UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM 10-QSB/A**

 

(Mark One)

 

[ X ]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007.

 

[     ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________

Commission file number: 0-27704

 

**i2 Telecom International, Inc.**

(Exact Name of Small Business Issuer as Specified in its Charter)

 

| Washington                      | 91-1426372          |
|---------------------------------|---------------------|
| (State or Other Jurisdiction of | (IRS Employer       |
| Incorporation or Organization)  | Identification No.) |

 

 

|                                     |                                                  |
|------------------------------------------|-------------------------------------------------------|
| Roswell, GA 30076                        | (404) 567-4750                                        |
| (Address of Principal Executive Offices) | (Issuer’s Telephone Number, Including Area Code) |

 

Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No o

 

As of May 14, 2007, the registrant had 100,926,674 shares of common stock outstanding.

 

 

 

 

 

 

INDEX

 

|   | Page |
|--------|------|

 

| PART I. | FINANCIAL INFORMATION |
|---------|-----------------------|

 

| Item 1. | Financial Statements | 3 |
|---------|----------------------|---|

 

| Item 2. | Management’s Discussion and Analysis of or Plan | 17 |
|---------|------------------------------------------------------|----|

|   | of Operation |
|--------|--------------|

 

| Item 3. | Controls and Procedures | 22 |
|---------|-------------------------|----|

 

| PART II. | OTHER INFORMATION |
|----------|-------------------|

 

| Item 1. | Legal Proceedings | 23 |
|---------|-------------------|----|

 

| Item 2. | Unregistered Sales of Equity Securities and | 23 |
|---------|---------------------------------------------|----|

|   | Use of Proceeds |
|--------|-----------------|

 

| Item 3. | Default Upon Senior Securities | 26 |
|---------|--------------------------------|----|

 

| Item 6. | Exhibits | 27 |
|---------|----------|----|

 

| SIGNATURE PAGE | 28 |
|----------------|----|

 

| CERTIFICATIONS |
|----------------|

 

 

 

 

 

**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**i2 TELECOM INTERNATIONAL, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

ASSETS

 

|                                                                                        |   | March 31,2007

As Restated |   | December 31, 2006

  |
|---------------------------------------------------------------------------------------------|--------|----------------------------|--------|---------------------------|
| Current Assets                                                                              |   |                       |   |                      |
| Cash                                                                                        | $      | 6,310                      | $      | 807,811                   |
| Accounts Receivable, net of Allowance for Doubtful Accounts of

$-0- and $-0-, respectively |   | 71,154                     |   | 59,822                    |
| Inventories                                                                                 |   | 299,670                    |   | 355,900                   |
| Prepaid Expenses and Other Current Assets                                                   |   | 141,890                    |   | 81,862                    |
| Total Current Assets                                                                        |   | 519,024                    |   | 1,304,795                 |
|                                                                                        |   |                       |   |                      |
|                                                                                        |   |                       |   |                      |
| Property and Equipment, Net                                                                 |   | 683,638                    |   | 764,426                   |
|                                                                                        |   |                       |   |                      |
| Other Assets                                                                                |   |                       |   |                      |  
Intangible Assets

Deposits

 

3,349,834

34,840

 

3,349,834

27,840

 
Total Other Assets

 

3,384,674

 

3,377,674

 
 

 

 

 

 

 
 

 

 

 

 

 
Total Assets

$

4,587,336

$

5,446,895

 
 

 

**i2 TELECOM INTERNATIONAL, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

March 31,2007

As Restated

 

December 31, 2006

 

Current Liabilities:

 

 

 

 

 

Accounts Payable and Accrued Expenses

$

2,598,417

$

4,078,375

 

Deferred Revenue

 

56,000

 

56,000

 

Convertible Bonds

 

2,796,436

 

2,147,784

 

Notes Payable-Current

 

1,906,375

 

2,761,607

 

Total Current Liabilities

 

7,357,228

 

9,043,766

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity (Deficit)

Preferred Stock, No Par Value, 5,000,000

Shares Authorized, 4,370 Shares and 4,495 Shares Issued and Outstanding, respectively

 

4,370,000

 

4,470,000

 

Common Stock, No Par Value, 250,000,000 Shares Authorized, 100,926,674 Shares and 77,183,480 Shares Issued and Outstanding, respectively

 

19,666,701

 

17,175,150

 

Restricted Common Stock (related to No Par Value above),

187,500 Shares and 1,003,784 respectively

 

7,500

 

143,473

 

Additional Paid-In Capital

 

3,321,486

 

2,505,384

 

Accumulated Deficit 

 

(29,953,175)

 

(27,890,878)

 

Total Shareholders’ Equity (Deficit)

 

(2,769,892)

 

(3,596,871)

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity (Deficit)

$

4,587,336

$

5,446,895

 

 

 

 

 

 

 

 

 

 

**i2 TELECOM INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

 

 

For the Three

Months Ended 

March 31, 2007

As restated

 

The Three

Months Ended March 31, 2006

 

Revenue

$

180,113

$

140,003

 

 

 

 

 

Cost of Revenue

 

115,051

 

71,017

 

 

 

 

 

Gross Profit (Loss)

 

65,062

 

For 68,986

 

 

 

 

 

General and Administrative Expenses

 

2,139,052

 

1,369,290

 

 

 

 

 

Loss From Operations

 

(2,073,990)

 

(1,300,304)

 

 

 

 

 

Other Income (Expense)

 

 

 

 

Interest Income

 

0

 

942

Interest Expense

 

(95,567)

 

(51,777)

Gain on Forbearance of Debt

 

55,061

 

0

Total Other Income (Expense)

 

(40,506)

 

(50,835)

 

 

 

 

 

Net Income (Loss)

$

(2,114,496)

$

(1,351,139)

Dividends on Preferred Stock

 

(130,205)

 

79,674

Net Loss Available to Common Shareholders

$

(2,244,701)

$

(1,430,813)

 

 

 

 

 

Weighted Average Common Shares: Basic

 

88,351,045

 

38,397,923

Basic Earnings Per Common Share: 

$

(.03)

$

(.04)

 

**i2 TELECOM INTERNATIONAL, INC**.

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

 

 

For the Three

Months Ended 

March 31, 2007

As restated

 

 

 

For the Three

Months Ended March 31, 2006

 

Cash Flows From Operations:

 

