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| XFN > SEC Filings for XFN > Form 10-K on 1-Apr-2009 | All Recent SEC Filings |
1-Apr-2009
Annual Report
The information set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") contains certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995, including,
among others (i) expected changes in the Company's revenues and profitability,
(ii) prospective business opportunities and (iii) the Company's strategy for
financing its business. Forward-looking statements are statements other than
historical information or statements of current condition. Some forward-looking
statements may be identified by use of terms such as "believes", "anticipates",
"intends" or "expects". These forward-looking statements relate to the plans,
objectives and expectations of the Company for future operations. Although the
Company believes that its expectations with respect to the forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, in light of the risks and
uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this Annual Report should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
You should read the following discussion and analysis in conjunction with the Financial Statements and Notes attached hereto, and the other financial data appearing elsewhere in this Annual Report.
The Company's revenues and results of operations could differ materially from those projected in the forward-looking statements as a result of numerous factors, including, but not limited to, the following: the risk of significant natural disaster, the inability of the Company to insure against certain risks, inflationary and deflationary conditions and cycles, currency exchange rates, changing government regulations domestically and internationally affecting our products and businesses.
OVERVIEW
Xfone, Inc. was incorporated in Nevada, U.S.A. in September 2000. We are a holding and managing company providing international voice, video and data communications services with operations in the United States, the United Kingdom and Israel offering a wide range of services, including: local, long distance and international telephony services; video; prepaid and postpaid calling cards; cellular services; Internet services; messaging services (Email/Fax Broadcast, Email2Fax and Cyber-Number); and reselling opportunities. We serve customers worldwide.
In February 2007, we moved our principal executive offices from the UK to Flowood, Mississippi, and shared executive office space with our wholly owned U.S. subsidiary, Xfone USA, Inc. In May 2008 the headquarters of Xfone USA and our principal executive offices recently moved from the Flowood, Mississippi location to Lubbock, Texas, to the existing headquarters of NTS Communications, Inc., which we acquired in February 2008.
On October 4, 2000, we acquired Swiftnet Limited which had a business plan to provide comprehensive range of telecommunication services and products, integrated through one website. Swiftnet was incorporated in 1990 under the laws of the United Kingdom and is headquartered in London, England. Until 1999, the main revenues for Swiftnet were derived from messaging and fax broadcast services. During 2000, Swiftnet shifted its business focus to voice services and now offers a comprehensive range of calling services to resellers and end customers. Utilizing automation and proprietary software packages, Swiftnet's strategy is to grow without the need for heavy investments and with lower expenses for operations and registration of new customers.
On April 15, 2004, we established an Israel based subsidiary, Xfone Communication Ltd., which changed its name to Xfone 018 Ltd. in March 2005. Headquartered in Petach Tikva, Israel, Xfone 018 Ltd. is a telecommunications service provider that owns and operates its own facilities-based telecommunications switching system. Xfone 018 provides residential and business customers with high quality international and local carrier services. We have been providing international telecom services in Israel through Xfone 018 since mid-December 2004. In July 2008, we launched an experimental deployment of our local telecom services, and introduced our Internet access services in December 2008.
On August 18, 2005, we entered into an Agreement and Plan of Merger to acquire I-55 Internet Services, Inc. ("I-55 Internet Services"), a Louisiana corporation (the "I-55 Internet Merger Agreement"). On September 13, 2005, we filed a Form 8-K discussing the impact of Hurricane Katrina on the transaction contemplated by the I-55 Internet Merger Agreement. On October 10, 2005, we entered into a First Amendment to the Merger Agreement, by and among I-55 Internet Services, Xfone, Xfone USA, our wholly-owned United States subsidiary, and Hunter McAllister and Brian Acosta, key employees of I-55 Internet Services, in order to induce Xfone and Xfone USA not to terminate the I-55 Internet Merger Agreement due to the material adverse effect that Hurricane Katrina has had on the assets and business of I-55 Internet Services. As part of the amendment and since, at that time, the merger of I-55 Internet Services with and into Xfone USA had not been consummated yet, in the interim, the parties agreed and entered into on October 11, 2005 a Management Agreement (the "I-55 Internet Management Agreement") that provided that I-55 Internet Services hired and appointed Xfone USA as manager to be responsible for the operation and management of all of I-55 Internet Services business operations, including among other things personnel, accounting, contracts, policies and budget. In consideration of the management services provided under the I-55 Internet Management Agreement, I-55 Internet Services assigned and transferred to Xfone USA all revenues generated and expenses incurred in the ordinary course of business during the term of the I-55 Internet Management Agreement. The term of the I-55 Internet Management Agreement commenced on October 11, 2005 and continued until the consummation of the merger on March 31, 2006.
