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, 2000 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: 000-27699
ePhone Telecom, Inc.
(Exact name of small business issuer as specified in its charter)
Florida 98-020-4749
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1145 Herndon Parkway
Herndon, Virginia 20170-5535
(Address of principal executive offices and Zip (Postal) Code)
(703) 787-7000
(Issuer's telephone number)
Suite 1000, 355 Burrard Street, Vancouver,
B.C, Canada V6C 2GB
(Former name, former address and former fiscal year,
if changed since last report)
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, 2000, the
Company had outstanding 13,442,400 shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: (check one): Yes ; No X
---- ----
ePhone Telecom, Inc.
FORM 10 - QSB
For the Period Ended March 31, 2000
INDEX
PART I. FINANCIAL INFORMATION.............................................1
Item I. Financial Statements (unaudited)
Balance sheet - March 31, 2000 and
December 31, 1999 ......................................................1
Statements of operations - three months
ended March 31, 2000 and 1999 and for the period April 30, 1996
(inception) to March 31, 2000 ..........................................2
Statements of cash flows - three months
ended March 31, 2000 and 1999 and for the period April 30, 1996
(inception) to March 31, 2000 ..........................................3
Notes to financial statements ............................................4
Item II. Management's Discussion and Analysis or Plan of Operation .......8
PART II.OTHER INFORMATION
Item 1. Legal Proceedings.............................................10
Item 2. Changes in Securities.........................................10
Item 3. Defaults Upon Senior Securities...............................11
Item 4. Submission of Matters to a Vote of Security-Holders...........11
Item 5. Other Information.............................................11
Item 6. Exhibits and Reports on Form 8-K..............................11
Signatures................................................................12
Ephone Telecom, Inc.
(A Development Stage Company)
Balance Sheets
(unaudited)
March 31, December 31,
2000 1999
----------- -----------
Current Assets:
Cash and cash equivalents ................................................. $ 3,557,682 $ 82,747
Restriced cash ............................................................ 1,000,120 --
Equipment purchase advances ............................................... 269,200 269,200
----------- -----------
Total Current Assets ................................................. 4,827,002 351,947
Property and Equipment ......................................................... 571,804 125,474
Other Assets ................................................................... 2,207,440 --
----------- -----------
$ 7,606,246 $ 477,421
=========== ===========
Liabilities and Stockholder's Equity:
Current Liabilities:
Accounts payable .......................................................... $ 406,283 $ 282,898
Accrued liabilities ....................................................... 574,443 332,000
Due to related parties .................................................... 96,895 91,995
----------- -----------
1,077,621 706,893
----------- -----------
Commitment and Contingencies ................................................... -- --
----------- -----------
Stockholders' Equity:
Common stock, par value $0.001, 50,000,000 shares authorized, 13,442,400
and 13,170,667 issued and outstanding at March 31, 2000 and
December 31, 1999, respectively ...................................... 13,442 13,171
Additional paid in capital ................................................ 1,625,683 1,375,954
Special Warrants, net...................................................... 7,219,036 --
Deficit accumulated during the development stage .......................... (2,329,536) (1,618,598)
----------- -----------
6,528,625 (229,473)
----------- -----------
Total Liabilities and Stockholders' Equity ..................................... $ 7,606,246 $ 477,421
=========== ===========
See accompanying notes to financial statements.
1
ePhone Telecom, Inc.
(A Development Stage Company)
Statements of Operations
(unaudited)
Three Month Ended (Inception)
March 31, April 30, 1996 to
2000 1999 March 31, 2000
------------ ------------ ------------
Bank Charges ..................... $ 596 $ -- $ 9,146
Communication .................... 5,821 -- 22,446
Consulting Fees .................. 22,025 -- 564,650
Depreciation ..................... 17,560 -- 49,632
Management Services .............. 56,969 6,000 439,969
Market Development ............... 142,080 -- 353,958
Office ........................... 3,756 32 44,777
Professional Fees ................ 35,608 2,277 131,946
Regulatory Expenses .............. 3,558 742 7,293
Rent ............................. -- 791 95,766
Salary ........................... 399,352 -- 399,352
Taxes ............................ 5,308 -- 5,308
Travel ........................... 18,306 2,734 197,295
------------ ------------ ------------
Net Loss ......................... $ (710,940) $ (12,575) $ (2,321,538)
------------ ------------ ------------
Loss per share - basis and diluted $ (.05) $ --
Weighted average number of common
shares outstanding................ 13,286,756 5,000,000
=================================================================================
See accompanying notes to financial statements.
