SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ____________
COMMISSION FILE NUMBER: 0-31949
INNOFONE.COM, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Nevada 98-020313
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
600 North Pine Island Road
Suite 450
Plantation, Florida 33324
(Address of principal executive offices and Zip (Postal) Code)
(954) 315-0341
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes X ; No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
INDICATE BY CHECK MARK WHETHER THE COMPANY HAS FILED ALL DOCUMENTS AND REPORTS
REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A
COURT. YES N/A NO N/A
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: As of March 31, 2001, the
Company had outstanding 26,181,504 shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: (check one): Yes ; No X
--- ----
INNOFONE.COM, INC.
FORM 10 - QSB
FOR THE PERIOD ENDED DECEMBER 31, 2000
INDEX
Page
PART I. FINANCIAL INFORMATION........................................................................F-1
Item 1. Financial Statements.....................................................................F-2
Item 2. Management's Discussion and Analysis or Plan of Operation..................................1
PART II. OTHER INFORMATION..............................................................................5
Item 1. Legal Proceedings..........................................................................5
Item 2. Changes in Securities......................................................................5
Item 3. Defaults Upon Senior Securities............................................................5
Item 4. Submission of Matters to a Vote of Security-Holders........................................6
Item 5. Other Information..........................................................................6
Item 6. Exhibits and Reports on Form 8-K...........................................................6
Signatures...................................................................................................7
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
Innofone.com, Inc.
Quarter ended March 31, 2001 and year ended June 30, 2000
The financial statements for the three months ended March 31, 2001 and
1999 include, in the opinion of Innofone.com, Inc. (the "Company"), all
adjustments necessary to present fairly the results of operations for such
periods. Results of operations for the three months ended March 31, 2001 are not
necessarily indicative of results of operations that will be realized for the
year ending June 30, 2001. The financial statements should be read in
conjunction with the Company's Form 10-SB, which contains financial statements
for the year ended June 30, 2000.
F-1
INNOFONE.COM, INCORPORATED
Consolidated Balance Sheets
(Stated in United States dollars)
March 31, 2001 with comparative figures as at June 30, 2000.
--------------------------------------------------------------------------------------------------------------
March 31, 2001 June 30,2000
--------------------------------------------------------------------------------------------------------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ - $ 8,257
Accounts receivable, net of allowance for doubtful accounts
of $58,600, June 30, 2000 -$54,000) 591,700 352,190
Prepaid expenses and deposits 56,098 86,895
Marketable securities (note 6) - 165,000
--------------------------------------------------------------------------------------------------------------
647,798 612,342
Fixed assets 297,268 332,328
--------------------------------------------------------------------------------------------------------------
$ 945,066 944,670
--------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank indebtedness (note8) $ 48,884 $ -
Accounts payable and accrued liabilities 1,934,550 794,480
Advances from ultimate shareholders 553,879 114,528
Convertible debt ( note 5) 500,000 -
Obligation under capital lease 1,073 2,236
Current portion of long-term debt (note 8) 67,334 40,524
--------------------------------------------------------------------------------------------------------------
3,105,720 951,768
Advances from ultimate shareholders - 244,177
Long-term debt - 47,954
Convertible debt 766,000 1,956,600
Shareholders' deficiency:
Share capital (note 2):
Common shares 4,707,682 4,702,250
Preferred shares 2,500 2,500
Additional paid-in capital 7,082,162 4,818,938
--------------------------------------------------------------------------------------------------------------
11,792,344 9,523,688
Deficit (14,737,612) (11,773,282)
Accumulated other comprehensive income (loss) 18,614 (6,235)
--------------------------------------------------------------------------------------------------------------
(2,926,654) (2,255,829)
Future operations (note 1(b)
Subsequent events (note 6)
--------------------------------------------------------------------------------------------------------------
$ 945,066 944,670
--------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
INNOFONE.COM, INCORPORATED
Consolidated Statements of Operations
(Stated in United States dollars)
Unaudited
For the nine months ended March 31, 2001 with comparative figures for the nine
months ended March 31, 2000.
