UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NUMBER 4 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
INNOFONE.COM, INC.
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(Name of Small Business Issuer in its charter)
NEVADA 98-020313
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
600 NORTH PINE ISLAND ROAD, SUITE 450, PLANTATION, FLORIDA 33324
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (954) 315-0341
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
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(Title of Class)
TABLE OF CONTENTS
Description of Business...........................................................................................1
Risk Factors......................................................................................................9
Management's Discussion and Analysis of Financial Condition and Results of Operations............................18
Legal Proceedings................................................................................................24
Recent Sales of Unregistered Securities..........................................................................24
Index to Financial Statements....................................................................................26
Financial Statements............................................................................................F-1
EXPLANATORY NOTE: Pursuant to Rule 12b-15 under the Securities Exchange Act
of 1934, as amended, the amended Items are amended and restated as set forth
below.
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
On June 26, 1998, we acquired Innofone Canada Inc. (formerly APC
Telecom Inc), a federally chartered Canadian company, in a stock-for-stock
exchange pursuant to an Agreement and Plan of Reorganization dated June 12,
1998 among Innofone.com, Innofone Canada and the shareholders of Innofone
Canada. As a result of the exchange, Innofone Canada became a wholly owned
subsidiary of Innofone.com. Innofone.com issued to the shareholders of Innofone
Canada 5,000,000 shares of its common stock, par value $.001 per share and
5,000,000 shares of its Series A, Convertible Preferred Stock.
Innofone.com, originally Propaint Systems, Inc., was incorporated in
Nevada in 1995. However, until the merger in June 1998, it was essentially a
"shell" company with no assets or operations.
Currently, all of our operations our conducted through our Canadian
operating subsidiary, Innofone Canada. We have two other subsidiaries, but they
do not conduct operations at this time.
Innofone Canada Inc. was incorporated in April 1998 for the purpose of
reselling traditional long distance and Internet telephony services to the
Canadian small business and residential markets. It had agreements in place that
allowed it to resell traditional long distance service over the Sprint Canada
network to potential customers.
As part of our original business plan, we targeted small business
customers through an internal sales team that would directly market our long
distance services door to door. We also focused on acquiring new residential
customers through the same direct, door to door marketing activities. In order
to offer our customers lower long distance telephone rates than those charged by
major service providers, we developed a strategic relationship with the Canadian
division of ACS - Affiliated Computer Services of Dallas Texas, ACS Toronto
(formerly ACS-Datex), to develop a Canadian exclusive software program called
Guaranteed Lowest Rate (GLR-TM-), which would rate and compare long distance
calling patterns for our clients against Bell, Sprint and AT&T.
We also intended to build a business and residential long distance
customer base to the point where we could feasibly carry our customers' long
distance calls over the Internet. In September 2000, after two years of
testing and upgrading of our Internet Telephony equipment, we abandoned this
strategy due to call quality problems and development costs. While we still
own the Internet Telephony equipment, we have no plans independently to
launch a direct to market PC to Phone service at this time.
In January 2001, we entered into a Marketing and Network Services
Agreement with ePhone Telecom, Inc. in which ePhone will assess the
feasibility of providing Voice over Internet services to Innofone. Innofone
has provided ePhone with two of its Internet Telephony Gateways for
evaluation and testing. Upon successful evaluation of the equipment by ePhone
and Innofone's agreement, ePhone may utilize Innofone's entire Internet
Telephony Network in conjunction with ePhone's existing Network to provide
Innofone with access to a world-wide Internet calling service. Under the
agreement, ePhone has a right of first refusal to carry our traffic on the
ePhone network. This right of first refusal is valid until December 31, 2010,
subject to Innfone's right to buy out ePhone's first right of refusal in case
of a change of control of Innofone.
ePhone has agreed to provide Innofone with ongoing technical support
and product development services to assist Innofone in the development of new
products and services. However, there are no assurances that ePhone will ever
provide Innofone with these services or take over the existing Innofone
Internet Network. In addition, ePhone provided us a "set up fee" of $500,000
in January 2001 to facilitate the "ramp up" of our marketing programs. If we
do not repay this fee by April 19, 2001, ePhone may convert its right to
receive the fee into 2,000,000 shares of common stock and a warrant to
purchase up to 2,000,000 shares of common stock at an exercise price of $0.75
per share.
While we still own the Internet Telephony equipment, we have no
plans to launch a direct to market PC to Phone service at this time, without
the assistance of ePhone. Instead, we would continue seeking a partner to
provide financing and management of these potential operations.
DESCRIPTION OF BUSINESS
Strategy
We currently offer residential and small business long distance
telephone services, calling cards, Internet access and cellular services through
strategic "partnerships" with industry leaders in the financial, retail and
Internet markets. Typically, we combine our services into bundles and our
partners market our bundle of services to their own customer or membership bases
as part of value-added or benefits programs. We believe that our partners
benefit from these arrangements because they can offer attractively priced
telephony services to their customers. We benefit from strong brand name
recognition and the customer's perception that he or she is buying services from
a company with which he or she has a prior relationship. We believe that our
relationships with strategic partners also make it easier for us to collect
charges for our services from the customer base.
STRATEGIC PARTNERSHIPS
VISA DESJARDINS
In April 2000, we launched our first bundled service offering to Visa
Desjardins, the credit card division of Quebec's largest financial institution.
Innofone, through the Desjardins program branded "Visez Juste," began offering
bundled service products to the Visa Desjardins credit card holders. The program
offers Visa cardholders long distance, calling cards and cellular phone
services. As of November 2000 we also will begin offering dial-up and high speed
Internet access through the Visez Juste program. As of September 30, 2000, more
than 33,000 customers had signed up for the Visez Juste program.
The Visez Juste program is offered directly by Visa Desjardins to its
credit cardholders, although it is being managed by Innofone. Visez Juste-TM-
is a trademark of Visa Desjardins.
Under our arrangement with Visa Desjardins, we receive payment directly
from Visa Desjardins approximately five days after the billing. Charges are
reflected on the customer's credit card. We earn revenues on the long distance
billings by charging Visa Desjardins's customers a higher price for long
distance services than we are charged. We are operating as a merchant for Visa
Desjardins, so we pay them a service charge of 1.75% on all charges for long
distance and cellular telephone charged to their customers. Also, Visa
Desjardins earns a commission of 4% on all revenue from customers signed for our
long distance and cellular services.
In addition to describing our services in inserts included in the
cardholder's monthly bill, Visa Desjardins is telephoning its credit card
account holders to market our services. For any customer that is signed up this
way, we pay Visa Desjardins $20 per account if the customer is enrolled in
one service element of the program, $25 for each customer enrolled in 2
services, $27 for each customer enrolled in three services and $30 for each
customer enrolled in four services.
Due to our current capital position, we have been unable to expand
our business and acquire new customers as quickly as anticipated under the
Visa Juste program. Although we are continuing to negotiate a definitive
agreement with Visa Dejardins, Visa Desjardins may decide to terminate its
arrangment with us. The loss of the Visa Juste program would have a material
adverse effect on our business strategy, our financial condition and our
operating results.
If we successfuly reach a definitive agreement with Visa Desjardins,
the agreement will memorialize the terms of our arrangement as described
above. In addition, when and if we add home security services to our product
offering, we will offer these services through the Visez Juste program.
In addition, under the terms of the anticipated agreement, we will
be responsible for maintaining the call center discussed under "Business -
Billing and Fulfillment - Equinox Marketing Services" and ensuring that it
performs all of its functions as outlined in the agreement. Further, we must
enter into an agreement with another company to develop and maintain systems
that are capable of (i) tracking cardholder information necessary to post a
charge to a cardholder's account, (ii) assigning a unique number to
participants in the program, (iii) assigning a unique number for each
transaction for posting to a customer's Visa account and (iv) providing the
ability to enter and track marketing source codes assigned when the call
center enrolls a new customer. We must also enter into an agreement with
another company to generate and mail monthly usage summary statements to each
customer. Finally, we will be responsible for retaining another company that
will develop and produce the direct marketing materials to be used in the
program, including the inserts that Visa Dejardins will include in customers'
credit card statements. If we are unable to meet our responsibilities under
the agreement, Visa Dejardins may terminate the agreement in accordance with
its terms.
The agreement will expire by its terms on December 25, 2005, but
will provide for renewal for five-year periods upon 180 days notice if both
parties agree. The agreement may be terminated earlier, however, upon
insolvency or bankruptcy, or upon 180 days notice in the case of default or
breach of a material term of the agreement. During the term of the contract,
we may not participate in a similar program under which telecommunications
benefits are provided for the purpose of marketing in Quebec any credit,
charge or debit cards, except for programs in conjunction with the Canadian
Imperial Bank of Commerce.
CANADIAN IMPERIAL BANK OF COMMERCE
CIBC BIZSMART PROGRAM. In September 2000 the Canadian Imperial Bank
of Commerce ("CIBC") launched its offering to small businesses in Canada
access to no-fee online daily banking, plus lowest price guarantees or
special discounts on products purchased through their bizsmart.com shopping
portal. Innofone entered into arrangements to provide long distance telephone
services, calling card services and cellular and PCS services on bizsmart.com.
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bizSmart.com features a series of links to discounted services
offered by selected service providers. Service providers, such as Innofone,
have created customized versions of their web sites for bizSmart members to
offer discounts to bizSmart members. bizSmart and SmartRate are trademarks of
CIBC.
We launched our second bundled services offering through bizsmart
under the trademark name SmartRate. We provide services on the following
basis: we compare the rates charged by major national long distance and
cellular service providers under their most competitive offers using our
proprietary software product. bizsmart members receive the lowest
rate/highest value solution for each service enrolled in plus a 10% discount
(5% in the case of cellular services). We review the service plans and rates
of the services on a monthly basis to ensure that they are still the most
competitive and that the rates are still the lowest rates. bizSmart members
are billed directly by Innofone, rather than by CIBC. We provide SmartRate
services to registered members of bizsmart only.
Under our agreement with CIBC relating to bizSmart.com, we pay
commissions to CIBC each month based on the number of active accounts. An
"active" account is one for which Innofone rendered a usage summary in the
month. CIBC will be paid a commission on long distance revenues of 2%, once
we have 20,000 accounts. The commission rate increases as the number of
accounts increases, to a maximum of 6% when we have over 100,000 accounts.
For cellular service the commission is 1% after we have 20,000 customers,
which increases as we add new customers to a maximum of 4% after 80,000
accounts are active. We have not yet acquired any customers through the
bizSmart.com site.
The bizSmart participation agreement expires by its terms on
September 25, 2005. If the relationship is successful, however, we expect that
this agreement will be extended or renewed. However, after March 25, 2002,
the agreement may be terminated by either party with 30 days notice if a
certain number of bizSmart customers have not purchased a service from us
during the first year the site is operational and, after discussing a means
for improving sales and implementing a plan to do so, we fail to meet the
required minimum within the next six months.
CIBC MERCHANT PROGRAM. In July 2000, we signed a Memorandum of
Understanding with another division of the CIBC, Merchant Card Services
(MCS). Although this Memorandum of understanding expired on July 31, 2000, we
continued to negotiate with CIBC for a definitive agreement related to the
Merchant Program. The launch of this program has been delayed due to the fact
that CIBC plans to transfer its Merchant Card Services operations to a new
company to be formed by the merger of CIBC's Merchant Card Services division
and National Data Corporation, a United States Company. We have been informed
that senior management of both MCS and the new company, along with their
counsel, have approved the draft form of the agreement to be executed between
Innofone and the new company. The merger is scheduled to close on February
15, 2001, and we expect to sign the agreement shortly thereafter. However, we
currently have no customers through this program, and we cannot assure you
that we will ever offer our services under this program.
Under this program, which we expect to launch in March, we will
offer the same product offerings as we do to the Visa Desjardins and Bizsmart
customers. This program, however, targets credit card merchants; it offers
the same rate and compare analysis for the small business segment of the
market, and includes long distance, cellular and Internet services.
We expect that it will cost us approximately $75,000 to launch this
program. In addition, we will incur customer acquisition costs.
MCS currently has some 100,000 merchant members across Canada. In
March we plan to begin an outbound telemarketing program through the Equinox
call center in an effort to sign up customers through this program.
Under this program, we bill the participating merchant customers
directly. Initially, they will pay us directly. However, we plan to implement a
system that will enable the amounts payable to be deducted as pre-authorized
debits from the merchants' bank accounts with CIBC. At that time, the total
monthly costs of our services will be shown on the merchants' Visa statements
sent by CIBC.
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CURRENT SERVICES AND PRODUCTS
The following are the components of our bundled services program, or
the various products that we offer through our strategic partnerships.
LONG DISTANCE SERVICE
Our long distance service guarantees that the customer receives the
best long distance rate available every month. The major telephone companies
offer several different rate plans. In addition, the best plan one month might
not be the best plan in another month due to variations in calling patterns.
Thus, under traditional calling programs it is virtually impossible to secure a
plan that will offer the lowest available rate every month.
When the customer receives his bill each month from Innofone, his
long distance calls are priced based on the rates charged by Bell, Sprint
Canada and Primus. The customer is charged the lowest of the three plans.
Visa Desjardins and CIBC customers receive an additional 10% discount. We may
offer the 10% discount to the customers of future partners depending on the
size of the customer base. However, this will be individually negotiated with
future strategic partners.
Customers who sign up for our long distance service are also sent a
calling card that is valid for long distance calls on the same plan.
We supply long distance telephone service to our customers over a
third party supplier network in Canada, through an agreement with Axxent
Corp. (formerly Optel Communications Corporation). Axxent, a full service
voice, data and internet provider, is also in the business of purchasing long
distance telephone service from major carriers, such as AT&T and Sprint, at
bulk rates and then reselling such service to smaller companies such as ours.
Innofone generates revenues from the reselling of long distance services. We
buy long distance services at a guaranteed rate and then resell the services
to our customers through the branded channels at a higher rate per minute.
Our agreement with Axxent is for an initial term of two years.
However, the agreement renews itself at the end of every two-year term unless
terminated by us or Axxent in writing at least 30 days before the expiration
of the two-year term.
We believe that Innofone has positioned itself well when buying long
distance services, and has significant purchasing power in the Canadian
marketplace due to its branded partner relationships with the credit card
companies. We believe that the rates Axxent charges us are substantially lower
than current market rates for a company of Innofone's size, mainly due to the
number of potential clients available through the channels and the anticipated
long distance traffic that these clients may generate for the carrier.
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GUARANTEED LOWEST RATE (GLR-TM-) PROGRAM
In the past, we offered our long distance services directly to
customers through our Guaranteed Lowest Rate (GLR-TM-) Program. This program was
identical in form to the one we now offer through Visa Desjardins and CIBC,
except that the customers did not get the extra 10% discount. Although we no
longer offer this program to new customers, we do continue to provide it for the
3,000 customers currently signed up for the program.
CELLULAR SERVICE
Customers who sign up for cellular services receive a bill each month
comparing the plans of Rogers Wireless, Bell Mobility, Clearnet and Microcell,
the four leading providers of cellular services in Canada, and they pay the
lowest of the four. Visa Desjardins and CIBC customers also receive an
additional a 5% discount. Our Agreement with Rogers Wireless, who provides the
cellular services we resell, does not provide for the additional discount for
future customers. However, we believe that we may be able to negotiate this
discount for future customers depending on the size of the customer base of the
relevant strategic partner.
We have contracted with Rogers Wireless Inc., Canada's leading cellular
phone provider, to provide all of the cellular phones, cellular airtime and
phone accessories to the customers of our branded program offerings.
Our agreement as a distributor for Rogers Wireless provides that
periodically, but not less often then every six months, Rogers and Innofone will
select a rate plan from Rogers retail pricing rate card and the retail pricing
rate card from three of Rogers's competitors.
We charge our customers for their actual use of Rogers's services:
o the applicable airtime and monthly service fees based upon the
lowest rate from the selected rate plans, plus
o charges for other call features, long distance, roaming, and
voicemail, less
o any additional discounts offered by us.
Rogers sends all of Innofone's customers cellular call records to ACS,
who handles our billing. ACS reviews the call records and determines the rates
to be billed for the calls. ACS then generates a bill and sends it to each
customer on Innofone's behalf. At the same time ACS provides Rogers with these
billing records. Rogers then bills Innofone an amount equal to 79% of the amount
the customers are billed, thus leaving Innofone with a 21% gross margin.
Rogers also provides Innofone, for resale to our customers, Nokia 5160
cellular telephones at a price of $99 per telephone. The $99 price of the phone
is billed directly to the customer's credit card and is payable to Rogers; we do
not pay for the phones in advance of the sale. Subsequent to signing the
agreement with us, Rogers also agreed to provide a $50 mail in rebate for all
new customers enrolled into the program.
We began enrolling cellular customers in July 2000. Our agreement
with Rogers requires that we sign up a minimum of 5,000 new cellular
telephone numbers (accounts) by April 20, 2001, 15,000 new telephone numbers
by April 20, 2002 and 25,000 new telephone numbers by April 20, 2003. If we
do not sign up the required number of
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customers, we are required to pay Rogers $20 Can. for every customer we are
short. As of December 31, 2000 Innofone had enrolled approximately 850
customers into the cellular program. We do not expect to enroll the required
5,000 customers by April 20, 2001, in part, because Rogers switched to a new
billing platform in August 2000 that slowed our acquisition of new
customers. Since the system became fully operational in September 2000, we
have been able to market our cellular services more aggressively. In informal
conversations with us, Rogers has acknowledged this delay due to their
billing system, and we do not believe that they will penalize us for any
customer shortfalls in 2001. However, there is no written agreement to this
effect and therefore we cannot assure you that Rogers will not impose the
penalty for any shortfall in enrolled customers.
Our agreement with Rogers expires on April 20, 2003. However, it
continues on a month to month basis unless terminated by us or Rogers or
renewed.
INTERNET ACCESS
Through our agreement with Bell Sympatico, we recently launched an
offering of dial-up and high speed Internet access to the Visa Desjardins
cardholders through the Visez Juste program. The agreement also allows us to
market these services to CIBC credit card holders. We may also provide these
Internet programs through all of our future offerings of our bundled services
program. This will have to be separately negotiated, however, as our current
agreement is limited to CIBC and Visa Desjardins customers.
Customers who sign up for Internet services through the CIBC or VISA
Desjardin programs receive a 10% discount off Sympatico's monthly rate. They
also receive a 10% discount off installation.
We entered into an ISP affinity program agreement with Bell Actimedia
Inc, a major Internet player in the Canadian marketplace, under the brand name
Bell Sympatico. This agreement provides for Innofone to act as a distributor and
to offer to the customers of its brand partners high-speed and dial-up Internet
services.
Through Equinox Marketing Services, we provide outbound telemarketing
for the purpose of signing customers of the brand offerings to the Sympatico
Internet service. Sympatico handles all of the customer support beyond the
original sign-up of the customer. Sympatico is also responsible for the delivery
of all product installation discs, high-speed equipment and any required
literature. We are responsible only for customer sign-ups and inquiries as they
relate to the billing of the service.
Under the agreement, Bell Sympatico pays us a commission based on
their collected net billings, exclusive of taxes, for services provided
pursuant to the agreement.
Our agreement with Bell Sympatico terminates on November 1, 2003.
Although the agreement contains no automatic renewal provisions, if
advantageous, we expect that the agreement will be renewed or extended.
FUTURE PRODUCTS AND SERVICES
We are currently considering a strategy to add gas and electric
utilities services and home security services to our core bundle of services.