2
EPhone Telecom, Inc.
(A Development Stage Company)
Statements of Cash Flows
(unaudited)
For the
Three Months period from
Ended Inception to
March 31, March 31,
----------- ----------- -----------
2000 1999 2000
---- ---- ----
Net loss .................................................... $ (710,940) $ (12,575) (2,321,538)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation ........................................... 17,560 -- 49,632
Stock issued for services rendered .................... -- -- 1,000
Stock option benefits charged to operations ........... -- -- 402,125
Changes in operating assets and liabilities:
Increase in accounts payable ........................... 123,385 11,752 406,284
Increase in accrued liabilities ........................ 242,444 -- 574,444
Increase due to related parties ........................ 4,900 823 96,895
----------- ----------- -----------
Net Cash Flows Used in Operating Activities ................. $ (322,651) $ -- (791,158)
=========== =========== ===========
Cash Flow From Investing Activities:
Purchase of fixed assets .................................... (463,890) -- (621,436)
Purchase of array license ................................... (2,207,440) -- (2,207,440)
Increase in equipment purchase advances ..................... -- -- (269,200)
Investment at restricted cash ............................... (1,000,120) -- (1,000,120)
----------- ----------- -----------
Net Cash Flows Used in Investing Activities ................. (3,671,450) -- (4,098,196)
=========== =========== ===========
Cash Flow From Financing Activities:
Proceeds from issuance of common stock ................. 250,000 10,000 1,228,000
Proceeds from issuance of special warrants, net ........ 7,219,036 -- 7,219,036
----------- ----------- -----------
Net Cash Flows Provided By Financing Activities ............. 7,469,036 10,000 8,447,036
=========== =========== ===========
Net Increase In Cash And Cash ............................... 3,474,935 10,000 3,557,682
Equivalents
Cash And Cash Equivalents, Beginning of Period .............. 82,747 -- --
----------- ----------- -----------
Cash And Cash Equivalents, End Of Period .................... $ 3,557,682 $ 10,000 $ 3,557,682
=========== =========== ===========
See accompanying notes to financial statements.
3
ePhone Telecom, Inc.
(A Development Stage Company)
Notes to Financial Statements
(unaudited)
1. Business and Summary of Significant Accounting Policies
ePhone Telecom, Inc., incorporated in 1996 under the laws of the State of
Florida, and is traded on the over-the-counter market, on the OTC Electronic
Bulletin Board operated by the National Association of Securities Dealers, Inc.,
under the trading symbol "EPHO". As of the date of this report, trading of the
stock of the company on the OTC Bulletin Board has been suspended. The Company's
common stock is currently traded in the pink sheets. The Company is eligible to
have trading resume on the OTC Bulletin Board when it has satisfied certain
filing requirements with the Securities and Exchange Commission.
The Company's vision is to become a global telecommunications carrier providing
a full complement of telecommunications services, including phone-to-phone
one-step dialing, using Voice over Internet Protocol ("VoIP") technology. Using
a call origination approach that involves its own Customer Premise Equipment
("CPE"), and a combination of its own dedicated Internet Protocol ("IP")
network, the public Internet and the public switched telephone network ("PSTN"),
the Company plans to develop the capacity to provide voice and fax transmission
and other telephony features at high quality and low cost.
The Company is a development stage company as defined in Statement of Financial
Accounting Standard ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises" and, since its incorporation has engaged in organizational
activities and the development of its VoIP technology. The Company has not yet
commenced commercial operations and has operated at a net loss each year since
inception.
The Company has prepared the accompanying unaudited financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
These financial statements should be read together with the financial statements
and notes in the Company's 1999 Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The accompanying
financial statements reflect all adjustments and disclosures, which in our
opinion are necessary for fair presentation. All such adjustments are of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of the results of the entire year.
2. Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives of 2 to 5 years.