-----------------------------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------------------------
(unaudited) (unaudited)
Sales $ 1,386,095 $ 531,465
Cost of sales 966,668 375,622
-----------------------------------------------------------------------------------------
Gross profit 419,427 155,843
Selling, general and administrative expenses 2,915,049 1,424,200
Amortization 109,408 62,751
Additional interest 138,400 1,312,750
Compensation cost of options 24,240 -
Interest on long term debt and bank charges 31,660 18,394
Loss on investment 165,000 -
-----------------------------------------------------------------------------------------
3,383,757 2,818,095
-----------------------------------------------------------------------------------------
Net loss (2,964,330) (2,662,252)
-----------------------------------------------------------------------------------------
Basic net loss per common share $ (0.13) $ (0.24)
-----------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 23,176,500 10,932,000
-----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
INNOFONE.COM, INCORPORATED
Consolidated Statements of Operations
(Stated in United States dollars)
(Unaudited)
For the quarter ended March 31, 2001 with comparative figures for the quarter
ended March 31, 2000
-------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Sales $ 666,722 $ 186,234
Cost of sales 467,598 142,870
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Gross profit 199,124 43,364
Selling, general and administrative expenses 716,910 824,010
Amortization 36,655 21,151
Additional interest - 874,750
Compensation cost for options 24,240 -
Interest on long-term debt and bank charges 12,033 8,014
Loss on investment 165,000 -
-------------------------------------------------------------------------------------------
954,838 1,727,925
-------------------------------------------------------------------------------------------
Net loss (755,714) (1,684,561)
-------------------------------------------------------------------------------------------
Basic net loss per common share $ (0.03) $ (0.15)
-------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 23,176,500 10,932,000
-------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
INNOFONE.COM, INCORPORATED
Consolidated Statements of Shareholders' Deficiency and Comprehensive Loss
(Stated in United States dollars)
Nine months ended March 31, 2001 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
(2,255,829)
Net loss for the nine months ended March 31, 2001 -
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 3,852 1,536,748
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, March 31, 2001 $ 4,707,682 $ 2,500 $ 7,082,162 $ -
------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
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)
Net loss for the nine months ended March 31, 2001 (2,964,330) (2,964,330)
Other comprehensive income, net of tax:
Foreign currency translation adjustment - 24,849 24,849
---------------------------------------------------------------------------------------------------------------
Total comprehensive loss (2,964,330) 24,849 (2,939,481)
Beneficial conversion feature of convertible debt 138,400
Convertible notes converted to common stock 1,540,600
Stock options exercised 66,000
Issuance of stock for legal fees 73,654
Issuance of stock by subscription agreement 450,002
---------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $(14,737,612) $ 18,614 $ (2,926,654)
---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
INNOFONE.COM, INCORPORATED
Consolidated Statements of Changes in Financial Position
(Stated in United States dollars)
For the nine months ended March 31, 2001 with comparative figures for the year
ended June 30, 2000.