In conjunction with the consummation of the merger and in exchange for all of
the capital stock of I-55 Internet Services, we issued a total of 789,863 shares
of our Common Stock valued at $2,380,178 and 603,939 warrants exercisable for a
period of five years into shares of our Common Stock, with an exercise price of
$3.31, valued based on the Black Scholes option-pricing model (the "Xfone Stock
and Warrant Consideration"). A portion of the Xfone Stock and Warrant
Consideration issued at closing was placed in an escrow account, to be held
pending certain adjustments. The Company subsequently made the following two
claims against such escrow account: Claim #1: The Company made a claim on March
27, 2007 to adjust the total consideration based upon the changes in customer
billings as determined pursuant to a formula set forth in the First Amendment to
the Merger Agreement (the "Customer Billing Adjustment Amount"), which the
Company had determined was $247,965.57. Claim #2: The Company determined an
undisclosed liability, in accordance with Article 6.03 of the I-55 Internet
Services, Inc. Merger Agreement (as amended), in the amount of $147,550 and on
November 28, 2006, sent a claim for this amount. The Shareholder Representatives
of I-55 Internet Services disputed the amounts in both claims submitted and so
the parties entered into negotiations on May 2, 2007, where they agreed to
reduce the amount claimed in Claim #1 by $104,948.46, which represents
adjustments made to the 90-Day column, Trade Accounts, and certain accounts that
had previously been listed as having 90-Day balances but were subsequently
confirmed as not having 90-Day balances, and by the final amount billed to EBI
Comm, Inc. ("EBI") in 2005 prior to the assets of EBI being purchased by Xfone
USA, and agreed to reduce the original Loss amount claimed in Claim #2 by
$6,800.00, representing additional services purchased with Zipa, Inc. under the
direction of Xfone USA during the Management Agreement period from October 2005
through March 2006. Upon settlement of the claims, two Joint Deposition Notices
for the escrow agent, Trustmark National Bank, were delivered to the Shareholder
Representatives of I-55 Internet Services for execution, however, a Shareholder
Representative refused to execute the notices pending approval of the claims by
the shareholders of I-55 Internet Services. On June 7, 2007, the shareholders
met and rejected the figure agreed upon with respect to Claim #1 and accepted
the figure agreed upon with respect to Claim #2. On or about May 12, 2008,
after further negotiations, Xfone USA and I-55 agreed to value Claim #1 at
$143,017.11 and Claim #2 at $140,750.00 for a total agreed loss of $283,767.11.
This resulted in the Company's receipt of 62,850 shares of Xfone Common Stock
and 44,470 Xfone Stock Warrants from the Escrow Account in satisfaction of these
claims (the "Returned Xfone Stock and Warrant Consideration") and the balance of
the Xfone Common Stock and Xfone Stock Warrants remaining in the Escrow Account
was distributed to the selling I-55 Internet shareholders and the escrow account
was closed out on June 16, 2008. The components of the Returned Xfone Stock and
Warrant Consideration were cancelled by the Company on June 3, 2008.
In conjunction with that certain Letter Agreement dated October 10, 2005 with
MCG Capital Corporation, a major creditor of I-55 Internet Services, and upon
the consummation of the merger on March 31, 2006, we issued to MCG Capital
667,998 shares of our Common Stock, valued at fair value of $2,010,006, in
return for retiring its loan with I-55 Internet Services.
I-55 Internet Services provided Internet access and related services, such as
installation of various networking equipment, website design, hosting and other
Internet access installation services, throughout the Southeastern United States
to individuals and businesses located predominantly in rural markets in
Louisiana and Mississippi. As a result of the merger with and into Xfone USA,
these services are now available in expanded markets throughout Louisiana and
Mississippi. The Internet service offerings include dial-up, DSL, high speed
dedicated Internet access, web services, email, the World Wide Web, Internet
relay chat, file transfer protocol and Usenet news access to both residential
and business customers. The I-55 Internet Services offerings provided various
prices and packages that allowed I-55 Internet Services subscribers to customize
their subscription with services that met customers' particular requirements.
Xfone USA now provides bundled services of voice and data (broadband Internet)
to customers throughout its service areas.