 

 

 

Net Loss 

$

(2,114,496)

$

(1,351,139)

Adjustments to Reconcile Net Income to cash

 

 

 

 

Depreciation and amortization

 

89,966

 

97,564

Stock compensation

 

138,925

 

92,917

Amortization of loan fees

 

816,483

 

0

(Increase) Decrease in:

 

 

 

 

Accounts receivable

 

(11,332)

 

51,195

Inventories

 

56,230

 

8,193

Prepaid Expenses

 

(81,461)

 

(555,822)

Other Assets

 

(7,000)

 

(22,000)

Increase (Decrease) In:

 

 

 

 

Accounts Payable and Accrued Expenses

 

(752,086)

 

249,349

Deferred Revenue

 

0

 

0

Net Cash Used In Operating Activities

 

(1,864,771)

 

(1,429,743)

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

Equipment Purchases

 

(9,178)

 

0

Payments for Patents and Trademarks

 

0

 

( 3,365)

Net Cash Used In Investing Activities

 

(9,178)

 

(33,123)

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

Payments of Convertible Bonds

 

(1,325,000)

 

0

Proceeds from Issuance of Convertible Bonds

 

2,375,000

 

600,000

Proceeds From Notes Payable

 

1,000,000

 

321,000

Payment of Notes Payable

 

(1,380,232)

 

(135,263)

Issuance of Common Stock

 

0

 

531,741

Proceeds from redemption of options

 

402,680

 

0

Net Cash Provided By Financing Activities

 

1,072,448

 

1,317,477

 

 

 

 

 

Increase (Decrease) in Cash

 

(801,501)

 

(145,389)

Balance, Beginning of Period

 

807,811

 

169,203

Balance, End of Period

$

6,310

$

23,814

 

 

UNAUDITED CONDENSENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLOCIES

 

**Item 1. Description of the Business**

 

**Background of the Company**

 

                

**Nature of Business**

 

i2 Telecom International. Inc., a Washington corporation, (“i2Telecom (WA)”) or the “Company”) through its subsidiary, i2 Telecom International, Inc. a Delaware corporation, (“i2Telecom (DE)”)provides low-cost telecommunications services employing next-generation Voice over Internet Protocol (“VoIP”) technology. These operations are based in Atlanta, Georgia. Through i2Telecom (DE), the Company controls its own proprietary technology and outsources the majority of its production and service functions with strategic partners. The Company, through i2Telecom (DE), provides the VoiceStick®, micro gateway adapters (InternetTalker®), VoIP long distance and other enhanced communication services to subscribers. The Company’s proprietary technology platform is built to the Session Initiation Protocol (“SIP”)standard. The Company’s revenue model now includes revenue from the sale of the VoiceStick® and other integrated access devices (“IADs”) along with recurring monthly subscriptions and call minute termination. The Company, a Washington corporation formerly known as Digital Data Networks, Inc., was incorporated as “Transit Information Systems, Inc.” under the laws of the State of Washington on October 17, 1988. In July 1995, the Company changed its name to “Digital Data Networks, Inc.” In March 2004, the Company changed its name to “i2 Telecom International, Inc.” The Company’s offices are currently located at 5070 Old Ellis Pointe, Suite 110, Roswell, GA 30076, and the Company’s telephone number at that address is (404) 567-4750. The Company maintains websites at www.i2telecom.com and www.voicestick.com .

 

From October 17, 1988, until February 27, 2004, the Company was a wireless, passenger communication and advertising company, principally engaged in selling digital advertising space through the operation of a digital information network, utilizing digital radio transmission technology to display current news, information and advertising to riders on-board public transit vehicles. From 1991 through February 2004, the Company operated a digital information network in Dallas, Texas under the assumed name “The Transit Network” on the Dallas Area Rapid Transit (“DART”) bus and rail system. 

 

In February 1996, the Company completed an initial public offering of shares of its common stock, no par value per share (the “Common Stock”), and raised net cash proceeds of approximately $5.8 million. 

 

On February 26, 2004, a newly-formed, wholly-owned subsidiary of the Company merged with and into i2 Telecom International, Inc., a Delaware corporation (“i2Telecom (DE)”), with i2Telecom (DE) surviving the merger as a wholly-owned subsidiary of the Company (the “Merger”), pursuant to that certain Agreement and Plan of Merger dated as of February 26, 2004, among the Company, a wholly-owned subsidiary of the Company, i2Telecom (DE) and certain stockholders of the Company and i2Telecom (DE) signatory thereto (the “Merger Agreement”). In connection with the Merger, former stockholders of i2Telecom (DE) became entitled to receive shares of Common Stock and shares of various classes and series of the Company’s preferred stock, no par value per share (collectively, the “Preferred Stock”), constituting up to 88.44% of the voting securities of theCompany, assuming the issuance of all contingent consideration such stockholders may become entitled to receive pursuant to the Merger Agreement upon the resolution of a certain legal proceeding pending against i2Telecom (DE). In connection with the Merger, effective February 26, 2004, (i) the Company’s Board of Directors (the “Board of Directors”) appointed Paul R. Arena, Chief Executive Officer and Chairman of the Board of i2Telecom (DE), to serve as a director of the Company; (ii) all individuals serving as officers of the Company immediately prior to the Merger resigned their positions with the Company; and (iii) the officers of i2Telecom (DE) were appointed as officers of the Company. 

 

On February 27, 2004, the Company sold substantially all of its operating assets relating to the operations of The Transit Network to Intransit Media, Inc. (“InTransit Media”) in exchange for InTransit Media assuming certain obligations and liabilities relating to such assets (the “Asset Sale”), pursuant to that certain Asset Purchase Agreement dated as of February 26, 2004, as amended by the First Amendment thereto dated as of February 26, 2004, between the Company and InTransit Media (the “Asset Purchase Agreement”). On March 5, 2004, in connection with the Merger and the Asset Sale, the Company changed its name from “Digital Data Networks, Inc.” to “i2 Telecom International, Inc.” and changed its ticker symbol on the over-the-counter electronic bulletin board from “DIDA” to “ITUI”. On December 8, 2004, the Companyrelocated its corporate headquarters to Georgia in order to be closer to more technology driven companies and to aide in the Company’s recruitment of technology workers. As a result of the Merger and the Asset Sale, the Company’s operations now consist of the operations of i2Telecom (DE). The Company’s operations as currently conducted are described below. 

