plan. Any shares reserved for issuance under the 2004
Plan that were not needed for outstanding options granted
under that plan were cancelled and returned to treasury
shares.
As
of September 30, 2011, the Company has granted a total of
5,714,819 stock options under the 2004 Plan to the officers,
directors, and employees, and consultants of the Company, of
which 308,077 expired in September 2007 and an additional
523,734 expired during the year ended December 31,
2008. In the three months ended March 31, 2008,
the Company issued 1,143,165 shares of common stock on the
cashless exercise of 1,232,320 stock purchase
options. The remaining 3,650,688 are fully vested
at September 30, 2011 and were originally granted with
exercise prices ranging from $0.04 to $0.97 per
share. On November 15, 2010, in order to provide
continued economic incentive to option holders, most of whose
options were issued at prices that were “out of the
money”, the Board of Directors authorized a re-pricing
of all the stock options under the 2004 Plan to $0.01, the
closing price of the Company’s common stock on that
day. The incremental compensation cost computed using the
Black-Scholes option pricing model was $14,000 which was
charged to expense on that date.
Omnibus Stock
and Incentive Plan – Effective January 19, 2007,
our Board of Directors approved the 2007 Omnibus Stock and
Incentive Plan (the “2007 Plan”) for directors,
officers, employees, and consultants. Our shareholders
ratified the 2007 Plan pursuant to the Schedule 14C
Information Statement filed with the Securities and Exchange
Commission which was declared effective on May 10,
2007. Any employee or director of, or
consultant for, us or any of the Company’s subsidiaries
or other affiliates will be eligible to receive awards under
the 2007 Plan. The Company has reserved 12,552,181 shares of
common stock for awards under the 2007 Plan. The 2007 Plan
specifically prohibits the re-pricing of any stock options
awarded under this plan.
In
November 2007, InterMetro granted 2,350,000 stock options to
purchase shares of common stock under the 2007 Plan at an
average exercise price of $0.25 per share to employees and
directors. 1,095,000 of the shares granted were immediately
vested at date of grant. In October 2008,
InterMetro granted 600,000 stock options to purchase shares
of common stock under the 2007 Plan at an average exercise
price of $0.25 per share to employees and directors. 30%
vested at date of grant with the remaining vesting 1/12 per
subsequent quarter over the succeeding 3 years expiring 5
years from date of grant. No options to purchase
shares of common stock were granted under the 2007 plan
during the nine months ended September 30,
2011. As of September 30, 2011 none of the
Company’s outstanding stock options under the 2007 Plan
have been exercised.
The
following presents a summary of activity under the
Company’s 2004 and 2007 Plans for the nine months ended
September 30, 2011 (unaudited):
The
aggregate intrinsic value in the table above represents the
total pretax intrinsic value (the difference between the
Company’s closing stock price on the last day of the
nine month period ended September 30, 2011 and the exercises
price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option
holders exercised their options on September 30, 2011. This
amount changes based on the fair market value of the
Company’s stock. As of September 30, 2011,
9,602,181 shares remain available for grant.
Additional
information with respect to the outstanding options at
September 30, 2011 is as follows:
As
of September 30, 2011, there was no unrecognized compensation
cost related to unvested share based compensation
arrangements granted under the 2004 and 2007 option
plans.
Warrants
– Historically, the Company has issued warrants to
providers of equipment financing. For a detailed
description of the warrants issued in connection with
equipment financing arrangements, see Note 4.
On April 30, 2008,
the Company negotiated a revolving line of credit,
which, as amended in September 2008, November 2008, May 2009,
January 2010, September 2010, December 2010, March 31, 2011,
June 30, 2011 and September 30, 2011 allows the Company to
borrow up to $2.4 million. Warrants to purchase
14,600,000 shares of the Company’s common stock with
exercise prices ranging from $0.01 to $0.05 per share have
been granted through September 30, 2011 in connection with
securing and amending this credit facility. In August 2011
the lender exercised a put to sell back to the Company
766,497 warrants for $100,000 resulting in an outstanding
balance of 13,833,503 warrants at September 30,
2011. See Note 11 for a detail of the warrants
issued in connection with this credit facility.
The
Company has issued warrants to its secured note holders in
connection with the execution of the loan agreements and
subsequent amendments. Warrants to purchase and
aggregate of 4,302,500 and 1,920,000 shares of the
Company’s common stock with exercise prices ranging
from $0.01 to $0.50 were outstanding with these note holders
as of September 30, 2011 and 2010,
respectively. See Note 7 for further details of
these warrants.