-------------------------------------------------------------------------------------------------------------------
March 31, 2001 June 30,2000
-------------------------------------------------------------------------------------------------------------------
(unaudited) (audited)
Cash flows provided by (used in):
Operations:
Net loss $ (2,964,330) $ (6,262,547)
Items not involving cash:
Amortization 109,408 94,585
Compensation cost on stock options 24,240 2,728,130
Beneficial conversion feature of convertible notes 138,400 1,312,750
Write-off of investment 165,000 -
Issuance of stock for legal fees 73,654 -
Change in non-cash operating working capital 931,357 195,606
-------------------------------------------------------------------------------------------------------------------
(1,522,271) (1,931,476)
Financing:
Advances from ultimate shareholders 195,174 49,519
Increase (decrease) in bank indebtedness 48,884 (28,816)
Principal payments on long-term debt (21,144) (40,524)
Principal payments on obligation
under capital lease (1,163) (1,416)
Increase in convertible debt 350,000 1,956,600
Proceeds from options exercised 66,000 30,000
Proceeds from set-up fee (note5) 500,000 -
Issuance of share capital 450,002 -
-------------------------------------------------------------------------------------------------------------------
1,587,753 1,965,363
Investments:
Additions to fixed assets (77,782) (141,942)
Proceeds from term deposit - 102,477
-------------------------------------------------------------------------------------------------------------------
(77,782) (39,465)
Effect of exchange rate changes on cash 4,043 13,835
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (8,257) 8,257
Cash and cash equivalents, beginning of period 8,257
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ - $ 8,257
-------------------------------------------------------------------------------------------------------------------
Cash interest paid for the nine months ended March 31, 2001 and the year ended
June 30, 2000 was $26,660 and $25,083 respectively.
See accompanying notes to consolidated financial statements
F-6
INNOFONE.COM,
INCORPORATED
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(Unaudited)
For the nine months ended March 31, 2001
----------------------------------------------------------
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 realization 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 March 31, 2001. Subsequent to March 31, 2001, the
Company's wholly owned subsidiary, Innofone Canada Inc. was deemed bankrupt
under Canadian bankruptcy laws and a trustee in bankruptcy has been
appointed to conduct a liquidation of the company's assets ( see note 9).
On February 26, 2001, a Petition for a Receiving Order ("Petition") under
the Bankruptcy and Insolvency Act (Canada) was filed by 9024-9574 Quebec
Inc. against Innofone Canada Inc. The effect of issuing a Receiving Order
against Innofone Canada Inc. would render the company bankrupt. On April
11, 2001 the company filed a Notice of Intent to File a Proposal ("NOI") to
its creditors, and subsequently filed a cash flow statement with bankruptcy
authorities. The effect of filing the NOI stays the hearing of the
petition, and affords the company time to consider how it intends to
restructure its debt. On May 2, 2001, the company attended a hearing at
which a creditor was filing a motion to
F-7
INNOFONE.COM,
INCORPORATED
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(Unaudited)
For the nine months ended March 31, 2001
----------------------------------------------------------
1. BASIS OF PRESENTATION (CONTINUED)
1(b) Future Operations (continued):
have the stay of the NOI lifted and have Innofone Canada Inc. declared bankrupt.
The company was unsuccessful in defeating the motion and on May 3, 2001 ,
Innofone Canada Inc. was declared bankrupt. The trustee, Raymond Chabot Inc. is
in the process of liquidating the assets of Innofone Canada Inc.
As at March 31, 2001, the consolidated financial statements of the Company
include the assets, liabilities, revenues and expenses of Innofone Canada Inc.
as, at that date, Innofone Canada Inc. continued to be under the control of the
Company. However, the consolidated balance sheet does not include any assets
other than assets recoverable through sale or recovery for previous services
provided (se discussion below). As at March 31, 2001, the summarized assets and
liabilities of Innofone Canada that are included in the consolidated balance
sheet of the Company are as follows:
Accounts receivable 577,451
Prepaid expenses and deposits 54,873
Capital assets 297,268
Bank indebtedness 48.884
Accounts payable and accrued
liabilities 1,784,038
Advances from ultimate shareholders 163,025
Obligation under capital lease 1,073
Current portion of long term debt 67,334
During the period from January 15, 2001 to May 3, 2001, Innofone Canada Inc. was
delayed in billing all of its customers for long distance, cellular and internet
services rendered. The Trustee is in the process of rendering these bill runs
which should generate sufficient funds with which to pay the claims of the
company's secured and preferred creditors, leaving funds to be disbursed to the
unsecured creditors. Innofone.com, Incorporated is a major unsecured creditor
whose claim in the amount of $3,513,955 represents approximately 2/3 of the
total claims against Innofone Canada Inc. At this time it cannot be determined
the extent of any recoveries that may be available to Innofone.com, Inc. from
the realization of the disposition of the assets of Innofone Canada Inc.