 

The Company, through its subsidiary, i2Telecom (DE), provides low-cost telecommunications services employing next-generation Voice over Internet Protocol (“VoIP”) technology. These operations are based in Roswell, Georgia. Through i2Telecom (DE), the Company controls its own proprietary technology and outsources the majority of its production and service functions with strategic partners. The Company, through i2Telecom (DE), provides the VoiceStick®, micro gateway adapters, VoIP long distance and other enhanced communication services to subscribers. The Company’s proprietary technology platform is built to the Session Initiation Protocol (“SIP”) standard. The Company’s revenue model now includes 

revenue from the sale of the VoiceStick® and other integrated access devices (“IADs”) along with recurring monthly subscriptions and call minute termination. The Company believes its proprietary technology provides meaningful advantages as compared to the technology of other VoIP providers particularly in the areas of quality of service, cost and robust feature set.

 

The Company’s proprietary technology platform is built to the SIP standard and offers the end user the following primary benefits: 

 

 

 

 

**•**    near carrier grade quality of service 

 

 

 

 

**•**    low cost long distance calling worldwide;

 

 

 

 

**•**    broadband telephony access via your laptop with the Company’s VoiceStick®; 

 

 

 

 

**•**    broadband telephony technology in the Company’s InternetTalker® IAD; 

 

 

 

 

**•**    plug and play technology using traditional phones without professional installation;

 

 

 

 

**•**    unlimited global calling among VoiceStick® and micro gateway users with a minimal monthly subscription; and

 

**•**    local and long distance calling via cellular phones utilizing Company’s proprietary technology.

 

 

The Company’s management is focused solely upon VoIP as the Company’s primary line of business. In addition, the Company’s management is constantly exploring various strategic alternatives, including partnering with other telecommunication companies, both foreign and domestic, and engaging in acquisitions of strategic competitors and/or telecommunication service providers. There can be no assurances that such efforts will be successful. The Company may finance these new business opportunities through a combination of equity and/or debt. If the Company determines to finance these opportunities by issuing additional equity, then such equity may have rights and preferences superior to the outstanding 

Common Stock, and the issuance of such equity will dilute the ownership percentage of the Company’s existing shareholders. If the Company determines to finance these opportunities by incurring debt, then such debt may not be available to the Company on favorable terms, if at all. 

 

**Liquidity and Going Concern**

 

It is imperative that the Company raise capital in the near-term in order to continue as a going concern. Without raising additional capital, the Company likely will not be able to satisfy 

its current and other liabilities due in the near-term unless they are modified or restructured. There is no guarantee that (i) additional capital will be available to the extent required, or that if available, it will be available on terms acceptable to the Company, or (ii) the Company’s current and other liabilities due in the near-term can be modified or restructured. If the Company cannot raise additional capital or modify or restructure such liabilities, then the Company may be unable to pursue its business plan and may be forced to cease doing business. 

 

As can be seen from the Company’s filings with the Securities and Exchange Commission (the “SEC”) over the past year, the Company has experienced net losses and negative cash flows from operations and has an accumulated deficit at March 31, 2007 of $29,953,175 million and a negative working capital position. The ability of the Company to generate positive cash flows from operations and net income is dependent, among other things, on market conditions, the recovery of recorded assets, cost control, identifying and securing additional revenue sources, and the Company’s ability to raise capital under acceptable terms. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. As noted in an explanatory paragraph in the Report ofIndependent Certified Public Accountants on the Company’s consolidated financial statements for the year ended December 31, 2006, as set forth in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006, (the “Annual Report”), these conditions have raised substantial doubt about the Company’s ability to continue as a going concern.

 

**Critical Accounting Policies**

 

The policies identified below are considered as critical to the Company’s business operations and the understanding of the Company’s results of operations. The impact of and any associated risks related to these policies on the Company’s business operations is discussed throughout “Management’s Discussion and Analysis or Plan of Operation.” For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Company’s consolidated financial statements for the year ended December 31, 2006, included in the Annual Report. Preparation of this Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007 (this “Quarterly Report”) requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, andthe reported amounts of revenue and expenses. There can be no assurance that actual results will not differ from those estimates.

 

**Basis of Consolidation**

 

The consolidated financial statements include the accounts of i2Telecom (DE) and SuperCaller Community, Inc. (“SuperCaller”), both of which are, directly or indirectly, wholly-owned subsidiaries of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. 

 

**Accounting Estimates**

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management 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 revenue and expenses during the reporting period. Estimates are used when accounting for allowances for doubtful accounts, revenue reserves, inventory 

reserves, depreciation and amortization, taxes, contingencies and impairment allowances. Such estimates are reviewed on an on-going basis and actual results could differ from those estimates.

 

**Revenue Recognition**

 

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”), as amended by SAB No. 101A and SAB No. 101B. SAB No. 101 requires that four basic criteria must be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services rendered; (iii) the fee is fixed and determinable; and (iv) collectibility is reasonably assured. Determination of criteria (iii) and (iv) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could beadversely affected. The Company has concluded that its revenue recognition policy is appropriate and in accordance with accounting principles generally accepted in the United States of America and SAB No. 101.

 

**Impairment of Long-Lived Assets**

 

The Company evaluates its long-lived assets for financial impairment and continues to evaluate them as events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flows from an asset is less than its carrying value. In that event, a loss is recognized for the amount by which the carrying value exceeds the fair value of the long-lived asset. The Company has not recognized any impairment losses. 

 

**Recent Accounting Pronouncements**  

 

In February of 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”(“SFAS NO. 155”), which is intended to simplify the accounting and improve the financial reporting of certain hybrid financial instruments. (i.e., derivatives embedded in other financial instruments). The statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125. SFAS No. 155 is effective for all financial instruments issued or acquired after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is New Accounting Pronouncements - In February of 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments”, which is intended to simplify the accounting and improve the financial reporting of certain hybrid financial instruments. (i.e., derivatives embedded in other financial instruments). The statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125. SFAS No. 155 is effective for all financial instruments issued or acquired after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the impact of SFAS No. 155 will have on its financial statements, if any.

 

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations.

 

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting 

for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109. “Accounting For Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management has not determined the effect, if any, the adoption of this statement will have on our results of operations or financial position.