In
February 2011 a shareholder exercised warrants to purchase
1,232,305 shares of the Company’s common stock for
$9,858. Pursuant to a vendor settlement, in August 2011 the
Company issued a warrant to purchase 145,000 shares with a
Black-Scholes fair market value of $2,000.
|
1 - Nature of Operations and Summary of Significant Accounting Policies | 9 Months Ended | ||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block] |
1
— Nature of Operations and Summary of Significant
Accounting Policies
Company
Background - InterMetro Communications, Inc.,
(hereinafter, “InterMetro” or the
“Company”) is a Nevada corporation which, through
its wholly owned subsidiary, InterMetro Communications, Inc.
(Delaware) (hereinafter, “InterMetro Delaware”),
is engaged in the business of providing voice over Internet
Protocol (“VoIP”) communications services. The
Company owns and operates state-of-the-art VoIP switching
equipment and network facilities that are utilized to provide
traditional phone companies, wireless phone companies,
calling card companies and marketers of calling cards with
wholesale voice and data services, and voice-enabled
application services. The Company’s customers pay the
Company for minutes of utilization or bandwidth utilization
on its national voice and data network and the
Company’s calling card marketing customers pay per
calling card sold. The Company’s headquarters is
located in Simi Valley, California.
Basis of
Presentation - The accompanying unaudited
interim condensed consolidated financial statements and
information have been prepared in accordance with accounting
principles generally accepted in the United States and in
accordance with the instructions for Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of
the information and disclosures required by accounting
principles generally accepted in the United States for
complete financial statements. In the opinion of management,
these condensed consolidated financial statements contain all
normal and recurring adjustments considered necessary to
present fairly the financial position, results of operations
and cash flows for the periods presented. The results for the
three and nine months period ended September 30, 2011 are not
necessarily indicative of the results to be expected for the
full year. These condensed consolidated statements should be
read in conjunction with the Company’s audited
consolidated financial statements for the year ended December
31, 2010 which are included in Form 10-K filed by the Company
on March 30, 2011.
Going
Concern - The accompanying consolidated financial
statements have been prepared assuming the Company will
continue as a going concern, which contemplates the
realization of assets and settlement of obligations in the
normal course of business. The Company had a working capital
deficit of $13,259,000 and had a total stockholders’
deficit of $13,860,000 as of September 30,
2011. Though the Company was profitable for the
nine months ended September 30, 2011 and the year ended
December 31, 2010, which included non-cash gains of $3.9
million and $2.3 million, respectively, it had net losses in
previous years and will have to generate and sustain
significant gross margin to maintain profitability. The
Company’s ability to continue as a going concern will
require additional financings if its ability to generate cash
from operations does not fund required payments on its debt
obligations. Obligations to the Company’s
debt holders include interest and principal payments to its
secured note holders (see Note 7), principal and interest due
on its revolving line of credit (see Note 11) and settlement
payments due (see Note 6). The loans under the revolving line
of credit are secured by substantially all of the
Company’s assets. The Company has other significant
matters of importance, including contingencies such as vendor
disputes and lawsuits discussed in Note 12 that could have
material adverse consequences to the Company such as
cessation of its operations.
The
Company anticipates it will not have sufficient cash flows to
fund its operations through fiscal 2011, or earlier,
depending on the results of the negotiations with Moriah
Capital, L.P. (“Moriah”) regarding the
Company’s indebtedness to Moriah discussed in Note 11.
If the Company were to require additional financings in order
to fund ongoing operations there can be no assurance that it
will be successful in completing the required financings
which could ultimately cause the Company to cease its
operations. The consolidated financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might
result should the Company be unable to continue as a going
concern. There are many claims and obligations
that could ultimately cause the Company to cease its
operations. The report from the Company’s
independent registered public accounting firm relating to the
year ended December 31, 2010 states that there is substantial
doubt about the Company’s ability to continue as a
going concern.
As
discussed in Note 11, the Company entered into agreements
with Moriah under which it could borrow up to
$2,400,000. At September 30, 2011, the Company had
borrowed $2,000,000. The availability of loan amounts under
the agreements expires on November 30, 2011 and all amounts
will be due at that time.
Management
believes that the losses in past years were primarily
attributable to costs related to building out and supporting
a telecommunications infrastructure, and the requirement for
continued expansion of the customer base, in order for the
Company to become profitable. This resulted in the Company
taking on debt and delaying payment to certain
vendors. The Company may be required to obtain
other financing during the next twelve months or thereafter
as a result of future business developments, including any
acquisitions of business assets or any shortfall of cash
flows generated by future operations in meeting the
Company’s ongoing cash requirements. Such financing
alternatives could include selling additional equity or debt
securities, obtaining long or short-term credit facilities,
or selling operating assets. Management continues to work
with its historical vendors in order to secure the continued
extension of credit. Management believes that cash flows from
operations and additional debt conversions are integral to
management’s plan to retire past due obligations and be
positioned for growth. No assurance can be given,
however, that the Company will be successful in restructuring
its debt on terms favorable to the Company or at all. Should
the Company be unsuccessful in this restructuring, material
adverse consequences to the Company could occur such as
cessation of its operations. Any sale of
additional common stock or convertible equity or debt
securities would result in additional dilution to the
Company’s stockholders.
