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 June 30, 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: 000-27699
ePHONE Telecom, Inc.
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(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)
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 June 30, 2001, the
Company had outstanding 17,853,848 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 June 30, 2001
INDEX
PART I. FINANCIAL INFORMATION.
Item I. Financial Statements (unaudited)
Balance sheet - June 30, 2001 and December 31, 2000 .......................1
Statements of operations - six months
ended June 30, 2001 and 2000 and for the period April 30, 1996
(inception) to June 30, 2001 ............................................2
Statements of operations - three months
ended June 30, 2001 and 2000 ............................................3
Statements of cash flows - six months
ended June 30, 2001 and 2000 and for the period April 30, 1996
(inception) to June 30, 2001 ..............................................4
Notes to financial statements .............................................5
Item II. Management's Discussion and Analysis or Plan of Operation ........8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................11
Item 2. Changes in Securities.........................................11
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)
June 30 December 31,
2001 2000
----------- -----------
Current Assets:
Cash and cash equivalents ................................................. $ 65,078 $ 1,525,978
Investment in marketable securities ....................................... -- 2,170,908
Restricted cash ........................................................... 50,000 579,435
Accounts receivable ....................................................... -- 39,200
Inventory ................................................................. 399,670 553,218
Other receivables ......................................................... 19,113 18,893
----------- -----------
Total Current Assets ................................................. 533,861 4,887,632
Property and Equipment, net .................................................... 1,699,432 999,902
Array Telecom Lease, net ...................................................... 1,294,177 1,663,942
Investment in ePHONE Technologies, Inc. ....................................... 185,000 185,000
Other Assets ................................................................... 37,043 102,543
----------- -----------
Total Assets ................................................................... $ 3,749,513 $ 7,839,019
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable .......................................................... $ 419,023 $ 309,258
Accrued liabilities ....................................................... 566,778 1,169,244
Customer advances ......................................................... 25,853 25,853
Capital lease obligation .................................................. 20,591 --
----------- -----------
Total Current Liabilities ............................................ 1,032,245 1,504,355
Capital lease obligation, net of current portion ............................... 25,918 --
Deferred royalty obligation ................................................... 603,334 410,000
Stockholders' Equity:
Common stock, par value $0.001
Authorized: 150,000,000 at June 30, 2001
and December 31, 2000
Issued and Outstanding: 17,853,848 and 17,453,848
at June 30, 2001 and December 31, 2000, respectively................ 17,854 17,454
Common stock to be issued ................................................ 45,000 --
Additional paid in capital ................................................ 21,326,787 21,204,687
Accumulated other comprehensive income .................................... -- 22,221
Deficit accumulated during the development stage .......................... (19,301,625) (15,319,698)
----------- -----------
Total Stockholders' Equity ................................ 2,088,016 5,924,664
----------- -----------
Total Liabilities and Stockholders' Equity ..................................... $ 3,749,513 $ 7,839,019
=========== ===========
See accompanying notes to financial statements.
1
ePHONE Telecom, Inc.
(A Development Stage Company)
Statements of Operations
(unaudited)
Six Months Ended April 6,1998
June 30, (inception) to
2001 2000 June 30, 2001
---------- -------- -----------------
Net revenues ..................... $ 512,720 $ 52,241 $ 1,102,543
Operating expenses
Cost of revenues .............. 475,826 22,152 887,376
Sales and marketing ........... 915,351 1,216,000 2,988,199
General and administrative..... 3,092,420 1,068,117 8,866,675
General and administrative -
non-cash compensation ...... 122,500 3,833,811 7,959,070
------------ ------------ ------------
Total operating expenses $ 4,606,097 6,140,080 20,701,320
------------ ------------ ------------
Loss from operations.............. (4,093,377) (6,087,839) (19,598,777)
Interest and other (income), net (111,450) (20,041) (305,152)
------------ ------------- -------------
Net Loss ......................... $ (3,981,927) $(6,067,798) $ (19,293,625)
============ ============= =============
Loss per share -(basic and diluted)$ (0.23) $ (0.45)
============ =============
Weighted average number of common
shares outstanding................ 17,672,633 13,391,770
============ =============
See accompanying notes to financial statements.
2
ePHONE Telecom, Inc.