On August 26, 2005, we entered into an Agreement and Plan of Merger to acquire I-55 Telecommunications, LLC ("I-55 Telecommunications"), a Louisiana corporation (the "I-55 Telecom Merger Agreement"). On September 13, 2005, we filed a Form 8-K discussing the impact of Hurricane Katrina on the transaction contemplated by the I-55 Telecom Merger Agreement. In order to demonstrate our intention to continue on with the transaction contemplated by the I-55 Telecom Merger Agreement, the parties entered into on October 12, 2005 a Management Agreement (the "I-55 Telecom Management Agreement") that provided that I-55 Telecommunications hired and appointed Xfone USA as manager to be responsible for the operation and management of all of I-55 Telecommunications' business operations. In consideration of the management services provided under the I-55 Telecom Management Agreement, I-55 Telecommunications assigned and transferred to Xfone USA all revenues generated and expenses incurred in the ordinary course of business during the term of the I-55 Telecom Management Agreement. The term of the I-55 Telecom Management Agreement commenced on October 12, 2005 and continued until the consummation of the merger on March 31, 2006.
In conjunction with the consummation of the merger and in exchange for all of
the capital stock of I-55 Telecommunications, LLC, we issued a total of 223,702
shares of our Common Stock valued at $671,687 and 79,029 warrants exercisable
for a period of five years into shares of our Common Stock, with an exercise
price of $3.38, valued based on the Black Scholes option-pricing model (the
"Xfone Stock and Warrant Consideration"). A portion of the Xfone Stock and
Warrant Consideration issued at closing was placed in an escrow account. The
Company determined a breach of the representations and warranties in the Merger
Agreement resulting from the failure of I-55 Telecommunications to disclose the
liability due and payable to the Louisiana Universal Service Fund ("LA USF")
through the period of October 2005, at which time Xfone USA undertook the
management role of I-55 Telecommunications. Pursuant to Section 1(g) of the
Escrow Agreement dated as of March 31, 2006 by and among Xfone USA, the Escrow
Agent, and the President and Sole Member of I-55 Telecommunications, and in
accordance with Article 6.02 of the Merger Agreement, Xfone USA notified the
other parties that it believed that it had suffered a Loss of $30,625.52,
pursuant to the provisions of Article 6.02 of the Merger Agreement dated as of
August 26, 2005. Having not received any response from the President and Sole
Member of I-55 Telecommunications, nor from his counsel, on October 15, 2007,
and after the allotted response time allowed, Xfone USA instructed the Escrow
Agent (Trustmark National Bank) to deliver from the Escrow Fund of the President
and Sole Member of I-55 Telecommunications, to the Company, 7,043 shares of
Common Stock and 4,838 Xfone Stock Warrants. The 7,043 shares of Common Stock
and 4,838 Xfone Stock Warrants were returned to the Company for cancellation on
October 31, 2007.
In conjunction with certain Agreements to Purchase Promissory Notes dated
October 31, 2005 / February 3, 2006 with Randall Wade James Tricou; Rene Tricou
- Tricou Construction; Rene Tricou - Bon Aire Estates; Rene Tricou - Bon Aire
Utility; and Danny Acosta, creditors of I-55 Telecommunications (the
"Creditors"), and upon the consummation of the merger on March 31, 2006, we
issued to the Creditors an aggregate of 163,933 restricted shares of Common
Stock and an aggregate of 81,968 warrants, exercisable at $3.38 per share, at a
total value of $492,220, in return for retiring their individual loans with I-55
Telecommunications.
I-55 Telecommunications provided voice, data and related services throughout Louisiana and Mississippi to both individuals and businesses. Prior to the merger with and into Xfone USA, I-55 Telecommunications was a licensed facility based CLEC operating in Louisiana and Mississippi with a next generation class 5 carrier switching platform. I-55 Telecommunications provided a complete package of local and long distance services to residential and business customers across both states. As a result of the merger, Xfone USA has now expanded its On-Net (facilities) service area, through I-55 Telecommunications, into New Orleans, Louisiana and surrounding areas, including Hammond, Louisiana. Xfone USA is expanding its sales offices to include New Orleans, in an effort to continue revenue growth and increase market share in the revitalized city, as well as into Hammond, Louisiana. The competition in secondary markets, such as Jackson, Mississippi, as opposed to Tier 1 markets such as Atlanta, Georgia, is also rapidly declining due to the removal of UNE-P and the decline in the competitive local exchange providers that had been dependent on UNE-P as their only source for providing competitive local telephone services in those markets. This provides for a unique opportunity for Xfone USA to gain market share, by utilizing its existing network and to expand its facilities into these opportunity areas becoming a primary alternative to the monopoly Incumbent Local Exchange Company.