 

**Quantitative and Qualitative Disclosure about Market Risk**

 

The Company believes that it does not have any material exposure to interest or commodity risks. The Company does not own any derivative instruments and does not engage in any hedging transactions.

 

**Comprehensive Income or Loss**

 

The Company has no components of other comprehensive income or loss, and accordingly, net loss equals comprehensive loss for all periods presented.

 

**Earnings Per Share**

 

For the first quarter of 2007 and 2006, net loss per share is based on the weighted average number of shares of Common Stock outstanding. At March 31, 2007 and March 31, 2006, the Company had, on a weighted average basis, 88,351,045 shares and 38,397,923 shares of Common Stock outstanding, respectively. 

 

At March 31, 2007, the Company had outstanding 100,926,674 shares of Common Stock and options and warrants to purchase 73,843,143 shares of Common Stock. Consequently, on an as-converted, fully-diluted basis, the Company would have 174,769,817 shares of Common Stock outstanding at March 31 2007.Options on 73,843,143 shares of common stock were not included in the computing of diluted earnings per share nor were bonds convertible into common shares because their effects were antidilutive

 

**Stock Compensation**

 

During 2004, the Company’s shareholders approved a stock option plan for its officers, directors and certain key employees. Generally, the options vest based on the attainment of certain performance criteria set forth in the option agreements. In addition, the Company has issued stock warrants to key employees, consultants, and certain investors, with expiration dates of one to five years. Effective January 1, 2005, the Company adopted early application of SFAS No. 123R. SFAS No. 123R supersedes APB Opinion No. 25 which was previously used by the Company. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Under APB Opinion No. 25, compensation expense wasrecorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price, the intrinsic value method. Under SFAS No. 123R, the Company recognizes an expense over the vesting period of the fair value of all stock-based awards on the date of grant. Beginning January 1, 2005, all stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123R and related interpretations.

 

Stock compensation expense is comprised of the amortization of deferred compensation resulting from the grant of stock options to employees at exercise or sale prices deemed to be less than fair value of 

the Common Stock at grant date, net of forfeitures related to such employees who terminated service while possessing unvested stock options, as these terminated employees have no further service obligations.

 

**Reclassifications**

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

**Interim Financial Data**

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC. These financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2006, set forth in the Annual Report. The interim financial information included herein has not been audited. However, management believes the accompanying unaudited interim financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the consolidated financial position of i2 Telecom International, Inc. and Subsidiaries as of March 31,2007 and March 31, 2006, and the results of their operations and cash flows for the three months ended March 31, 2007 and 2006. The results of operations and cash flows for the period are not necessarily indicative of the results of operations or cash flows that can be expected for the year ending December 31, 2007.

 

NOTES PAYABLE

 

Notes Payable as of March 31, 2007 and December 31, 2006:

 

 

 

2007

2006

a.    8% note payable due to an individual previously affiliated with SuperCaller. The principal and all accrued interest are due and payable upon the Company obtaining certain levels of equity funding. 

 

$50,000

$50,000

b. 6% note payable due to an individual previously affiliated with SuperCaller. The principal and all accrued interest are due and payable upon the Company obtaining certain levels of equity funding. 

 

50,000

50,000

c.  10% note payable due to an individual shareholder of the company payable in monthly installments of $4,000, including interest, through August 31, 2007 when all outstanding principal and interest is due. The note is unsecured and guaranteed by an officer of the Company. 

 

265,446

273,000

d. 12% note payable due to a corporation. The principal and all accrued interest were due on Sept. 30, 2005.The note is unsecured and guaranteed by an officer of the Company. In March 2007, the maturity date was extended to June 30, 2007.

 

100,000

100,000

e. 12% note payable due to an corporation. In January The note was repaid in full in the current quarter.

 

0

300,000

f. 12% note payable to an officer and director of the Company. The note was repaid in full in the current quarter.

 

0

75,000

g. 12% note payable due to an individual. The note was repaid in full in the current quarter.

 

0

50,000

 

 

h. 12% note payable due to an individual. The note was repaid in full in the current quarter.

0

50,000

 

i. 10% note payable due to a corporation. The note requires weekly payments of $3,000, including interest, until paid in full. In addition to weekly payments, the note requires payments of $10,000 for every $100,000 of new capital raised. The note is unsecured. 

90,930

133,607

k. 13% note payable due to corporation. The note was repaid in March 2007. 

0

1,000,000

l. 13% note payable due to an individual. The note was repaid in March 2007.

 

0

100,000

m. 13% note payable due to an individual. The note was repaid in March 2007.

 

0

100,000

n. 12% note payable due to an individual. In January 2007, the note and accrued interest was paid off via the issuance of common stock. 

 

0

50,000

o. 12% note payable due to an individual with a maturity date of September 15, 2006. In January 2007, the note principal and accrued interest were paid off through the issuance of common stock.

 

0

50,000

p. 8% note payable to an individual. The principal and all accrued interest were due on February 18, 2006. The note is unsecured. In March 2007, the maturity date was extended until June 30, 2007.

 

25,000

25,000

q. 8% note payable to an individual. The principal and all accrued interest were due on February 18, 2006. The note is unsecured. In March 2007, the maturity date was extended until June 30, 2007.

 

25,000

25,000

r. 12% note payable to an individual. The principal and all accrued interest was due on March 15, 2007. The note is unsecured. In March 2007, the maturity date was extended until June 30, 2007

 

100,000

100,000

s. 12% note payable to an individual. The principal and all accrued interest were due on March 15, 2007. The note is unsecured. In March 2007, the maturity date was extended until June 30, 2007.

 

200,000

200,000

t. 8.25% note payable to anindividual. The principal and all accrued interest are due on January 4, 2008. The note is secured.

 

750,000

0

u. 8.25% note payable to an individual. The principal and all accrued interest are due on January 4, 2008. The note is secured.

 

250,000

0

v. Non interest bearing note payable to a corporation due on 1/31/2007. The note was unsecured and was paid off in firstQuarter.