(A Development Stage Company)
Statements of Operations
(unaudited)
Three Months Ended
June 30,
2001 2000
---------- --------
Net revenues ..................... $ 93,520 $ 52,241
Operating expenses
Cost of revenues .............. 203,434 22,152
Sales and marketing ........... 232,800 977,099
General and administrative..... 1,370,597 596,079
General and administrative -
non-cash compensation ...... -- 3,833,811
------------ ------------
Total operating expenses $ 1,806,831 5,429,141
------------ ------------
Loss from operations.............. (1,713,311) (5,376,900)
Interest and other (income), net (14,851) (20,039)
------------ -------------
Net Loss ......................... $ (1,698,460) $(5,356,861)
============ =============
Loss per share -(basic and diluted)$ (0.10) $ (0.40)
============ =============
Weighted average number of common
shares outstanding................ 17,853,848 13,442,400
============ =============
See accompanying notes to financial statements.
3
ePHONE Telecom, Inc.
(A Development Stage Company)
Statements of Cash Flows
(unaudited)
April 6, 1998
Six Months Ended (Inception) to
June 30, June 30, 2001
------------------------- -----------------
2001 2000
---- ----
Cash Flows from Operating Activities:
Net loss .................................................... $ (3,981,927) $ (6,067,798) $(19,293,625)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and Amortization........................... 492,182 152,226 1,189,449
Fair value of stock issued charged to operations ...... 122,500 671,828 4,692,779
Stock option benefits charged to operations ............ -- 3,161,983 3,266,291
Deferred royalty expense .............................. 193,334 -- 603,334
Inventory reserve ...................................... 108,900 -- 150,000
Realized gain ......................................... (45,470) -- (45,470)
Changes in operating assets and liabilities:
Accounts receivable and other receivables 38,980 (10,024) (19,113)
Inventory............................................ 44,648 (148,980) (549,670)
Other assets......................................... 65,500 (26,767) (37,043)
Accounts payable ....... (198,501) (57,646) 110,758
Accrued liabilities ................................. (602,466) 249,243 566,778
Due to related parties .............................. -- (91,995) --
Customer deposits.................................... -- 13,606 25,853
----------- ----------- -----------
Net cash flows used in operating activities ................. (3,762,320) (2,154,324) (9,339,679)
=========== =========== ===========
Cash flow from investing activities:
Purchase of fixed assets ............................... (467,172) (461,665) (1,624,695)
Purchase of Array telecom license ...................... -- (2,207,383) (2,218,589)
Purchase of investments................................. -- -- (2,798,687)
Redemption of marketable securities .................... 2,194,157 -- 2,844,157
Deposit to restricted cash, net......................... 529,435 (1,894,865) (50,000)
Investment in ePHONE Technologies, Inc.................. -- -- (170,000)
----------- ----------- -----------
Net cash flows provided by (used in) investing activities ... 2,256,420 (4,563,913) (4,017,814)
=========== =========== ===========
Cash flow from financing activities:
Proceeds from exercise of warrants ..................... 45,000 -- 45,000
Proceeds from issuance of common stock ................. -- 250,000 1,228,000
Proceeds from issuance of special warrants, net ........ -- 14,013,398 12,149,571
----------- ----------- -----------
Net cash flows provided by financing activities ............. 45,000 14,263,398 13,422,571
=========== =========== ===========
Net (decrease) increase in cash and cash .................... (1,460,900) 7,545,161 65,078
equivalents
Cash and cash equivalents, beginning of period .............. 1,525,978 82,747 --
----------- ----------- -----------
Cash and cash equivalents, end of period .................... $ 65,078 $ 7,627,908 $ 65,078
=========== =========== ===========
See accompanying notes to financial statements.
4
ePHONE Telecom, Inc.
(A Development Stage Company)
Notes to Financial Statements
(unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
ePHONE Telecom, Inc. was incorporated in 1996 under the laws of the State of
Florida, and is traded on the OTC Electronic Bulletin Board operated by the
National Association of Securities Dealers, Inc. under the trading symbol
"EPHO".
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 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 2000 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 accounting
principles generally accepted in the United States of America 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.
BASIS OF PRESENTATION
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 in the development of its VoIP technology.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions about amounts that affect the reported amounts in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
5
RECLASSIFICATIONS
Certain 2000 balances and disclosures have been reclassified to conform to the
2001 presentation.
NOTE 2 - GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets, and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements the Company has incurred losses since its inception and has an
accumulated deficit of $19,301,625 (unaudited) and $15,319,698 at June 30, 2001
and December 31, 2000, respectively.
At June 30, 2001, the Company has $65,078 of cash and a working capital
shortfall. The Company's continuation as a going concern is dependent upon its
ability to immediately raise additional financing to fund its operations and
allow the Company to successfully develop and introduce its products to market.