With the deregulation of gas and electric services in specific regions within
Canada, we consider utilities to be a significant commodity to offer to our
pre-existing and future customers through branded channels. Although we had
begun negotiating for the supply of these services, we have currently
discontinued pursuing utilities services due to financial constraints. We
plan to review the situation in the third quarter of 2001. If we believe that
we have adequate financing and a sufficient number of customers, we may
reconsider providing these additional services at that time.
Currently we only offer our services in Canada. However, the level of
acceptance of our current offerings and the lack of similar type offerings in
other countries has led us to begin researching the possibilities of expanding
our business into other countries. Due to the similarity of these services
throughout North America, we established an office in the United States for the
purpose of researching the viability of offering bundled services through
branded loyalty programs and market acceptance of our product offerings. If it
appears that there is a viable market for our products in the United States, we
plan to offer our services there. However, we cannot assure you that we will
market our products in the United States, or that if we do, our products will be
accepted or the business will be profitable. In addition, we will not launch any
branded programs outside of Canada without first securing adequate financing to
do so. We cannot assure you that we will be able to secure the necessary
financing.
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BILLING AND FULFILLMENT
ACS COMMUNICATIONS
ACS Communications Industry Services, Inc. performs our client billing
services by utilizing custom designed software. Under our agreement with them,
ACS handles not only routine functions including order entry, customer service
functions, accounting, sales tracking and receipts processing functions but also
provides other billing functions including invoice preparation and mailing. ACS
also furnishes us with monthly management reports, which are comprised of
profit, loss, and margin reports, tax summaries, price per minute, rate program
and calling analyses, and other services.
We believe that the key selling point for our services is our promise
to our subscribers that they will always receive a lower telephone bill from us
than they would receive from any of the major telephone carriers. We accomplish
this by utilizing exclusive customized software, supplied by ACS, which rates a
customer's long distance calls against selected plans from each of three major
Canadian telephone companies.
The initial term of our agreement with ACS is until March 2, 2003.
However, the agreement automatically renews for successive two-year terms
unless terminated by us or ACS at least 120 days before the date of
termination.
EQUINOX MARKETING SERVICES
Equinox Marketing Services is a bilingual call center operating from
offices in Montreal, Canada which handles all customer service inquiries on our
behalf. They have been trained on all aspects of our program offerings and our
billing software, which they can access through the Internet, using the ACS
billing system. They are set up to handle all inbound calls, which can be from
customers having questions about their bills, or from Visa Desjardins customers
who have received an insert with their Visa statement and may have questions
about the program. The call center also handles most of the administrative
tasks for the Visa Desjardins program, including processing applications,
handling service termination requests and generating monthly reports on the
program.
Equinox also handles our outbound telemarketing program. We provide
Equinox with the names and phone numbers of customers of the branded Visa
programs along with pre-approved telephone scripts provided by Visa. Using this
database of customers, Equinox contacts each individual Visa cardholder and
offers the program's long distance and cellular phone services. Since the launch
of Visez Juste outbound telemarketing in May 2000, the program has consistently
achieved in excess of a 27% acceptance rate and continues to enroll some 3,000
clients into the program monthly.
In July 2000 Visa Desjardins agreed to give us access to their full
credit card base of over 1,200,000 cardholders for the purpose of outbound
telemarketing.
WATTS DISTRIBUTION SERVICES, LTD.
Watts Distribution Services Ltd. provides fulfillment services for all
of our client enrollment needs, into the branded programs.
Innofone and its brand partners provide Watts with a pre approved
fulfillment package design and layout that is distributed to all new clients
enrolled into the program. Watts creates the welcome kits including a welcome
letter, calling card (where ordered), calling card international guide and long
distance terms and conditions for long distance subscribers. For clients
enrolling in the cellular phone program, Watts provides the cellular phone,
cellular user guide and cellular terms and conditions for
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cellular subscribers.
For those customers who subscribe to both services, all pieces are
included in the welcome kit. Watts is also responsible for the activation of the
cellular phone prior to sending it out to customers in their welcome kit.
PATENTS & TRADEMARKS
We have made application to secure several trademarks for the purpose
of branding its bundled service offerings to clients through its original direct
to market sales and more recently through its branded channel partners. We will
continue to develop our trademark strategies to ensure our first to market
brands are protected.
We have no patents or patents pending at this time.
EMPLOYEES AND KEY RELATIONSHIPS
As of September 30, 2000, we employ eight full-time employees at our
Canadian offices through our subsidiary, Innofone Canada. We plan to hire two
additional employees at our Canadian offices over the next twelve months as our
customer base increases. We do not foresee any substantial increase in employee
requirements, due to the strategic outsourcing of operations to our suppliers
and billing and fulfillment service providers.
Innofone.com employs only its three executive team members, consisting
of Ron Crowe, Chairman & VP, Larry Hunt President & CEO, and Rick Quinney, CFO.
We plan to hire a new CFO to replace Mr. Quinney, although he will continue to
be CFO of Innofone Canada. Otherwise, we have no immediate plans to hire any
additional employees.
The success of our marketing program has been largely dependent on the
services of a marketing consultant, Doug Burdon, who has an extensive background
in the design and development of branded loyalty programs. On November 30, 1999,
we engaged the services of Mr. Burdon to manage our marketing effort. Under the
terms of our original agreement with Mr. Burdon, which expired on March 31,
2000, Mr. Burdon was to receive a royalty equal to 2% of gross revenues
generated from any accounts he facilitates in establishing for us. Mr. Burdon
had the right to exchange the royalty for stock options on or before November
30, 2001, and he has already elected to convert this royalty into 2.75 million
options. See "Security Ownership of Certain Beneficial Owners and Management"
for a description of Mr. Burdon's options. On April 5, 2000 we entered into a
new agreement with Mr. Burdon, superceding the November 30, 1999 agreement.
Under the terms of the revised agreement, Mr. Burdon was not to receive any
royalties but would receive options of up to 5,500,000 shares of common stock,
at an exercise price of $0.50 per share, subject to the satisfaction of the
conditions described in "Security Ownership of Certain Beneficial Owners and
Management".
We granted Mr. Burdon options covering 2,750,000 shares in
connection with his efforts in facilitating Innofone's business arrangement
with Visa Desjardins, described below. 1,437,500 of these options are
currently exercisable, with the remaining 1,312,500 shares becoming
exercisable over the next eighteen months. Mr. Burdon's agreement with us
provided that he may have been granted additional options for 2,750,000
shares, which options would become exercisable over a period of 18 months,
upon the execution of a second agreement with a bank for use of Innofone's
services. However, Mr. Burdon recently terminated his relationship with us
and therefore he will not be entitle to those options.
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In addition, until September 30, 2000, we paid Mr. Burdon $8,250 per
month as an advisory fee. We are negotiating a new contract with Mr. Burdon
through our subsidiary in the United States, but we have not yet determined the
terms of that agreement.
We believe that our employee relations are excellent. We provide each
employee with industry standard employee benefits, including health coverage and
an employee stock option plan.
COMPETITION
We compete with many companies in the increasingly competitive
telecommunications industry, including some of the largest corporations in the
world. Bell Canada continues to dominate the Canadian market. The other large
competitors are Sprint Canada, AT&T and, MCI/WorldCom, Inc. Many of these
companies have greater financial resources and access to capital than us, as
well as greater name recognition in the telecommunications industry.
Therefore, we cannot assure you that we will be able to compete successfully.
Innofone has captured only a small percentage - less than 1%, of the
Canadian marketplace for the services it offers.
The main method of competition in our primary business-telephone
service, is price. By offering lower prices than our main competitors, we
believe this is a competitive advantage for Innofone.
To our knowledge, there are no other companies in Canada that offer
bundled services in a manner similar to Innofone.
GOVERNMENT REGULATIONS
The only Canadian Regulations applicable to the telecommunications
industry apply only to those who own the systems and networks that carry long
distance service. These regulations do not apply to companies that solely
provide telecommunications services over others' networks, including resellers
such as Innofone. Therefore, there are no Canadian regulations that
materially affect our business. In the event we decide to offer our services
in other countries, we will have to comply with any applicable local laws.
Innofone believes that its programs deliver the best price/value
proposition and the bundled solution. Innofone programs offer a unique
underlying `Core value benefit' message - `Compare and Save'. The current
bundle of products and services include: residential and small business long
distance, calling cards, Internet access and cellular services. We may add
utilities offerings to our bundle of services in the near future. In
addition, we may add home security, local telephone service and cable
television services to our product offerings at a later date. While we are
considering adding these services, however, we have not started developing
plans to offer them and there are no contracts or negotiations in place
regarding these services.
RISK FACTORS
Investing in our common stock involves substantial risk. Investors
should carefully consider the risks described below and the other information in
this registration statement, including our financial statements and the related
notes, before purchasing our common stock. The risks and uncertainties described
below are not the only ones facing us. Additional risks not presently known to
us or that we currently consider insignificant may also impair our business
operations in the future. You should not purchase our common stock unless you
can afford the loss of your entire investment.
Our business, financial condition and plan of operations could be
materially adversely affected by any of the following risks. The trading
price of shares of our common stock could decline due to any of these risks,
and you might lose all or part of your investment. This registration
statement also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from
9
those anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by us described below or elsewhere in this
document.
RISKS RELATED TO OUR FINANCIAL CONDITION
OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION.
Our independent auditors' report on our financial statements
includes additional comments for U.S. readers which indicates that there
exists certain factors that raise substantial doubt as to our ability to
continue as a going concern. These factors are further explained in the notes
to our financial statements. The financial statements do not contain any
adjustments that might result from this uncertainty. Among the reasons cited
as raising substantial doubt about our ability to continue as a going concern
is the fact that we have no current sources of financing. While we are
attempting to arrange private sources of financing, there can be no assurance
that we will be able to do so. You should read the auditors' report and the
additional comments and examine our financial statements.
Many investment bankers and investors view companies with a "going
concern" qualification as less desirable for investment. Accordingly, we may
have a more difficult time raising equity capital or borrowing capital on
acceptable terms or at all. Our suppliers also might be less willing to extend
credit. In addition, our potential strategic partners might be less willing to
enter into a relationship with us that allows us to offer our services to their
members if they believe that we will not be viable enough to provide service,
support, back-up, and follow-on products when needed. Our potential customers
might be less willing to purchase our services for similar reasons. Furthermore,
we might be disadvantaged in recruiting employees who might be concerned about
the stability of employment with us. Therefore, the "going concern"
qualification can have severe adverse consequences to us.
WE CANNOT ENSURE THAT ADDITIONAL FUNDS WILL BE AVAILABLE TO US ON REASONABLE
TERMS, OR AT ALL.
We will need additional funding to continue and expand our business
and to carry out our business plan. We currently do not have any revolving
loans or lines of credit. In addition, while we are attempting to arrange
funding through private equity investments and other sources, we cannot
assure you that these efforts will be successful. Since August 1999, we have
raised a total of $2,806,602 from private offerings. In addition, we have
received a $500,000 "set up" fee from ePhone Telecom to ramp up our marketing
programs, which fee must be repaid or may be converted into stock and
warrants. We cannot assure you, however, that we will be able to obtain the
funds necessary to continue and expand our business on acceptable terms, or
at all. If we are unable to obtain the funds we need to continue and expand
our business, we may consider various strategic alternatives, including
securing a business partner for our Canadian operations or a sale of our
company, our subsidiary Innofone Canada, or some or all of our assets.
WE HAVE NOT BEEN OPERATING VERY LONG AND HAVE A HISTORY OF INCURRING LOSSES
WHICH MAY MAKE IT DIFFICULT TO FUND OPERATIONS.
We have a limited operating history on which you can evaluate our
business and prospects, and we have not yet commenced some of the services
that we intend to offer in the future. We have incurred net losses since our
inception. For the year ended June 30, 2000, we incurred net losses of
approximately $4,817,280. At June 30, 2000, we had insufficient cash to fund
our operations. Our ability to achieve and sustain profitable operations
depends on many circumstances, including our ability to establish effective
distribution channels, market demand, pricing and competition in the
telecommunications industry in the countries where we operate and intend to
operate. If we do not achieve and sustain profitability, our ability to
respond effectively to market conditions, to make capital expenditures and to
take advantage of business opportunities could be negatively affected. In
addition, our prospects must be considered in light of the risks encountered
by companies like us developing products and services in new and rapidly
evolving markets. Our failure to perform in these areas could have a material
adverse effect on our business, plan of operations and financial condition.
At current levels, we believe that our current customer base will
cover our ongoing expenses, on a going-forward basis, within the next 90
days. However, the revenues from these sources will not be sufficient to meet
our existing liabilities as they become due or expand our offerings in
accordance with our business plan.
Due to our current capital situation, we have decided not to expend
funds on new customer acquisitions until we have new financing in place or
until our cash flows from existing accounts are sufficient to cover our
ongoing expenses and start acquiring new customers pursuant to our existing
strategic relationships. We expect to be in a position to resume new customer
acquisitions within the next 60 days.
10
RISKS RELATED TO OUR BUSINESS
WE HAVE BEEN RELIANT UPON THE CONTINUED SERVICES OF DOUGLAS BURDON, WHO HAS
RECENTLY TERMINATED HIS RELATIONSHIP WITH OUR COMPANY. THIS MAY IMPEDE OUR
ABILITY TO SECURE NEW PARTNERING RELATIONSHIPS.
In November 1999, we entered into an agreement with Douglas Burdon
pursuant to which Mr. Burdon marketed our services to banking and other
institutions in Canada. Mr. Burdon's efforts were instrumental in
facilitating our current arrangement with Visa Desjardins and CIBC. Please
refer to "Business - Employees and Key Relationships", "Business - Strategic
Partnerships - Visa Desjardins" and "Business - Strategic Partnerships -
Canadian Imperial Bank of Commerce" for a further description of these
arrangements. Mr. Burdon was not an employee or subject to any restrictions
preventing him from working with other companies, including our competitors.
In February 2001, Mr. Burdon terminatd his relationship with Innofone. As a
result, we must now develop alternative methods for identifying and obtaining
new program partners. We cannot be sure that we will be able to do so. In
addition Mr. Burdon's termination of his relationship with us might
negatively affect our relationships with any strategic partners that were
introduced to us through Mr. Burdon.
WE HAVE NOT ENTERED INTO A COMPREHENSIVE AGREEMENT WITH VISA DESJARDINS TO
PROVIDE OUR SERVICES TO THEIR CARDHOLDERS, WHICH REPRESENTS A SUBSTANTIAL
PORTION OF OUR CURRENT OPERATIONS.
We have not entered into a comprehensive agreement with Visa
Desjardins to provide our telecommunications services to its cardholders.
Currently, we are operating pursuant to a Memorandum of Understanding we
signed with Visa Desjardins that does not cover all material aspects of our
arrangement. In addition, the Memorandum of Understanding provides that
either party may cancel the launch of the program, but it does not address
whether the arrangement can be terminated under the present situation - after
launch of the program. Although we are presently negotiating a comprehensive
agreement with Visa Desjardins, our current capital level has adversely
affected our ability to expand the program and acquire new customers. As a
result, we cannot assure you that Visa Desjardins will not terminate the
program or that a final, comprehensive agreement will be completed. If we are
unable to finalize a comprehensive agreement it is possible that disputes
could arise over terms of our arrangement with Visa Desjardins which could
have a material, adverse effect on our business. Furthermore, if Visa
Desjardins cancels the arrangement or no comprehensive agreement is reached,
our business would be materially adversely affected.
OUR AGREEMENT WITH ROGERS WIRELESS INC. IMPOSES SUBSTANTIAL CONDITIONS ON US
WHICH WE MAY NOT BE ABLE TO SATISFY, CAUSING US TO MAKE SUBSTANTIAL PAYMENTS TO
ROGERS.
Our agreement with Rogers requires that we arrange for a minimum of
5,000 new telephone numbers accounts by April 20, 2001; 15,000 new accounts
by April 20, 2002; and 25,000 new accounts by April 20, 2003. If we do not
reach these minimums we are obligated to pay Rogers an amount equal to $20
Can. times the number of accounts we are short of the minimum. In addition,
we are required to deposit with Rogers a security deposit of $100,000 Can. If
we are unable to arrange a letter of credit, we would be forced to make a
cash deposit to satisfy the condition or risk Rogers terminating the
contract. At the date of this filing, this payment has neither been made nor
requested. The payment of $100,000 Can. at the present time would adversely
affect our ability to undertake other projects or fund other operations.
SOME OF OUR AGREEMENTS MAY BE TERMINATED IF WE DO NOT MEET CERTAIN MINIMUMS
OR SATISFY VARIOUS OTHER CONDITIONS.
Our Agreement with Rogers Wireless provides that Rogers may
terminate our agreement with them if we do not meet the minimum customer
requirements discussed in "Business -- Cellular Service." In addition, our
agreement with CIBC relating to the bizSmart website provides that after
March 25, 2002, either party may terminate the agreement with 30 days notice
if a certain number of bizSmart customers have not purchased a service from
us during the first year the site is operational and, after discussing a
means for improving sales of our services and implementing a plan to do so,
we fail to meet the required minimum within the next six months.
As we have indicated, we do not expect to meet the minimum required
under the Rogers agreement by April 20, 2001. In addition, more than three
months into the twelve-month period referred to above regarding the CIBC
agreement, no bizSmart customers have purchased a service from us through
the bizSmart website; we do not expect to meet the minimum number of
customers under this agreement either.
Based on our previous experience with Rogers and CIBC, we do not
expect that either of them would unilaterally terminate our agreement with
them. Nevertheless, the agreements do provide that Rogers and CIBC may
terminate our agreements with them, and we cannot assure you that they will
not do so. If that were to happen, we would have to find a replacement
provider for our cellular services. This would negatively impact our financial
condition due to both our inability to provide and generate revenue from
cellular services while we searched for a replacement provider, as well as
the cost of searching for the provider itself. In addition, the loss of what
is currently one of only two partner relationships would reduce the number of
potential customers to whom we could offer our services. This would have a
negative impact on our revenues and results of operations.
In addition, certain of our agreements require that we take certain actions
and fulfill certain responsibilities. If we fail to satisfy these
requirements, the other party may be able to terminate the relevant
agreement. As our business is dependent on the continuation of our
agreements, any such termination could disrupt and adversely affect our
business.
WE MAY FACE QUALITY AND CAPACITY PROBLEMS OVER OUR NETWORK UPON FAILURES BY
THIRD PARTIES ASSOCIATED WITH THE TELEPHONE AND INTERNET INFRASTRUCTURE.
Third parties maintain, and in many cases own, the phone lines and
other equipment that we use to provide our services. Some of these third parties
are national telephone companies. They may increase their charges for using
these lines at any time and decrease our profitability. They may also fail to
properly maintain their lines and disrupt our ability to provide service to our
customers. We are unable to control, manage or repair the infrastructure we are
dependent upon. Any failure by these third parties to maintain these lines and
networks that leads to a material disruption of our ability to provide service
11
over telephone lines could discourage our customers from using our network,
which could have the effect of delaying or preventing our ability to become
profitable. Lack of performance or significant price changes by these
providers will also lead to a material disruption of our ability to offer our
products in an easy, efficient and cost effective manner, which could have
the effect of delaying or preventing our ability to become profitable.
Although our competitors face similar issues, we believe that we may be less
able to tolerate performance issues than they can and our business will be
hurt more because we do not have their financial strength, national market
presence or associated goodwill.