F-8
INNOFONE.COM,
INCORPORATED
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(Unaudited)
For the nine months ended March 31, 2001
----------------------------------------------------------
(c) Bulletin Board Listing
In January 2001, the Company completed a Registration Statement that has been
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.
2. SHARE CAPITAL:
The number of outstanding common shares of the Company as at March 31, 2001 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 3,851,500 -
Shares subscribed 1,000,004 -
-------------------------------------------------------
Outstanding shares
as at March 31, 2001 26,181,504 2,500,000
-------------------------------------------------------
During the nine months ended March 31, 2001, 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 in accordance with the original terms. 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 and
one warrant to purchase common stock at $1.00 per share and expiring in March
2002. On February 14, 2001, $1,039,500 in convertible notes dated in December
1999, and January and February 2000, were converted into 2,598,750 shares of
common stock in accordance with the original terms.
F-9
INNOFONE.COM,
INCORPORATED
Notes to Consolidated Financial Statements
(continued)
(Stated in United States dollars)
(unaudited)
For the nine months ended March 31, 2001
----------------------------------------------------------
3. STOCK OPTIONS :
The following table summarizes the stock option activity:
-----------------------------------------------------
Number of Weighted-average
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 685,000 $ 0.09
Exercised (430,000) $ 0.15
Forfeited (3,375,000) $ 0.42
Expired (80,000) $ 0.34
-----------------------------------------------------
Outstanding at March 31, 2001 6,022,000 $ 0.43
(held by11optionees)
--------------------------------------------------------
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.
F-10
INNOFONE.COM,
INCORPORATED
Notes to Consolidated Financial Statements
(continued)
(Stated in United States dollars)
(unaudited)
For the nine months ended March 31, 2001
(b)Geographic information:
The Company derives all of its revenue from Canada and all of its fixed assets
are physically located in Canada.
5. OTHER EVENTS:
On January 12, 2001 the Company signed a Marketing and Network Services
Agreement with ePhone Telecom Inc. ("ePhone") whereby the Company agreed to
provide ePhone with a first right of refusal until December 31, 2010 to carry
its long distance traffic using the ePhone internet network. The agreement also
provides for assessing the feasibility of developing new products together and
generally developing the business of each company. As part of the agreement,
ePhone paid the Company a set-up fee of $500,000 which is due for repayment on
April 19, 2001. This repayment date was subsequently extended to January 19,
2002. If the set-up fee is not repaid, ePhone has the right to convert into an
equivalent amount of shares of the Company based on a price of $0.25 per share.
For accounting purposes, the set-up fee will be initially recognized in the
financial statements as a loan. The market value of the Company's common shares
at the date of signing the marketing agreement was less than the conversion
price. Therefore, there was no embedded beneficial conversion option. Each share
would also have a non-detachable warrant to convert into common shares at a
price of $0.75.
On January 12, 2001, the Company granted 100,000 vested options to an employee
having an exercise price of $0.50, and on February 9, 2001, the Company granted
60,000 vested options to two employees having an exercise price of $0.25.
Effective March 2001, 525,000 options granted to two employees became vested
having achieved certain business targets. All 685,000 options expire 12 months
after the vesting date. The market price of the Company stock at the grant date
and vesting date was not in excess of the exercise price. Therefore, there was
no intrinsic value to the options at their grant date. However, in accordance
with the Company's accounting policy, the fair value of the options aggregated
$24,240, and is recognized as compensation expense in these financial
statements. The fair value has been determined using the Black-Scholes option
pricing model assuming a dividend yield of 0%, expected volatility of 100%, and
a risk free interest rate of 6%.