 

0

30,000

 

 

 

 

 

Total Long Term Debt

1,906,376

2,761,607

Less: Current Portion

1,906,376

2,761,607

Long-Term Portion

$ -0-

$ -0-

 

 

CONVERTIBLE BONDS 

 

On January 9, 2006, the Company closed a financing transaction in which it sold 10% secured convertible debentures (the “Debentures”) to Cornell Capital Partners, LP (“Cornell”) to raise $1,750,000 pursuant to a Securities Purchase Agreement dated thereof (the “Securities Purchase Agreement”). The Company paid Yorkville Advisors, LLC a structuring fee of $15,000 and paid a commitment fee equal to 10% of the total purchase price of the Debentures upon the funding of the Debentures. Cornell also received a three-year warrant to purchase 7,150,000 shares of common stock at an exercise price of $0.07 per share (the “Warrant”).

 

During the year ended December 31, 2006, Cornell converted $425,000 of the convertible bonds into 14,707,310 shares of common stock. In January 2007, the Company paid off the remaining balance due to Cornell on these bonds. 

 

On December 29, 2006, the Company closed a financing transaction in which it sold 6% secured convertible debentures (the “Debentures”) to raise $2,000,000 pursuant to a Securities Purchase Agreement dated thereof (the “Securities Purchase Agreement”). The Company received $1,625,000 in December 2006 and remaining 375,000 in January 2007.

The Debentures mature on June 29, 2007. The Debentures are convertible from time to time into 28,571,429 shares of common stock of the Company at the price of $.07 per share and 28,571,429 warrants exercisable at the price of $.07 per share. In addition The Notes will automatically convert into Common Stock if any of the following events occur: (i) the Shares become registered and freely trading, or (ii) the financial closing by the Company of $10,000,000 or more. The warrants associated with the bonds were valued at $987,343. The proceeds from the sale of the bonds have been allocated between the bonds and warrants and a discount on the bonds have been recorded.  As of March 31, 2007, the unamortized bond discount was $493,671.

On February 28, 2007, the Company closed a financing transaction in which it sold 6% secured convertible debentures (the “Debentures”) to raise $2,000,000 pursuant to a Securities Purchase Agreement dated thereof (the “Securities Purchase Agreement”). 

The Debentures mature on August 28, 2007. The Debentures are convertible from time to time into 16,666,666 shares of common stock of the Company at the price of $.12 per share and 8,333,333 warrants exercisable at the price of $.12 per share. In addition The Notes will automatically convert into Common Stock if any of the following events occur: (i) the Shares become registered and freely trading, or (ii) the financial closing by the Company of $10,000,000 or more. The warrants associated with the bonds were valued at $851,871. The proceeds from the sale of the bonds have been allocated between the bonds and warrants and a discount on the bonds have been recorded.  As of March 31, 2007, the unamortized bond discount was $709,892.

 

Convertible bonds at March 31, 2007 and December 31, 2006:

 

 

2007

2006

10% Convertible Bonds

0

1,325,000

6% Convertible Bonds

2,796,436

822,784

Total

2,796,436

2,147,784

 

 

 

 

 

 

 

 

 

 

STOCK OPTIONS AND WARRANTS 

 

 

March 31, 2007

December 31,2006

 

 

 

 

 

Number of

Options/

Warrants

Weighted

Average

Exercise

Price

 

Number of

Options/

Warrants

Weighted

Average

Exercise

Price

Outstanding at Beginning of 

Period

 

81,668,183

 

$ .23

 

27,784,602

 

$   .56

Options Granted

950,000

$ .23

7,546,940

$ .08

Warrants Granted

38,301,190

$ .07

53,814,744

$ .08

Forfeited

(879,073)

$ .61

(5,518,731)

$ .24

Corrected

(9,292,395)

$ .37

(1,959,372)

$ .01

Outstanding at End of Period

110,747,905

$ .17

81,668,183

$ .23

Options Exercisable at End of 

Period

110,114,809

 

$ .10

 

80,798,104

 

$ .13

Weighted-average Fair Value of

Options Granted During the Period

 

 

$ .02

 

 

 

$ .06

 

 

As of March 31, 2007, the range of option and warrant exercise prices for outstanding and exercisable options and warrants was $.01 to $1.00 with a weighted average remaining contractual life of 2.13 years.

 

STOCK APPRECIATION RIGHTS AND RESTRICTED SHARE UNITS 

 

On December 31, 2003, the Company terminated its stock appreciation plan and cancelled all outstanding rights granted. As consideration for the consideration of rights cancelled, each employee received restricted stock or cancellation of their notes receivable at rate of $3.00 per right. On December 31, 2003, the Company amended its 2002 Stock Option Plan to properly administer the granting of restricted stock. Under the amended plan, employees are granted restricted share units without cost to the employee. Each restricted share unit awarded to a participant represents an unfunded, unsecured right, which is nontransferable except in the event of death, of the employee to receive one share of common stock, $.01 par value, of i2Telecom (DE) on the date specified in the grant. As a result of the Merger each such right was converted into the right to receive shares of Common Stock, no parvalue per share, and Preferred Stock Series B, no par value per share (the “Preferred Stock Series B”), as outlined in the Merger 

Agreement. The restricted share units granted under the plan vest evenly over three years, with immediate vesting upon termination. 

 

Information with respect to restricted share units as of March 31, 2007 and 2006 is as follows:

 

 

2007

2006

Restricted Units-Beginning of Year

1,003,784

382,568

Restricted Units Granted

0

6,500,000

Transfer to Common Stock Due to Lapse of Restrictions

(816,294)

(5,878,784)

Restricted Units-End of Year

187,500

1,003,784

Weighted Average Fair Value of Shares

$ .07

$ .14

Pre-Tax Compensation Expense Charged to

Earnings, net of cancellations

 

$ -0-

 

$ 392,500

 

 

SUBEQUENT EVENTS 

 

In May 2007, the Company issued to Vestal Venture Capital three-year warrants to purchase aggregate of 600,000 shares of Common Stock at an exercise price of $0.15 per share, vested immediately upon the date of grant with a three-year expiration period. The warrants were issued in connection with the execution of a promissory note in the amount of $600,000 made to the Company. 

 

RESTATEMENT OF FINANCIAL STATEMENTS 

 

The financial statements for the three months ended March 31, 2007 have been restated to properly reflect a discount on convertible bonds and allocate the portion of proceeds received to warrants issued along with convertible debt. The restatement increased the net loss for the three months ended March 31, 2007 by $182,404, net of income taxes. 

