Friday, June 09, 2006 10:47:23 AM
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION Back to Table of Contents
Introduction
The following discussion of our financial condition and results of our operations should be read in conjunction with the Financial Statements and Notes thereto. Our fiscal year ends December 31. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See "Factors Which May Affect Future Results"). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) various competitive market factors that may prevent us from competing successfully in the marketplace.
Plan of Operation
As noted above, the Company has spent millions researching and developing a now patented technology. Calypso Wireless' technology allows you to switch and connect from either a cellular network or a Wireless Local Area Network Access Point (WLAN), seamlessly without the user noticing the change. This means uninterrupted connectivity as you travel in and out of the range of WLAN access points. The use of ASNAP™ (Automatic Switching of Network Access Points) also increases the amount of available wireless bandwidth from the current state of technology of 9.6 kbps to 11 Mbps.
A part of its original business model was to manufacture and become a supplier of cellular devices. To that end, it expended funds to purchase equipment to be used in the manufacturing of the phones and entered into the beginnings of the design phase with RV Technology. During 2006, the Management of Calypso, began an in-depth review of the business model and decided to redirect our focus from becoming a supplier of cellular broadband real time video phones, and other wireless devices because we faced substantial competition in the wireless device market from a variety of companies and technologies, some of which are larger, have longer operating histories, have substantially greater financial, technical and marketing resources, larger customer bases, greater name recognition and more established relationships in the industry than we have. Consequently, these competitors can devote greater resources to the development, promotion, sale and support of their products. The cost to achieve the quality of this type of product desired would have been a continuing drain on company resources and probably too late for the advantage we would have had with the market.
The Company has revised its business model such that it will sell licensing agreements with OEMs and businesses that cater to enterprise companies to license the technology based on our patented ASNAP™ technology (U.S. Patent Number: 6,680,923) and or license the patent rather than become a supplier of cellular and other devices. Calypso Wireless' mission is to conduct research and develop products which can be licensed to manufacturers, carriers and enterprise companies in the global wireless communications industry. We believe our commercial success depends on identifying broad-based technology solutions for our customers, and ultimately the end user.
Our technology was further advanced through the acquisition of Sleipner S. A. Sleipner builds advanced IP-based communications systems and software platforms enabling comprehensive network-telephony solutions and innovative data converged services for enterprise and consumer customers. Sleipner's VoIP and IP solutions and applications are designed on CoMEDIA, the first complete family of SIP-based solutions offered to the market. Service providers and enterprises can build their own SIP applications using Sleipner technology to fit their unique voice needs and compared with circuit-based deployments, VoIP implementations are completed faster with fewer difficulties. Sleipner's COMOB software enables smart phones and wireless PDA/Pocket PCs to switch between GSM or CDMA cellular towers and Wi-Fi access points known as hotspots. The European mobile market has a base of over 342 million subscribers and is continuing to grow rapidly. The Company believes that with its patented ASNAP™ technology, European mobile carriers should be able to expand their customer base, reduce costs of additional frequency spectrum and infrastructure, and increase revenues by offloading capacity to the Wireless Local Area Networks and IP Networks with new services featuring our WiFi-GSM-GPRS VoIP cellular phone.
Our company is distinctive in its focus on creating products which minimize the technological barriers to change and accelerate the communication industry's operating efficiency. Calypso's products and services include the Calypso Wireless ASNAP™ PATENT. The ASNAP™ system implements the Calypso patented ASNAP™ technology that allows the seamless switching between PSTN and VoIP, through the ASNAP™ seamless session control. In addition, the Calypso-Sleipner ASNAP™ MediaGateway/Media Server which is a comprehensive and flexible development environment for business and carrier-grade critical Next Generation Network( NGN) solutions. It is a script driven telephony and VoIP application server. As such, it has its own scripting language built by class extensions from the ASNAP™ Script Interpreter. While the server scripting language can support the creation of complete telephony and VoIP applications, it was designed to be a specific programming language made for the NGN. Further, the IDE/Script Editor an easy to use Integrated Development Environment for Windows. This Editor is specifically designed for ASNAP™ Script and has features for beginners and professional developers.