These factors among others may indicate that the Company will be unable to
continue as a going concern. The Company is actively pursuing additional equity
financing to provide the necessary funds for working capital.
The financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern.
NOTE 3 - RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2001 and 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 $74,000 and $110,000, respectively.
During the six months ended June 30, 2001, the Company paid $247,969 to ePHONE
Technologies, Inc, a related party, for consulting services.
During the six months ended June 30, 2001, the Company paid $25,000 in
consulting fees to an officer of the Company.
The Company paid $100,000 as provided for in a Service and Deployment agreement
with 7bridge Systems, LTD, a related party.
NOTE 4 - MARKETABLE INVESTMENTS
The Company's available-for -sale investments consisted of debt instruments
issued by federal and state government agencies. During the six months ended
June 30, 2000, the Company redeemed the remaining $2,194,157 of
available-for-sale debt securities.
6
NOTE 5- STOCKHOLDER'S EQUITY
During the six months ended June 30, 2001, the Board of Directors approved the
grant of 3,975,000 stock options pursuant to the Company's 2000 Long Term
Incentive Plan. The exercise price of the options was $.50 and the vesting
periods range from immediate to 3 years.
On February 14, 2001, the Board of Directors approved the issuance of 250,000
stock options to a consultant in an exchange for services to be provided. The
stock options have an exercise price of $0.50 and expire in three years. The
vesting terms are subject to Management's discretion and have not yet been
determined. The market value of the Company's common stock at the grant date was
$0.23. The fair value associated with these options totaled $42,500 and was
recorded as non-cash compensation during the three month period ended March 31,
2000.
On March 23, 2001, the Company entered into a Settlement Agreement and Mutual
General Release (the "Settlement Agreement") with Charles Yang to resolve all
claims and disputes between the Company and Mr. Yang, including all claims
relating to Mr. Yang's employment by and separation from the Company. Pursuant
to the terms of the Settlement Agreement, the Company agreed to pay Mr. Yang
$400, 000 in cash in installments by July 23, 2001, and issue Mr. Yang 400,000
shares of the Company's common stock. The Company recorded $180,000 in expense
related to this settlement during the three month period ended March 31, 2001.
The fair value of the stock on the date of issuance was $80,000 and is recorded
as non-cash compensation in the statement of operations.
In early 2000, the Company sold a total of 13,436,316 Special Warrants, as
adjusted for redemptions and penalties, to investors. On August 13, 2001 final
receipts from the regulators of the British Colombia, Alberta , Ontario and
Quebec provinces in Canada were received for the registration prospectus dated
August 7, 2001. Each Special Warrant was then deemed converted, as provided for
in the special warrant agreement, into one share of common stock and a warrant
to purchase one share of common stock at an exercise price of $1.60 per share
expiring on March 31, 2002, for no additional consideration.
During June 2001, the Company received $45,000 for the exercise of warrants to
purchase shares of common stock. The Board of Directors approved the repricing
of all outstanding warrants during May 2001 and June 2001 to a range of $0.20
- -$0.80. Accordingly, Management will issue the appropriate number of shares
related to the exercise of the warrants when the repricing occurs during the
third quarter. The Company has recorded this amount as Common stock to be issued
in the accompanying balance sheet at June 30,2001.
NOTE 6 - MAJOR CUSTOMER
For the six months ended June 30, 2000, all of the Company's sales were to one
customer.
NOTE 7 - SUPPLEMENTAL NON CASH INVESTING AND FINANCING ACTIVITY
The Company entered into Capital lease obligations totaling approximately
$47,000 for the purchase of property and equipment.
At June 30, 2001, the Company had obligations totaling $308,000 included in
accounts payable for the purchase of property and equipment.
NOTE 8 - SUBSEQUENT EVENT
Subsequent to June 30, 2001, the Company received a total of $211,000 from the
exercise of warrants to purchase shares of common stock.
7
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Certain statements made by our management may be considered to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties. The
words "believe," "expect," "anticipate" and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion, among
others.
Our financial statements have been presented on a going concern basis, which
contemplates the realization of assets and settlement of liabilities and
commitments in the normal course of business. The Company has experienced losses
since its inception and we expect to incur additional losses for the foreseeable
future. Our auditors included a fourth paragraph in their Report of Independent
Certified Public Accountants on our December 31, 2000 financial statements
drawing special attention to several factors that raise doubt about our ability
to continue as a going concern.
On the following pages we present management's plan of operations. You should
read this information in conjunction with our financial statements and notes
included in the Form 10-KSB.