 

**Item 2. Management’s Discussion and Analysis or Plan of Operation**

 

Certain statements in this Quarterly Report and in future filings by the Company with the SEC and in the Company’s written and oral statements that are not statements of historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “intend,” “will” and similar expressions are examples of words that identify forward-looking statements. Forward-looking statements include, without limitation, statements regarding our future financial position, business strategy and expected cost savings. These forward-looking statements are based on our current beliefs, as well as assumptions we have made based upon information currently available to us. 

 

Each forward-looking statement reflects our current view of future events and is subject to risks, uncertainties and other factors that could cause actual results to differ materially from any results expressed or implied by our forward-looking statements. Important factors that could cause actual results to differ materially from the results expressed or implied by any forward-looking statements include: 

 

 

• 

 

our ability to fund future growth; 

 

 

• 

 

our ability to become profitable; 

 

 

• 

 

the volatility of the price of our Common Stock; 

 

 

• 

 

market demand for and market acceptance for our products; 

 

 

• 

 

our ability to protect our intellectual property rights; 

 

 

• 

 

new regulation and legislation; 

 

 

• 

 

trends for the continued growth of our business and other businesses we may acquire; 

 

 

• 

 

our ability to successfully market existing products and services and develop and market new products and services; 

 

 

• 

 

our ability to expand our market for existing products and services; 

 

 

• 

 

the effects of our accounting policies and general changes in accounting principles generally accepted in the United States of America; 

 

 

• 

 

General economic conditions of the telecommunications market, including the new and evolving market for next-generation communications solutions; and 

 

 

• 

 

other risks and uncertainties disclosed in our Annual Report. 

 

 

On November 5, 2005, the Federal Communications Commission (FCC) (www.fcc.gov) Enforcement Bureau issued further revisions to E-911 compliance requirements for interconnected VoIP service providers. VoIP providers won’t be forced to cut off subscribers who don’t receive E-911 services by November 28, 2005. However, VoIP companies will be expected to stop marketing their service and accepting new customers in service areas that aren’t equipped to do E-911 call routing, even if subscribers would be able to get “basic” 911 service. The FCC document states “Although we do not require providers that have not achieved full 911 compliance by November 28, 2005, to discontinue the provision of interconnected VoIP service to any existing customers, we do expect that such providers willdiscontinue marketing VoIP service, and accepting new customers for their service, in all areas where they are not transmitting 911 calls to the appropriate PSAP in full compliance with the Commission’s rules.”

 

As of the date of this report, the Company has only partly met the FCC’s order for E-911 compliance.

All subsequent forward-looking statements relating to the matters described in this document and attributable to us or to persons acting on our behalf are expressly qualified in their entirety by such factors. We have no obligation to publicly update or revise these forward-looking statements to reflect new information, future events, or otherwise, except as required by applicable Federal securities laws, and we caution you not to place undue reliance on these forward-looking statements. 

 

**Business of the Company**

 

The Company, through its subsidiary, i2Telecom (DE), provides low-cost telecommunications services employing next-generation VoIP technology. These operations are based in Atlanta, Georgia. Through i2Telecom (DE), the Company controls its own proprietary technology and outsources the majority of its production and service functions with strategic partners. The Company, through i2Telecom (DE), provides the VoiceStick®, micro gateway adapters (InternetTalker®), VoIP long distance and other enhanced communication services to subscribers. The Company’s proprietary technology platform is built to the Session Initiation Protocol (“SIP”) standard. The Company’s revenue model now includes revenue from the sale of the VoiceStick® and other integrated access devices (“IADs”) along with recurring monthly subscriptions andcall minute termination. The Company believes its proprietary technology provides meaningful advantages particularly in the areas of ease of use, high quality service, and low cost and robust features.

 

The Company’s proprietary technology platform is built to the SIP standard and offers the end user the following primary benefits: 

 

 

•

near carrier grade quality of service; 

 

 

•

low cost long distance calling worldwide; 

 

 

•

broadband access via laptop with the Company’s VoiceStick®; 

 

 

•

broadband technology in the Company’s InternetTalker® IAD; 

 

 

•

plug and play technology using traditional phones (including cellular) without professional installation; and 

 

 

•

unlimited global calling among VoiceStick® and InternetTalker® IAD users with a minimal monthly subscription. 

 

The Company’s management intends to focus solely upon VoIP as the Company’s primary line of business. In addition, the Company’s management is constantly exploring various strategic alternatives, including partnering with other telecommunication companies, both 

foreign and domestic, and engaging in acquisitions of strategic competitors and/or telecommunication service providers. There can be no assurances that such efforts will be successful. The Company may finance these new business opportunities through a combination of equity and/or debt. If the Company determines to finance these opportunities by issuing additional equity, then such equity may have rights and preferences superior to the outstanding Common Stock and Preferred Stock, and the issuance of such equity will dilute the ownership percentage of the Company’s existing shareholders. If the Company determines to finance these opportunities by incurring debt, then such debt may not be available to the Company on favorable terms, if at all. 

 

 

RESULTS OF OPERATIONS

 

**Results of operations for the three months ended March 31, 2007 compared with the results of operations for the three months ended March 31, 2006.**

 

Revenues increased to $180,113 for the first quarter of 2007 from $140,003 for the first quarter of 2006. The increase in revenues was driven by an increase in the number of customer subscriptions to the Company’s service offerings.

 

Cost of revenues increased to $115,051 for first quarter of 2007 from $71,017 for first quarter of 2006. The increase was associated with the increase in customer subscriptions.

 

Gross profit for the first quarter of 2007 was $65,062 as compared to a gross profit of $68,986 for the first quarter of 2006. 

 

Sales, general and administrative expenses for the first quarter of 2007 were $2,139,052 as compared to $1,369,290 for the same period in 2006. This increase was primarily attributable to a combination of increased stock compensation expenses and an increase in fees associated with financing activities. 

 

Loss from operations for the first quarter of 2007 as compared to the first quarter of 2006 increased to $2,073,990 from $1,300,304 primarily due to the increase in sales, general and administrative expenses for the first quarter. 

 

Net loss for the first quarter of 2007 was $2,114,496 as compared to a net loss for the same period in 2006 of $1,351,139. The increase in net loss for the first quarter 2007 as compared to the same period in 2006 is primarily attributable to a combination of increased stock compensation expenses and an increase in fees associated with financing activities. 