Our current products and services are more fully described above under Products and Services.
Calypso Wireless will continue research and development for future growth. 3GPP IMS IP Multimedia Subsystem Service Convergence is a new way to communicate and access communications and content. It is presence based, location and visual communications with push-to-talk, -view, -share, and -access relevant media. This provides enriched communication between users and applications- take your office with you, mobilizing the enterprise, have your media at hand, be always best connected and have broadband everywhere. 3GPP IMS is based on SIP (session initiation protocol). The SIP protocol was originally defined by the IETF and then adopted for mobile networks by 3GPP and 3GPP2. SIP is typically used for VoIP (Voice over Internet Protocol) Session control and would be the basis for VoIP networks; however 3GPP IMS-based architectures suffer from requiring a carrier network to upgrade to newer equipment. Calypso Wireless ASNAP™ technology allows for seamless integration to the existing core networks, the existing cellular/landline devices, without requiring a carrier forklift to an elusive unified core network.
Examples of future converged applications that can arise from the Calypso Wireless ASNAP™ patented technologies, using technologies from Calypso wireless and potential OEMs include:
- Presence and Location-based Applications
- Seamless video Session Continuity
- Seamless Music Session continuity
- Seamless Video Gaming Session Continuity
- Federated Identity Management
MVNE/MVNO Revenue Settlements and Convergence with Seamless Session Continuity
In conjunction with its direction towards licensing its technology, the Company has reduced its operating costs by reducing the number of employees to approximately 10 employees. We have not experienced any work stoppages and consider our relations with our employees to be good.
Liquidity and Capital Resources
At December 31, 2005, we had a working capital deficit of $716, 527 compared to a working capital deficit of $2,505,166 at December 31, 2004. The Company's negative working capital is partially due the cash used to purchase RV Technology. In 2004, the working capital deficit was greater due to the restatement related to accruing liabilities for the issuance of stock to non-employees for non-cash compensation. The Company issued stock as compensation to preserve its cash. During 2005, the Company raised $3,920,000 in private placement offerings.
The Company requires approximately $5 million to fund its annual operating budget for 2006. These funds will be used for development of additional products, marketing the products, obtaining additional patents and normal business operations.
We have historically sustained our operations and funded our capital requirements with the funds received from the sale of our common stock. To date, the Company's has received over $15.5 million from its financing activities and has issued shares valued at approximately $11.5 million for services provided to the Company.
The Company is currently negotiating a Private Placement Memorandum to raise additional funds. Further, the Board of Directors has given its consent to a group of investors that are planning to acquire a majority interest in Calypso shares through private transactions. These private transactions, if consummated, would result in a change in control with a new Board of Directors and new management. These investors are planning to invest additional working capital resources in the Company. However, there can be no assurance that these individual purchase transactions will be finalized. In such an event, this may have a materially adverse effect on our business, operating results and financial condition.
We have not included continued operational funding for Sleipner in our cash requirements. The share Purchase Agreement makes reference to a Collaboration Agreement which was signed with Drs. Massimo Plateo, Alessandro Valenti, Francesco Cafiero, Bruno Motta (the Collaborators). Pursuant to the Collaboration Agreement, the Collaborators were required to devote their time, attention, energy and skills to the faithful and diligent performance of their duties, including, without limitation, traveling as reasonably requested by Calypso and consistent with past practice. Except as otherwise agreed between Calypso and Collaborators, from time to time Collaborators agreed to devote all of their business time, attention, skill, and efforts to the performance of their services and responsibilities on behalf of Calypso. Under the Collaboration Agreement, Calypso agreed to fund the operations of the Company for the duration of the two year initial term in an amount of US$77,000,00 (seventy-seven thousand) per month to cover costs relating to ordinary administration of Sleipner S.A. in a manner consistent with past practice with certain other requirements and reductions for commission. Calypso, funded the operations fund for two months. Because appropriate accounting records for the expenditures from this fund were not provided to Calypso's Chief Financial Officer and funding was discontinued. Calypso is continuing to review whether the Collaborators met the terms of the service description in the Collaboration Agreement. During 2006, Calypso Wireless has merged most of the operations of Sleipner into Calypso and Mr. Alessandro Valenti has joined Calypso as the Vice President of Research and Development.