Principles of
Consolidation - The consolidated financial statements
include the accounts of InterMetro, InterMetro Delaware,
and InterMetro Delaware’s wholly owned
subsidiary, Advanced Tel, Inc. (“ATI”). All
intercompany balances and transactions have been eliminated
in consolidation.
Use of
Estimates - In the normal course of preparing
financial statements in conformity with U.S. generally
accepted accounting principles, management is required to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Revenue
Recognition - VoIP services are recognized as revenue
when services are provided primarily based on usage. Revenues
derived from sales of calling cards through retail
distribution partners are deferred upon sale of the cards.
These deferred revenues are recognized as revenue generally
at the time card minutes are expended. The Company has
revenue sharing agreements based on successful
collections. The company recognizes revenue from
these customers at time of invoicing based on the history of
collections with such customers. The Company recognizes
revenue in the period that services are delivered and when
the following criteria have been met: persuasive evidence of
an arrangement exists, the fees are fixed and determinable,
no significant Company obligations remain and collection is
reasonably assured. Deferred revenue consists of fees
received or billed in advance of the delivery of the services
or services performed in which collection is not reasonably
assured. This revenue is recognized when the services are
provided and no significant Company obligations remain.
Management of the Company assesses the likelihood of
collection based on a number of factors, including past
transaction history with the customer and the credit
worthiness of the customer. Generally, management of the
Company does not request collateral from customers. If
management of the Company determines that collection of
revenues are not reasonably assured, amounts are deferred and
recognized as revenue at the time collection becomes
reasonably assured, which is generally upon receipt of
cash.
Accounts
Receivable - Accounts receivable consist of trade
receivables arising in the normal course of business. The
Company does not charge interest on its trade receivables.
The allowance for doubtful accounts is the Company’s
best estimate of the amount of probable credit losses in the
Company’s existing accounts receivable. The Company
reviews its allowance for doubtful accounts monthly. The
Company determines the allowance based upon historical
write-off experience, payment history and by reviewing
significant past due balances for individual collectibility.
If estimated allowances for uncollectible accounts
subsequently prove insufficient, additional allowance may be
required. Bad debt expense amounted to $110,000
and $152,000, and $21,000 and $63,000 for the three and nine
months ended September 30, 2011 and 2010,
respectively.
Network
Costs - The Company’s network costs consist of
telecommunication costs, leasing collocation facilities and
certain build-outs, and depreciation of equipment related to
the Company’s network infrastructure. It is
not unusual in the Company’s industry to occasionally
have disagreements with vendors relating to the amounts
billed for services provided between the recipient of those
services and the vendor. As a result, the Company currently
has disputes with vendors that it believes did not bill
certain network charges correctly. The Company’s
policy is to include amounts that it intends to dispute or
that it has disputed in a reserve account as an offset to
accounts payable if management believes that the facts and
circumstances related to the dispute provide probable support
that the dispute will be resolved in the Company’s
favor.
Depreciation and
Amortization - Depreciation and amortization of
property and equipment is computed using the straight-line
method based on the following estimated useful lives:
Maintenance
and repairs are charged to expense as incurred; significant
betterments are capitalized.
Impairment of
Long-Lived Assets - The Company assesses impairment of
its other long-lived assets in accordance with the provisions
of Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 360,
“Property, Plant and Equipment”. An
impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors considered by the Company
include:
When
management of the Company determines that the carrying value
of a long-lived asset may not be recoverable based upon the
existence of one or more of the above indicators of
impairment, an estimate is made of the future undiscounted
cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future
undiscounted cash flows and eventual disposition is less than
the carrying amount of the asset, an impairment loss is
recognized in the amount by which the carrying amount of the
asset exceeds the fair value of the asset, based on the fair
market value if available, or discounted cash flows if not.
To date, the Company has not had an impairment of long-lived
assets and is not aware of the existence of any indicators of
impairment.