 

The Company’s net accounts receivable balance increased between March 31, 2007 and March 31, 2006 by approximately $11,000. This increase is due to additional invoicing during the quarter. The Company’s inventory decreased by approximately $56,000 between March 31, 2007 and March 31, 2006. The inventory decrease was primarily due to shipments  to customers.

 

 

 

**For the Three Months Ended**

 

 

**March 31,**

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

Variance

 

% Diff.

Gross Revenue

 

$180,113

 

$140,003

 

$40,111

 

29%

Cost of Sales

 

115,051

 

71,017

 

(44,034)

 

(62%)

Gross Profit

 

$65,062

 

$68,986

 

($3,923)

 

(6%)

Operating Expenses:

 

 

 

 

 

 

 

 

General and Administrative Expenses

 

$2,139,052

 

$1,369,290

 

$(769,762)

 

(43%)

Other Income (Expense) Net

 

(40,506)

 

(50,835)

 

10,329

 

20%

Net Loss

 

($2,114,496)

 

($1,351,139)

 

$(763,357)

 

(43%)

 

RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS-CONTINUED

LIQUIDITY AND CAPITAL RESOURCES 

 

**Liquidity and capital resources as of March 31, 2007 as compared with liquidity and capital resources as of March 31, 2006.**

 

On March 31, 2007, the Company had a working capital deficit of  $6,838,204 compared to March 31, 2006 when the Company had a working capital deficit of approximately $5,700,000. The increase in the Company’s working capital deficit was primarily due to a increase in short-term debt of approximately $1,700,000. Net cash used in operating activities was ($1,864,771) for the first quarter of March 31, 2007. Again, the increase in net cash used in operating activities between March 31, 2007 and March 31, 2006 is attributable to a increase in fees associated with finance activity’s and decresase in accounts payable. Net loss from operations of $2,114,496 is reduced by the following non-cash items : depreciation (approximately $90,000), stock compensation (approximately $139,000) and amortization of loan fees (approximately $816,000). Primary sources of cash inflows from operations are from sales ofthe VoiceStick®, VoiceStick® activation charges and pre-paid charges and receivables collected from sales to customers for the Company’s IAD, as well as the collection of revenue for carrying long distance calls and from monthly service fees. Future cash inflows from sales are subject to the Company’s pricing and ability to procure business at existing market conditions.

 

Net cash used in investing activities was approximately ($9,178) for the first quarter of 2007 as compared to approximately ($33,123) for the same period in 2006. Both periods investing activities were primarily due to equipment purchases and payment for patents and trademarks. 

 

Net cash provided by financing activities was $1,072,448 for the first quarter of 2007 as compared to $1,317,477 for the same period in 2006. The principal source of cash for the first quarter of 2007 was from the issuance of notes payable of $1,000,000, the issuance of convertible bonds of $2,375,000, and the exercise of stock options of $402,680, offset by the retirement of notes payable of $1,380,232 and the repayment of convertible bond of $1,325,000. 

 

OFF BALANCE SHEET ARRANAGEMENTS 

 

None.

 

**Item 3: Controls and Procedures**

 

The Company’s Chief Executive Officer and principal financial officer has evaluated the Company’s controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officer has concluded that, as of the end of the period covered by this Quarterly Report, the Company’s controls and procedures are effective.

 

**PART II-OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

The Company is not a party to any material legal proceedings other than ordinary routine claims and proceedings incidental to its business and the Company does not expect these ordinary claims and proceedings, either individually or in the aggregate, to have a material adverse effect on the Company.

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

In January 2007, the Company issued to James Rose and Doug Bender, both officers of the Company, 624,671 and 1,000,000 restricted shares, respectively, of Common Stock in lieu of compensation in the amounts of $62,467 and $100,000, respectively. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the shares to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon the filing by the Company of a registration statement. 

Also in January 2007, the Company issued to a consultant three-year warrants to purchase an aggregate of 1,600,000 shares of Common Stock at an exercise price of $0.12 per share, vesting at the rate of 133,333 warrant shares per month, with a three-year expiration period. In addition, the Company issued an aggregate of 1,000,000 shares of Common Stock at an exercise price of $0.01 per share, vesting at the rate of 166,666 warrant shares per month, with a three-year expiration period in connection with services provided to the Company. The warrants were issued in consideration of consultancy agreement with the Company. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the warrants to the Companyregarding their investment interest and sophistication, among other things. 

Also in January 2007, the Company issued to five individuals, including Audrey Braswell, a director, and Paul Arena, an officer and director, an aggregate of 5,045,856 shares of Common Stock in lieu of outstanding promissory notes, with interest, totaling $504,587. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the shares to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon the filing by the Company of a registration statement. 

In February 2007, the Company issued to Joel Katz an aggregate of 1,000,000 shares of Common Stock in lieu of $100,000 in consulting fees due. The shares were issued in connection with consulting services provided by him to the Company. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the warrants to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by the Company of a registration statement.

Also in February 2007, the Company issued to five individuals, an aggregate of 970,000 shares of Common Stock in lieu of $112,150 in fees due. The shares were issued in connection with services provided by them to the Company. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the shares to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by the Company of a registration statement. 

Also in February 2007, the Company issued to 42 individuals three-year warrants to purchase aggregate of 8,333,333 shares of Common Stock at an exercise price of $0.12 per share, vested immediately upon the date of grant with a three-year expiration period. The warrants were issued in connection with the execution of Convertible Notes in the aggregate amount of $2,000,000 made to the Company. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the warrants to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by the Company of a registration statement.

In March 2007, the Company issued to Audrey Braswell, a director, and Phillip Rapp, 750,000 and 250,000 shares, respectively, of Common Stock in accordance with the terms of promissory notes in the amounts of $750,000 and $250,000, respectively. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. 

The Company based such reliance upon factual representations by the recipients of the shares to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by the Company of a registration statement. 

Also in March 2007, a total of 5,263,941 shares of Common Stock were issued to 12 individuals and institutional investors of the Company’s Series D and Series E convertible preferred shares in lieu of $374,068 of preferred dividends for the first, second , third and fourth quarters of 2006. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the shares to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon the filing of a registration statement. 

Also in March 2007, a total of 3,288,700 shares of Common Stock were issued to 16 individuals and institutional investors who exercised warrants received upon the purchase of the Company’s Series C convertible preferred shares. The Company received $394,644 from the warrant exercise. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the shares to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon the filing of a registration statement. 