During the quarter, the Company converted into common shares the promissory
notes which became due on December 31, 2001. The notes in the amount of
$1,039,500 were convertible into 2,598,750 shares of common stock. The notes
also included a warrant to purchase one common share at a price of $1.00 for
each $0.40 of notes purchased. These warrants expired December 31, 2000, but the
Company has extended the period to exercise the warrant to December 31, 2001.
The fair value of the warrants issued at the extension date was not material.
F-11
INNOFONE.COM,
INCORPORATED
Notes to Consolidated Financial Statements
(continued)
(Stated in United States dollars)
(unaudited)
For the nine months ended March 31, 2001
----------------------------------------------------------
6. SUBSEQUENT EVENTS:
(a) Preferred shares:
By March 31, 2001, the Company had generated in excess of $2,000,000 Canadian in
cumulative revenue, thereby allowing 1,250,000 shares of preferred stock to be
converted into 3,750,000 shares of common stock. The Company is in the process
of having the preferred stock converted to common stock.
(b) Loss on investment:
In May 2001 Axxent Canada filed for protection under the Bankruptcy and
Insolvency Act (Canada). Innofone Canada Inc. holds warrants in Axxent Canada
which have been recorded as an investment in marketable securities. In light of
the bankruptcy proceedings, these warrants have no value, and the investment has
been written off.
7. NON CASH FINANCING ACTIVITY:
During the nine months ended March 31, 2001, the Company issued 150,000 common
shares in exchange for legal fees of $73,654 which had been incurred. These
shares have been valued at the market price of the Company's shares on the dates
at which both performance had been completed and the shares became issuable.
8. BANK INDEBTEDNESS:
On March 28, 2001, the Royal Bank of Canada demanded repayment of its
credit facilities given to Innofone Canada Inc. and issued a Notice of Intent to
Enforce Security pursuant to Section 244 of the Bankruptcy and Insolvency Act
(Canada).
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and Notes thereto for the year ended June 30,
2000 included in the Company's Form 10-SB, as amended, originally filed with the
SEC on November 14, 2000. This Quarterly Report on Form 10-QSB includes
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Words such as "may," "plans," "expects," "anticipates,"
"approximates," "believes," "estimates," "intends," "hopes," "potential," or
"continue", and variations of such words and similar expressions are intended to
identify such forward-looking statements. The Company intends such
forward-looking statements, all of which are qualified by this statement, to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Litigation Securities Reform Act of 1995 and is including this
statement for purposes of complying with these safe harbor provisions. The
Company has based these statements on its current expectations and projections
about future events. These forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
actual results to differ materially from those projected in these statements.
Forward-looking statements include but are not limited to:
- our expectations regarding the amount of our receivable from Innofone
Canada that we expect to recover; and
- our future business plan.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's views only as of the date hereof. The
Company is not obligated to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Quarterly Report on Form 10-QSB might not occur.
Readers should carefully review the risk factors described in the Form 10-SB and
any other documents the Company files from time to time with the Securities and
Exchange Commission, including any future Annual Reports on Form 10-KSB and
Quarterly Reports on Form 10-QSB.
OVERVIEW
As previously reported, on May 3, 2001, a court adjudged our operating
subsidiary, Innofone Canada, Inc., bankrupt under the Bankruptcy and Insolvency
Act (Canada). During the period from January 15, 2001 to May 3, 2001, Innofone
Canada was delayed in billing all of its customers for long distance, cellular
and Internet services rendered. Raymond Chabot, Inc., the court-appointed
trustee, now has processed those billings and is in the process of liquidating
the assets of Innofone Canada.
1
As a result of the bankruptcy of Innofone Canada, the Company has suspended
its current business operations. The Company will seek to be acquired by or
acquire an interest in a business entity that desires to seek the perceived
advantages of a corporation which has a class of securities registered under the
Securities Exchange Act of 1934. The Company does not plan to restrict its
search to any specific business, industry or geographic location. Management
anticipates that it will be able to participate in only one potential business
venture because the Company has nominal assets and limited financial resources.