WE ARE DEPENDENT ON THIRD PARTIES FOR THE OPERATION OF OUR BUSINESS. IF THEY
DON'T PERFORM AS EXPECTED, OUR BUSINESS WILL BE HARMED.
All major facets of our present business operations, including
supplying long distance telephone services, billing and marketing, are
primarily managed by, and are dependent upon the services and technologies
of, outside contractors and independent sales representatives. The failure of
any of these parties to perform in accordance with the terms and conditions
of their contracts with us or to achieve forecasted levels of performance, as
the case may be, would harm our business. If this happens, we may not be able
to find others which are willing and able to carry out our business
operations and plans without any interruptions in our routine business
activities, or at all.
CUSTOMER ATTRITION MAY AFFECT OUR FINANCIAL PERFORMANCE.
Purchasers of our long distance services are not obligated to purchase
any minimum amount of our services, and can stop using our service at any time
and without penalty. Our customers may not continue to buy their long distance
telephone service through us or through independent carriers and marketing
companies that purchase services from us. If a significant portion of our
customers were to decide to purchase long distance service from other long
distance service providers, we may not be able to replace them. A high level of
customer attrition is common in the long distance industry, and our financial
results are affected by this attrition. Attrition is attributable to a variety
of factors, including our termination of customers for nonpayment and the
initiatives of existing and new competitors who, to attract new customers, may
o implement national advertising campaigns,
o utilize telemarketing programs, and
o provide cash payments and other forms of incentives.
12
OUR FAILURE TO ACQUIRE, INTEGRATE AND OPERATE NEW TECHNOLOGY COULD HARM OUR
COMPETITIVE POSITION.
The telecommunications industry is characterized by rapid and
significant technological advancements and the related introduction of new
products and services. We do not possess significant intellectual property
rights with respect to all of the technologies we use and we are dependent on
third parties for the development of and access to new technology. The effect of
technological changes on our business plan cannot be predicted. In addition, it
is impossible for us to predict with any certainty whether demand for services
in our future markets will develop or will prove to be an economical and
efficient technology that is capable of attracting customer usage. Failure by us
to obtain and adapt to new technology in our future markets could have a
material adverse effect on our business and plan of operations.
GROWTH OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO MANAGE EXPANSION AND
DEVELOPMENT EFFECTIVELY.
Our business plan requires the expansion of our business and the
services we offer. Our ability to grow effectively will require us to
implement and improve our operating, financial and accounting systems and to
hire, train and manage new employees. Among other things, the continued
expansion and development of our business will also depend upon our ability
to:
o secure financing;
o evaluate and penetrate potential new markets;
o hire enough qualified employees; and
o build an effective distribution channel.
In addition, we must perform these tasks in a timely manner, at
reasonable costs and on satisfactory terms and conditions.
We have experienced problems securing financing. To date, we have
not experienced problems relating to new markets, hiring qualified employees
or with distribution channels. However, these are common issues and risks in
our industry, and as our business expands and we need to hire additional
employees, increase distribution channels and penetrate new markets, we are
likely to experience problems with these aspects of the business.
Our expansion may involve acquiring other companies or assets. These
acquisitions could divert our resources and management and require integration
with our existing operations. Failure to effectively manage our planned
expansion could have a material adverse effect on our business, growth,
financial condition and plan of operations and the market price of our common
stock. We cannot assure you that we will be successful or timely in developing
and marketing service enhancements or new services that respond to technological
change, changes in customer requirements and emerging industry standards. Even
if we are successful, we cannot assure you that our lack of significant
experience with respect to a new service or market will not hinder our ability
to successfully capitalize on any such opportunity.
GIVEN THE RAPID CHANGES IN THE TELECOMMUNICATIONS INDUSTRY, IT IS LIKELY THAT
NEW LAWS AND REGULATIONS WILL BE PASSED TO REGULATE IT. SOME OF THESE NEW LAWS
MAY ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS.
13
The nature and scope of existing or future laws in various
jurisdictions relating to telecommunications and the Internet is uncertain
and may take years to resolve. This uncertainty could expose us to
substantial liability for which we might not be indemnified. It is impossible
to predict the regulatory climate, controls, regulations and rules affecting
telephone and internet-related businesses. We are presently unaware of laws,
regulations or rules that prevent or restrict us from offering our services.
It is possible, however, that with the integration and merger of
telecommunication, computing, television and broadcast services, which some
observers predict is inevitable, laws, regulations and rules may be passed
and promulgated that could prevent or restrict us from pursuing our business.
Any new or existing legislation or regulation relating to the Internet could
have a material adverse effect on our business, plan of operations and
financial condition. Furthermore, such events, if not preventing or
restricting our right to pursue our business, could result in an increased
competitive environment.
WE MAY NOT BE ABLE TO SUCCEED IN THE INTENSELY COMPETITIVE MARKET FOR OUR
SERVICES.
The market for long distance and cellular telephone service, as well as
for Internet dial-up services, is extremely competitive and will likely become
more competitive.
Intense competition in our markets can be expected to continue to put
downward pressure on prices and adversely affect our profitability. We cannot
assure you that we will be able to compete successfully against our competitors
and we may lose customers or fail to grow our business as a result of this
competition.
We compete against such companies as Bell Canada, AT&T, MCI/Worldcom
and Sprint, all of which are larger than we are and have substantially greater
customer bases, financial and marketing resources and goodwill than we do. The
main component of our business plan is providing a service which promises to
provide the lowest telephone rates of all major carriers; however, our larger
competitors have the resources to respond by offering a similar plan or even
undercutting our rate structure.
Furthermore, we face competition from a growing number of companies
that offer low-cost internet-based services. Moreover, various cable TV
operators in the United States have begun, and others have announced their
intention to begin, offering telephone service through existing cable TV
lines. These companies pose a substantial threat to traditional telephone
companies because of the cable TV industry's superior technology enabling
greater transmission capacity, versatility and speed. The impact of cable TV
companies entering the telephone business will increase competition, having
unpredictable effects on the industry in general, and upon us, in particular,
due to our lack of financial resources and customer bases as compared to the
larger, more-established telephone companies. These cable companies, as well,
have substantial subscriber bases and financial and marketing resources that
place our present and planned business operations at a serious competitive
disadvantage.
WE MAY BE UNABLE TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO CONTINUE GROWING
OUR BUSINESS.
We will require significant amounts of additional capital to fund the
expansion of out network, develop additional business and services we intend to
offer, and for working capital.
The exact amount and timing of our future capital requirements will
depend upon many factors, including:
o the cost of developing and expanding our networks and services;
14
o the development of new services;
o our ability to penetrate new markets;
o regulatory changes;
o the status of competing services;
o the magnitude of potential acquisitions, investments and strategic
alliances; and
o our plan of operations.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES MAY BE LIMITED.
The enforcement by investors of civil liabilities under the United
States federal securities laws may be adversely affected by the fact that all of
our officers and directors are not citizens of the United States and the
majority of our assets are located in Canada. There can be no assurance that (a)
U.S. stockholders will be able to effect service of process within the United
States upon such persons, (b) U.S. stockholders will be able to enforce, in
United States courts, judgments against such persons obtained in such courts
predicated upon the civil liability provisions of United States federal
securities laws, (c) appropriate foreign courts would enforce judgments of
United States courts obtained in actions against such persons predicated upon
the civil liability provisions of the federal securities laws, and (d) the
appropriate foreign courts would enforce, in original actions, liabilities
against such persons predicated solely upon the United States federal securities
laws.
RISKS RELATED TO OUR STOCK AND CAPITAL STRUCTURE
THE MARKET FOR OUR COMMON STOCK IS LIMITED AND IT MAY BE DIFFICULT FOR YOU TO
RESELL YOUR SHARES.
Our common stock is not traded on any securities exchange, on the
NASDAQ National Market or SmallCap Market, or on the OTC Bulletin Board, and
there is only a very limited trading market in our common stock in the
over-the-counter market in the United States. Currently, our common stock only
trades via the "pink sheets." Our common stock has not traded on the NASDAQ
since September 1, 1999. We have no plans to list our common stock on NASDAQ or
on any securities exchange in the near future; moreover, our common stock does
not qualify for a NASDAQ listing, or listing on any major stock exchange.
PENNY STOCK RULES LIMIT THE LIQUIDITY OF OUR COMMON STOCK.
Our common stock may now and in the future be subject to the penny
stock rules under the Securities Exchange Act of 1934. These rules regulate
broker-dealer practices for transactions in "penny stocks." Penny stocks
generally are equity securities with a price of less than $5.00. The penny stock
rules require broker-dealers to deliver a standardized risk disclosure document
that provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
15
completing the transaction and must be given to the customer in writing before
or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction,
the broker and/or dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These additional penny stock
disclosure requirements are burdensome and may reduce the trading activity in
the market for our common stock. As long as our common stock is subject to the
penny stock rules, holders of our common stock may find it more difficult to
sell their shares.
YOUR INVESTMENT IN INNOFONE.COM MAY BE DILUTED.
We may issue a substantial number of shares of our common stock without
shareholder approval. It is likely that we will sell additional common stock or
other securities which are exchangeable for, or convertible into, common stock.
In addition, we have an outstanding loan due on December 31, 2000 which may be
converted into common stock at the holder's option. Any such issuance of
additional securities in the future could reduce an investor's ownership
percentage and voting rights in Innofone.com and further dilute the value of his
or her investment.
SINCE MANAGEMENT OWNS A CONTROLLING INTEREST IN INNOFONE, THEY COULD MAKE
DECISIONS THAT MAY BE IN THEIR OWN BEST INTERESTS BUT THAT MINORITY SHAREHOLDERS
FEEL ARE NOT IN THEIR BEST INTERESTS.
Our officers, directors, and principal shareholders, and their
family members and business associates, in the aggregate, beneficially own
approximately 60% of our outstanding common stock and voting rights attached
to 2,500,000 shares of preferred stock so that management and persons
affiliated with them presently have approximately 64% voting control of
Innofone. In addition, management and persons affiliated with them have the
right to acquire voting rights to an additional 7,500,000 shares of common
stock in the event all 2,500,000 shares of preferred stock are converted into
shares of common stock. See "Security Ownership of Certain Beneficial Owners
and Management." Our management is therefore able to exert substantial
influence over us and control most matters requiring shareholder approval,
including, without limitation, the election of directors, modification of our
capital structure, adoption of stock option plans and award of grants
thereunder, terms and conditions of a merger or consolidation of Innofone
with another company, and negotiation of the terms and conditions of a tender
offer for our common stock made by another company. Management could, for
example, block another person or company trying to buy all of our outstanding
common stock in a transaction in which shareholders would receive a premium
over the then current market value for their common stock.
In addition, this concentration of voting power could have a depressive
effect on the market price of the common stock.
MANAGEMENT'S RIGHT TO RECEIVE ADDITIONAL COMMON STOCK FROM THE CONVERSION OF
PREFERRED STOCK COULD RESULT IN THEIR CAUSING US TO PURSUE A BUSINESS STRATEGY
THAT MAY NOT BE DESIRABLE.
Management and founding shareholders who are either friends, family
members or business associates of management have the right to receive a maximum
of 7,500,000 shares of common stock pursuant to rights attached to 2,500,000
shares of preferred stock held by them. The holders of the preferred stock have
the right to convert the 2,500,000 shares of the preferred stock into common
stock
16
when we have generated $7,000,000 Can. in revenues. See "Description of
Securities." Although management believes that its near-term goal of generating
revenues and expanding our customer base is in Innofone's best interests,
management's view may be in conflict with our overall objective of achieving
profitable operations. There is the risk to shareholders that Innofone could
pursue a business strategy of generating revenues that could result in
management increasing its stockholdings at the expense of achieving
profitability.
THE SALE OF LARGE AMOUNTS OF OUR STOCK INTO THE PUBLIC MARKET, OR THE PERCEPTION
THAT SUCH SALES COULD OCCUR, MAY HAVE A DEPRESSIVE EFFECT ON THE PRICE OF THE
MARKET PRICE OF THE COMMON STOCK.
All of our outstanding common stock is presently restricted from
resale. However, approximately 10,947,780 shares of our outstanding common
stock has been held for more than 2 years by non-affiliates and therefore may
be freely sold in reliance on Rule 144 of the Securities Act, subject to the
availability of adequate public information. An additional 10,934,970 shares
of our common stock may be sold in compliance with certain volume
restrictions and manner of sale limitations under Rule 144, and 1,252,750 of
these may be sold without these restrictions within the next year. An
additional approximately 1,700,004 shares of our common stock will become
eligible to be resold pursuant to Rule 144 in the next 12 months. You should
note that these figures do not take into account stock that may be issued
pursuant to outstanding warrants and options and upon the conversion of the
convertible promissory notes into common stock.
Assuming conversion of our outstanding preferred stock, and the
exercise of our existing warrants and options and options we plan to issue in
the near future, we will have a total of 47,462,258 shares of common stock
outstanding. All the shares of common stock received from conversion of the
preferred stock may be resold immediately in the public market, subject to
limitations on such resales by persons considered company affiliates under
federal securities laws.
As restrictions on resales end, and more common stock not subject to
resale restrictions is issued, the market price could drop significantly if the
holders of this common stock sell it or are perceived by the market as intending
to sell it.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following discussion in conjunction with the
financial statements and the notes thereto as well as the other financial
information included elsewhere in this filing.
OVERVIEW
On June 26, 1998 we acquired all of the outstanding stock of Innofone
Canada, a private company. Under the terms of the transaction, the shareholders
of Innofone Canada received 5,000,0000 shares of common stock and 5,000,0000
shares of preferred stock of us, or 83% of the total equity and voting power of
the combined company. Since the former shareholders of Innofone Canada
controlled us after the acquisition, the transaction between the two companies
has been accounted for as a re-capitalization of Innofone by Innofone Canada.
Application of re-capitalization accounting results in the consolidated
financial statements of the combined entity being issued under the name of our
legal parent (Innofone), but they are considered a continuation of the financial
statements of the legal subsidiary, Innofone Canada. Because Innofone Canada is
deemed to be the issuer for accounting purposes, its assets and liabilities are
included in the consolidated financial statements at their historical carrying
values. In addition, control of the net assets and operations is deemed to be
acquired by Innofone Canada and for the purposes of this transaction, the deemed
consideration is the net book value of Innofone as of June 26, 1998. A result of
the re-capitalization is that the continuing entity is deemed to be the issuing
company that is the legal subsidiary. Consequently, the comparative cumulative
figures for the Statements of Operations and Deficit and Changes in Financial
Position are from the date of the subsidiary's incorporation, April 24, 1998, to
June 30, 2000.
Prior to our arrangements with Visa Desjardins and CIBC, we were not
offering a 10% discount on our services. See "Business - Current Services and
Products - Guaranteed Lowest Rate (GLR) Program" for a description of our
long distance offering prior to our arrangements with Visa Desjardins and
CIBC. Under our current program, we compare the customer's long distance
calling charges under the three major competitors' plans, selects the lowest,
and then offer the further 10% discount. The cost of the 10% discount is
expected to be offset by reduced collection costs. Despite the 10% discount,
we anticipate that the gross profit under the new program will improve over
the gross profit we were earning under the old GLR program. Under the GLR
program, one of the attractive features was that we offered excellent rates
on international calls that were only 10% above our costs. As a consequence,
many customers joined our program to take advantage of these low
international rates. This also caused our gross profit to decrease.
FOREIGN CURRENCY TRANSLATION
To June 30, 1998, our functional currency was the United States
dollar. To that date, substantially all of our operations had been undertaken
in United States dollars. For the years ended June 30, 2000 and 1999, our
functional currency changed to Canadian dollars. The effect of the change has
been applied prospectively from July 1, 1998, immediately subsequent to the
Innofone Canada transaction. We made this change in functional currency to
reflect the primary economic development for us being the Canadian dollar,
the primary currency in which our business is conducted.
Our reporting currency is United States dollars. The consolidated
statements of operations is translated into United States dollars using the
average exchange rate for the year. The consolidated balance sheets are
translated into United States dollars using the year-end exchange rate. The
translation gains or losses are included in the consolidated statement of
shareholders' deficiency as accumulated other comprehensive income or loss.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUES
Revenues for the quarter ended September 30, 2000 increased 350% to
$416,768 as compared to revenues of $119,779 for the quarter ended September 30,
1999. The revenue increase is due entirely to an increase in the number of
billable long distance calling minutes by our customer base. Revenues from the
first quarter in 1999 were generated by GLR customers acquired through our
direct marketing agents while the revenues for the quarter ended September 30,
2000 reflect the customer acquisition program with Visa Desjardins. For the
quarter ended September 30, 2000, approximately 70% of our revenues were
generated from the Visa Desjardin customer base and 30% were generated from our
GLR customer base. Approximately 90% of our revenues for the quarter ended
September 30, 2000 are from the resale of long distance voice services to
residential and small and medium sized businesses. The remaining 10% of revenues
are from the resale of cellular phones and services.
COST OF SALES AND GROSS MARGIN
As a result of our increased revenues, our cost of sales increased
225% from $89,696 for the quarter ended September 30, 1999 to $290,785 for the
quarter ended September 30, 2000.
Our gross profit also increased from $30,083 for the first quarter in
1999 to a gross profit of $125,983 for the quarter ending September 30, 2000.
The increase in gross profit is a result of our increased sales and related cost
of services. Our gross profit as a percentage of sales improved from 25% during
the three months ended September 1999 to 30% for the same period ending
September 30, 2000.
During the quarter ended September 30, 1999 we had a direct sales team
marketing our services to predominantly residential customers. In order to
facilitate sales in 1999, we modified our GLR program. Our original GLR program
compared the customer's long distance calling charges against the plans of Bell,
Sprint and AT&T, and we would then charge our customer the amount of whichever
plan yielded the lowest long distance charges. Under our revised GLR program, we
not only compared the customer's long distance calling against the three major
competitors' plans but we added to the comparison our own rated GLR plan. Our
rated GLR plan was a flat rate of $0.10 per minute anytime, anywhere in Canada,
plus a significant reduction in our selling rates for international long
distance calling. While this change to the GLR program allowed us to expand our
customer base, our revenue per customer declined. This resulted in an overall
decline in our profit margins during the first quarter of 1999. Also
contributing to the decline during 1999 was the change in customer mix from
business customers more to residential customers. Residential customers are
typically less profitable, because they generally make fewer calls and make them
during non-business hours when we cannot charge the higher rates we charge
during business hours.
During the quarter ended September 30, 2000, we began generating
revenues from our Visa Desjardin program, where we have modified our pricing
structure back to the original GLR program of comparing the customer's long
distance calling charges under each of the three major competitors' plans. As
explained above, our revenues and profit margins are higher under the
original GLR program. In addition to giving the customer the lowest of the
three plans, the Visa Desjardin customers were offered an additional 10%
discount. While the Visa Desjardin customer base is entirely residential,
this change back to our original GLR comparison plan has enabled us to
increase our profit margins for the first quarter ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Our selling, general and administrative expenses were $1,052,545 for
the quarter ending September 30, 2000, up 270% from $283,750 in the same
quarter last year. This increase reflects our increased customer acquisitions
and the attendant costs, the expansion of our management team, and our
changed business model where we have gone from direct sales of a single
product to marketing a bundle of services to a selective customer base using
outbound marketing of our products by external call centers. The primary
reasons for the increase in selling, general and administrative expenses is
due to increases in management and consulting fees, professional fees,
customer acquisition costs, salaries and benefits, billing costs, call center
costs, order fulfillment costs and office and general expenses.
Management and consulting fees increased 165% to $171,974 for the
quarter ended September 30, 2000 from $64,367 for the first quarter in 1999.