Goodwill and
Intangible Assets - The Company records goodwill when
consideration paid in a business acquisition exceeds the fair
value of the net tangible assets and the identified
intangible assets acquired. The Company accounts for goodwill
and intangible assets in accordance with FASB ASC 350
“Goodwill and Other”. FASB ASC 350 requires that
goodwill and intangible assets with indefinite useful lives
not be amortized, but instead be tested for impairment at
least annually or whenever changes in circumstances indicate
that the carrying value of the goodwill may not be
recoverable. FASB ASC 350 also requires the Company to
amortize intangible assets over their respective finite lives
up to their estimated residual values. At
September 30, 2011, using the present value calculation of a
net cash flow analysis, the Company has determined that due
to the decline in revenue and operating income of ATI in
2011, the carrying value of the Company’s goodwill was
not fully recoverable and has taken a charge for the
impairment of goodwill in the amount of $450,000 (see Note
2).
Vendor
Disputes - The
Company’s policy is to include amounts that it intends
to dispute or that it has disputed in a reserve account as an
offset to accounts payable if management believes that the
facts and circumstances related to the dispute provide
probable support that the dispute will be resolved in the
Company’s favor.
Stock-Based
Compensation - The Company has applied FASB ASC 718
“Compensation – Stock
Compensation”. For grants to employees
under its 2004 plan and 2007 plan, the Company estimates the
fair value of each option award on the date of grant using
the Black-Scholes option-pricing model. Expected volatility
is based on the historical volatility of a peer group of
publicly traded entities. The expected term of the
options granted is derived from the average midpoint between
vesting and the contractual term, as described in the
SEC’s Staff Accounting Bulletin No. 107,
“Share-Based Payment.” The risk-free
rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. The
Company did not grant any options during the nine months
ended September 30, 2011 and 2010.
Concentration of
Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist
primarily of cash, accounts receivable, accounts payable,
accrued expenses, and short term debt. The Company maintains
its cash with a major financial institution located in the
United States. The balances are insured by the Federal
Deposit Insurance Corporation up to $250,000. Periodically
throughout the year the Company maintained balances in excess
of federally insured limits. The Company encounters a certain
amount of risk as a result of a concentration of revenue from
a few significant customers and services provided from
vendors. Credit is extended to customers based on an
evaluation of their financial condition. The Company
generally does not require collateral or other security to
support accounts receivable. The Company performs ongoing
credit evaluations of its customers and records an allowance
for potential bad debts based on available information. To
date, such losses, if any, have been within
management’s expectations.
The
Company had three customers which accounted for 56% and two
customers which accounted for 46% of net revenue for the nine
months ended September 30, 2011 and 2010,
respectively.
The
Company had accounts receivable balances from two and three
customers that accounted for 42% and 70% of total accounts
receivable at September 30, 2011 and December 31, 2010,
respectively.
Income
Taxes - The Company accounts for income taxes in
accordance with FASB ASC 740, “Income Taxes,”
which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events
that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences
between the financial statement and tax basis of assets and
liabilities using presently enacted tax rates in effect.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be
realized.
Segment and
Geographic Information - The Company operates in one
principal business segment primarily in the United States.
All of the operating results and identified assets are
located in the United States.
Basic and
Diluted Net Income (Loss) per Common Share - Basic net
income (loss) per common share excludes dilution for
potential common stock issuances and is computed by dividing
net income (loss) by the weighted-average number of common
shares outstanding for the period. Diluted net income (loss)
per share includes dilution for potential common stock
issuances when the warrants, options or common stock
conversion rights underlying those potential issuances are
below the then fair market value of the Company’s
common stock and have intrinsic value. A total of
13,974,093 and 13,688,908 potential common stock issuances
were included in the calculation of diluted net income per
share for the three and nine months ended September 30, 2011,
respectively. As none of the Company’s
potential stock issuances had intrinsic value at September
30, 2010, they had no effect on the calculation of diluted
net income per common share for the three and nine months
ended September 30, 2010.
Recent
Accounting Pronouncements - In May
2011, the FASB issued ASU 20 11-04, "Fair Value Measurement
(Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and
International Financial Reporting Standards ("IFRSs")." Under
ASU 2011-04, the guidance amends certain accounting and
disclosure requirements related to fair value measurements to
ensure that fair value has the same meaning in U.S. GAAP and
in IFRSs and that their respective fair value measurement and
disclosure requirements are the same. ASU 2011-04
is effective for public entities during interim and annual
periods beginning after December 15, 2011. Early
adoption by public entities is not permitted. The Company
does not believe that the adoption of ASU 20 11-04 will have
a material impact on the Company's consolidated results of
operation and financial condition.
In
June 2011, the FASB issued ASU No. 20 11-05, "Comprehensive
Income (Topic 220): Presentation of Comprehensive Income,"
("ASU 2011 -05") which ends current comprehensive income
guidance. This accounting update eliminates the option to
present the components of other comprehensive income as part
of the statement of shareholders’ equity. Instead, the
Company must report comprehensive income in either a single
continuous statement of comprehensive income which contains
two sections, net income and other comprehensive income, or
in two separate but consecutive statements. ASU 2011-05 will
be effective for public companies during the interim and
annual periods beginning after Dec. 15, 2011 with early
adoption permitted. The Company does not believe that the
adoption of ASU 2011-05 will have a material impact on the
Company's consolidated results of operation and financial
condition.