Also in March 2007, the Company issued to Mssrs. Troon, McGraw and Glazov an aggregate of 2,878,571 shares of Common Stock upon the exercise of warrants. The warrants, exercisable at an average exercise price of $.125 per share, were issued in lieu of additional consideration for a loan extension to the Company. Mssrs. Troon, McGraw and Glazov exercised the warrants under the cashless exercise provisions of their warrant agreement. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the warrants to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon the filing of a registration statement. 

Also in March 2007, the Company issued to Phillip Rapp an aggregate of 942,857 shares of Common Stock upon the exercise of warrants. The warrants, exercisable at an average exercise price of $.077 per share, were issued in lieu of additional consideration for a loan extension to the Company. Mr. Rapp exercised the warrants under a cashless exercise formula. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipient of the warrants to the Company regarding his investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon the filing of a registration statement. 

In May 2007, the Company issued to Vestal Venture Capital three-year warrants to purchase aggregate of 600,000 shares of Common Stock at an exercise price of $0.15 per share, vested immediately upon the date of grant with a three-year expiration period. The warrants were issued in connection with the execution of a promissory note in the amount of $600,000 made to the Company. The warrants were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the warrants to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing by the Company of a registration statement.

 

**Item 3. Defaults Upon Senior Securities**

 

As of December 31, 2006, the Company was in arrears in the payment of dividends in the amount of $374,068 owed in respect of the Company’s outstanding Preferred Stock Series D and Preferred Stock Series E. Default interest rate accrues at 13% per annum. On March 27, 2007, a total of 5,263,941 shares of Common Stock were issued to 12 individuals and institutional investors in full satisfaction of the above 

referenced dividends. The shares were issued without registration under the Securities Act in reliance upon the exemptions from registration set forth in Section 4(2) and Regulation D. The Company based such reliance upon factual representations by the recipients of the shares to the Company regarding their investment interest and sophistication, among other things. However, these shares are entitled to “piggyback registration” rights upon filing of a registration statement within 6 months. 

 

**Item 6. Exhibits**

 

The exhibits required to be filed with this Quarterly Report are set forth on the Exhibit Index filed herewith.

 

**SIGNATURE**

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Date: August 22, 2007

 

 

 

/S/ Paul R. Arena

 

 

Paul R. Arena,

 

 

Chairman of the Board

 

 

Chief Executive   Officer and

 

 

Principal Financial Officer

 

 

 

 

 

 

**EXHIBIT LIST**

 

 

 

 

 

 

 

 

**Exhibit** **No.**

 
**Exhibit**

 
**Method of Filing**

 
 

 

 

 

 

 

 

 

 

 

 

 

 

3.1 

   

Articles of Incorporation, as amended. 

   

Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003. 

 

 

 

 

 

3.2 

   

Bylaws, as amended.

   

Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003. 

 

 

 

 

 

3.3 

   

Certificate of Designations of Rights and Preferences of Preferred Stock Series D of i2 Telecom International, Inc. 

   

Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed August 13, 2004. 

 

 

 

 

 

3.4 

   

Amendment to the Company’s Articles of Incorporation filed June 3, 2004. 

   

Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004. 

 

 

 

 

 

3.5 

   

Amendment to the Company’s Articles of Incorporation filed August 10, 2004. 

   

Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004. 

 

3.6

 

Certificate of Designations for Series E Preferred Stock.

 

Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 22, 2005.

 

 

 

 

 

3.7

 

Amendment to the Company’s Articles of Incorporation filed April 17, 2006.

 

Incorporated by reference to Exhibit 3.1.8 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.1

 

Registration Rights Agreement dated May 2007 by and between the Company and Vestal Venture Capital.

 

 

Filed herewith.

4.2

 

Warrant dated May 2007 by and between the Company and Vestal Venture Capital.

 

Filed herewith.

 

 

 

 

10.1

 

Promissory Note dated May 2007 by and between the Company and Vestal Venture Capital.

 

 

Filed herewith.

10.2

 

Term Loan Agreement dated May 2007 by and between the Company and Vestal Venture Capital.

 

 

Filed herewith.

10.3

 

Pledge Agreement dated May 2007 by and between the Company and Vestal Venture Capital.

 

 

Filed herewith.

10.4

 

Loan Subordination Agreement dated May 2, 2007 by and between the Company and University Bank.

 

Filed herewith.

 

 

 

31.1 

   

Rule 13a-14(a)/15d-14(a) Certification of the Company’s Chief Executive Officer. 

   

Filed herewith. 

 

 

 

 

 

31.2 

   

Rule 13a-14(a)/15d-14(a) Certification of the Company’s Chief Financial Officer. 

   

Filed herewith. 

 

 

 

32.1 

   

Section 1350 Certification of the Company’s Chief Executive Officer. 

   

Filed herewith. 

 

 

 

32.2 

   

Section 1350 Certification of the Company’s Principal Financial Officer. 

   

Filed herewith. 

 

**Exhibit 31.1**

 

**Certification**

 

I, Paul R. Arena, certify that: 

 

 

1.

I have reviewed this Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007 of i2 Telecom International, 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 small business issuer as of, and for, the periods presented in this report; 

 

4.

As the sole certifying officer, I am are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer 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 small business issuer, 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)

Evaluated the effectiveness of the small business issuer’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 

 

(c)

Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and 

 

5.

As the small business issuer’s sole certifying officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s 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 small business issuer’s internal control over financial reporting. 

 

Date: August 22, 2007

 

 

/S/ Paul R. Arena

 

Paul R. Arena,

 
 

Chairman of the Board,

Chief Executive Officer and Principal Financial Officer

 

**Exhibit 32.1**

 

**SECTION 1350 CERTIFICATION**

 

I, Paul R. Arena, Chairman of the Board, Chief Executive Officer and Chief Financial Officer of i2 Telecom International, Inc. (the “Company”), do hereby certify in accordance with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

 

1.

The Quarterly Report on Form 10-QSB of the Company for the period ended March 31, 2006 (the “Periodic Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. §§78m or 78o(d)); and

 

 

2.

The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: August 22, 2007

 

 

/S/ Paul R. Arena

 

Paul R. Arena,

 
 

 

 
 

Chairman of the Board, 

 
 

Chief Executive Officer and Principal Financial Officer

 
 

Chairman of the Board, 

 
 

 

 

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