Management and consulting fees during the first quarter of 1999 only
consisted of the remuneration to the three senior officers, which increased
by 78% to $115,000 in the first quarter of 2000. The remaining consulting
fees, representing a 100% increase over the same period in 1999, consisted of
$25,000 in management fees paid to our marketing consultant, Mr. Burdon, and
approximately $30,000 in consulting fees paid for systems integration in
connection with our billing platform.
Professional fees increased 334% from $38,364 for the quarter ended
September 30, 1999 to $166,468 for the first quarter in 2000. Professional fees
include legal and accounting fees related the filing with the SEC, legal fees
relating to the raising of capital and legal fees paid in stock to our Canadian
solicitor.
Customer acquisition costs increased 456% from $58,005 for the first
quarter last year to $322,741 for the quarter ended September 30, 2000. The
first quarter this year reflects commissions we paid Equinox and Visa Desjardin,
who were responsible for the rapid expansion of our customer base and
consequently our increase in sales. We pay them a commission of $20 Canadian for
each new customer that is signed through the outbound sales activity of their
call centers. The customer acquisition fees paid in the quarter ended September
30, 1999 represent commissions we paid Adcom Sales Inc., our direct sales
marketing team which has since discontinued selling for us.
Salaries and benefits increased 150% from $21,395 in the first quarter
in 1999 to $52,442 in the quarter ended September 30, 2000. This increase is
primarily due to the salaries we paid to Mr. Blaquiere, who was hired as the
president of Innofone Canada in October 1999, and the additional support staff
we have hired since September 30, 1999.
Billing costs increased by 780% from $9,226 for the first quarter in
1999 to $81,299 for the first quarter in 2000. We pay these costs to our
independent billing company. The increase reflects the increased sales through
the launch of the Visa Desjardin project.
In order to launch the Visa Desjardin project, we needed to utilize the
services of a call center for customer service and customer acquisition, and the
services of an order fulfillment company to provide new customers with a welcome
kit that includes a letter welcoming them to the program as well as any products
ordered and related literature. These costs did not exist during the first
quarter in 1999. For the quarter ended September 30, 2000, call center costs
were $79,534 and order fulfillment costs were $65,196.
Office and general costs increased approximately 10% from $92,443 in
the first quarter 1999 to $100,413 for the quarter ended September 30, 2000.
This increase is due to general increases in the volume of our business.
Included in office and general expenses are expenses such as rent, computer
lease costs, printing costs, advertising and marketing costs, travel and
entertainment expenses, telephone charges, bad debt expenses, insurance and
office supplies.
AMORTIZATION. Amortization expense consists of the depreciation of
our capital assets. Our amortization expense for our first quarter of 2000
was $36,923 as compared to $17,818 for the three months ended September 30,
1999. The relative increase in amortization expense is the result of our
acquiring new computer equipment for our HotCaller Project and our additional
staff.
ADDITIONAL INTEREST: Additional interest decreased 220% from
$438,000 in the quarter ended September 30, 1999 to $138,400 in the quarter
ended September 30, 2000. This additional interest relates to the imbedded
beneficial conversion feature of convertible debt issues.
INTEREST AND BANK CHARGES. Interest on long term debt and bank charges
for the three months ended September 30, 2000, increased 18% to $5,770 from
$4,899 in 1999. While the interest on long-term debt has declined as the term
loan is being repaid, bank charges are higher due to the increased banking
activity accompanied by our growth in revenues.
Due to the above factors, we incurred losses of $1,107,655 for the
quarter ending September 30, 2000 as compared to losses of $714,384 for the
quarter ended September 30, 1999.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 2000.
REVENUES
Our revenue is generated primarily from reselling long distance
services at a higher rate than we pay for it. We are also generating revenues
from the resale of cellular services that we are offering as
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part of our services to the Visa Desjardins credit card customer base. For
cellular services, we earn a commission based on monthly cellular services.
However, cellular services revenues are currently less that 2% of our monthly
revenues.
We are charged for a customer's long distance calls by the carrier at
wholesale rates, negotiated through Axxent. We then charge our customers higher
rates than we pay. We are responsible for billing our customers and for
collecting payments from the customers. For Visa Desjardins customers, our
invoice is charged to the customers credit card, and we receive payment directly
from Visa Desjardins. In future periods, and subject to arranging additional
financing, of which there can be no assurance, we expect to continue to expand
our long distance customer base, while offering other services including prepaid
calling cards, internet services, home security services and utilities.
We showed strong revenue growth, with sales rising approximately 600%,
from $105,100 for the year ended June 30, 1999 to $736,127 for the year ended
June 30, 2000. This revenue growth is due entirely to our increase in the number
of billable long distance calling minutes by our expanding customer base. These
revenues are from the resale of long distance voice services to residential and
small and medium sized businesses through our Guaranteed Lowest Rate program.
Because we launched the Visa Desjardin project in the spring of 2000, very
little revenue from the Visa Desjardin project is included in our revenues for
the year ended June 30, 2000.
OPERATING EXPENSES
Our operating expenses consist of cost of services, selling, general
and administrative costs ("SG&A"), interest and financing costs, amortization
costs and compensation expense for options. Through June 30, 2000, cost of
services consisted of expenditures to the underlying carriers of the long
distance services that Innofone resells to its customers. The main carrier
selling services to us through the Axxent Agreement is Sprint Canada. SG&A costs
also include the personnel costs, the costs to acquire new customers, billing
costs, premises costs, call center costs, order fulfillment costs and other
related administrative expenses. Amortization expense includes depreciation and
amortization of capital assets including computer hardware, software and
web-site development costs, furniture and fixtures, leasehold improvements and
telephone and technical equipment.
COST OF SALES AND GROSS MARGIN. Our cost of sales increased
approximately 640% from $71,273 for the year ended 1999 to $528,603 for the year
ended 2000, contributing to an increase in gross profit from operations of
approximately from $33,827 for the year ended June 30, 1999 compared to $207,524
for the year ended June 30, 2000. This increase in gross profit was due to our
increase in sales and related costs of services. Our gross profit as a
percentage of sales, however, declined from 32% for the year ended June 30, 1999
to 28% for the year ended June 30, 2000. We attribute this decline in the gross
profit margin to the change in customer mix between the two periods. For the
year ended June 30, 1999, approximately 13% of our customer base consisted of
business customers generating approximately 52% of our monthly revenues. For the
year ended June 30, 2000, our business customers constituted only 4% of our
total customer base, generating approximately 33% of our total monthly revenue.
Profit margins are typically higher with business customers than with
residential customers because their calling patterns are concentrated during
daytime business hours where we are able to charge higher rates. Therefore, our
growth in residential customers has resulted in declining margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses increased by $4,236,394, or 530%, from $801,259 in 1999
to $5,037,653 in 2000. The primary reasons for this
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increase were increases in compensation costs for stock options, management
and consulting fees, billing costs, customer acquisition costs, call center
costs, marketing and advertising costs and order fulfillment costs.
Compensation costs for stock options increased 2000% from $112,470 in
1999 to $2,728,130 in 2000. This increase occurred primarily as a result of
options we granted to Douglas Burdon during the year ended June 30, 2000.
Management and consulting fees increased approximately 91%, from
$180,000 in 1999 to $344,215 in 2000. Management and consulting fees
generally consist of remuneration for the three senior officers, Mr. Larry
Hunt, Mr. Ron Crowe, and Mr. Rick Quinney, and consulting fees to our primary
marketing consultant, Mr. Burdon. Payments to our senior officers increased
approximately 36%, from $180,000 in 1999 as compared to $245,000 in 2000. In
both 1999 and 2000, they agreed to take less than their employment contracts
stipulated, with the balance being accrued until cash flow permits. In
addition, during our year ended June 30, 2000 we began our payments to Mr.
Burdon that amounted to approximately $90,000 for the year. The remainder of
the increase is due to payments to various other consultants.
Billing costs increased approximately 660%, from $61,391 in 1999 to
$466,678 in 2000. Billing costs are not only increasing as revenues are
increasing, but they also include a one-time charge of $270,000 paid to ACS,
the external billing company, for software changes to their billing engine to
accommodate the Visa Desjardin project.
Customer acquisition costs increased from $32,580 in 1999 to
$216,027 in 2000. Customer acquisition costs are ongoing commissions we paid
to independent sales agents in addition to one-time commissions we paid to
acquire new customers, including those in our Visa Desjardin program. During
fiscal 2000, we had a declining number of active sales agents, and
consequently, commissions to sales agents declined from 100% of acquisition
costs in 1999 to 21% of acquisition costs in 2000. The one time commission
cost paid to acquire a customer is generally $20 per new customer.
Call center costs were $0 in 1999 and $217,689 in 2000. These costs
include amounts paid to Equinox, who is our external call center in Montreal
established to do all customer service and outbound marketing for the Visa
Desjardin project. We had no call center in 1999.
Marketing and advertising costs increased approximately 1,017%, from
$27,286 in 1999 to $304,840 in 2000. This increase relates entirely to the
launch of the Visa Desjardin project in April 2000.
Order fulfillment costs increased from $0 in 1999 to $73,236 in 2000.
Order fulfillment costs consist of amounts paid to Watts Distribution, which is
responsible for sending welcome letters to new customers along with any products
that they may have ordered. During 1999, all customer fulfillment requirements
were handled
AMORTIZATION. Amortization expense represents the amortization of
capital costs for computer equipment, software, web-site development costs,
leasehold improvements, furniture and fixtures, and telephone and technical
equipment for a total of $94,585 for the year ended June 30, 2000 compared to
$56,075 for the year ended June 30, 1999. Amortization expense in 1999 included
a one-time charge for $23,729 that related to a franchise fee that was expensed
following the termination of a franchise agreement. Amortization expense
increased in fiscal 2000 due to amortization of new computer equipment costing
approximately $270,000, which was acquired at the end of fiscal 1999 and for
which no amortization expense was claimed in fiscal 1999. The increase is also
attributable to $35,549 of additional amortization claimed on web site
development costs and software costs for the HotCaller web site.
20
INTEREST AND FINANCING CHARGES. Interest on long term debt represents
interest on the bank loan for a total of $11,094 for the year ended June 30,
2000 as compared to $15,037 for the year ended June 30, 1999. The decrease in
interest and financing charges is due to the declining bank debt. Other interest
and bank charges increased to $13,989 in the year ended June 30, 2000 compared
to $8,732 in 1999.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT. The embedded
beneficial conversion feature of the private debt offerings that we completed
during the fiscal year amounted to $1,312,750. This amount was expensed over
the period to the first date of conversion. The embedded beneficial
conversion feature is the difference between the market value of the
company's stock on the date when the convertible note was signed and the
conversion price of the subscription.
GAIN ON SALE OF INVESTMENT. On June 17, 1999, we sold our investment
in Canadian Telecom Resellers Alliance Inc. to Axxent Corporation and
received 156,250 warrants to purchase 156,250 Class B non-voting shares in
Axxent. The warrants were assigned a value of $165,000 and, consequently, a
gain of $75,882 has been recorded on the sale of the investment in fiscal
1999.
COMPENSATION EXPENSE FOR STOCK OPTIONS. Compensation expense for stock
options represents the difference between the fair value of stock options
granted during the year and the stock trading value on the date of grant. The
majority of this expense relates to options granted to Mr. Douglas Burdon, the
marketing consultant responsible for bringing the Visa Desjardin project to us.
NET LOSS. We incurred losses of $6,262,547 for the year ended June 30,
2000 compared to a loss of $771,394 for the year ended June 30, 1999. However,
without giving effect to the compensation expense for options, the embedded
conversion feature of the convertible debt and the amortization expense, all of
which are non cash items, the net loss from operations for the year ended June
30, 2000 would have been $2,127,082.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the
proceeds from the sale and issuance of equity securities, loans from
stockholders and bank financing.
In 1999, we borrowed approximately $170,000 from a bank for the
acquisition of five internet gateways. The bank loan is secured by a General
Security Agreement that is a first charge on our assets. The loan bears
interest at the Royal Bank Prime plus 3% and is repayable at the rate of $3,418
per month. As of June 30, 2000, $88,478 remained outstanding on this loan.
As of September 30, 2000 Innofone had borrowed $244,177 from investors
and various stockholders. The stockholder loans are unsecured, non-interest
bearing, and are repayable in monthly installments of $1,220 beginning July 1,
2003 and ending in 2018.
From August 1999 through August 2000, we have funded operations
principally from private offerings of notes and common stock and have raised a
total of $1,956,600 from these offerings. Each note consists of an 8% unsecured
interest bearing promissory note, convertible into common stock. As of
September 30, 2000, $501,100 of these notes have been converted into 1,252,750
shares of common stock.
In connection with these offerings, we also issued warrants to purchase
common stock. There are currently outstanding warrants to purchase 4,118,750
shares of common stock at exercise prices of either
21
$1.00 or $1.50 per share. If all the warrants are exercised, we would receive
$4,678,754 in net proceeds. However, we cannot assure you that any warrants will
be exercised.
Funds from these sources have been used for working capital to fund the
original testing of the internet telephony gateways, marketing and development
costs for the Visa Desjardins project, the acquisition of new customers and
other general corporate purposes.
Mr. Douglas Burdon, a marketing consultant for us, was instrumental
in bringing the Visa Desjardin business to Innofone, and as a result, he
received a total of 2,750,000 options to purchase our common stock at a price
of $0.50 per share. Mr. Burdon has indicated to management that he will be
exercising options to acquire 1,000,000 shares when our common stock begins
trading again on the OTC Bulletin Board. This would generate $500,000 in
working capital that could be used to help fund operations. However, there
can be no assurance that Mr. Burdon will exercise any or all of these options.
At September 30, 2000, we had $86,587 in cash. We are using these funds
to finance current operations. Our fixed monthly expenses are approximately
$92,000. If we hire a new Vice President of Finance, as discussed below, our
fixed monthly expenses will be approximately $100,000. We believe that the funds
currently on hand, combined with receivables in the amount of $279,208, should
provide sufficient capital to continue operations and meet our liabilities for
the next sixty days. In addition, $34,000 of our monthly expenses consists of
payments to our executive officers, who are willing to defer a portion of their
salaries, if necessary, due to lack of funds.
At June 30, 2000 we had insufficient cash to fund our operations for
the next twelve months. In addition, we currently have no sources of
financing. These circumstances caused our independent auditors to include
with their auditors' report additional comments for U.S. readers that state
that there is substantial doubt as to our ability to continue as a going
concern. See "Risk Factors--Our financial statements contain a "going
concern" qualification" and Note 1 to the Financial Statements for more
information regarding the going concern opinion. Due to our capital
situation, we have decided that we will not expend funds on new customer
acquisitions until we have new financing in place, or until our cash flows
from existing accounts are sufficient to cover our ongoing expenses and to
start acquiring new customers pursuant to our existing strategic
relationships. We currently expect that we will be in a position to resume
new customer acquisitions within the next 60 days.
Since September 1, 2000 we raised through five private placements
approximately $850,000 and have been relying on these funds to continue
operations. In addition, we have received from ePhone Telecom, in connection
with our marketing and network services agreement with them, a $500,000 "ramp
up" fee for use towards our marketing programs, which must be repaid but may
be instead converted into common stock and warrants. However, these funds
will be insufficient to continue operations over the next twelve months and
undertake new projects.
We estimate that we will need monthly revenues of approxmiately
Cdn.$450,000 to break even under the Visa Desjardins program. Because that
program absorbs most of our fixed costs, we estimate that we will need
approximately Cdn.$200,000 in monthly revenues to break even under the
Merchant Program and any other future programs. Currently, we are generating
approximately Cdn.$300,000 in monthly revenues from the Visa Desjardins
program.
At current levels, we believe that our current customer base will
cover our ongoing expenses, on a going-forward basis, within the next ninety
days. However, the revenues from these sources will not be sufficient to meet
our existing liabilities as they become due and to expand our offerings in
accordance with our current business plan. We estimate that we require
$2,500,000 in additional financing -approximately $200,000 to establish the
CIBC Merchant Program and approximately $300,000 to establish other future
programs, and the balance to pay liabilities as they become due and acquire
new customers under both these and our existing offering programs.
Accordingly, we are dependent on securing additional financing, of which
there can be no assurance. If we are unable to obtain the funds we need to
continue and expand our business, we may consider various strategic
alternatives, including securing a business partner for our Canadian
operations or a sale of our company, our subsidiary Innofone Canada, or some
or all of our assets.
In January, our Canadian subsidiary, Innofone Canada, entered into
an offer of employment letter with Richard Olson to serve as Vice President
Finance to continue to explore financing opportunities for us. Mr. Olson is a
well-seasoned financial manager and we believe that he
22
could be instrumental in assisting with our capital requirements. However,
negotiations with Mr. Olson are currently on hold until Innofone is
successful in re-establishing its listing on the over-the-counter-Bulletin
Board. Even then, however, there can be no assurance that Mr. Olson will
execute an employment agreement with Innofone Canada or that he will be
successful in raising any of the required capital necessary to assist in our
continued growth.
The timing and amount of our capital requirements over the next twelve
months will depend on a number of factors, including the number of new customers
that are signed and the demand for our products and services. Continued
operations depend upon our ability to attain profitable operations and obtain
sufficient cash from external financing to meet our liabilities as they become
payable. These conditions cast substantial doubt on our ability to
continue as a going concern. However, we believe that if we are able to raise
the $2,500,000 we believe is necessary to continue operations according to our
business plan, this financing, combined with working capital that will be
obtained from operations, will be sufficient to meet our liabilities
and commitments as they become payable.
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Part II
ITEM 3. LEGAL PROCEEDINGS
On March 1, 2001, our principal subsidiary, Innofone Canada Inc., was
served with a Petition for a Receiving Order pursuant to Section 43 of the
Bankruptcy & Insolvency Act of Canada. This petition was filed by Equinox
Marketing Services, who operates our call center and our outbound telemarketing
program. Please refer to "Business - Billing and Fulfillment - Equinox Marketing
Services" for a description of our business relationship with Equinox. Equinox
filed the petition as a creditor and requests that Innofone Canada be adjudged
bankrupt on the grounds that it has "ceased to meet its obligations generally as
they become due." A hearing on the Petition is scheduled on March 13th, 2001
before the Registrar of the Bankruptcy and Insolvency Division of the Superior
Court for the District of Montreal.
We do not believe that Innofone Canada has committed any act or failed
to do anything in the course and conduct of its business that would give rise to
the granting of such an Order as requested by the Petitioner creditor. We
further believe that although a dispute exists between Innofone Canada and the
Petitioner/Creditor, the dispute should be resolved by discussions and/or resort
to the civil court process and not pursuant to Canadian Bankruptcy legislation.
The Company has retained Counsel in the Province of Quebec and intends
to move to strike the requested Petition. We believe that the Petition is
without merit, and Innofone Canada intends to vigorously defend this action.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On June 15, 1998, Innofone issued 1,000,000 common share purchase
warrants to a shareholder of Innofone as consideration for services provided,
related to the reverse take-over transaction with APC Telecom Inc. described
in the next paragraph. A value of $9,838 was assigned to the common share
purchase warrants. Each common share purchase warrant was exercisable until
June 30, 1999 to acquire one common share at $0.02 per share. On January 5,
1999, the common share purchase warrants were exercised. Upon exercise of the
1,000,000 common share purchase warrants, 1,000,000 common shares were issued
at $0.02 per share. The share purchase warrants and the shares issued upon
exercise of the warrants were issued pursuant to the exemptions from
registration set forth in Rule 504 of the Securities Act of 1933.