In
September 20 II , the FASB issued ASU No. 20 11 -08,
"Intangibles - Goodwill and Other (Topic 350): Testing
Goodwill for Impairment," ("ASU 2011-08") which simplifies
how entities test goodwill for impairment. This accounting
update permits an entity to first assess qualitative factors
to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount as
a basis for determining whether it is necessary to perform
the two-step good will impairment test described in Topic
350. The more-likely-than-not threshold is defined as having
a likelihood of more than 50 percent. ASU 2011-08 will be
effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011
with early adoption permitted. The Company does not believe
that the adoption of ASU 2011-08 will have a material impact
on the Company's consolidated results of operation and
financial condition.
|
7 - Secured Promissory Notes and Advances | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Debt Disclosure [Text Block] |
7
— Secured Promissory Notes and Advances
2008 Bridge Loan
- In November and December 2007, the Company received
$600,000 in advance payments, pursuant to the sale of secured
notes with individual investors, including $330,000 from
related parties. In 2008 the Company received an
additional $1,320,000, including $170,000 from related
parties, pursuant to the sale of additional secured notes
with individual investors, for a total of
$1,920,000. The secured notes were issued on
January 16, 2008 and were scheduled to mature 13 to 18 months
after issuance (“2008 Bridge
Loan”). The 2008 Bridge Loan was extended in
2009 to July 15, 2010, and then modified on October 5, 2010
(“2008 Bridge Loan Modification”) to
be paid in quarterly installments, of interest, fees and
principal, commencing March 31, 2011 and concluding on July
15, 2012. A partial interest payment of $42,600 was made on
March 31, 2011 and the June 30, 2011 and September 30, 2011
payments on principal were not made. The 2008 Bridge Loan
bears interest at a rate of 13% per annum and contain an
origination and documentation fee equal to 3% and 2.5%,
respectively, of the original principal amount of the note.
The 2008 Bridge Loan is collateralized by substantially all
of the assets of the Company. Since inception, the
Company has incurred $1,014,000 in interest and fees,
including $74,000 and $209,000 during the three and nine
months ended September 30, 2011, respectively.
In
connection with the notes, the Company originally issued
two common stock purchase warrants for every dollar received
or 3.84 million common stock purchase warrants with an
exercise price of $1.00, (the “Initial Warrants”
and the “Additional Warrants”, collectively the
“2008 Bridge Origination
Warrants”). These 2008 Bridge Origination
Warrants contained terms which resulted in 3.84 million
shares of common stock being issued in 2009, in accordance
with those terms, to extinguish the 2008 Bridge Origination
Warrants. In exchange for the first extension of
the due date from July 15, 2009 to July 15, 2010 the holder
received a common stock purchase warrant (“Extension
Warrants”) for each dollar of principal with an
exercise price of $0.50 per share that were set to expire on
July 14, 2016. The 2008 Bridge Loan Modification
extends the term of Extension Warrants to July 14, 2018. In
exchange for the 2008 Bridge Loan Modification the holder
received a common stock purchase warrant (“2010
Extension Warrants”) for each dollar of principal with
an exercise price of $0.01 per share that will expire on
October 5, 2017. The value associated with the
2010 Extension Warrants was $11,000 and was recorded as an
offset to the principal balance of the secured notes and is
being amortized into interest expenses over the term of the
notes using the effective interest method. The
warrants were valued using the Black-Scholes formula.
The
“Initial Warrants” also contained a put feature
which gave the holder the option to put the warrant back to
the Company for $0.15 per share and had been carried as a
liability in the Company’s financial statements. The
put feature was eliminated pursuant to the 2008 Bridge Loan
Modification and the $288,000 related liability was
reclassified to equity.