4
At March 31, 2000 and December 31, 1999, property and equipment consisted of the
following:
March 31, December 31,
2000 1999
---- ----
Computer equipment ........... $ 19,820 $ 19,820
Fuurniture and fixtures ...... 222,350 --
Telecommunications equipment . 379,056 137,726
--------- ---------
621,436 157,546
Less: accumulated depreciation (49,632) (32,072)
--------- ---------
Property and Equipment ....... $ 571,804 $ 125,474
========= =========
3. Other Assets
On March 31, 2000, the Company entered into a Strategic Alliance Agreement and a
License Agreement with Comdial Corporation ("Comdial") and Array Telecom
Corporation ("Array Telecom"), a wholly owned subsidiary of Comdial. In
connection with the Agreement and the License, the Company made an initial
payment to Comdial of $2,650,000. As part of the Agreement, the Company received
the fixed assets of Array Telecom, with a book value of approximately $443,000
and assumed the lease for Array Telecom's Herndon, Virginia facility. The
License grants the Company an exclusive license for all Voice over Internet
Protocol (VoIP) technology that has been developed by Array Telecom for a period
of five years.
The License Agreement requires the Company to pay a further $2,180,000 for the
VoIP technology over the next 5 years with minimum payments of $180,000 due in
the first year and $500,000 in each of the next four years. Additional royalty
payments will be payable to the extent that 2% of gross sales as defined in the
Agreement exceed minimum payments for the VoIP technology. As part of the
arrangement, the Company also agreed to pay an additional amount of $350,000 to
employees of Array Telecom as compensation for benefits forfeited by them as a
result of the creation of the Strategic Alliance.
The following is a schedule of future minimum rental payments required under
this lease.
Year Ending December 31,
2000 168,728
2001 173,790
2002 179,004
2003 184,374
2004 62,061
---------
Total future minimum lease payments 767,957
=========
5
4. Stockholders' Equity
Private Placement
In 1999 the Company offered 1,350,000 units at $0.75 per unit to certain private
investors (including some of the directors and officers of the Company) pursuant
to an exemption from registration under Regulation S. Each unit consists of one
share of common stock and one warrant to purchase one share of common stock at
$1.25 per share. As of March 31, 2000, the Company had received payment for all
units, totaling 1,350,000 shares for $1,012,500 and payments for warrants for
92,400 shares amounting to $115,500.
Special Warrants Offering
On March 7, 2000, the Company finalized an Agency Agreement with Groome
Capital.com Inc. of Canada ("Groome"). Groome agreed to act as the Company's
agent to offer in a private placement, primarily in Canada, but also globally --
excluding the United States -- up to 16,363,635 Special Warrants at and for a
price of $1.10 per Special Warrant. Each Special Warrant entitles the holder to
receive at no cost, one Unit ("Unit"). Each Unit is comprised of one share of
common stock of the Company and one warrant ("Warrant"). The Warrant entitles
the holder to purchase an additional share of the Company during a term of 24
months at and for a price of $1.60 per share. The Company agreed to pay Groome
commissions of 8% of the gross proceeds received by the Company from the sale of
the Special Warrants. Groome will also receive as compensation - (a) broker
warrants (the "Broker Warrants") equal to 8% of the number of Units sold
pursuant to the private placement offering; each Broker Warrant provides Groome
with the option to purchase one share of the Company's common stock, exercisable
at $1.10 per share, for a period of 24 months following the date of closing of
the offering; and (b) an option to purchase an additional 250,000 shares of
common stock of the Company, exercisable at a price of $0.60 per share, for a
period of 24 months following the date of closing of the offering.
On March 31, 2000, the closing of the sale of the first portion of the Special
Warrants the Company had received $7,219,036, net of $781,927 of offering costs
from the sale of 7,273,602 Special Warrants. On April 7, 2000, the closing of
the sale of a second portion of the Special Warrants occurred, and on April 20,
2000, the closing of the sale of the final portion of the Special Warrants
occurred. The total net proceeds received by the Company from the Sale of
Special Warrants was approximately $12,205,000. The total number of Special
Warrants sold by the Company was 13,780,838.