On June 26, 1998, APC Telecom Inc., a federally chartered Canadian company
("APC"), was acquired by Innofone in a stock-for-stock exchange pursuant to an
Agreement and Plan of Reorganization dated June 12, 1998 among Innofone, APC and
the shareholders of APC. As a result of the exchange, APC became a wholly owned
subsidiary of Innofone. Innofone issued to the shareholders of APC (i) 5,000,000
shares of its common stock, par value $.001 per share ("Shares"), and (ii)
5,000,000 shares of Series A, Convertible Preferred Stock, pursuant to the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933, as a transaction not involving a public offering.
From July 28, 1998 through October 14, 1998 Innofone sold a total of 2,000,000
Units, at a price of $0.05 per Unit, to 13 investors located in the Bahamas,
Hong Kong, and Mexico, netting Innofone $100,000. Each Unit consisted of (i) one
Share; (ii) One Class A common stock purchase warrant exercisable April 30,
1999, to purchase one Share at a price of $0.10 per Share; (iii) One Class B
common stock purchase warrant exercisable until April 30, 1999, to purchase one
Share at a price of $.14 per Share; and (iv) One Class C common stock purchase
warrant exercisable until April 30, 1999, to purchase one Share at a price of
$0.20 per Share. A total of (i) 1,848,000 Class A Warrants were exercised,
between December 23, 1998 and April 30, 1999, netting Innofone $184,800, (ii)
1,820,000 Class B Warrants were exercised, between December 8, 1998 and April
30, 1999, netting Innofone $254,800, and (iii) 462,000 Class C Warrants were
exercised, between April 10, 1999 and April 30, 1999, netting Innofone $92,400.
The Units were sold pursuant to the exemption from registration set forth in
Rule 504, promulgated under the Securities Act; the shares issued pursuant to
the exercise of the Class A, B, and C Warrants were issued pursuant to the
exemption from registration set forth in Rule 504, promulgated under the
Securities Act.
During August 1999, Innofone raised a total of $501,100 U.S. in a private
placement of its convertible promissory notes to 23 subscribers in Canada. Each
holder of the notes is entitled to convert the note plus accrued interest with
shares at the rate of $0.40 U.S. per share. The notes are unsecured, bear
interest at the annual rate of 8% and are due on July 31, 2000. Each holder of
the notes is entitled to convert the notes plus accrued interest into common
stock at the rate of $0.40 per share. Each note also originally included
warrants allowing the holder to purchase one share of common stock of
HotCaller.com, Inc., one of our non-operating subsidiaries, for each $.80 of
notes purchased, at a price of $2.00 per share. The warrants were cancelled in
an amendment to each subscription agreement. The notes and warrants were sold
pursuant to the exemption from registration set forth in section 4(2) of the
Securities Act, as a transaction not involving a public offering, and pursuant
to the exemption from registration set forth in Regulation S.
During December 1999 and January and February 2000, Innofone raised a total
of $1,039,500 U.S. in a private placement of its convertible promissory notes
to 50 subscribers in Canada. Each holder of the notes is entitled to convert
the note plus accrued interest to shares at the rate of $0.40 U.S. per share.
The notes are unsecured, bear interest at the annual rate of 8% and are due
beginning in January 2001. Each note also included a warrant allowing the
holder to purchase 2.5 shares of common stock, for every $1.00 of notes
purchased, at an exercise price of $1.00 per share. The warrants were to
expire December 31, 2000. Prior to this time, however, the noteholders
informed us that, pursuant to the terms of the notes, they wished to convert
the notes into common stock. The conversion of the notes into 2,598,750
shares of common stock was completed as of February 15, 2001. The notes and
warrants were sold pursuant to the exemption from registration set forth in
section 4(2) of the Securities Act, as a transaction not involving a public
offering, and pursuant to the exemption from registration set forth in
Regulation S.
In June 2000, Innofone raised $416,000 in a private placement of our convertible
promissory notes to four investors in Canada and the Bahamas. Each holder of the
notes is entitled to convert the note plus accrued interest into common stock at
the rate of $0.80 per share. The notes are unsecured, bear interest at the
24
annual rate of 8%, and are due on June 1, 2001. Each note also included a
warrant allowing the holder to purchase one share of common stock, for every
$.80 of notes purchased, at an exercise price of $1.50 per share; a total of
520,000 warrants were issued. The notes and warrants were sold pursuant to the
exemption from registration set forth in section 4(2) of the Securities Act, as
a transaction not involving a public offering, and pursuant to the exemption
from registration set forth in Regulation S.
In September 2000, Innofone raised $500,002 in two separate private placements,
to the same purchasers, of 1,000,004 Units consisting of one share of common
stock and one warrant to purchase common stock at $1.00 per share. The common
stock and warrants were sold pursuant to the exemption from registration set
forth in section 4(2) of the Securities Act, as a transaction not involving a
public offering.
In October 2000, Innofone raised $150,000 in a private placement of our
convertible promissory notes to one investor in the Bahamas. The holder of the
note is entitled to convert the note plus accrued interest into common stock at
the rate of $0.50 per share. The notes are unsecured, bear interest at the
annual rate of 10%, and are due on October 4, 2001. The holder of the note also
received 300,000 warrants entitling him to purchase one share of common stock at
an exercise price of $1.00 per share. The notes and warrants were sold pursuant
to the exemption from registration set forth in section 4(2) of the Securities
Act, as a transaction not involving a public offering, and pursuant to the
exemption from registration set forth in Regulation S.
In November 2000, Innofone raised $100,000 in a private placement of our
convertible promissory notes to two investors in the Bahamas. The notes are
unsecured, bear interest at an annual rate of 8%, and are due on November 15,
2001. Each holder of the note is entitled to convert the note (plus accrued
interest) into common stock at the rate of $0.30 per share. Each note also
included a warrant allowing the holder to purchase one share of common stock
for every $0.30 of notes purchased, at an exercise price of $0.75 per share.
The notes and warrants were sold pursuant to the exemption from registration
set forth in Regulation S.
In December 2000, Innofone raised $100,000 in a private placement of our
convertible promissory notes to two investors in the Bahamas. The notes are
unsecured, bear interest at an annual rate of 8%, and are due on November 15,
2001. Each holder of the note is entitled to convert the note (plus accrued
interest) into common stock at the rate of $0.30 per share. Each note also
included a warrant allowing the holder to purchase one share of common stock
for every $0.30 of notes purchased, at an exercise price of $0.75 per share.
The notes and warrants were sold pursuant to the exemption from registration
set forth in Regulation S.
In January 2001, Innofone received a $500,000 "ramp up" fee from ePhone
Telecom, Inc. pursuant to our marketing and network services agreement with
them. If we do not repay this fee by April 19, 2001, ePhone may convert its
right to receive the fee into 2,000,000 shares of common stock plus a warrant
to purchase 2,000,000 shares of common stock at an exercise price of
$0.75 per share. However, if Innofone completes a financing on more favorable
terms or at a lower price within six months of issuing the common stock, then
the amount of ephone's shares will be adjusted so that it receives similar
terms. This sale is exempt from registration pursuant to the exemption set
forth in Section 4(2) of the Securities Act, as a transaction not involving a
public offering.
25
PART F/S
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report...................................................................................F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999.......................................................F-3
Consolidated Statements of Operations--years ended June 30, 2000 and 1999 .....................................F-5
Consolidated Statements Shareholders' Deficiency and Comprehensive Loss--years ended
June 30, 2000 and 1999.....................................................................................F-6
Consolidated Statements of Cash Flows--years ended June 30, 2000 and 1999 .....................................F-7
Notes to Consolidated Financial Statements.....................................................................F-8
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2000 and June 30, 2000........................................F-31
Consolidated Statements of Operations--Three Months Ended September 30, 2000 and 1999 and Year
Ended June 30, 2000.......................................................................................F-32
Consolidated Statements of Shareholders' Deficiency and Comprehensive Loss--Three Months Ended
September 30, 2000 and 1999...............................................................................F-33
Consolidated Statements of Changes in Financial Position......................................................F-34
Notes to Unaudited Consolidated Financial Statements..........................................................F-35
26
Consolidated Financial Statements
(Stated in United States dollars)
INNOFONE.COM,
INCORPORATED
Years ended June 30, 2000 and 1999
F-1
AUDITORS' REPORT
To the Shareholders of Innofone.com, Incorporated
We have audited the consolidated balance sheets of Innofone.com, Incorporated as
at June 30, 2000 and 1999 and the consolidated statements of operations,
shareholders' deficiency and comprehensive loss and cash flows for the years
ended June 30, 2000 and 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 2000 and
1999 and the results of its operations and its cash flows for the years ended
June 30, 2000 and 1999 in accordance with accounting principles generally
accepted in the United States of America.
We also audited the adjustments described in note 18 that were applied to
restate the Company's previously issued financial statements. In our
opinion, such adjustments are appropriate and have been properly applied.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
September 30, 2000 except as to note 16(b) which is as of October 4, 2000,
and note 18 which is as of January 31, 2001.
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast
substantial doubt on the Company's ability to continue as a going concern,
such as those described in note 1(b) to the financial statements. Our report
to the shareholders dated September 30, 2000, except as note 16(b) which is as
of October 4, 2000 and note 18 which is as of January 31, 2001 is expressed
in accordance with Canadian reporting standards which does not permit a
reference to such events and conditions in the auditors' report when these
are adequately disclosed in the financial statements.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
September 30, 2000 except as to note 16(b) which is as of October 4, 2000 and
note 18 which is as of January 31, 2001.
F-2
INNOFONE.COM, INCORPORATED
Consolidated Balance Sheets, as restated (see note 18)
(Stated in United States dollars)
June 30, 2000 and 1999
-------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,257 $ -
Term deposit - 102,477
Accounts receivable, net of allowance for doubtful accounts
of $54,000 (1999 - nil) 352,190 73,167
Prepaid expenses and deposits 86,895 18,792
Investment (note 17) 165,000 -
-------------------------------------------------------------------------------------------------------------------
612,342 194,436
Fixed assets (note 3) 332,328 286,370
Investment (note 17) - 165,000
-------------------------------------------------------------------------------------------------------------------
$ 944,670 $ 645,806
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank indebtedness $ - $ 28,816
Accounts payable and accrued liabilities 794,480 254,130
Advances from ultimate shareholders (note 4) 114,528 67,000
Current portion of long-term debt (note 5) 40,524 41,012
Obligation under capital lease 2,236 3,695
-------------------------------------------------------------------------------------------------------------------
951,768 394,653
Advances from ultimate shareholders (note 4) 244,177 245,405
Long-term debt (note 5) 47,954 89,176
Convertible debt (notes 6, 8 and 16) 1,956,600 -
Redeemable equity securities (note 7) - 6,860
Shareholders' deficiency:
F-3
Share capital (note 7):
Common shares 4,702,250 8,700
Preferred shares 2,500 1,570
Additional paid-in capital 4,818,938 748,178
-------------------------------------------------------------------------------------------------------------------
9,523,688 758,448
Deficit 11,773,282 (823,235)
Accumulated other comprehensive loss (6,235) (25,501)
-------------------------------------------------------------------------------------------------------------------
(2,255,829) (90,288)
Future operations (note 1(b))
Commitments (note 9)
Subsequent events (note 6)
-------------------------------------------------------------------------------------------------------------------
$ 944,670 $ 645,806
See accompanying notes to consolidated financial statements.
F-4
INNOFONE.COM, INCORPORATED
Consolidated Statements of Operations, as restated (see note 18)
(Stated in United States dollars)
Years ended June 30, 2000 and 1999
1998
-------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------
Sales $ 736,127 $ 105,100
Cost of sales 528,603 71,273
-------------------------------------------------------------------------------------------
Gross profit 207,524 33,827
Selling, general and administrative expenses
(including stock compensation expense of $2,728,130
(1999-$112,470)) 5,037,653 801,259
Gain on sale of investment (note 17) - (75,882)
Amortization 94,585 56,075
Interest on long-term debt and bank charges 25,083 23,769
Additional interest expense (note 6(a) and (b)) 1,312,750 --
-------------------------------------------------------------------------------------------
6,470,071 805,221
-------------------------------------------------------------------------------------------
Net loss $ (6,262,547) $ (771,394)
-------------------------------------------------------------------------------------------
Basic net loss per share (note 11) $ (0.50) $ (0.13)
-------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 12,542,976 5,767,819
-------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
INNOFONE.COM, INCORPORATED
Consolidated Statements of Shareholders' Deficiency and Comprehensive Loss,
as restated (see note 18)
(Stated in United States dollars)
Years ended June 30, 2000 and 1999
----------------------------------------------------------------------------------------------------------------------
Common
Additional share
Common Preferred paid-in purchase
shares shares capital warrants Deficit
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 1,570 $ 1,570 $ 1,000 $ 9,838 $ (51,841)
----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Issuance of common shares for cash 2,000 -- 98,000 -- --
Exercise of warrants for common shares 4,130 -- 527,870 (9,838) --
Exercise of common share purchase
warrants for common shares 1,000 -- 8,838 -- --
----------------------------------------------------------------------------------------------------------------------
7,130 -- 634,708 (9,838) --
----------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- (771,394)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss -- -- -- -- (771,394)
Compensatory value of stock options -- -- 112,470 -- --
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 8,700 1,570 748,178 -- (823,235)
----------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- (6,262,547)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss -- -- -- -- (6,262,547)
Beneficial conversion feature of convertible
debt (note 6) -- -- 1,312,750 -- --
Compensatory value of stock options 2,728,130
Stock options 120 -- 29,880 -- --
Conversion of preferred shares
including deemed distribution of $4,687,500 4,690,000 (2,500) -- -- (4,687,500)
Reclassification of redeemable equity securities 3,430 3,430 -- -- --
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $ 4,702,250 $ 2,500 $ 4,818,938 $ -- $(11,773,282)
----------------------------------------------------------------------------------------------------------------------
Accumulated
other
comprehensive
loss Total
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ -- $ (37,863)
----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Issuance of common shares for cash -- 100,000
Exercise of warrants for common shares -- 522,162
Exercise of common share purchase
warrants for common shares -- 9,838
----------------------------------------------------------------------------------------------------------------------
-- 632,000
----------------------------------------------------------------------------------------------------------------------
Net loss -- (771,394)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (25,501) (25,501)
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss (25,501) (796,895)
Compensatory value of stock options -- 112,470
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (25,501) (90,288)
----------------------------------------------------------------------------------------------------------------------
Net loss -- (6,262,547)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment 19,266 19,266
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss 19,266 (6,243,281)
Beneficial conversion feature of convertible
debt (note 6) -- 1,312,750
Compensatory value of stock options 2,728,130
Stock options -- 30,000
Conversion of preferred shares -- --
Reclassification of redeemable equity securities -- 6,860
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $ (6,235) $(2,255,829)
----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
INNOFONE.COM, INCORPORATED
Consolidated Statements of Cash Flows, as restated (see note 18)
(Stated in United States dollars)
Years ended June 30, 2000 and 1999
-------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------
Cash flows provided by (used in):
Operations:
Net loss $(6,262,547) $ (771,394)
Items not involving cash:
Amortization 94,585 56,075
Write-off of franchise fee - 23,729
Loss on disposal of fixed asset - 17,071
Loss on sale of investment - (75,882)
Compensation cost on stock options (note 8) 2,728,130 112,470
Beneficial conversion feature of convertible debt (note 6) 1,312,750 -
Change in non-cash operating working capital:
Accounts receivable (279,893) (56,900)
Prepaid expenses and deposits (68,323) 32,049
Accounts payable and accrued liabilities 543,822 39,800
-------------------------------------------------------------------------------------------------
1,931,476 (622,982)
Financing:
Advances from ultimate shareholders 49,519 83,017
Increase (decrease) in bank indebtedness (28,816) 28,816
Principal payments on long-term debt (40,524) (40,321)
Proceeds on long-term debt - -
Principal payments on obligation under capital lease (1,416) (1,105)
Increase in convertible debt 1,956,600 -
Proceeds from options exercised 30,000 -
Issuance of share capital - 632,000
-------------------------------------------------------------------------------------------------
1,965,363 702,407
Investments:
Additions to fixed assets (141,942) (285,963)
Proceeds from disposal of fixed asset - 106,330
Purchase of term deposit - (102,477)
Payment of franchise fee - -
Investment in CTRA - (89,118)
Proceeds on sale of investment in CTRA - 40,000
Payment of note payable to CTRA - (40,000)
Proceeds from term deposit 102,477 -
-------------------------------------------------------------------------------------------------
(39,465) (371,228)
Effect of exchange rate changes on cash 13,835 (18,482)
-------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 8,257 (310,285)
Cash and cash equivalents, beginning of period - 310,285
-------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 8,257 $ -
-------------------------------------------------------------------------------------------------
Cash interest paid for the periods ended June 30, 2000 and 1999 was
$25,083 and $73,679, respectively. See note 13(d) for other non-cash
financing and investing activities.
See accompanying notes to consolidated financial statements
F-7
INNOFONE.COM, INCORPORATED
Notes to Consolidated Financial Statements
(Stated in United States dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
Innofone.com, Incorporated (the "Company") is incorporated under the laws of
the State of Nevada. The Company commenced commercial operations in fiscal
1999 and, accordingly, they are no longer considered to be in the development
stage and certain cumulative information from inception presented in prior
years is no longer disclosed. The Company, through its legal subsidiary
Innofone Canada, Inc. ("Innofone Canada") that operates in Canada, is engaged
in the business of long distance telephone and internet telephony. All of the
Company's sales are to Canadian customers in the residential and business
sectors. The Company is not dependent on a single customer. However, the
Company uses only a few carriers of long distance services that they are
dependent on for the usage of their telephone networks. On June 29, 1999,
Hotcaller.com Inc. ("Hotcaller") was incorporated and is a wholly owned
subsidiary of the Company. The Hotcaller business is an advertiser sponsored
program that allows customers to make free long distance calls from their
personal computer to a regular phone utilizing internet telephony. However,
Hotcaller has not commenced commercial operations. In addition, the Company
has another wholly owned subsidiary, Access South ("Access"), which is dormant.
1. BASIS OF PRESENTATION:
(a) Business combination of the Company and Innofone Canada Inc.:
On June 26, 1998, the shareholders of the Company approved a share
exchange takeover bid whereby, on June 26, 1998, the Company
acquired all of the outstanding shares of Innofone Canada, a private
company. Under the terms of the transaction, the shareholders of
Innofone Canada received 5,000,000 common shares and 5,000,000
Series A, voting convertible preferred shares of the Company. The
result of this transaction is that the former shareholders of
Innofone Canada acquired 83% of the outstanding common shares of the
Company on a fully diluted basis.
As former shareholders of Innofone Canada hold 83% of the
outstanding common shares of the Company immediately subsequent to
these transactions, the transaction between the two companies has
been accounted for as a recapitalization of the Company by Innofone
Canada effectively as if Innofone Canada had issued common shares
for consideration equal to the net monetary assets of the Company.
Application of recapitalization accounting results in the following:
(i) The consolidated financial statements of the combined entity are
issued under the name of the legal parent (the "Company") but
are considered a continuation of the financial statements of the
legal subsidiary, Innofone Canada;
(ii) As Innofone Canada is deemed to be the issuer for accounting
purposes, its assets and liabilities are included in the
consolidated financial statements at their historical carrying
values;
F-8
BASIS OF PRESENTATION (CONTINUED):
(iii) Control of the net assets and operations of the Company is
deemed to be acquired by Innofone Canada. For purposes of this
transaction, the deemed consideration is considered to be
equivalent to the net book value of the Company's net assets as
at June 26, 1998.