There can be no assurance that the Company will be successful in locating or
negotiating an agreement with any such business entity.
For further information on the bankruptcy, please refer to note 1(b) to the
consolidated financial statements of the Company included with this Quarterly
Report on Form 10-QSB.
REVENUES
Revenues for the quarter ended March 31, 2001 increased 260% to $666,722 as
compared to revenues of $186,234 for the quarter ended March 31, 2000. Revenues
for the nine months ended March 31, 2001 increased 160% to $1,386,095 from
$531,465 for the nine months ended March 31, 2000. The revenue increase is due
to the increase in billable long distance calling minutes by our customer base.
Revenues from the nine months ended March 31, 2000 were generated by GLR
customers acquired through our direct marketing agents while the revenues for
the nine months ended March 31, 2001 reflect the customer acquisition program
with Visa Desjardins. For the nine months ended March 31, 2001, approximately
80% of our revenues were generated from the Visa Desjardins customer base with
the remaining 20% coming from our GLR customer base. Approximately 95% of our
revenues for the nine months ended March 31, 2001 are from the resale of long
distance services to residential and small and medium sized businesses. The
remaining 6% of revenues are from the resale of cellular services.
COST OF SALES AND GROSS MARGIN
As a result of our increased revenues, our cost of sales increased 157% to
$966,668 for the nine-month period ended March 31, 2001 as compared to $375,622
for the nine-month period ended March 31, 2000. Our cost of sales increased 225%
to $467,598 for the quarter ended March 31, 2001 as compared to $142,870 for the
quarter ended March 31, 2000.
Our gross profit increased 170% from $155,843 for the nine months ended
March 31, 2000 to a gross profit of $419,427 for the nine months ended March 31,
2001. Our gross profit for the three months ended March 31, 2001 increased 360%
from $43,364 for the quarter ended March 31, 2000 to a gross profit of $199,124
for the quarter ended March 31, 2001. Our gross profit as a percentage of sales
for the nine months ended March 31, 2001 increased slightly from 29% in 2000 to
30% in 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses were $716,910 for the
quarter ended March 31, 2001, down 13% from $824,010 for the quarter ended March
31, 2000. However, during the quarter ended March 30, 2000, selling general and
administrative expenses included $507,227 which was spent in developing the
bundled services program for Visa Desjardins and
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there was no similar charge during the quarter ended March 31, 2001.
Excluding those development costs, selling general and administrative
expenses for the quarter ended March 31, 2000 were $316,783 representing
approximately 44% of the total selling general and administrative costs for
the quarter ended March 31, 2001. Billing costs increased 320% from $32,208
in the quarter ended March 31, 2000 to $136,526 for the quarter ended March
31, 2001, and professional fees increased 210% from $47,273 in the quarter
ended March 31, 2000 to $146,667 in the quarter ended March 31, 2001. The
increased billing costs are a function of the increased revenues in the third
quarter of 2001 and the increased professional fees relate to SEC filing
costs, audit and accounting fees and legal fees incurred in relation to the
financial difficulties of Innofone Canada Inc.
Our selling general and administrative expenses for the nine months ended
March 31, 2001 increased 100% to $2,915,049 as compared to $1,424,200 for the
nine months ended March 31, 2000. The major component of the selling general and
administrative expenses for the nine months ended March 31, 2001 were customer
acquisition costs paid to Equinox and Visa Desjardins in the amount of $616,643,
which were 330% higher than $140,240 in customer acquisition costs for the nine
months ended March 31, 2000. Management fees of $515, 168 for the nine months
ended March 31, 2001 were for Larry Hunt, Ron Crowe, Rick Quinney, Douglas
Burdon and Nino Sylvestri although approximately $150,000 were accrued but never
paid to the three founding shareholders. These management fees were
approximately 100% higher than the management fees of $258,803 paid in the nine
months ended March 31, 2000. Professional fees $361,775 for the nine months
ended March 31, 2001 were approximately 190% higher than the professional fees
of $124,478 incurred for the nine months ended March 31, 2000. Billing costs of
$348,998 for the nine months ended March 31, 2001 were 540% higher than the
$53,920 in billing costs reported for the nine months ended March 31, 2000.