A. Plan of Operation
Management continues to focus on the build out of ePHONE's network and beginning
principal business operations. Our initial strategy based on carrying traffic
over the Internet was a valid and economical approach at the time the business
plan was developed. The last few quarters have seen a dramatic shift in the cost
of leased lines due to oversupply of telecommunications facilities in many of
the world's major routes. In many cases it is now more economical to lease
facilities than it is to buy Internet connectivity at either end. This situation
has existed for some time but was initially thought to be an anomaly. It is now
clear it is a longer-term trend and one that is worth capitalizing on to improve
the quality of service and decrease costs simultaneously.
This market shift has demanded the rethinking of ePHONE's core network
deployment strategy. In this process the current technology has been found to be
wanting and supplemental products purchased and installed. These new products,
purchased from Cisco, provide a significantly enhanced utilization of leased
circuits and a significantly greater flexibility in connecting to other
carriers. This broadens the availability of competitive rates available to
ePHONE thus allowing an improvement in margins and an increase in wholesale
arbitrage opportunities.
During the 2nd quarter of 2001 Cisco equipment has been deployed both in Herndon
(ePHONE's head office) and a new POP (Point of Presence) in New York. This new
POP is strategically located in one of the major telecommunications facilities
in New York, providing access to numerous carriers and significantly reduced
rates. These decreased rates are providing an opportunity to focus on the
American market to identify lucrative short-term opportunities. We believe these
opportunities will be realized in the 3rd quarter of 2001.
Some setbacks have been experienced in the introduction of the Business Direct
and Business Connect services. These services both require CPE (Customer
Premises Equipment) installation and on going support. In the original plan it
was expected that a nominal fee and a security deposit could be charged that
would largely defer the cost of the equipment. This model has been found to be
erroneous in practice. The incremental cost of the equipment renders the entry
cost for the product too high for the target market. Prepaid cards are a
preferable choice as there is no entry cost and the convenience of CPE solutions
is apparently not a major buying motivator. It is expected that these business
products will continue to be a good fit in markets where the cost of accessing
POPs is prohibitive or in market segments where the convenience factor outweighs
the additional cost of deployment. These products are no longer being
aggressively promoted but will be utilized in appropriate situations.
New employees were hired in the 2nd quarter that further enhanced ePHONE's
considerable expertise in telecommunications and information technology. This
additional manpower brings with it extensive contacts in the domestic market and
therefore new opportunities in both wholesale and retail services. In addition,
the changing competitive landscape is posing previously unforeseen
opportunities.
The telecommunications industry has been hard hit by the high technology
downturn in the financial markets. Many small (and large) carriers and VOIP
service providers have ceased operations. These companies were carrying a
substantial amount of traffic, this now surfeit traffic is causing minute rates
to stabilize and even increase on some routes creating opportunities in both the
wholesale and retail markets. The equipment ePHONE installed in the 2nd quarter
positions ePHONE to be able to take advantage of the opportunity posed by this
traffic surplus and the ensuing opportunities.
8
These rapid changes in the telecommunications market necessitate the
reconsideration of ePHONE's core strategy. A thorough analysis of the market, as
it is today, and the development of appropriate strategies will be undertaken
early in the 3rd quarter. The POPs deployed in Europe during the 1st quarter are
not performing to ePHONE's expectations, consequently no further POPs of this
type will be deployed until the technical issues can be resolved and the
existing POPs (Amsterdam, Brussels, Frankfurt and Warsaw) brought to full
production capability.
Notwithstanding the technical and market challenges facing ePHONE it is clear
that ePHONE is well positioned to take advantage of the opportunities being
posed. Management is confident the revenue and traffic goals can be reached by
the end of the year though perhaps not in the ways originally envisaged.
Management is committed to moving quickly to take advantage of the market
changes and make the required decisions to reposition ePHONE as a strong
participant in this new telecommunications market.
Liquidity and Capital Resources
ePHONE has funded operations through equity financing, and does not have a line
of credit or similar credit facility available to it.
ePHONE is short of available funds. Unless we are able to raise additional
funds, we will not be able to continue operations. EPHONE must rely on its
ability to raise money through equity financing and capital equipment loans to
fund the deployment of technology, operating costs and marketing activities.
On March 31, 2000, April 7, 2000, and April 20, 2000, ePHONE closed the sale of
the first, second, and final portion, respectively, of the Special Warrants and
received net proceeds of approximately $12,205,000. The total number of Special
Warrants ePHONE sold in this offering was 13,780,837.