We have not included funding for future purchases of RV Technology stock to increase our equity interest in our capital requirements. Our Board has decided against further investment in RV Technology at this time and we are not pursuing further design and production activities.
Results of Operations - Year Ended December 31, 2005 compared to Year Ended December 31, 2004
Revenues
The Company did not generate any revenue related to the sale of its products during the years 2005 and 2004. The Company received two purchase orders for the C1250i dual mode cellular phone, from Inversion CCS and Serinova during 2005. Delivery against these purchase orders will not be made in light of the Company's change in business model which does not include production or deliver of phones. In addition, these purchase orders required lines of credit which neither company was able to obtain.
Operating Expenses
During 2005, the Company incurred operating expenses of $10,715,246 compared to $10,950,630, as restated, during 2004. Our operating expenses decreased by $467,271. This decrease is the result of a net reduction of impairment expense, an increase in expense for research and development, a deduction in expense for stock-based compensation and an increase in salaries. The 2004 impairment expense of $3,446,411 was due to the write-down of equipment. In 2005, the impairment expense of $1,949,999 was due to the write-down of the value of the RV Technology investment. RV Technology's unaudited financial statements have substantial negative retained earnings which has increased due to losses in the first quarter of 2006. The Company has not obtained audited information from RV Technology and has recorded an impairment charge.
Net Loss and Loss Per Share
The Company had a net loss of $10,715,246 for the year ended December 31, 2005, compared to a restated net loss of $10,950,630 in 2004. The net loss decreased by $235,384. the decrease was due to the reasons set forth under Operating Expenses above. The Company's net loss per share for 2005 and 2004, as restated, were $0.09 and $0.10, respectively.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements for the fiscal year ending December 31, 2005.
ITEM 7. FINANCIAL STATEMENTS Back to Table of Contents
The preparation of financial statements in conformity with generally accepted accounting principles require the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in the financial statements, and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.
We believe application of accounting policies, and the estimates inherently required by the policies, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when the facts and circumstances dictate a change.
Our accounting policies are more fully described in note 1 to the notes to consolidated financial statements, contained in this Form 10-KSB. We have identified certain critical accounting policies that are described below.
Software development costs represent capitalized costs incurred in the development of the cellular phones and telecommunications infrastructure software. The Company began capitalizing these costs once technological feasibility had been established during the first quarter of 1999. All costs incurred prior to establishment of technological feasibility were expensed as research and development expenses. The Company established a policy to amortize the capitalized software and development costs over a three-year period beginning January 2004 and filed restated financial statements to reflect this change. The 2004 amortization amounted to $1,552,698. Effective January 1, 2005, all costs associated with the development of the phones, which were completed in early 2005, were expensed as incurred. Management concluded that the Company's annual report for the year ended December 31, 2004 and the quarterly report for the period ended March 31, 2005 should be restated. Such restatements were subsequently made and amended reports were filed.
Certain stock had been issued in 2005, which related to consulting agreements previously entered into by the Company. The Company entered into various consulting agreements with individuals for services to be provided and with consideration to be paid in shares of common stock of the Company. Pursuant to EITF 96-18, "Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services", the value of the share consideration should have been recorded as of the date the service agreements were entered into because the shares were fully vested and nonforfeitable. Management of the Company concluded on April 17, 2005 that the Company's consolidated financial statements contained in the Company's Form 10-KSB's for the years ended 2004 and 2003 would require restatement. On September 7, 2005, management was able to determine the proper treatment for recording these particular transactions as costs at the date at which a commitment for performance by the counterparty to earn the equity instruments was reached and the valuation of the liability would be based on the stock price on dates of said contracts. The cost has been amortized over the life of the contracts. All other stock-based transactions were fully expensed for all prior financial reporting periods. Management concluded that the Company's annual reports on Form 10-KSB for the years ended December 31, 2004 and 2003, and the Company's quarterly report for the period ended March 31, 2005 should be restated and the financial statements and the amended consolidated financial statements for the aforementioned periods were subsequently filed. The Company has been notified of an SEC investigation relating to the consulting agreements. We are providing the requested information and will continue to fully comply with all future requests. The Company believes the failure to initially report these consulting agreements and the resulting restatement was caused by a misunderstanding and misinterpretation of the accounting requirements and as a result of deficiencies in disclosure controls. In an attempt to correct this deficiency, the Company has hired a new CFO and has retained an accounting consultants, both of whom are certified public accountants.
New Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Internal Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS No. 154 on January 1, 2006. Any impact on the Company's consolidated results of operations and earnings (loss) per share will be dependent on the amount of any accounting changes or corrections of errors whenever recognized.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153. This statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions," is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.
The guidance in that opinion; however, included certain exceptions to that principle. This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date of this statement is issued. Management believes the adoption of this statement will have no impact on the financial statements of the Company.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152, which amends FASB statement No. 66, "Accounting for Sales of Real Estate," to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions." This statement also amends FASB Statement No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects," to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management believes the adoption of this statement will have no impact on the financial statements of the Company.
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151, "Inventory Costs-- an amendment of ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges." This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this statement will have any immediate material impact on the Company.
Purchase Business Combinations
The Company acquired the 16.8% interest in RV Tech by paying $1,000,000 in cash ($666,666 in working capital to RV Tech and $333,334 to the shareholders of RV Tech) and issuing 1,000,000 shares of the Company's restricted common stock. This acquisition is being accounted for under the cost method. Calypso Wireless acquired the outstanding shares of Sleipner S. A. for 1,500,000 shares of restricted common stock. The shares were issued to the Sleipner shareholders in December, 2005. Its financial information is included in the consolidated financial statements for Calypso Wireless, Inc.
The Registrant's audited financial statements for the fiscal years ended December 31, 2005 and 2004 are attached to this annual report on Form 10-KSB.
Consolidated Financial Statements for the Fiscal Year ended December 31, 2005 and 2004
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OF OPERATION Back to Table of Contents
Introduction
The following discussion of our financial condition and results of our operations should be read in conjunction with the Financial Statements and Notes thereto. Our fiscal year ends December 31. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See "Factors Which May Affect Future Results"). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) various competitive market factors that may prevent us from competing successfully in the marketplace.
Plan of Operation
As noted above, the Company has spent millions researching and developing a now patented technology. Calypso Wireless' technology allows you to switch and connect from either a cellular network or a Wireless Local Area Network Access Point (WLAN), seamlessly without the user noticing the change. This means uninterrupted connectivity as you travel in and out of the range of WLAN access points. The use of ASNAP™ (Automatic Switching of Network Access Points) also increases the amount of available wireless bandwidth from the current state of technology of 9.6 kbps to 11 Mbps.
A part of its original business model was to manufacture and become a supplier of cellular devices. To that end, it expended funds to purchase equipment to be used in the manufacturing of the phones and entered into the beginnings of the design phase with RV Technology. During 2006, the Management of Calypso, began an in-depth review of the business model and decided to redirect our focus from becoming a supplier of cellular broadband real time video phones, and other wireless devices because we faced substantial competition in the wireless device market from a variety of companies and technologies, some of which are larger, have longer operating histories, have substantially greater financial, technical and marketing resources, larger customer bases, greater name recognition and more established relationships in the industry than we have. Consequently, these competitors can devote greater resources to the development, promotion, sale and support of their products. The cost to achieve the quality of this type of product desired would have been a continuing drain on company resources and probably too late for the advantage we would have had with the market.
The Company has revised its business model such that it will sell licensing agreements with OEMs and businesses that cater to enterprise companies to license the technology based on our patented ASNAP™ technology (U.S. Patent Number: 6,680,923) and or license the patent rather than become a supplier of cellular and other devices. Calypso Wireless' mission is to conduct research and develop products which can be licensed to manufacturers, carriers and enterprise companies in the global wireless communications industry. We believe our commercial success depends on identifying broad-based technology solutions for our customers, and ultimately the end user.