As part of this offering, the Company agreed to hold 12.5% of the gross proceeds
($1,000,120) from the sale of the Special Warrants, together with any interest
earned therefrom, in escrow until the date on which the last receipt in respect
of the Prospectus is issued by the regulatory in the jurisdictions where a
Prospectus will have been filed.
In the event that (i) a receipt has not been issued by each of the regulatory
authorities in the jurisdictions in respect to the final Prospectus qualifying
the securities for distribution in the jurisdiction, and (ii) the securities
have not been registered under the Securities Act on or before the date which is
180 days following the initial closing of the offering (March 31, 2000) each
investor in the offering may elect to have returned to them, out of the escrowed
funds, 12.5% of their original investment in exchange for 12.5% of the units
they previously acquired. In the event that the Final Prospectus is not received
on or before 150 days after the closing date, any Special Warrant which has not
been exercised shall be entitled to receive 1.1 units on the exercise of each
such Special Warrant for no additional consideration. The Company has recorded
these escrowed funds as restricted cash in the balance sheet.
Reserved shares
The Company intends to issue in escrow 14,000,000 shares of the Company's common
stock for no cash consideration, which will be released in four tranches,
conditional upon the Company's operations reaching a series of performance
targets. The targets envisioned pertain to achieving levels of operations
6
defined by reference to the degree of development of the operating network and
cumulative net sales. The recipients of these escrowed performance shares will
include directors, executive officers, non-executive officers and individuals
providing services to the Company.
At March 31, 2000, no part of the network was operational and no revenues had
been generated, and as such no shares were issuable. Reservation of these shares
and their issue is dependent upon receiving shareholder approval of an amendment
to the Company's Articles of Incorporation in order to increase the number of
authorized common shares.
5. Related party transactions.
During the three months ended March 31, 2000 the Company incurred costs for
management services provided by companies in which certain directors of the
Company have a controlling interest and incurred consulting fees to certain
directors of the Company totaling $50,000. The Company incurred no such costs
during the three months ended March 31, 1999.
At March 31, 2000, the following balances with companies controlled by certain
officers and/or directors were outstanding. They are payable on a current basis.
Amounts due related parties at March 31, 2000 and December 31, 1999 consist of
the following:
March 31, December 31,
2000 1999
---- ----
Access International Capital Corporation $ 100 $ 100
AXON Management ........................ 86,670 74,670
Independent Management Consultants of BC 3,750 3,225
Fraser Leishman ........................ -- 6,000
Management Services of Arizona ......... 6,375 8,000
------- -------
$96,895 $91,995
======= =======
7
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward-Looking Information.
Some of the statements in this Management's Discussion and Analysis or Plan of
Operations are forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements.
Forward-looking statements include but are not limited to:
o our expectations and estimates as to completion dates of the network of
regional gateways we are installing and the network.
o our ability to implement successfully our operating strategy
o future financial performance as estimated in the Company's financial
projections.
The following factors, among others, could cause our actual results to differ
materially from those expressed in any forward-looking statements we make:
o inaccuracies in our forecasts of customer or market demand
o highly competitive market conditions
o changes in or developments under laws, regulations and licensing
requirements in countries in which the Company is installing gateways
o changes in telecommunications technology
These factors should not be construed as exhaustive. We will not update or
revise any forward-looking statements.
Plan of Operation.
Our plan of operation for the next 12 months is to offer a variety of services,
using a number of different products, to customers ranging from individuals to
large corporations. This plan requires significant technical integration. Since
the Company is neutral towards the selection of the hardware platform, it is
likely that changes to the basic hardware systems deployed will occur
continuously, as industry products, capabilities, and protocols evolve. The
ongoing requirement to integrate the best products and technology available
would require significant technical expertise and management. Even deploying the
initial network will require the integration of internet protocol gateway
technology, autodialers, embedded customer premises equipment, public switched
telephone network access ranging from single analog lines to digital T-1/E-1
lines, IP routers and network interfaces, billing systems, and much more.
Integrating this variety of technology is expected to be challenging.
8
The plan calls for the Company to deliver a range of enhanced services. In
addition, the Company network operations center will require the ability to
deploy these services, bill and monitor the services. It is likely that the
Company will need to hire a development team that will build the technology to
supply the services that cannot be purchased directly.