On September 27, 2005, a Securities Purchase Agreement was entered for a $2,000,000 financial transaction by and among us, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf Coast Utilities, Inc. and Laurus Master Fund, Ltd. The investment took the form of a convertible term note secured by our United States assets. The Term Note had a 3 year term, bore interest at a rate equal to prime plus 1.5% per annum, and was convertible, under certain conditions, into shares of our common stock at an initial conversion price equal to $3.48 per share. In conjunction with the financial transaction, we issued to Laurus Master Fund 157,500 warrants which are exercisable at $3.80 per share for a period of five years. The closing of the financial transaction was on September 28, 2005. As of August 1, 2007, Laurus Master Fund, Ltd. assigned to Valens U.S. SPV I, LLC a principal amount equal to $169,925.11 of the Term Note, and to Valens Offshore Fund SPV I, Ltd. a principal amount equal to $549,289.76 of the Term Note. The Term Note was fully paid off in cash on September 26, 2008.
On September 28, 2005, a Securities Purchase Agreement was entered for a $2,212,500 financial transaction by and among us, Crestview Capital Master, LLC, Burlingame Equity Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity Investors (Offshore), Ltd., and Mercantile Discount - Provident Funds. Upon the closing of the financial transaction on October 31, 2005, we issued to the investors an aggregate of 885,000 shares of common stock at a purchase price of $2.50 per share together with, 221,250 warrants exercisable at $3.00 per share and 221,250 warrants exercisable at $3.25 per share. The financial transaction resulted in dilution in the percentage of common stock owned by the Company's existing shareholders, although the price paid was in excess of the net tangible book value per share and accordingly was not economically dilutive.
On November 23, 2005, a Securities Purchase Agreement was entered for a $810,000
financial transaction by and among us, Mercantile Discount-Provident Funds,
Hadar Insurance Company Ltd., the Israeli Phoenix Assurance Company Ltd., and
Gaon Gemel Ltd. In conjunction with the financial transaction, we issued an
aggregate of 324,000 shares of common stock at a purchase price of $2.50 per
share together with 81,000 warrants exercisable at $3.00 per share for a period
of five years and 81,000 warrants exercisable at $3.25 per share for a period of
five years. The financial transaction was closed on April 6, 2006. The financial
transaction resulted in dilution in the percentage of common stock owned by the
Company's existing shareholders, although the price paid was in excess of the
net tangible book value per share and accordingly was not economically dilutive.
On January 1, 2006, Xfone USA, Inc., our wholly owned subsidiary, entered into an Agreement with EBI Comm, Inc. ("EBI"), a privately held Internet Service Provider, to purchase the assets of EBI. EBI provided a full range of Internet access options for both commercial and residential customers in north Mississippi. Based in Columbus, Mississippi, EBI's services included Dial-up, DSL, T1 Dedicated Access and Web Hosting. The customer base, numbering approximately 1,500 Internet users, is largely concentrated in the Golden Triangle area, which includes Columbus, West Point and Starkville, Mississippi. The acquisition was structured as an asset purchase, providing for Xfone USA to pay EBI total consideration equal to 50% of the monthly collected revenue from the customer base during the first 12 months, beginning January 2006. Acquired assets include the customer base and customer lists, trademarks and all related intellectual property, fixed assets and all account receivables. As a result of further negotiations between us and EBI, we have agreed to pay the total consideration of this acquisition in cash in the amount of $85,699 in monthly payments of $10,000 until paid in full, and we made the first of such payments on June 1, 2007 and final payment on January 25, 2008. The acquisition was not significant from an accounting perspective.
On January 10, 2006 (effective as of January 1, 2006), Xfone USA, Inc., our wholly owned subsidiary, entered into an Asset Purchase Agreement with Canufly.net, Inc. ("Canufly.net"), an Internet Service Provider based in Vicksburg, Mississippi, and its principal shareholder, Mr. Michael Nassour. Canufly.net provided residential and business customers with high-speed Internet services and utilized the facilities-based network of Xfone USA, as an alternative to BellSouth, to provide Internet connectivity to its customers. Canufly.net also provided Internet services through a small wireless application in certain areas in Vicksburg, Mississippi. The transaction was closed on January 24, 2006. We agreed to pay a total purchase price of up to $710,633, payable as follows: (i) $185,000 in cash payable in twelve equal monthly payments, the first installment was paid at closing, and as of December 31, 2006, the entire amount was paid in full and in accordance with the Asset Purchase Agreement; (ii) $255,633 in cash, paid at closing, to pay off the loan with the B&K Bank; (iii) 33,768 restricted shares of Common Stock and 24,053 warrants exercisable at $2.98 per share for a period of five years were issued to the shareholders of Canufly.net during May 2006. Following the closing in 2006 and due to the satisfaction of certain earn out provisions in the Asset Purchase Agreement the Company issued in March 2007 an additional 20,026 restricted shares of Common Stock and 14,364 warrants exercisable at $2.98 per share for a period of five years to the shareholders of Canufly.net. The acquisition was not significant from an accounting perspective.