Our technology was further advanced through the acquisition of Sleipner S. A. Sleipner builds advanced IP-based communications systems and software platforms enabling comprehensive network-telephony solutions and innovative data converged services for enterprise and consumer customers. Sleipner's VoIP and IP solutions and applications are designed on CoMEDIA, the first complete family of SIP-based solutions offered to the market. Service providers and enterprises can build their own SIP applications using Sleipner technology to fit their unique voice needs and compared with circuit-based deployments, VoIP implementations are completed faster with fewer difficulties. Sleipner's COMOB software enables smart phones and wireless PDA/Pocket PCs to switch between GSM or CDMA cellular towers and Wi-Fi access points known as hotspots. The European mobile market has a base of over 342 million subscribers and is continuing to grow rapidly. The Company believes that with its patented ASNAP™ technology, European mobile carriers should be able to expand their customer base, reduce costs of additional frequency spectrum and infrastructure, and increase revenues by offloading capacity to the Wireless Local Area Networks and IP Networks with new services featuring our WiFi-GSM-GPRS VoIP cellular phone.
Our company is distinctive in its focus on creating products which minimize the technological barriers to change and accelerate the communication industry's operating efficiency. Calypso's products and services include the Calypso Wireless ASNAP™ PATENT. The ASNAP™ system implements the Calypso patented ASNAP™ technology that allows the seamless switching between PSTN and VoIP, through the ASNAP™ seamless session control. In addition, the Calypso-Sleipner ASNAP™ MediaGateway/Media Server which is a comprehensive and flexible development environment for business and carrier-grade critical Next Generation Network( NGN) solutions. It is a script driven telephony and VoIP application server. As such, it has its own scripting language built by class extensions from the ASNAP™ Script Interpreter. While the server scripting language can support the creation of complete telephony and VoIP applications, it was designed to be a specific programming language made for the NGN. Further, the IDE/Script Editor an easy to use Integrated Development Environment for Windows. This Editor is specifically designed for ASNAP™ Script and has features for beginners and professional developers.
Our current products and services are more fully described above under Products and Services.
Calypso Wireless will continue research and development for future growth. 3GPP IMS IP Multimedia Subsystem Service Convergence is a new way to communicate and access communications and content. It is presence based, location and visual communications with push-to-talk, -view, -share, and -access relevant media. This provides enriched communication between users and applications- take your office with you, mobilizing the enterprise, have your media at hand, be always best connected and have broadband everywhere. 3GPP IMS is based on SIP (session initiation protocol). The SIP protocol was originally defined by the IETF and then adopted for mobile networks by 3GPP and 3GPP2. SIP is typically used for VoIP (Voice over Internet Protocol) Session control and would be the basis for VoIP networks; however 3GPP IMS-based architectures suffer from requiring a carrier network to upgrade to newer equipment. Calypso Wireless ASNAP™ technology allows for seamless integration to the existing core networks, the existing cellular/landline devices, without requiring a carrier forklift to an elusive unified core network.
Examples of future converged applications that can arise from the Calypso Wireless ASNAP™ patented technologies, using technologies from Calypso wireless and potential OEMs include:
- Presence and Location-based Applications
- Seamless video Session Continuity
- Seamless Music Session continuity
- Seamless Video Gaming Session Continuity
- Federated Identity Management
MVNE/MVNO Revenue Settlements and Convergence with Seamless Session Continuity
In conjunction with its direction towards licensing its technology, the Company has reduced its operating costs by reducing the number of employees to approximately 10 employees. We have not experienced any work stoppages and consider our relations with our employees to be good.
Liquidity and Capital Resources
At December 31, 2005, we had a working capital deficit of $716, 527 compared to a working capital deficit of $2,505,166 at December 31, 2004. The Company's negative working capital is partially due the cash used to purchase RV Technology. In 2004, the working capital deficit was greater due to the restatement related to accruing liabilities for the issuance of stock to non-employees for non-cash compensation. The Company issued stock as compensation to preserve its cash. During 2005, the Company raised $3,920,000 in private placement offerings.