Experts in networking, internet protocol telephony, and network design will be
required in order to advise on the design and construction of the Company's
network and services. Often, such design involves the technical evaluation of
candidate products.
The Company has begun the development of its network in Europe. The Company,
with its European partners, plans to install and test 30 regional gateways, or
the Company's switches, in Europe during the year 2000, 80 gateways in the year
2001 and 190 gateways in the year 2002.
At the same time the Company recognizes the need to generate revenues from
operations. As regional gateways are tested and become operational, customers
will be added through the efforts of the Company's partners.
Liquidity and Capital Resources.
The Company has funded its operations through equity financing and has had no
line of credit or similar credit facility available to it. The Company's
outstanding shares of common stock, par value $.001 per share, have been traded
in the past under the symbol "EPHO" on the over-the-counter market on the OTC
Electronic Bulletin Board by the National Association of Securities Dealers,
Inc. As of the date of this report, trading of the stock of the Company on the
OTC Bulletin Board has been suspended. The Company's common stock is currently
traded in the pink sheets. The Company intends to apply to have trading resume
on the OTC Bulletin Board when it has satisfied certain filing requirements with
the SEC.
The Company must rely on its ability to raise money through equity financing to
set up a global network, which is the vital part of its business plan. The
majority of funds raised will be allocated to the deployment of the technology
and marketing activities.
In the first quarter of 2000, the Company offered special warrants at $1.10 per
warrant in a Regulation S private placement. Each special warrant (the "Special
Warrant") entitled the holder to receive one share of common stock and one share
purchase warrant exercisable at $1.60 within 24 months. As of March 31, 2000,
subscriptions had been received for 7,273,602 Special Warrants for $8,000,963.
On April 7, 2000, the closing of the sale of a second portion of the Special
Warrants occurred, and on April 20, 2000, the closing of the sale of the final
portion of the Special Warrants occurred. The total net proceeds received by the
Company from the sale of Special Warrants was approximately $12,205,000. The
total number of Special Warrants sold by the Company was 13,780,838.
We believe that our cash and cash equivalents will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures until
September 2001.
9
Successful implementation of our business plan depends on our ability to gain
name recognition in targeted markets and set up of our networks infrastructure
and our ability to develop the software needed to make our network superior to
our competitor.
Employees.
The Company currently has 18 employees working in its Herndon office. The
majority of these employees are involved in the design, development and
marketing of the ePhone's products and services. The Company expects to hire
additional employees as it rolls out its plan of operation in the latter half of
2000.
Results of Operations.
During the three months ended March 31, 2000, the Company incurred a net loss of
$710,940, representing a significant increase over our net loss during the three
months ended March 31, 1999 of $12,575. In 2000, we enter into a Strategic
Alliance alliance and a License Agreement with Array Technology. This was a
critical part of our Business Plan, since it gave us exclusive rights to VoIP
technology developed by array for 5 years. We anticipate that, as we develop and
roll-out our network in 2000, that we will continue to incur increased costs.
Our costs during the three months ended March 31, 2000 related primarily to:
o signing bonuses paid to 4 former employees of Array telecom (3
executives of the Company and one senior software developer) and
o marketing and management consulting activities.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in an arbitration relating to the termination of its
former President and Chief Operating Officer, Charles Yang. A breakdown in the
relationship between the Company and Mr. Yang developed in early 2000 and he
ceased providing services to the Company on January 31, 2000. Mr. Yang's
positions as President and Chief Operating Officer of the Company were formally
terminated on March 9, 2000. Mr. Yang then gave notice to the Company that he
required his dispute with the Company to be arbitrated. Management does not
anticipate that the outcome of such arbitration will have a material impact on
earnings or financial position of the Company.
Item 2. Changes in Securities
Not applicable.
10
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a)(1) Exhibits. 27.1 Financial Data Schedule.
(b) Reports on Form 8-K. Not Applicable.
11
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, ePhone Telecom Inc.
Date: May 22, 2000 Row J. Zadeh
/s/ Row J. Zadeh
-------------------------------------
Row J. Zadeh
President and Chief Executive Officer
Bahram H. Ossivand
/s/ Bahram H. Ossivand
-------------------------------------
Bahram H. Ossivand
Chief Financial Officer
12