2009 Bridge
Loan- In November and December 2008, two related party
secured note holders advanced an additional $310,000 and in
2009 there were advances of an additional $152,500 from
existing note holders, including $65,000 from related
parties, paying 13% interest per annum. On June
12, 2009, the Company entered into a Short Term Loan and
Security Agreement (“2009 Bridge Loan”) with the
advance lenders. Per the 2009 Bridge Loan, the
maturity date of the loans was extended from June 30, 2009 to
February 28, 2010, and then subsequently modified on October
5, 2010 (“2009 Bridge Loan
Modification”) to be paid in quarterly
installments, of interest, fees and principal, commencing
November 30, 2010 and concluding February 28,
2012. On November 30, 2010 the note holders waived
their initial installment payment for 60 days and received
their first payments as of January 31, 2011. A partial
interest payment of $59,300 has been made and the May 31,
2011 and August 31, 2011 payments on principal were not
made. The 2009 Bridge Loan accrues interest at 13%
per annum and contain an origination and documentation fee
equal to 3% and 2.5%, respectively, of the original principal
amount of the note. The holder of each note
has the right, at any time and from time to time, to convert
the entire principal plus accrued interest and origination
and documentation fee, or any portion thereof, into shares of
common stock by dividing the conversion amount by
$0.25. The 2009 Bridge Loan is collateralized by
substantially all of the assets of the
Company. Since inception, the Company has
incurred $196,000 in interest and fees, including $18,000 and
$51,000 during the three and nine months ended September 30,
2011, respectively.
As
was the case for the 2008 Bridge Loan warrants, the
provisions of the 2009 Bridge Loan warrants included terms
that resulted in the company providing shares of common stock
in lieu of exercise under certain conditions, which
conditions occurred on June 12, 2009 and resulted in the
issuance of 1,387,500 shares of common stock to extinguish
the 2009 Bridge Original Warrants. In exchange for
the 2009 Bridge Loan Modification the holder received a
common stock purchase warrant (“2010 Extension
Warrants”) for each dollar of principal with an
exercise price of $0.01 per share that expire on October 5,
2017. The value associated with the 2010 Extension
Warrants was $3,000 and was recorded as an offset to the
principal balance of the secured notes and is being amortized
into interest expenses over the term of the notes using the
effective interest method. The warrants were
valued using the Black-Scholes formula.
The
total expense recorded by the Company for amortization of the
debt discount related to all warrants was $2,000 and $1,000
for the three months ended September 30, 2011 and 2010,
respectively and $6,000 and $5,000 for the nine months ended
September 30, 2011 and 2010, respectively. The net
amount of the notes was $2,378,000 and $2,371,000 as of
September 30, 2011 and December 31, 2010,
respectively. The Company did not make certain
scheduled interest and principal payments on both the 2008
and 2009 Bridge Loans during the three and nine months ended
September 30, 2011. It has not received a
notice of cure or default from any of the note holders in
response to the non-payments.
|
12 - Commitments and Contingencies | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Commitments and Contingencies Disclosure [Text Block] |
12
— Commitments and Contingencies
Facility
Lease – The Company leases its facility in Simi
Valley, California under a non-cancelable operating lease
that expires on March 31, 2012 at an annual expense of
approximately $168,000. Rent expense for the
Company’s facilities for the nine months ended
September 30, 2011 and 2010 was $144,000 and $165,000,
respectively.
Vendor
Agreements – The Company has entered into
agreements with its network partners and other vendors for
various services which are, in general, for periods of twelve
months and provide for month to month renewal periods.
Vendor Disputes
– It is not unusual in the Company’s
industry to occasionally have disagreements with vendors
relating to the amounts billed for services provided between
the recipient of those services and the vendor, or in some
cases, to receive invoices from companies that the Company
does not consider a vendor. The Company currently has
disputes with vendors and other companies that it believes
did not bill certain charges correctly or should not have
billed any charges at all. The Company’s policy is to
include amounts that it intends to dispute or that it has
disputed in a reserve account as an offset to accounts
payable if management believes that the facts and
circumstances related to the dispute provide probable support
that the dispute will be resolved in the Company’s
favor. As of September 30, 2011, there were
approximately $503,000 of disputed payables that were
recorded in a reserve account as an offset to accounts
payable at September 30, 2011. The Company is in discussion
with the significant vendors, or companies that have sent
invoices, regarding these charges and it may take additional
action as deemed necessary against these vendors in the
future as part of the dispute resolution process. Management
does not believe that any settlements would have a material
adverse effect on the Company’s financial position or
results of operations. Management reviews available
information and determines the need for recording an estimate
of the potential exposure when the amount is probable,
reasonable and estimable based on FASB ASC 450
“Contingencies.”
A
Local Exchange Carrier – In April 2008, the Company
entered into a settlement agreement with a significant
provider of network services to the Company
(“Vendor”). The settlement agreement
included a payment arrangement for past due amounts of
approximately $3.0 million with full repayment due prior to
December 31, 2008. The settlement agreement also
provided a separate credit to the Company of approximately
$1.4 million for past disputes. The Company
received a notice of default, dated August 12, 2009,
threatening, among other things, a rescission of the $1.4
million credit. Effective March 31, 2011, the
Company entered into a settlement agreement (“the
Agreement”) with the Vendor which superseded and
replaced the April 2008 settlement between the parties.