The Company requires approximately $5 million to fund its annual operating budget for 2006. These funds will be used for development of additional products, marketing the products, obtaining additional patents and normal business operations.
We have historically sustained our operations and funded our capital requirements with the funds received from the sale of our common stock. To date, the Company's has received over $15.5 million from its financing activities and has issued shares valued at approximately $11.5 million for services provided to the Company.
The Company is currently negotiating a Private Placement Memorandum to raise additional funds. Further, the Board of Directors has given its consent to a group of investors that are planning to acquire a majority interest in Calypso shares through private transactions. These private transactions, if consummated, would result in a change in control with a new Board of Directors and new management. These investors are planning to invest additional working capital resources in the Company. However, there can be no assurance that these individual purchase transactions will be finalized. In such an event, this may have a materially adverse effect on our business, operating results and financial condition.
We have not included continued operational funding for Sleipner in our cash requirements. The share Purchase Agreement makes reference to a Collaboration Agreement which was signed with Drs. Massimo Plateo, Alessandro Valenti, Francesco Cafiero, Bruno Motta (the Collaborators). Pursuant to the Collaboration Agreement, the Collaborators were required to devote their time, attention, energy and skills to the faithful and diligent performance of their duties, including, without limitation, traveling as reasonably requested by Calypso and consistent with past practice. Except as otherwise agreed between Calypso and Collaborators, from time to time Collaborators agreed to devote all of their business time, attention, skill, and efforts to the performance of their services and responsibilities on behalf of Calypso. Under the Collaboration Agreement, Calypso agreed to fund the operations of the Company for the duration of the two year initial term in an amount of US$77,000,00 (seventy-seven thousand) per month to cover costs relating to ordinary administration of Sleipner S.A. in a manner consistent with past practice with certain other requirements and reductions for commission. Calypso, funded the operations fund for two months. Because appropriate accounting records for the expenditures from this fund were not provided to Calypso's Chief Financial Officer and funding was discontinued. Calypso is continuing to review whether the Collaborators met the terms of the service description in the Collaboration Agreement. During 2006, Calypso Wireless has merged most of the operations of Sleipner into Calypso and Mr. Alessandro Valenti has joined Calypso as the Vice President of Research and Development.
We have not included funding for future purchases of RV Technology stock to increase our equity interest in our capital requirements. Our Board has decided against further investment in RV Technology at this time and we are not pursuing further design and production activities.
Results of Operations - Year Ended December 31, 2005 compared to Year Ended December 31, 2004
Revenues
The Company did not generate any revenue related to the sale of its products during the years 2005 and 2004. The Company received two purchase orders for the C1250i dual mode cellular phone, from Inversion CCS and Serinova during 2005. Delivery against these purchase orders will not be made in light of the Company's change in business model which does not include production or deliver of phones. In addition, these purchase orders required lines of credit which neither company was able to obtain.
Operating Expenses
During 2005, the Company incurred operating expenses of $10,715,246 compared to $10,950,630, as restated, during 2004. Our operating expenses decreased by $467,271. This decrease is the result of a net reduction of impairment expense, an increase in expense for research and development, a deduction in expense for stock-based compensation and an increase in salaries. The 2004 impairment expense of $3,446,411 was due to the write-down of equipment. In 2005, the impairment expense of $1,949,999 was due to the write-down of the value of the RV Technology investment. RV Technology's unaudited financial statements have substantial negative retained earnings which has increased due to losses in the first quarter of 2006. The Company has not obtained audited information from RV Technology and has recorded an impairment charge.
Net Loss and Loss Per Share
The Company had a net loss of $10,715,246 for the year ended December 31, 2005, compared to a restated net loss of $10,950,630 in 2004. The net loss decreased by $235,384. the decrease was due to the reasons set forth under Operating Expenses above. The Company's net loss per share for 2005 and 2004, as restated, were $0.09 and $0.10, respectively.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements for the fiscal year ending December 31, 2005.
ITEM 7. FINANCIAL STATEMENTS Back to Table of Contents
The preparation of financial statements in conformity with generally accepted accounting principles require the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in the financial statements, and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.