--------------------------------------------------------------------------------
Deemed consideration $ 20,275
Assigned value of net assets:
Prepaid expenses and deposits $ 20,275
--------------------------------------------------------------------------------
(b) Future operations:
These financial statements have been prepared on the going concern
basis, which assumes the realizations of assets and settlement of
liabilities in the normal course of operations, notwithstanding the
significant operating losses since incorporation, negative working
capital and shareholders' deficiency at June 30, 2000. Effective
September 1, 1999, the Company's shares were delisted from the
National Association of Securities Dealers ("NASD") over-the-counter
Bulletin Board. The Company is in the process of preparing a
Registration Statement to be filed with the United States Securities
and Exchange Commission in order for the Company's shares to be
eligible for trading in the United States on the NASD
over-the-counter Bulletin Board. Continued operations depend upon the
Company's ability to attain profitable operations and obtain
sufficient cash from external financing to meet the Company's
liabilities as they become payable. These conditions and events cast
substantial doubt on the Company's ability to continue as a going
concern. Management is of the opinion that sufficient working capital
will be obtained from operations and external financing to meet the
Company's liabilities and commitments as they become payable.
F-9
2. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in the United
States, the more significant of which are outlined below.
(a) Basis of presentation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Innofone Canada, Hotcaller
and Access. All significant intercompany transactions and balances
have been eliminated on consolidation.
(b) Cash equivalents:
Cash equivalents are nil as at June 30, 2000 and 1999. For purposes
of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or
less when acquired to be cash equivalents.
(c) Fixed assets:
Fixed assets are recorded at cost and are amortized over the
estimated useful life of the asset using the following methods and
annual rates:
-------------------------------------------------------------------------------------------------------------------
Asset Basis Rate
-------------------------------------------------------------------------------------------------------------------
Computer equipment Declining balance 30%
Computer software and website
development costs Straight line 2 years
Furniture and fixtures Declining balance 20%
Leasehold improvements Straight line Over the lease term
Telephone Declining balance 30%
Technical equipment Declining balance 30%
-------------------------------------------------------------------------------------------------------------------
Computer software and website development costs are expensed as
incurred unless they meet generally accepted criteria for deferral
and amortization. The development costs incurred in the conceptual
formulations of alternatives and prior to the establishment of
technological feasibility do not meet the accepted criteria for
development and are expensed as incurred. Capitalized computer
software and website development is evaluated in each reporting
period prior to determine whether it continues to meet criteria for
continued deferral and amortization.
F-10
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Use of estimates:
The preparation of financial statements in conformity with United
States generally accepted accounting principles 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 revenues and expenses during the period. Actual results
could differ from those estimates.
(e) Income taxes:
Income taxes are accounted for under the asset and liability method.
Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
To the extent that the recoverability of deferred tax assets is not
considered to be more likely than not, a valuation allowance is
provided.
(f) Foreign currency translation:
To June 30, 1998, the Company's functional currency was considered
to be the United States dollar because the Company had not commenced
commercial operations in Canada. The Company had entered into a
franchise agreement with a United States Company and had purchased
equipment from a United States Company. To June 30, 1998,
substantially all of the Company's operations had been undertaken
in United States dollars. As the functional and reporting currency
was the United States dollar, a cumulative translation adjustment
is included in the accounts to that date.
For the years ended June 30, 2000 and 1999, the Company's functional
currency changed to the Canadian dollar because the Company's wholly
owned subisdiary, Innofone Canada, Inc. had commenced economic
activity in Canada. The effect of the change has been applied
prospectively because the Company's wholly owned subsidiary,
Innofone Canada, Inc. had commenced economic activity in Canada.
From July 1, 1998. This change in functional currency has been made
to reflect the primary economic environment for the Company being
the Canadian dollar the primary currency in which its business is
conducted.
The Company's reporting currency is the United States dollar
because the Company is a United States Corporation and it is
trading publicly in the United States. The consolidated statements
of operations are translated into United States dollars using the
average exchange rate for the year. The consolidated balance sheets
are translated into United States dollars using the year-end
exchange rate. The translation gains or losses are included in
the consolidated statement of shareholders' deficiency as
accumulated other comprehensive income or loss.
There was no effect on the Company's financial position at the
date of adoption of the Canadian dollar due to the change in
functional currency. On a prospective basis, this change will
result in the Company's consolidated financial position and
results of operations being impacted by changes in the exchange
rate between the United States and Canadian dollars subsequent to
June 30, 1998. To June 30, 2000. the accumulated other
comprehensive loss of $6,235 (1999-$25,501) reflected in
shareholders' deficiency in the consolidated balance sheet
reflects the impact of these exchange rate fluctuations
subsequent to June 30, 1998. If the Company had been able to
retain the United States dollar as its functional currency for
all operations and the same exchange rate movements had occurred
over this period, this amount would not have been recorded and an
equal and offsetting adjustment would primarily have been applied
to reduce the balance attributable to fixed assets.
F-11
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Comprehensive income:
On July 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net
loss and foreign currency translation adjustments and is presented
in the consolidated statements of shareholders' deficiency and
comprehensive loss. The statement requires only additional
disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations.
Prior year financial statements conform to the requirements of SFAS
No. 130.
(h) Stock options:
The Company applies the fair value based method of accounting
prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
in accounting for its stock options to both employees and
non-employees. As such, compensation expense is recorded on the
date of grant based on the fair value of the award and is
recognized over the service period.
(i) Impairment of long-lived assets and long-lived assets to be disposed
of:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
(j) Revenue recognition:
The Company generates revenue from the resale of long distance
services when the services are rendered. The Company recently
launched its program of reselling cellular services. The Company
earns a commission based on the monthly revenues billed as these
services are rendered and this commission will be recognized as
revenue when the services are rendered. There would be no impact
on the Company's financial statements by adopting the revenue
recognition principles of SAB 101.
F-12
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(k) Development costs of bundled services:
The costs of developing bundled services programs include software
development and systems integration costs, marketing costs, and call
center development costs. The software development costs are paid to
the Company's external billing partner in order to modify the
billing engine and customer support services program to meet the
needs of each bundled services program. Costs incurred during the
preliminary project stage are expensed. Costs incurred during the
application development stage are capitalized and costs during the
post-implementation stage such as training costs are expensed.
Upgrades and enhancements to the billing software are capitalized
where additional functionality is probable. Systems integration
costs include costs paid to our external billing partner to
ensure accurate transfers of files between our call center, our
suppliers and our billing company and these costs are expensed as
incurred. Marketing costs consist of the creative design
costs for artwork as well as the costs of all printed materials.
Call center development costs are paid to external suppliers of call
center services and include the costs of training their staff and
preparing for the launch of a bundled services program. All costs
for development of marketing materials and training for the call
center are expensed as incurred.
(l) Investment:
The investment in Axxent Inc. warrants (note 17) is accounted for
by the cost method.
3. FIXED ASSETS:
-------------------------------------------------------------------------------------------------------------------
Accumulated Net book
2000 Cost amortization value
-------------------------------------------------------------------------------------------------------------------
Computer equipment $ 296,860 $ 53,422 $ 243,438
Computer software and website development costs 106,666 35,908 70,758
Furniture and fixtures 16,955 4,179 12,776
Leasehold improvements 6,214 2,263 3,951
Telephone 1,688 1,006 682
Technical equipment 1,215 492 723
-------------------------------------------------------------------------------------------------------------------
$ 429,598 $ 97,270 $ 332,328
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Accumulated Net book
1999 Cost amortization value
-------------------------------------------------------------------------------------------------------------------
Computer servers and software $ 267,378 $ 263 $ 267,115
Furniture and fixtures 13,526 1,087 12,439
Leasehold improvements 5,456 1,059 4,397
Telephone 1,654 248 1,406
Technical equipment 1,192 179 1,013
-------------------------------------------------------------------------------------------------------------------
$ 289,206 $ 2,836 $ 286,370
-------------------------------------------------------------------------------------------------------------------
F-13
4. ADVANCES FROM ULTIMATE SHAREHOLDERS:
The ultimate shareholders are those registered shareholders who existed
on June 26, 1998, the date the Company approved the share exchange
takeover as described in note 1(a). Advances from ultimate shareholders,
classified as long term, are unsecured, non-interest bearing providing
the Company is not in default of any payments required to be made
starting July 1, 2003, and are repayable in equal monthly installments
beginning July 1, 2003 to 2018. The current advances from ultimate
shareholders are unsecured, non-interest bearing and due on demand.
5. LONG-TERM DEBT:
--------------------------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------------------------------------------------------
Bank loan bearing interest at the bank's prime rate plus 3%, repayable in
monthly principal payments of $4,774 from October 1998 to April 1999
and $3,418 commencing in May 1999, interest repayable monthly effective
upon inception of
the loan $ 88,478 $ 130,188
Less current portion 40,524 41,012
--------------------------------------------------------------------------------------------------------------------------------
$ 47,954 $ 89,176
--------------------------------------------------------------------------------------------------------------------------------
The loan is secured by a first charge against the assets of the Company.
Certain shareholders have signed personal guarantees totalling $42,500 to
secure the loan.
Principal repayments are as follows:
-------------------------------------------------------------------------------------------------------------------
2001 $ 40,524
2002 40,524
2003 7,430
-------------------------------------------------------------------------------------------------------------------
$ 88,478
-------------------------------------------------------------------------------------------------------------------
F-14
6. CONVERTIBLE DEBT:
During the year ended June 30, 2000, the Company completed three private
convertible debt offerings, raising an aggregate total of $1,956,600.
These three offerings are described below:
(a) On August 5 and 6, 1999, the Company raised $501,100 through a
subscription of 8% unsecured convertible promissory notes (amended on
October 5, 1999) which are due July 31, 2000. The notes are
convertible into common shares of the Company with a par value of
$0.001 per share at a price of $0.40 per share. The total market
value of the Company's common shares on August 5 and 6, 1999 was
$438,000 higher than the total conversion price. Therefore, these
convertible promissory notes have an embedded beneficial conversion
feature that has been charged to interest expense and additional
paid-in capital on the dates the notes were issued. Effective
September 12, 2000, all of the promissory notes have been converted
into 1,252,750 common shares.
(b) During the period from December 1999 to February 2000, the
Company raised $1,039,500 through the subscription of 8% unsecured
convertible promissory notes which are due December 31, 2000. The
notes are convertible into common shares of the Company with a par
value of $0.001 per share at a price of $0.40 per share. The notes
also include a warrant to purchase one common share of the Company
with a par value of $0.001 at a price of $1.00 per share for each
$0.40 of notes purchased on or before December 31, 2000. The total
market value of the Company's common shares at the dates when the
notes were signed was $874,750 higher than the total conversion
price.The embedded beneficial conversion feature has been charged to
interest expense and added to additional paid in capital.
As of September 30, 2000, no notes have been converted into common
shares and no warrants have been exercised.
(c) On June 1, 2000, the Company raised $416,000 through the subscription
of 8% unsecured convertible promissory notes which are due June 1,
2001. The notes are convertible into common shares of the Company
with a par value of $0.001 per share at a price of $0.80 per share.
The market value of the Company's common shares at the dates when
the notes were signed was less than the conversion price. Therefore,
there is no embedded beneficial conversion feature. The notes also
include a warrant to purchase one common share of the Company with a
par value of $0.001 at a price of $1.50 per share for each $0.80 of
notes purchased on or before June 30, 2001.
As of September 30, 2000, no notes have been converted into common
shares and no warrants have been exercised.
F-15
7. SHARE CAPITAL:
As described in note 1(a), Innofone Canada is deemed, for accounting
purposes, to have acquired the Company effective June 26, 1998.
As at June 26, 1998, the authorized share capital of Innofone Canada
consisted of an unlimited number of common shares. The change in share
capital of Innofone Canada for the period from April 24, 1998 (date of
incorporation) to June 26, 1998, the effective date of the business
combination with the Company was as follows:
-------------------------------------------------------------------------------------------------------------------
Total
-------------------------------------------------------------------------------------------------------------------
Existing share capital of Innofone Canada, June 26, 1998 $ 563
Ascribed value of the shares of the Company as a result
of the recapitalization of the Company by Innofone Canada
(see note 1(a)) 20,275
-------------------------------------------------------------------------------------------------------------------
Share capital of the Company, June 26, 1998 $ 20,838
-------------------------------------------------------------------------------------------------------------------
F-16
7. SHARE CAPITAL (CONTINUED):
The number of outstanding common shares of the Company as at June 30,
2000 is computed as follows:
-------------------------------------------------------------------------------------------------------------------
Common
share
Common Preferred purchase
shares shares warrants
-------------------------------------------------------------------------------------------------------------------
Existing outstanding shares and
warrants as at June 30, 1998 6,000,000 5,000,000 1,000,000
Common share purchase warrants exercised 1,000,000 - (1,000,000)
Sale of units 2,000,000 - 6,000,000
Warrants exercised 4,130,000 - (4,130,000)
Warrants expired - - (1,870,000)
-------------------------------------------------------------------------------------------------------------------
Outstanding shares and warrants
as at June 30, 1999 13,130,000 5,000,000 -
Preferred shares converted to common shares 7,500,000 (2,500,000) -
Options exercised 120,000 - -
-------------------------------------------------------------------------------------------------------------------
Outstanding shares and warrants
as at June 30, 2000 20,750,000 2,500,000 -
-------------------------------------------------------------------------------------------------------------------
The Company's authorized share capital consists of 100,000,000 common
shares and 25,000,000 preferred shares each with a par value of $0.001
per share. The 5,000,000 issued preferred shares are voting, convertible
as described further below to common shares on a 3 for 1 basis at the
option of the holder based on certain revenue targets being met and
participate equally as to dividends with each common share. If after
five years the performance criteria has not been met, the remaining
preferred shares are convertible into 1/2 of a common share each. Any
dividends declared and paid by the Company would be declared and paid
in United States dollars.
On February 14, 2000 and February 15, 2000, 2,500,000 preferred shares
were converted into 7,500,000 common shares as three internet gateways,
the performance criteria for their release had been established. When the
Company generates $2,000,000 Canadian in cumulative revenue, 1,250,000
shares of preferred stock can be converted into 3,750,000 shares of
common stock. The remaining 1,250,000 shares of preferred stock can be
converted to 3,750,000 shares of common stock when the Company has
generated $7,000,000 Canadian in cumulative revenue. For accounting
purposes, the conversion of the preferred shares will include both a
non-performance element (equal to 1/2 of the preferred shares converted)
and a performance element (equal to the balance). If and when the
additional common shares are issued based upon meeting the performance
criteria, the fair value of any such additional shares will be recognized
as a deemed distribution against equity in the period when the
performance criteria is met. Until these targets are met, the preferred
shares remain outstanding with all rights and restrictions continuing.
F-17
7. SHARE CAPITAL (CONTINUED):
The Company had the right, until June 26, 2000, to redeem, at a price of
$0.01 per common share, 3,429,688 common shares issued to the founders
("Founder Shares") of Innofone Canada who are now officers, directors and
significant shareholders of the Company (the "Executives") and shares
issued to an affiliate of the founders of Innofone Canada, to effect the
business combination with Innofone Canada, in the event that any
Executives employment with the Company or its affiliates is terminated.
The Founder Shares are classified as redeemable equity securities and
are excluded from the weighted average number of common shares used in
the basic net loss per share calculation until June 26, 2000 (note 11).
As of June 26, 2000, no Founder Shares were redeemed, and
consequently, they were reclassified to common shares and preferred
shares.
As at June 30, 2000, all of the Company's outstanding common stock is
restricted from resale. However, approximately 10,947,780 shares of
outstanding common stock has been held for more than 2 years by
non-affiliates and therefore may be freely sold in reliance on Rule 144
of the Securities Act. An additional 9,682,220 shares of common stock
may be sold in compliance with certain volume restrictions and
manner of sale limitations under Rule 144, and 898,000 of these may be
sold without these restrictions within the next year. These figures do
not take into account stock that may be issued pursuant to outstanding
warrants and options and upon the conversion of convertible promissory
notes into common stock.
Assuming conversion of the outstanding preferred stock into 7,500,000
shares of common stock, and issuance of 5,500,000 shares of common
stock pursuant to rights granted to a key consultant, the Company will
have a total of 36,582,754 shares of common stock outstanding. All the
shares of common stock received from conversion of the preferred stock
may be resold immediately in the public market, subject to limitations
on such resales by persons considered company affiliates under federal
securities laws.
On June 15, 1998, the Company issued 1,000,000 common share purchase
warrants to a shareholder of the Company as consideration for services
provided, related to the recapitalization transaction (note 1). A value
of $9,838 was assigned to the common share purchase warrants. Each common
share purchase warrant was exercisable until June 30, 1999 to acquire one
common share at $0.02 per share. On January 5, 1999, the common share
purchase warrants were exercised. Upon exercise of the 1,000,000 common
share purchase warrants, 1,000,000 common shares were issued at $0.02 per
share. The payment for these shares was offset by a $20,000 payable for
services provided to the Company and the $9,838 value assigned to common
share purchase warrants was reallocated $1,000 to common shares based on
their par value and $8,838 as additional paid-in capital.
On July 7, 1998, the Company made an offering of 2,000,000 units, under
rule 504 of Regulation D of the Securities Act of 1933, at a price of
$0.05 per unit. Each unit consisted of one common share, $0.001 par value
per share and three common share purchase warrants exercisable at $0.10,
$0.14 and $0.20 respectively, each of which was exercisable until April
30, 1999. Cash in the amount of $100,000 was received on the sale of the
units and $2,000 was allocated to common shares based on their par value
and $98,000 to additional paid-in capital. As at April 30, 1999,
4,130,000 share purchase warrants were exercised for $532,000. This cash
was allocated $4,130 to common shares based on their par value and
$527,870 to additional paid-in capital. The remaining share purchase
warrants expired.
F-18
8. STOCK OPTIONS:
At June 30, 2000, the Company has two stock-based compensation plans
which are described below. The Company accounts for the fair value of
its grants under these plans in accordance with FASB Statement 123. The
compensation cost that has been charged against income for those plans
was $1,282,863 and $112,470 for 2000 and 1999, respectively.
The full amount was assigned as additional paid up capital.
In 1997, the Company adopted a Compensatory Stock Option Plan (the "CSO
Plan") and an Employee Stock Compensation Plan (the "ESC Plan") pursuant
to which the Company's Board of Directors may grant stock options to
employees, consultants, advisors or directors of the Company. The CSO
Plan authorizes grants of options to purchase up to 1,500,000 shares of
authorized but unissued common stock and the ECS plan authorizes grants
of options to purchase up to 1,000,000 shares of authorized but unissued
common stock. Stock options are granted under the CSO Plan with an
exercise price equal to or greater than 100% of the stock's fair market
value at the date of grant and the vesting period is limited to no more
than 10 years.
Pursuant to the Company's CSO Plan, the Company has granted 1,175,000
stock options to directors and employees for the purchase of common
shares ranging from $0.10 to $1.00 per share, expiring from August 10,
2000 to June 30, 2002 and vesting either on the date of grant or periods
up to 12 months after the date of grant. The Company has granted a
further 250,000 options to an employee which vest upon meeting certain
business targets. Once vested, the employee is entitled to exercise the
options to purchase common shares of the Company for $0.50 per share.