The Agreement resolves all outstanding disputes between the
parties and includes definitive resolution of the credits
previously due to the Company, unconditionally. As a
result of the settlement the Company recorded a non-recurring
gain during the nine months ended September 30,
2011. The settlement contains a long-term payment
plan and is subject to timely payment by the
Company.
The
Company has periodically received “credit hold”
and disconnect notices from major telecommunications
carriers. Suspension of service by any major
carrier could have a material adverse effect on the
Company’s operations and financial
condition. These disconnect notices were generated
primarily due to the non-payment of charges claimed by each
carrier, including some amounts disputed by the
Company. Service has been maintained with each
carrier, although further notices are possible if the Company
is unable to make timely payments to its counterparties or to
resolve the disputed amounts. Such payments would
be in addition to current charges generated with such
carriers.
The
Company has received several notices from state and local
regulatory and taxing authorities for its possible failure to
file certain documents pertaining to the Company’s
wholly-owned subsidiary ATI. The amounts at issue
with these potential filings are not material.
Legal
Proceedings
A
Network Service Provider – On October 12, 2010,
the Company was served a complaint filed by a network service
provider (“NSP”) against the Company asserting
various causes of action. The NSP claimed that the
Company owed various charges totaling $505,583. The Company
denied that it owed this amount. The Company and NSP settled
the complaint on August 12, 2011 for $100,000, subject to
timely payments through January 2013.
On
March 31, 2011, the Company was notified that a former
employee and the former president of Advanced Tel, Inc,
(“ATI”) the Company’s wholly owned
subsidiary, had filed suit against the Company asserting,
among other things, that the Company owed said former
employee certain amounts related to the agreement entered
into by the parties (“Purchase Agreement”) when
the Company purchased ATI in 2006. The Company
denies that it owes these amounts and is vigorously asserting
its position.
Universal
Service Administrative Company – The Universal Service
Administrative Company (USAC) administers the Universal
Service Fund (USF). In 2009 and 2010 the Company did
not make all of the payments claimed by the USAC in a timely
manner and USAC transferred these unpaid amounts to the
Federal Communications Commission (FCC) for collection.
The FCC has transferred some of these unpaid amounts to the
Department of the Treasury which worked with the Company to
establish long term payment plans. Should
any of the remaining unpaid amounts with the FCC transfer
from the FCC to Treasury, additional fees, surcharges and
penalties will be added to the amount due. As of
September 30, 2011, the Company has recorded an aggregate
$1.3 million in connection with the USF. The
Company continues to work with the FCC and the Department of
the Treasury to resolve these amounts in long term payment
programs. Failure to finalize any significant
proposed payment plan would likely have a material adverse
effect on the Company.
Consulting
Agreement – Commencing in December 2006, the
Company entered into a three-year consulting agreement with
an affiliate of a stockholder and debt holder pursuant to
which the Company received services related to strategic
planning, investor relations, acquisitions, and corporate
governance. The Company was obligated to pay
$13,000 a month for these services, subject to annual
increases. In June 2008, the parties orally agreed
to cancel the agreement and any future
obligation. Included in accounts payable is
$182,000 at September 30, 2011 and December 31, 2010 for
unpaid amounts.
|
8 - Long-Term Debt | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term Debt [Text Block] |
8
— Long-Term Debt
The
Company’s long-term debt consists of the
following:
A
summary of future maturities of long-term debt for the twelve
months ending September 30th are as follows:
|
6 - Vendor Settlements, Contingent Gains and Gain of Forgiveness of Debt | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Other Income and Other Expense Disclosure [Text Block] |
6
— Vendor Settlements, Contingent Gains and Gain of
Forgiveness of Debt
During
the nine months ended September 30, 2011, the Company entered
into numerous cash payment plan agreements with vendors for
amounts less than the liability recorded in accounts payable
and accrued expenses and, in some cases, in exchange for the
issuance of shares of the Company’s common
stock. As a result of these agreements, the
Company recorded a gain on forgiveness of debt of $1,087,000
and $3,009,000 for the three and nine months ended September
30, 2011, respectively. In addition, the Company
wrote-off certain accounts payable for Competitive Local
Exchange Carriers (“CLEC”) that resulted in a
gain of $527,000 and $865,000 for the same periods, and is
included in accounts payable write-off. The CLEC
accounts payable were written off based on a two year statute
of limitations on such accounts payable balances. In the
three and nine months ended September 30, 2011, these
transactions reduced accounts payable by $958,000 and
$5,155,000,respectively, and accrued expenses by $0 and
$93,000, respectively.