We believe application of accounting policies, and the estimates inherently required by the policies, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when the facts and circumstances dictate a change.
Our accounting policies are more fully described in note 1 to the notes to consolidated financial statements, contained in this Form 10-KSB. We have identified certain critical accounting policies that are described below.
Software development costs represent capitalized costs incurred in the development of the cellular phones and telecommunications infrastructure software. The Company began capitalizing these costs once technological feasibility had been established during the first quarter of 1999. All costs incurred prior to establishment of technological feasibility were expensed as research and development expenses. The Company established a policy to amortize the capitalized software and development costs over a three-year period beginning January 2004 and filed restated financial statements to reflect this change. The 2004 amortization amounted to $1,552,698. Effective January 1, 2005, all costs associated with the development of the phones, which were completed in early 2005, were expensed as incurred. Management concluded that the Company's annual report for the year ended December 31, 2004 and the quarterly report for the period ended March 31, 2005 should be restated. Such restatements were subsequently made and amended reports were filed.
Certain stock had been issued in 2005, which related to consulting agreements previously entered into by the Company. The Company entered into various consulting agreements with individuals for services to be provided and with consideration to be paid in shares of common stock of the Company. Pursuant to EITF 96-18, "Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services", the value of the share consideration should have been recorded as of the date the service agreements were entered into because the shares were fully vested and nonforfeitable. Management of the Company concluded on April 17, 2005 that the Company's consolidated financial statements contained in the Company's Form 10-KSB's for the years ended 2004 and 2003 would require restatement. On September 7, 2005, management was able to determine the proper treatment for recording these particular transactions as costs at the date at which a commitment for performance by the counterparty to earn the equity instruments was reached and the valuation of the liability would be based on the stock price on dates of said contracts. The cost has been amortized over the life of the contracts. All other stock-based transactions were fully expensed for all prior financial reporting periods. Management concluded that the Company's annual reports on Form 10-KSB for the years ended December 31, 2004 and 2003, and the Company's quarterly report for the period ended March 31, 2005 should be restated and the financial statements and the amended consolidated financial statements for the aforementioned periods were subsequently filed. The Company has been notified of an SEC investigation relating to the consulting agreements. We are providing the requested information and will continue to fully comply with all future requests. The Company believes the failure to initially report these consulting agreements and the resulting restatement was caused by a misunderstanding and misinterpretation of the accounting requirements and as a result of deficiencies in disclosure controls. In an attempt to correct this deficiency, the Company has hired a new CFO and has retained an accounting consultants, both of whom are certified public accountants.
New Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Internal Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS No. 154 on January 1, 2006. Any impact on the Company's consolidated results of operations and earnings (loss) per share will be dependent on the amount of any accounting changes or corrections of errors whenever recognized.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153. This statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions," is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.
The guidance in that opinion; however, included certain exceptions to that principle. This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date of this statement is issued. Management believes the adoption of this statement will have no impact on the financial statements of the Company.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152, which amends FASB statement No. 66, "Accounting for Sales of Real Estate," to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions." This statement also amends FASB Statement No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects," to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management believes the adoption of this statement will have no impact on the financial statements of the Company.
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151, "Inventory Costs-- an amendment of ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges." This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this statement will have any immediate material impact on the Company.
Purchase Business Combinations
The Company acquired the 16.8% interest in RV Tech by paying $1,000,000 in cash ($666,666 in working capital to RV Tech and $333,334 to the shareholders of RV Tech) and issuing 1,000,000 shares of the Company's restricted common stock. This acquisition is being accounted for under the cost method. Calypso Wireless acquired the outstanding shares of Sleipner S. A. for 1,500,000 shares of restricted common stock. The shares were issued to the Sleipner shareholders in December, 2005. Its financial information is included in the consolidated financial statements for Calypso Wireless, Inc.
The Registrant's audited financial statements for the fiscal years ended December 31, 2005 and 2004 are attached to this annual report on Form 10-KSB.
Consolidated Financial Statements for the Fiscal Year ended December 31, 2005 and 2004
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