Salaries and wages of $215,824 were 290% higher in the nine months ended March
31, 2001 as compared to $55,000 in salaries and wages for the comparable period
in 2000. Finally call center costs of $213,761 and order fulfillment costs
$194,022 were incurred for the nine months ended March 31, 2001 whereas there
were no such charges in the nine months ended March 31, 2000. The remaining
selling general and administrative costs included rent, travel costs, bad debt
expenses and other general office expenses which all were higher in the nine
months ended March 31, 2001 due to the increased activity from the Visa
Desjardins program.
AMORTIZATION
Amortization expense consists of the depreciation of our capital assets.
Our amortization expense for the three months ended March 31, 2001 was $36,655
as compared to $21,151 for the three months ended March 31, 2000. Amortization
for the nine months ended March 31, 2001 increased to $109,408 as compared to
$62,751 for the nine months ended March 31, 2000. The relative increase in
amortization was the result of our acquiring new computer equipment for our
additional staff.
ADDITIONAL INTEREST
Additional interest represents the embedded beneficial conversion feature
of notes that are convertible into common stock at prices lower than the market
vale of the stock at the time the notes were granted. Additional interest for
the nine months ended March 31, 2001 was $138,400 as compared to $1,312,750 for
the nine months ended March 31, 2000.
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There was no additional interest in the quarter ended March 31, 2001 as compared
to $874,750 in the quarter ended March 31, 2000.
COMPENSATION COST OF OPTIONS
Compensation cost of options of $24,240 for the three months ended March
31, 2001 represents the fair value of options granted to employees during the
quarter. There was no compensation cost of options during the nine months ended
March 31, 2000.
INTEREST ON LONG-TERM DEBT AND BANK CHARGES
Interest on long-term debt and bank charges include interest on long-term
debt, interest charged on overdue accounts payable, and bank charges. For the
nine months ended March 31, 2001, interest on long-term debt and bank charges
increased 72% from $18,394 for the nine months ended March 31, 2000 to $31,660
for the nine months ended March 31, 2001. Interest and bank charges increased
50% to $12,033 for the quarter ended March 31, 2001 as compared to $8,014 for
the quarter ended March 31, 2000. The reason for these increases is primarily
due to interest charged on overdue accounts payable which were significantly
higher as of March 31, 2001.
LOSS ON INVESTMENT
The loss on investment during the quarter ended March 31, 2001 reflects the
decline in the value of warrants for the purchase of common stock in Axxent
Canada. In May 2001, Axxent Canada filed for protection under the Bankruptcy and
Insolvency Act (Canada), thereby rendering the warrants valueless.
NET LOSS
Due to the above factors, our net loss decreased to $755,714 for the three
months ended March 31, 2001 as compared to $1,684,561 for the three months ended
March 31, 2000. Our loss for the nine months ended March 31, 2001 increased 10%
from $2,662,252 for the nine months ended March 31, 2000 to $2,964,330.
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
from bank financing. During the nine months ended March 31, 2001, 430,000
options were exercised generating proceeds of $66,000. In September 2000, we
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. In January 2001, we were paid a set-up fee of $500,000
by ePhone Telecom Inc., which for accounting purposes has been initially
recognized in our financial statements as a loan, pending determination of
whether or not they will convert it in to common shares of the Company. As a
result of these activities, we raised $1,066,002 during the nine months ended
March 31, 2001 to help finance our operations.
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During the nine months ended March 31, 2001, the company invested
$77,782 in fixed assets. This investment related to web site development
costs for the BizSmart program as well as other software and systems
development costs relating to the Visa Desjardins program. This compares to
$84, 609 invested in fixed asset additions primarily relating to computers
for additional staff and for the HotCaller program during the nine months
ended March 31, 2000.