On May 10, 2006, we, Story Telecom, Inc., Story Telecom Limited, Story Telecom (Ireland) Limited, Nir Davison, and Trecastle Holdings Limited, a company owned and controlled by Mr. Davison, entered into a Stock Purchase Agreement. Pursuant to the Stock Purchase Agreement, we increased our ownership interest in Story Telecom from 39.2% to 69.6% in a cash transaction valued at $1,200,000. $900,000 of the total consideration was applied to payables owed by Story Telecom to us and our subsidiary Swiftnet Limited for back-end telecommunications services. The balance of $300,000 was paid to Story Telecom to be used as working capital. Story Telecom, Inc., a telecommunication service provider, operated in the United Kingdom through its two wholly owned subsidiaries, Story Telecom Limited and Story Telecom (Ireland) Limited (which was dissolved on February 23, 2007). Following the acquisition, Story Telecom operates as a division of our operations in the United Kingdom. The stock purchase pursuant to the Stock Purchase Agreement was completed on May 16, 2006. The transaction contemplated by the Stock Purchase Agreement was not significant from an accounting perspective.
On March 25, 2008, in connection with a settlement of a legal proceeding
initiated by Mr. Nir Davison and due to come before the UK Employment Tribunal
Service, we purchased from Mr. Davison and Trecastle Holdings Limited, the
shares of common stock of Story Telecom, Inc. that each party owned,
respectively, for an aggregate purchase price of £270,000 ($538,083), pursuant
to the terms of a Compromise Agreement and a Securities Purchase Agreement
entered into between the parties on that date. Upon acquisition of the shares of
common stock of Story Telecom, Inc. from Mr. Davison and Trecastle Holdings,
Story Telecom, Inc. became our wholly owned subsidiary.
On May 25, 2006, we and the shareholders of Equitalk.co.uk Limited, a privately held telephone company based in the United Kingdom ("Equitalk") entered into an Agreement relating to the sale and purchase of Equitalk (the "Equitalk Agreement"). The Equitalk Agreement provided for us to acquire Equitalk in a restricted Common Stock and warrant transaction valued at $1,650,000. The acquisition was completed on July 3, 2006, and on that date Equitalk became our wholly owned subsidiary. In conjunction with the completion of the acquisition and in exchange for all of the capital stock of Equitalk, we issued a total of 402,192 restricted shares of our Common Stock and a total of 281,872 warrants exercisable at $3.025 per share for a period of five years. Founded in December 1999, Equitalk, a VC-financed company, was the first fully automated e-telco in the United Kingdom. Equitalk provides both residential and business customers with low-cost IDA and CPS voice services, broadband and teleconferencing.
On June 19, 2006, we entered into a Securities Purchase Agreement to sell to Central Fund for the Payment of Severance Pay of the First International Bank of Israel Ltd.; Meiron Provident Fund for Self Employed Persons of the First International Bank of Israel Ltd.; Atidoth Provident and Compensation Fund of the First International Bank of Israel Ltd.; Tohelet Provident and Compensation Fund of the first International Bank of Israel Ltd.; Mishtalem Funds for Continuing Education of the First International Bank of Israel Ltd.; Keren Hashefa Provident and Compensation Fund of the First International Bank of Israel Ltd.; Hamelacha Provident and Compensation Fund of the First International Bank of Israel Ltd.; Teuza Provident and Compensation Fund of the First International Bank of Israel Ltd.; Kidma Provident Funds Management Company Ltd. for Menifa Provident Fund for Bank of Israel Employees; and Security Pension Fund for Artisans Industrialists and Self Employed Persons Ltd. an aggregate of 344,825 restricted shares of common stock, at a purchase price of $2.90 per share, together with an aggregate of 172,415 warrants to purchase shares of common stock, at an exercise price of $3.40 per share and with a term . . .
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