At June 30, 2000, these targets had not been met.
Pursuant to the Company's ESC Plan, 100,000 stock options have been
granted to an employee for the purchase of common shares at $0.0001 per
share. The Company has granted a further 900,000 options to that employee
but the options do not vest until certain business targets are met. Once
vested, these options can be exercised at $0.0001 per share subject to a
release provision over 24 months after vesting. At June 30, 2000,
these targets had not been met.
The Company has also granted stock options, which are not part of the ESC
Plan and the CSO Plan. These options were approved by the Company's Board
of Directors and were granted to key consultants and advisors of the
Company. The Company has granted a total 3,110,000 stock options to
purchase common shares ranging from $0.20 to $0.50 per share, expiring
from August 10, 2000 to September 15, 2002, and vesting at the time of
grant. 2,750,000 of these options are subject to being released on a
quarterly basis over an 18 month period. Any compensation expense
relating to options subject to release provisions would be charged to
operations over the release period. The Company has also granted a
further 3,207,000 stock options to consultants and advisors of the
Company at prices ranging from $0.001 to $0.50. These options vest
upon achieving certain business targets, and for 2,750,00 of those
options, they are subject to being released on a quarterly basis over
an 18 month period.
F-19
8. STOCK OPTIONS (CONTINUED):
The following table summarizes the activity for stock options which
have been granted to date:
-------------------------------------------------------------------------------------------------------------------
Number of Weighted-average
options exercise price
-------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 - n/a
Granted 1,380,000 $ 0.64
Exercised - n/a
Forfeited - n/a
Expired - n/a
-------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1999 1,380,000 $ 0.64
Granted - employees vested 255,000 $ 0.29
Granted - non-employees vested 2,750,000 $ 0.50
Granted - employees not vested 1,150,000 $ 0.11
Granted - non-employees not vested 3,207,000 $ 0.46
Exercised (120,000) $ 0.25
Forfeited - n/a
Expired - n/a
-------------------------------------------------------------------------------------------------------------------
Outstanding (held by 13 optionees) at June 30, 2000 8,622,000 $ 0.54
-------------------------------------------------------------------------------------------------------------------
Subsequent to the year end, 50,000 options expired and 430,000 options
were exercised for total proceeds of $66,000.
The weighted average grant date fair value of options granted during the
year has been broken out between employees and non employees in the
following tables:
Employees
-------------------------------------------------------------------------------------------------------------------
Weighted-average
Weighted-average grant date
exercise price fair value of options
-------------------------------------------------------------------------------------------------------------------
Options whose exercise price is at fair market value $ 0.46 $ 0.25
Options whose exercise price is less
than fair market value 0.01 1.42
Options whose exercise price is greater
than fair market value 0.50 0.10
-------------------------------------------------------------------------------------------------------------------
Total weighted-average grant date fair value of options $ 0.14 $ 1.06
-------------------------------------------------------------------------------------------------------------------
Non employees
-------------------------------------------------------------------------------------------------------------------
Weighted-average
Weighted-average grant date
exercise price fair value of options
-------------------------------------------------------------------------------------------------------------------
Options whose exercise price is at fair market value $ N/A $ N/A
Options whose exercise price is less
than fair market value 0.48 0.97
Options whose exercise price is greater
than fair market value N/A N/A
-------------------------------------------------------------------------------------------------------------------
Total weighted-average grant date fair value of options $ 0.48 $ 0.97
-------------------------------------------------------------------------------------------------------------------
The weighted average remaining contractual life for all outstanding
options is approximately one year.
F-20
8. STOCK OPTIONS (CONTINUED):
The fair value of each option was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions
used for 2000: dividend yield of 0%, expected volatility of 100%,
risk-free interest rate of approximately 6% and expected life of two
years.
9. COMMITMENTS:
(a) Lease commitments:
The Company has entered into operating leases for its premises and
equipment for terms expiring in June 2003. The annual lease payments
for the next three years are as follows:
-------------------------------------------------------------------------------------------------------------------
2001 $ 36,000
2002 25,000
2003 21,000
-------------------------------------------------------------------------------------------------------------------
$ 82,000
-------------------------------------------------------------------------------------------------------------------
(b) CTRA Agreement:
The Company has entered into an agreement with CTRA ("CTRA
Agreement") on April 11, 2000 to resell the Company's long distance
services. The agreement expires on April 10, 2002, and automatically
renews every two years unless either party notifies the other at
least 30 days prior to the expiration of the term that it does not
wish to renew. Should the Company wish to terminate the agreement at
a date other than the renewal date, then it is subject to a
termination charge of $50,000 Canadian dollars. The Company is
subject to a $0.005 Canadian premium per minute on its rates from
CTRA if it does not reach a minimum monthly billing of six million
minutes by March 31, 2001 and every month thereafter.
F-21
9. COMMITMENTS (CONTINUED):
(c) ACS Communications Industry Services, Inc. Agreement:
Effective March 2, 2000, the Company entered into a three-year agreement
with ACS Communications Industry Services, Inc. ("ACS"), whereby, ACS
will provide to the Company all billing related functions including
invoice preparation and mailing, dial-in-access over the internet to the
ACS iCars software, and all other routine functions including order
entry, customer service functions, accounting, sales tracking and
receipts processing functions. The Company is committed to a minimum
monthly service bureau fee of $10,000 per month. In the event that the
Company terminates the contract prior to March 3, 2003, it is subject to
a financial penalty of the greater of the three previous months average
billing or $10,000, times 50% of the number of months remaining in the
contract. The contract will automatically be renewed for a further two
years under the same terms and conditions unless either party wishes to
terminate the agreement after the three-year anniversary date.
(d) Rogers Wireless Inc. Agreement:
Effective April 20, 2000, the Company entered into a three-year agreement
with Rogers Wireless Inc ("Rogers") to resell their cellular based
telecommunications services to customers of financial institutions in
Canada for which the Company is offering bundled services. Under the
terms of the agreement, the Company is obligated to arrange for 5,000 new
customers by April 20, 2001, 15,000 new customers by April 20, 2002 and
25,000 new customers by April 20, 2003. If these minimums are not
reached, the Company is obligated to pay to Rogers $20 Canadian, times
the number of customers that the Company is short of the minimum. Rogers
would also have the option to terminate the contract upon 10 days notice
if the anniversary dates minimum are not met. The Company is also
required to post a security deposit with Rogers in the amount of $100,000
Canadian which has been accrued in the year ended June 30, 2000. After
three years, this agreement shall deem to continue on a month-to-month
basis, unless either party terminates after giving thirty days written
notice.
F-22
9. COMMITMENTS (CONTINUED):
(e) Visa Desjardins:
On November 22, 1999, the Company entered into a memorandum of
understanding with Visa Desjardins, a Quebec financial institution
in order to launch a cellular, calling card, internet, home security
and long distance bundled services program to Visa Desjardins credit
cardholders. The Company is responsible for all of its costs
relating to the program. The Company is obligated to pay a 1.75%
merchant fee on all charges made on client credit cards and a
commission of 4% will be payable on gross sales commencing August 1,
2000. In addition, the Company is obligated to pay Visa Desjardins a
performance fee for each customer enrolled in a certain number of
services. If either party cancels the launch of this program prior
to completing a detailed contract, each party will be responsible
for their own costs incurred to that point.
The Company is marketing its services to the Visa Desjardins
credit card customer base by a combination of advertising
material included as inserts with the customers credit card bill
and out bound telemarketing. Visa Desjardins will be marketing
these services through their own call centre, and in addition,
the Company has retained the services of Equinox Marketing
Services to provide outbound telemarketing and customer support
services for the Visa Desjardin program. The Company is
obligated to pay a one time fee for each new customer that is
signed up through the outbound telemarketing programs. During the
year, the Company also signed a Memorandum of Understanding with
Watts Distribution Services Ltd. ("Watts") whereby Watts provides
fulfillment services for the Company's new customer enrollment
needs. These services include a new customer welcome letter and
where requested, long distance calling cards or cellular phones.
(f) Mr. Burdon:
On November 30, 1999, the Company engaged the services of Mr.
Burdon to manage its marketing efforts focused on developing
relationships with businesses which can market the Company's long
distance services and other products to their customer base. This
agreement expired on March 31, 2000. On April 5, 2000, a new
agreement, superseding the November 30, 1999 agreement was signed
with Mr. Burdon. Under the terms of the agreement, Mr. Burdon is
entitled to receive options of up to 5,500,000 shares of common
stock which are exercisable at an exercise price of $0.50 per
share within a two year period of being granted, and which are
subject to the satisfactions of certain conditions. Effective
April 5, 2000, 2,750,000 options for common shares were granted
to Mr. Burdon in connection with his past efforts in facilitating
the Company's business arrangement with Visa Desjardins and in
connection with his signing a new agreement with the Company.
Of the 2,750,000 options granted on April 5, 2000, 1,000,000
options were exercisable on signing the agreement with Mr.
Burdon, with the remaining 1,750,000 options becoming exercisable
over an eighteen-month period from April 5, 2000. All of these
options were earned and are non-forfeitable effective April 5,
2000. The remaining balance of options for 2,750,000 common shares
will be earned upon the signing of a second agreement with a
financial institution for the marketing of the Company's products
and services. As part of the agreement, Mr. Burdon also receives an
advisory fee of $8,250 per month, for as long as the Company
considers his services worthwhile.
The fair value of the 2,750,000 options granted on April 5, 2000
were estimated using the grant date of April 5, 2000 using the
Black-Scholes option pricing model assuming a dividend yield of 0%,
expected volatility of 100%, a risk free interest rate of
approximately 6% and an expected life of two years.
The compensation costs relating to the 2,750,000 options that
were granted and earned effective April 5, 2000 was determined to
be $2,689,200 (included in total compensation expense of
$2,728,130). These amounts have been assigned as additional
paid-in capital in the financial statements as at June 30, 2000.
F-23
9. COMMITMENTS (CONTINUED):
Compensation expense for the remaining 2,750,000 stock options will
be recognized whenever Mr. Burdon successfully negotiates and signs
the second agreement.
10. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
(a) Financial instruments:
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at June 30, 2000 and
1999. The estimated fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than a forced or
liquidation sale. These estimates, although based on the relevant
market information about the financial instrument, are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
-------------------------------------------------------------------------------------------------------------------
2000 2000
-------------------------------------------------------------------------------------------------------------------
Carrying Fair
amount value
-------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 8,257 $ 8,257
Accounts receivable 352,190 352,190
Deposits 86,895 86,895
Financial liabilities:
Accounts payable and accrued liabilities 794,480 794,480
Obligation under capital lease 2,236 2,236
Long-term debt 88,478 88,478
Advances from ultimate shareholders 358,705 358,705
Convertible debt 1,956,600 1,956,600
-------------------------------------------------------------------------------------------------------------------
F-24
10. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED):
-------------------------------------------------------------------------------------------------------------------
1999 1999
-------------------------------------------------------------------------------------------------------------------
Carrying Fair
amount value
-------------------------------------------------------------------------------------------------------------------
Financial assets:
Term deposit $ 102,477 $ 102,477
Accounts receivable 73,167 73,167
Deposits 5,105 5,105
Financial liabilities:
Bank indebtedness 28,816 28,816
Accounts payable and accrued liabilities 254,130 254,130
Long-term debt 130,188 130,188
Obligation under capital lease 3,695 3,695
Advances from ultimate shareholders 312,405 312,405
-------------------------------------------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
(i) Cash and cash equivalents, accounts receivable, deposits,
accounts payable and accrued liabilities and obligation under
capital lease:
The carrying amounts approximate fair value because of the
short maturity of these instruments.
(ii) Long-term debt:
The fair value is estimated by discounting the future cash
flows at rates currently offered to the Company for similar
debt instruments of comparable maturity by the Company's
bankers.
(iii) Advances from ultimate shareholders:
Imputed interest computed at comparable market rates on the
interest free advances from ultimate shareholders is not
considered to be material to the financial statements.
Consequently, the financial statements do not include a charge
for imputed interest on the interest free advances and the
fair value is considered to be comparable to the carrying
value.
F-25
10. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED):
(b) Currency rate risk:
The Company's current operations are headquartered in Canada and all
sales are generated in Canada. Since the financial results are
reported in United States dollars, fluctuations in the value of the
United States dollar relative to the Canadian dollar could materially
affect the Company's results.
11. BASIC NET LOSS PER SHARE:
Basic net loss per share figures are calculated using the weighted
average number of common shares outstanding computed on a daily basis.
The Founder Shares are excluded from the weighted average number of
common shares until June 26, 2000 (note 7) and are included for the
period effective June 27 and June 30, 2000. The effect of the conversion
of the preferred shares on an if-converted basis and stock options has an
anti-dilutive effect.
12. INCOME TAXES:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at June 30, 2000 and 1999 are
presented below:
-------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,226,000 $ 318,000
Net capital loss carryforwards 30,000 30,000
Capital assets, principally due to differences
in amortization 75,000 32,000
-------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,331,000 380,000
Less valuation allowance (1,331,000) (380,000)
-------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
-------------------------------------------------------------------------------------------------------------------
F-26
12. INCOME TAXES (CONTINUED):
The valuation allowance for deferred tax assets as of June 30, 2000 and
1999 was $1,331,000 and $380,000, respectively. The net change in the
total valuation allowance for the years ended June 30, 2000 and 1999 was
an increase of $951,000 and $357,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset,
the Company will need to generate future taxable income of approximately
$27,000, $638,000 and $1,955,000 prior to the expiration of the net
operating loss carryforwards in 2005, 2006 and 2007, respectively and
future taxable capital gains of approximately $67,000 to utilize the net
capital loss carryforward available indefinitely. Based upon the level of
historical taxable income it cannot be reasonably estimated at this time
if its more likely than not the Company will realize the benefits of the
deferred tax assets. Consequently, the deferred tax assets have been
reduced by an equivalent valuation allowance. The valuation allowance
will be adjusted in the period that is determined with reasonable
certainty that it is more likely than not that some portion or all of the
deferred tax assets will be realized.
At June 30, 2000, the Company has net operating loss carryforwards for
income tax purposes of approximately $2,722,000 which are available to
offset future taxable income, if any, through 2005 to 2007, respectively.
In addition, the Company has net capital loss carryforwards for income
tax purposes of approximately $67,000 which are available to offset
future taxable capital gains.
13. NON-CASH FINANCING AND INVESTING ACTIVITIES:
(a) In 1999, a capital lease obligation of $4,800 was incurred
when the Company entered into a lease for
furniture and fixtures.
(b) In 1999, 1,000,000 shares of common stock were issued upon the
conversion of 1,000,000 common share purchase warrants to settle an
outstanding liability.
(c) In 1999, a note payable of $40,000 was issued when the Company
purchased an investment in CTRA.
(d) In 1999, the Company received an investment valued at $165,000
on sale of CTRA (note 17.)
F-27
14. SEGMENTED INFORMATION:
(a) Reportable segment:
The Company has one reportable segment; resale of long distance
services. The resale of long distance services is provided to
residential and small to medium sized businesses. This segment
represents the result of operations for the Company.
(b) Geographic information:
The Company derives all of its revenue from Canada and all of its
fixed assets are physically located in Canada.
15. NEW US ACCOUNTING STANDARDS:
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 (SAB 101), REVENUE RECOGNITION IN FINANCIAL STATEMENTS, on
December 3, 1999. SAB 101 provides additional guidance on the application
of existing generally accepted accounting principles to revenue
recognition. The Company does not expect the initial application of SAB
101 will materially impact reported results on existing contractual
arrangements.
16. SUBSEQUENT EVENTS:
(a) In September 2000, the Company raised a total of $500,002 in two
separate private placements totaling 1,000,004 units consisting of
one share of common stock with a par value of $.001 at a price of
$0.50 per share and one warrant to purchase common stock
at $1.00 per share expiring in March 2002.
(b) On October 4, 2000, the Company raised $150,000 through a
subscription of 10% unsecured promissory notes which are due
October 4, 2001. The capital amount of the notes shall be payable
on demand in whole or in part in the event that the Company makes a
distribution of its securities worth at least $500,000 by private
placements or otherwise. The notes are convertible into common
shares of the Company with a par value of $0.001 at a price of
$0.50 per share. The market value of the Company's common shares at
the subscription date was less than the conversion price.
Therefore, there is no embedded beneficial conversion option. The
notes also include a non-detachable warrant to purchase one common
share of the Company with a par value of $0.001 at a price of $1.00
per share.
(c) On November 16, 2000, the Company raised $100,000 through a
subscription of 8% unsecured promissory notes which are due
November 15, 2001. On December 16, 2000, the Company raised a
further $100,000 through a subscription of 8% unsecured promissory
notes which are due November 15, 2001. Both subscriptions for notes
are convertible into common shares of the Company with a par value
of $0.001 at a price of $0.30 per share. The market value of the
Company's common shares at the subscription date was less than the
conversion price. Therefore, there is no embedded beneficial
conversion option. The notes also include a non-detachable warrant
to purchase one common share of the Company with a par value of
$0.001 per share at a price of $0.75 per share.
(d) In September 2000, the Company launched its second bundled services
offering through CIBC bizsmart under the trademark name SmartRate.
Pursuant to the terms of a Definitive Agreement with Canadian
Imperial Bank of Commerce ("CIBC") signed effective May 15, 2000,
the Company is obligated to pay a commission of 2% on long distance
calling revenues, once the Company has signed 20,000 accounts. This
commission increases to a maximum of 6% once the Company has 100,000
signed accounts. For cellular service the commission is 1% after
the Company has 20,000 signed accounts and that increases to a
maximum of 4% after 80,000 accounts are active. The agreement is
for a term of five years expiring in September 2000, although, by
mutual agreement, a renewal agreement can be entered into.
(e) In July 2000, the Company signed a Memorandum of Understanding
with the Merchant Card Services division CIBC. The Company expects
to launch this program in January 2001 and will offer the same
bundle of long distance, calling cards, cellular and internet
services as are offered to Visa Desjardins and CIBC bizsmart. This
service will be marketed to the CIBC merchant members across Canada
and CIBC will earn a commission on total revenues billed to
participating merchants.
(f) On September 7, 2000, the Company entered into an ISP Affinity
Program Agreement with Bell Actimedia Inc. to resell Bell Sympatico
Internet access as part of its bundled services offering through
the Visa Desjardins and CIBC programs. The Agreement becomes
effective on November 1, 2000 and expires on November 1, 2003,
unless either party terminates the agreement after giving sixty
days notice. Under the terms of the agreement the Company earns a
commission on monthly Internet access revenues depending on volume
and customer retention rates.
F-28
17. GAIN ON SALE OF INVESTMENT:
During fiscal 1999, the Company purchased a 12.5% investment in
Canadian Telecom Resellers Alliance Inc. ("CTRA"), a corporation
incorporated under the laws of the Province of Ontario for
consideration consisting of cash of $89,118 and a note payable to
CTRA for $40,000.