At
September 30, 2011, the balance in vendor settlements payable
was $3,396,000 including $1,164,000 of deferred gains subject
to timely payments. The settlements will be paid
in periods ranging from one to thirty months with an
aggregate monthly payment of approximately
$81,000. The Company will continue to
approach vendors to enter into similar agreements as well as
continuing to write-off certain CLEC accounts payable under
statute of limitations.
During
the nine months ended September 30, 2010, the Company entered
into numerous payment plan agreements with vendors for
amounts less than the liability recorded in accounts payable
and accrued expenses and, in some cases, in exchange for the
issuance of shares of the Company’s common
stock. As a result of these agreements, the
Company recorded a gain on forgiveness of debt
of $261,000 and $907,000 in the three and nine
months period ended September 30, 2010,
respectively. In addition, the Company wrote-off
certain accounts payable for Competitive Local Exchange
Carriers (“CLEC”) that resulted in a gain of $0
and $685,000 for the same periods. These
transactions reduced accrued expenses by $1,535,000 and
reduced accounts payable by $1,863,000. These transactions
also resulted in vendor settlements payable of $2,152,000 at
September 30, 2010 including $1,064,000 of gain contingency
based on timely payments and issuance of 1,610,069 shares of
common stock valued at $30,000.
|
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited) (USD $) In Thousands, except Share data | Preferred Stock [Member] | Common Stock [Member]
USD ($) | Additional Paid-in Capital [Member]
USD ($) | Retained Earnings [Member]
USD ($) | Total
USD ($) |
---|---|---|---|---|---|
Balance at Dec. 31, 2010 | $ 73 | $ 29,145 | $ (46,054) | $ (16,836) | |
Balance, shares (in Shares) at Dec. 31, 2010 | 25,000 | 72,975,423 | |||
Warrants exercised | 1 | 9 | 10 | ||
Warrants exercised (in Shares) | 1,232,305 | ||||
Stock issued for debt | 6 | 6 | |||
Stock issued for debt (in Shares) | 145,000 | ||||
Warrants issued for forgiveness of debt | 2 | 2 | |||
Warrants issued in connection with line of credit financing | 45 | 45 | |||
Net income for the nine months ended September 30, 2011 | 2,913 | 2,913 | |||
Balance at Sep. 30, 2011 | $ 74 | $ 29,207 | $ (43,141) | $ (13,860) | |
Balance, shares (in Shares) at Sep. 30, 2011 | 25,000 | 74,352,728 |
2 - Acquisition and Intangible Assets | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Schedule of Goodwill [Table Text Block] |
2
— Acquisition and Intangible Assets
In
March 2006, the Company acquired all of the outstanding
stock of Advanced Tel, Inc. (“ATI”), a switchless
reseller of wholesale long-distance services, for a
combination of shares of its common stock and cash. The
Company acquired ATI to increase its customer base, to add
minutes and revenue to its network and to access new sales
channels. The initial portion of the purchase price included
308,079 shares of the Company’s common stock, a payable
of $250,000 to be paid over the six-month period following
the closing and a $150,000 two-year unsecured promissory note
in an amount tied to ATI’s working capital of
$150,000. These amounts were payable to the former
selling shareholder of ATI who was appointed President of ATI
at the acquisition closing date. As of September 30, 2011 and
December 31, 2010, $75,000 remained unpaid to the former
selling shareholder. The fair value of the shares issued was
based on the guaranteed price of $4.87 per
share. The number of shares of common stock
consideration paid to the selling shareholder of ATI was
subject to an adjustment (or the payment of additional cash
in lieu thereof at the option of the Company) if the trading
price of the Company’s common stock did not reach a
minimum price of $4.87 per share during the two years
following the closing date. The selling
shareholder of ATI was also entitled to contingent
consideration of common shares and cash during the two
succeeding years from the acquisition date upon meeting
certain performance targets tied to revenue and
profitability. In December 2008, the Company
issued 4,089,930 shares of common stock, with a fair value of
$611,043, as full payment of the contingent
consideration. During the third quarter of 2009,
the President of ATI departed from the Company. On
March 31, 2011, the former President of ATI filed a law suit
against the Company (see Note 12 to the Consolidated
Financial Statements).
At
September 30, 2011, using the present value calculation of a
net cash flow analysis, the Company has determined that due
to the decline in revenue and operating income of ATI in
2011, the carrying value of the Company’s goodwill was
not fully recoverable and has taken a charge for the
impairment of goodwill in the amount of $450,000. The Company
has developed an integration plan for utilizing the
Company’s network to carry the ATI customer traffic.
The execution of this plan is expected to result in a cost
structure that will make the ATI more competitive and improve
gross margin through the cost savings.
|
3 - Prepayments and Other Current Assets | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Table Text Block] |
3
— Prepayments and Other Current Assets
The
following is a summary of the Company’s other current
assets (in thousands):
|
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