Due to the bankruptcy of Innofone Canada, our sole operating subsidiary,
the Company has no operating business and no assets except for its claim as
an unsecured creditor on a portion of the liquidation proceeds of Innofone
Canada. The Company is entitled to approximately 60%-70% of the proceeds left
after the secured creditors are paid in the amount of Can. $340,000.
Depending on the balance of the liquidation proceeds after the secured claims
are paid, the Company expects to receive between Can. $300,000 and Can.
$400,000 (approximately between US$200,000 and US$270,000). However, the
receipt of this amount, or of any proceeds at all, will be dependent upon,
among other factors, the actual amounts of unsecured claims that are made on
Innofone Canada, the ultimate determination of the claims of secured
creditors and the amount that the Trustee is able to sell the business of
Innofone Canada for. There can be no assurance that the Company will receive
the amount of the proceeds it is expecting, or that it will receive any
proceeds at all from the liquidation. In addition, approximately Can.
$100,000(or US$150,000) has been assigned to creditors of the Company once
the recoveries from the Canadian company are realized.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 1, 2001, the Company's operating subsidiary, Innofone Canada Inc.,
was served with a Petition for a Receiving Order under the Bankruptcy &
Insolvency Act of Canada (the "Petition"). The Petition was originally filed by
Equinox Marketing Services, who operated our call center and our outbound
telemarketing program. The petition requested that Innofone Canada Inc. be
adjudged a bankrupt on the grounds that it had "ceased to meet its obligations
generally as they become due." On May 3, 2001 Innofone Canada was adjudged
bankrupt by a Judge of the Bankruptcy and Insolvency Division of the Superior
Court of Quebec, District of Montreal (the "Court"). The Court further appointed
a trustee and declared that Innofone Canada was deemed to have made an
assignment of its assets to the trustee for the benefit of its creditors as of
February 27, 2001, the date of the Petition. For more information, please refer
to the Forms 8-K dated March 1, 2001, March 13, 2001, April 11, 2001 and May 3,
2001, that the Company has filed with the Securities and Exchange Commission,
and Item 6, Exhibits and Reports on Form 8-K.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
On May 7, 2001, the Company's three directors appointed two additional
directors, Stephane Solis and Walter Pickering to the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) EXHIBITS. None.
(a)(2) LIST OF SCHEDULES. All schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
omitted because they are not applicable or the information is included in the
financial statements included herein.
(b) REPORTS ON FORM 8-K.
The Company filed the following reports on Form 8-K for the quarter ended March
31, 2001:
(1) On March 12, 2001, the Company filed a Current Report on Form 8-K to
report that its operating subsidiary, Innofone Canada Inc., was served
with a Petition for a Receiving Order under the Bankruptcy &
Insolvency Act of Canada on March 1, 2001.
(2) On March 23, 2001, the Company filed a Current Report on Form 8-K to
report that a hearing on the merits of the receiving order had been
set for May 2 and 3, 2001.
The Company filed the following additional Forms 8-K subsequent to the quarter
ended March 31, 2001:
(3) On April 24, 2001, the Company filed a Current Report on Form 8-K to
report that Innofone Canada had filed a Notice of Intention to Make a
Proposal under the Canadian Bankruptcy and Insolvency Act to its
creditors and that it had consented to the appointment of an interim
receiver for its assets, excluding its equipment and fixed assets. It
also reported the termination of the bizSmart Agreement with the
Canadian Imperial Bank of Commerce.
(4) On May 9, 2001, the Company filed a Current Report on Form 8-K to
report that Innofone Canada had been adjudged bankrupt.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
Date: May 18, 2001 Innofone.com, Inc.
/s/ Larry Hunt
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Larry Hunt
President and Chief Executive Officer
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