Effective June 17, 1999, the Company sold its investment in CTRA to
Optel Communications Corp. ("Optel") an arm's length Canadian
controlled private corporation and received $40,000 in cash to repay
the note payable to CTRA and 156,250 warrants to purchase 156,250
Class B non-voting shares in Optel. Optel is a wholly owned subsidiary
of AXXENT, Inc. ("AXXENT"), a company listed on the Toronto Stock
Exchange, and the warrants were subsequently exchanged for equivalent
warrants in AXXENT. On October 27, 1999 AXXENT completed a reorganizaton
of its issued and outstanding share capital. As a result of this
reorganization, the warrants to purchase class B non-voting shares in
AXXENT were consolidated on a three-for-one basis. As a result, the
Company holds 52,833 warrants to purchase 52,833 Class B non-voting
shares of AXXENT. The warrants are exercisable in four six month
intervals commencing June 17, 1999 at a price of Cdn. $6.00 per warrant
except that the warrants were not exercisable prior to October 27, 2000,
and expire on June 17, 2004. The Company is also entitled to exercise
up to 93,750 additional warrants at a price of Cdn. $6.00 per warrant at
any time after November 30, 2000 if CTRA meets certain business targets
during the period from June 17, 1999 until November 30, 2000. The
additional warrants expire on June 17, 2004. As of June 30, 2000, no
warrants have been exercised and none of the business targets have
been met.
The fair value of the warrants received on the transaction were
estimated to be $165,000 using the Black - Scholes option pricing
model assuming a dividend yield of 0%, expected volatility of 112%,
and a risk free interest rate of 5.5%, over an expected life of five
years. These are recorded as investments. As a result of the sale of
its investment in CTRA, the Company recorded a gain of $75,882.
18. RESTATEMENT OF PREVIOUSLY ISSUED FIGURES:
Previously issued financial statements of the Company as at June 30,
2000 and 1999 and for the years then ended have been restated as
follows:
(a) Restatement of share capital as at June 30, 1999:
Share capital for the year ended June 30, 1999 has been restated
to give effect to the redemption provisions of Founder Shares as
described in note 7. The Founder Shares included in common shares
and preferred shares have been reclassified out of share capital
for the year ended June 30, 1999 and were reclassified back to
share capital when the redemption provisions expired on June 26,
2000. As a result of the restatement, preferred share capital
decreased $3,430 and common share capital decreased $3,430 and
redeemable equity securities increased $6,860.
(b) Restatement of loss of sale of investment:
The Company previously reported a loss of $89,118 on the sale of
its investment in CTRA for the year ended June 30, 1999. This loss
has been restated to a reported gain of $75,882 after giving
consideration to the fair value of the warrants received in the
transaction and as described in note 17. As a result of the
restatement the net loss decreased by $165,000 which resulted in
the base net loss per share decreasing by $10.03 to $0.13 per
share.
(c) Restatement of Burdon options:
As described in note 9(f), on April 5, 2000 the Company granted
2,750,000 options to purchase common shares to Mr. Burdon. The
Company had previously reported a compensation expense of
$1,243,933 by June 30, 2000 with an additional $1,445,267 to be
recognized over the period to April 5, 2002. The consolidated
financial statements have been restated to recognize all of this
compensatory value by June 30, 2000. As a result of the
restatement, the net loss increased by $1,445,267 which resulted in
the basic net loss per share increasing $0.12 to $0.50 per share.
(d) Restatement of conversion of preferred shares:
As described in note 7, the conversion of 2,500,000 preferred
shares into 7,500,000 common shares includes performance elements,
with respect to 6,250,000 common shares and non-performance
elements with respect to 1,250,000 common shares. The market value
of the performance element is accounted for as a deemed
distribution through equity. This distribution, equaling
$4,687,500 had not previously not been recognized.
F-29
Consolidated Financial Statements
(Stated in United States dollars)
INNOFONE.COM,
INCORPORATED
For the quarter ended September 30, 2000
(Unaudited)
F-30
INNOFONE.COM, INCORPORATED
Consolidated Balance Sheets
(Stated in United States dollars)
September 30, 2000 with comparative figures as at June 30, 2000
-------------------------------------------------------------------------------------------------------------------
September 30, 2000 June 30,2000
-------------------------------------------------------------------------------------------------------------------
(unaudited) (audited)
Assets
Current assets:
Cash and cash equivalents $ 96,952 $ 8,257
Accounts receivable, net of allowance for doubtful accounts
of $18,400 (June 30, $54,000) 279,208 352,190
Prepaid expenses and deposits 80,905 86,895
Investment 165,000 165,000
-------------------------------------------------------------------------------------------------------------------
622,065 612,342
Fixed assets 291,308 332,328
-------------------------------------------------------------------------------------------------------------------
$ 913,373 $ 944,670
-------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Deficiency
Current liabilities:
Accounts payable and accrued liabilities $ 989,554 $ 794,480
Advances from ultimate shareholders 277,035 114,528
Current portion of long-term debt 39,907 40,524
Obligation under capital lease 1,717 2,236
-------------------------------------------------------------------------------------------------------------------
1,308,213 951,768
Advances from ultimate shareholders 236,467 244,177
Long-term debt 40,572 47,954
Convertible debt 1,455,500 1,956,600
Shareholders' deficiency:
Share capital (note 2):
Common shares 4,705,083 4,702,250
Preferred shares 2,500 2,500
Additional paid-in capital 6,045,261 4,818,938
-------------------------------------------------------------------------------------------------------------------
10,752,844 9,523,688
Deficit (12,880,937) (11,773,282)
Accumulated other comprehensive loss 714 (6,235)
-------------------------------------------------------------------------------------------------------------------
(2,127,379) (2,255,829)
Future operations (note 1(b))
Subsequent events (note 6)
-------------------------------------------------------------------------------------------------------------------
$ 913,373 $ 944,670
-------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-31
INNOFONE.COM, INCORPORATED
Consolidated Statements of Operations
(Stated in United States dollars)
For the three months ended September 30, 2000 with comparative figures for the
three months ended September 30, 1999 and the year ended June 30, 2000
-------------------------------------------------------------------------------------------------------------------
Three months ended Year ended
-------------------------------------------------------------------------------------------------------------------
September 30, 2000 September 30, 1999 June 30, 2000
-------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (audited)
Sales $ 416,768 $ 119,779 $ 736,127
Cost of sales 290,785 89,696 528,603
-------------------------------------------------------------------------------------------------------------------
Gross profit 125,983 30,083 207,524
Selling, general and administrative expenses 1,052,545 283,750 5,037,653
(including stock compensation expense of
nil (1999-nil and $2,728,130 for the
year ended June 30, 2000)
Amortization 36,923 17,818 94,585
Additional interest (note 2) 138,400 438,000 1,312,750
Interest on long term debt and bank charges 5,770 4,899 25,083
-------------------------------------------------------------------------------------------------------------------
1,233,638 744,467 6,470,071
-------------------------------------------------------------------------------------------------------------------
Net loss (1,107,655) (714,384) (6,262,547)
-------------------------------------------------------------------------------------------------------------------
Basic net loss per share $ (0.05) $ (0.07) $ (0.50)
-------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 21,584,260 9,700,312 12,542,976
-------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-32
INNOFONE.COM, INCORPORATED
Consolidated Statements of Shareholders' Deficiency and Comprehensive Loss
(Stated in United States dollars)
Three months ended September 30, 2000 with comparative figures for the year
ended June 30, 2000
---------------------------------------------------------------------------------------------------------------------
Common
Additional share
Common Preferred paid-in purchase
shares shares capital warrants
---------------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 8,700 1,570 748,178 --
---------------------------------------------------------------------------------------------------------------------
Net loss for the year ended June 30, 2000 -- -- -- --
Other comprehensive income, net of tax:
Foreign currency translation adjustment -- -- -- --
---------------------------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- --
---------------------------------------------------------------------------------------------------------------------
Beneficial conversion feature of convertible debt 1,312,750
Compensatory value of stock options -- -- 2,728,130 --
Stock options 120 -- 29,880 --
Conversion of preferred shares 4,690,000 (2,500) -- --
Reclassification of redeemable equity securities 3,430 3,430
---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 4,702,250 2,500 4,818,938 --
Net loss for the three months ended September 30, 2000 --
Other comprehensive income, net of tax:
Foreign currency translation adjustment -- -- -- --
---------------------------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- --
Beneficial conversion feature of convertible debt 138,400
Convertible notes converted to common stock 1,253 499,847
Stock options exercised 430 65,570
Issuance of stock for legal fees 150 73,504
Issuance of stock by subscription agreement 1,000 449,002
---------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $4,705,083 $ 2,500 $6,045,261 $ --
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Accumulated
other
comprehensive
Deficit income Total
---------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 (823,235) (25,501) (90,288)
---------------------------------------------------------------------------------------------------------------
Net loss for the year ended June 30, 2000 (6,262,547) -- (6,262,547)
Other comprehensive income, net of tax:
Foreign currency translation adjustment -- 19,266 19,266
---------------------------------------------------------------------------------------------------------------
Total comprehensive loss (6,262,547) 19,266 (6,243,281)
---------------------------------------------------------------------------------------------------------------
Beneficial conversion feature of convertible debt 1,312,750
Compensatory value of stock options -- -- 2,728,130
Stock options -- -- 30,000
Conversion of preferred shares 4,687,500 -- --
Reclassification of redeemable equity securities 6,860
---------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 (11,773,282) (6,235) (2,255,829)
Net loss for the three months ended September 30, 2000 (1,107,655) (1,107,655)
Other comprehensive income, net of tax:
Foreign currency translation adjustment -- 6,949
---------------------------------------------------------------------------------------------------------------
Total comprehensive loss (1,107,655) 6,949 (1,100,706)
Beneficial conversion feature of convertible debt 138,400
Convertible notes converted to common stock 501,100
Stock options exercised 66,000
Issuance of stock for legal fees 73,654
Issuance of stock by subscription agreement 450,002
---------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $(12,880,997) $ 714 $(2,127,379)
---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-33
INNOFONE.COM, INCORPORATED
Consolidated Statements of Changes in Financial Position
(Stated in United States dollars)
For the quarter ended September 30, 2000 with comparative figures for the year
ended June 30, 2000
-------------------------------------------------------------------------------------------------------------------
September 30, 2000 June 30, 2000
-------------------------------------------------------------------------------------------------------------------
(unaudited) (audited)
Cash flows provided by (used in):
Operations:
Net loss $ (1,107,655) $ (6,262,547)
Items not involving cash:
Amortization 36,923 94,585
Compensation cost on stock options 308,407 2,728,130
Beneficial conversion feature of convertible notes 138,400 1,312,750
Change in non-cash operating working capital 274,046 195,606
-------------------------------------------------------------------------------------------------------------------
(658,286) (1,931,476)
Financing:
Advances (to) from ultimate shareholders 154,797 49,519
Increase(decrease) in bank indebtedness - (28,816)
Principal payments on long-term debt (7,999) (40,524)
Principal payments on obligation under capital lease (519) (1,416)
Increase in convertible debt - 1,956,600
Proceeds from options exercised 66,000 30,000
Issuance of share capital 523,656 -
-------------------------------------------------------------------------------------------------------------------
735,935 1,965,363
Investments:
Additions to fixed assets (441) (141,942)
Proceeds from term deposit - 102,477
-------------------------------------------------------------------------------------------------------------------
(441) (39,465)
Effect of exchange rate changes on cash 11,487 13,835
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 88,695 8,257
Cash and cash equivalents, beginning of period 8,257
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 96,952 $ 8,257
-------------------------------------------------------------------------------------------------------------------
Cash interest paid for the quarter ended September 30, 2000 and the year ended
June 30, 2000 was $3,464 and $25,083 respectively.
See accompanying notes to consolidated financial statements
F-34
INNOFONE.COM, INCORPORATED
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(Unaudited)
For the quarter ended September 30, 2000
--------------------------------------------------------------------------------
Innofone.com, Incorporated (the "Company") is incorporated under the laws of the
State of Nevada. The Company, through its legal subsidiary Innofone Canada Inc.
("Innofone Canada") that operates in Canada, is engaged in the
telecommunications business of providing long distance telephone services,
cellular services and internet services. All of the Company's sales are to
Canadian customers in the residential and business sectors. The Company is not
dependent on a single customer. However, the Company uses only a few carriers of
long distance services that they are dependent on for the usage of their
telephone lines.
1. BASIS OF PRESENTATION:
(a) Interim financial statements:
These unaudited interim consolidated financial statements should be
read in conjunction with the Company's annual consolidated
financial statements which were completed as of June 30, 2000. In
the opinion of management, the unaudited interim consolidated
financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all
adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of the results of such periods.
The results of operations for the interim periods are not
necessarily indicative of the results of operations for the full
year.
(b) Future operations:
These financial statements have been prepared on the going concern
basis, which assumes the realizations of assets and settlement of
liabilities in the normal course of operations, notwithstanding the
significant operating losses since incorporation, negative working
capital and deficiency in shareholders' equity at September 30, 2000
and the Company's shares being delisted from the National Association
of Securities Dealers ("NASD") over-the-counter Bulletin Board. The
Company is in the process of preparing a Registration Statement to be
filed with the United States Securities and Exchange Commission in
order for the Company's shares to be eligible for trading in the
United States on the NASD over-the-counter Bulletin Board. Continued
operations depend upon the Company's ability to attain profitable
operations and obtain sufficient cash from external financing to meet
the Company's liabilities as they become payable. These conditions
and events cast substantial doubt on the Company's ability to
continue as a going concern. Management is of the opinion that
sufficient working capital will be obtained from operations and
external financing to meet the Company's liabilities and commitments
as they become payable.
F-35
2. SHARE CAPITAL:
The number of outstanding common shares of the Company as at September
30, 2000 is computed as follows:
---------------------------------------------------------------------------------------------------------------
Common Preferred
Shares Shares
---------------------------------------------------------------------------------------------------------------
Existing outstanding shares and
warrants as at June 30, 2000 20,750,000 2,500,000
Shares issued in exchange for legal fees 150,000 -
Options exercised 430,000 -
Promissory notes converted to stock 1,252,750 -
Shares subscribed 1,000,004 -
---------------------------------------------------------------------------------------------------------------
Outstanding shares as at September 30, 2000 23,582,754 2,500,000
---------------------------------------------------------------------------------------------------------------
During the quarter ended September 30, 2000, 430,000 options were
exercised generating proceeds of $66,000 for the Company. Effective
September 12, 2000, $501,100 in convertible notes dated August 5,and 6,
1999, were converted into 1,252,750 shares of common stock. During the
quarter, the Company raised a total of $500,002 in two separate private
placements totaling 1,000,004 units consisting of one share of common
stock and one warrant to purchase common stock at $1.00 per share and
expiring in March 2002.
F-36
3. STOCK OPTIONS:
The following table summarizes the stock option activity:
---------------------------------------------------------------------------------------------------------------
Number of
average Weighted-
options exercise price
---------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1999 1,380,000 $ 0.64
Granted - vested 3,005,000 $ 0.48
Granted - not vested 4,357,000
Exercised (120,000) $ 0.25
Forfeited - n/a
Expired - n/a
---------------------------------------------------------------------------------------------------------------
Outstanding (held by 13 optionees) at June 30, 2000 8,622,000 $ 0.54
Granted -
Exercised (430,000) 0.15
Forfeited -
Expired (50,000) 0.50
---------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 2000 (8,142,000) 0.47
(held by 11 optionees)
---------------------------------------------------------------------------------------------------------------
The weighted average remaining contractual life for all outstanding options is
approximately one year.
4. SEGMENTED INFORMATION:
(a) Reportable segment:
The Company has one reportable segment; resale of long distance
services. The resale of long distance services is provided to
residential and small to medium sized businesses. This segment
represents the result of operations for the Company.
(b) Geographic information:
The Company derives all of its revenue from Canada and all of its
fixed assets are physically located in Canada.
5. NON-CASH FINANCING AND INVESTMENT ACTIVITY:
During the quarter ended September 30, 2000, the Company issued
150,000 common shares in exchange for legal fees which had been
incurred.
F-37
6. SUBSEQUENT EVENTS:
On October 4, 2000, the Company raised $150,000 through a subscription
of 10% unsecured promissory notes which are due October 4, 2001. The
capital amount of the notes shall be payable on demand in whole or in
part in the event that the Company makes a distribution of its
securities worth at least $500,000 by private placements or otherwise.
The notes are convertible into common shares of the Company with a par
value of $0.001 at a price of $0.50 per share. The market value of the
Company's common shares at the subscription date was less than the
conversion price. Therefore, there is no embedded beneficial
conversion option. The notes also include a non-detachable warrant to
purchase one common share of the Company with a par value of $0.001 at
a price of $1.00 per share.
On November 16, 2000, the Company raised $100,000 through a
subscription of 8% unsecured promissory notes which are due November
15, 2001. On December 16, 2000, the Company raised $100,000 through a
subscription of 8% unsecured promissory notes which are due on
November 15, 2001. Both subscriptions for notes are convertible into
common shares of the Company with a par value of $0.001 at a price of
$0.30 per share. The market value of the Company's common shares at
the subscription date was less than the conversion price. Therefore,
there is no embedded beneficial conversion option. The notes also
include a non-detachable warrant to purchase one common share of the
Company with a par value of $0.001 at a price of $0.75 per share.
F-38
PART III
Item 1. Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION
---------- ------------------------------------------------------------------------------------------------
2.1# Certificate of Incorporation of the Registrant and all amendments thereto.
2.2* Bylaws of the Registrant, as currently in effect (originally filed as 3.01(i)).
3.1# Specimen Common Stock Certificate
6.1t Agreement dated April 11, 2000 between Axxent Corp. (formerly Optel Communications) and Registrant.
6.2** Agreement dated March 2, 2000 between ACS Communications Industry Services, Inc. and Registrant
(originally filed as Exhibit 10.08).
6.3** Reseller Agreement dated April 20, 2000 between Rogers Wireless, Inc. and Registrant (originally filed as
Exhibit 10.10).
6.4# Memorandum of Understanding dated November 22, 1999 between Visa Desjardins and Registrant.
6.5t# Memorandum of Understanding dated July 7, 2000 between Innofone and CIBC.
6.6t BizSmart Participation Agreement dated September 21, 2000 between Canadian Imperial Bank and Innofone
Canada, Inc.
6.7t Agreement dated September 7, 2000 between Bell Actimedia, Inc. and Innofone Canada, Inc.
6.8* 1997 Compensatory Stock Option Plan (originally filed as Exhibit 10.04).
6.9* 1997 Employee Stock Option Plan (originally filed as Exhibit 10.05).
6.10* 1997 Compensatory Stock Option Plan (originally filed as Exhibit 10.04).
6.11# Form of 2000 Stock Incentive Plan
6.12# Employment Agreement between the Registrant and Larry Hunt.
6.13# Employment Agreement between the Registrant and Ronald Crowe.
6.15* Memorandum of Understanding dated November 30, 1999 between the Registrant and Douglas Burdon (originally
filed as Exhibit 10.03)
6.16** Amended Memorandum of Understanding dated April 5, 2000 between the Registrant and Douglas Burdon
(originally filed as Exhibit 10.09).
6.17# Marketing and Network Services Agreement between the Registrant
and ePhone Telecom, Inc., dated as of January 8, 2001.
6.18# Offer of Employment from Innofone Canada to Rick Olson.
12.1* Agreement and Plan of Reorganization among the Registrant, APC Telecommunications Inc. and the
Shareholders of APC Telecommunications, dated June 12, 1998 (originally filed as Exhibit 2.02).
# Previously filed.
* Incorporated by reference from the Registrant's registration statement on
Form SB-2, file no. 333-94497, filed January 12, 2001.
** Incorporated by reference from amendment number 1 to the Registrant's
registration statement on Form SB-2, file no. 333-94497, filed May 26, 2000.
t Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been filed with the Commission
pursuant to our application for confidential treatment.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this amendment to its registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
INNOFONE.COM, INC.
Date: March 12, 2001 By: /s/ LARRY HUNT
-----------------------
Larry Hunt
President