The special warrant agreements contained certain penalties in the event that
ePHONE did not meet the prescribed deadlines for registration of common stock to
be issued on the exercise of the special warrants in both Canada and the United
States. ePHONE failed to meet these deadlines, and consequently; each special
warrant holder was entitled to exercise their right to have 12.5% of their
original investment returned to them and reduce the number of special warrants
they held by the same percentage ("Redemption Right"). In addition, each special
warrant holder will receive an additional 10% of their original investment in
shares of common stock of ePHONE upon the exercise of the special warrants. As
of March 31, 2001, all special warrant holders have exercised their Redemption
Rights, with ePHONE returning $1,894,865 to these investors.
On August 13, 2001 final receipts from the regulators of the British Colombia,
Alberta , Ontario and Quebec provinces in Canada were received for the
registration prospectus dated August 7, 2001. Each Special Warrant was then
deemed converted, as provided for in the special warrant agreement, into one
share of common stock and a warrant to purchase one share of common stock at an
exercise price of $1.60 per share expiring on March 31, 2002, for no additional
consideration.
On March 31, 2000, ePHONE 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, ePHONE made an initial payment to
Comdial of $2,650,000. As part of the Agreement, ePHONE received the fixed
assets of Array Telecom, with a book value of approximately $431,000 and assumed
the lease of Array Telecom's Herndon, Virginia facility. The License grants
ePHONE 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 difference between the amount paid to Comdial and the amount recorded as
fixed assets totaled $2,219,000, and represents the value of the licensed
technology and is recorded as an intangible asset.
In connection with the License Agreement entered into with Array Telecom, ePHONE
is required to pay an additional $2,180,000 for the VoIP technology over 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, ePHONE 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.
9
During the six months ended June 30, 2001, operating activities consumed
$3,762,320 of cash. Investing activities provided $2,256,420 consisting of the
redemption of marketable securities, receipt of restricted cash, and net of
payments to purchase fixed assets. At June 30, 2001 ePHONE had cash totaling
$65,078 . Management believes, ePHONE will need to raise $850,000to enable it to
operate through the fourth quarter of 2001. However, such financing may not be
available when needed or, if available, may not be on terms favorable to ePHONE.
If additional funds are raised through issuance of equity securities, the
existing stockholders may experience significant dilution.
Current Liabilities at June 30, 2001 were $1,032,245 , of which $566,778 was
accrued liabilities.
On January 19, 2001, ePHONE entered into a Marketing and Networking Services
Agreement with Innofone.com (INNF-a company listed in NASDAQ pink sheets). This
Agreement allows for the two companies to start cooperating in enhancing ePHONE
`s voice over Internet Protocol (VoIP) network with termination traffic
resulting from Innofone's marketing programs. In addition, ePHONE and
Innofone.com agreed to pursue new marketing programs including personal computer
to phone voice services, packaging calling cards in Innofone's fulfillment kits
and other new products and services. ePHONE paid Innofone.com a set-up fee
totaling $500,000. Innofone.com agreed to repay this amount to ePHONE within 90
days of the agreement date. If such amount is not repaid, ePHONE may, at its
option, convert the amount into shares of Innofone's common stock at $0.25 per
share and a warrant to purchase an additional share at $0.75 per share. The
Agreement expires December 31, 2010.
On March 5, 2001, Innofone.com announced in a press release that its principal
subsidiary, Innofone Canada, Inc., was served on March 1, 2001, with a Petition
for a Receiving Order pursuant to Section 43 of the Bankruptcy & Insolvency Act
of Canada. Innofone.com stated that although a dispute exists between Innofone
Canada Inc., 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. Innofone.com further stated that it intends to
retain counsel in the province of Quebec to vigorously defend this action, and
will move to strike the requested Petition, because it believes the Petition is
without merit.
The Company and Innofone.com have agreed to extend the due date of the $500,000
set-up fee repayment six months to October 2001. Due to the uncertainty
regarding collection of this amount, Management has recorded this amount as a
selling and marketing expense during the three months ended March 31, 2001. The
Company has not yet determined the impact of this development on its
relationship with Innofone.com.
C. Stock Compensation Activity During 2001
On February 14, 2001, the Board of Directors approved issuance of 2,250,000
stock options pursuant to the Company's 2000 Long Term Incentive Plan. The
exercise price of the options was $.50 and the vesting periods range from
immediate to 3 years.
On February 14, 2001, the Board of Directors approved the issuance of 250,000
stock options to a consultant in an exchange for services to be provided. The
stock options have an exercise price of $0.50 and expire in three years. The
vesting terms are subject to Management's discretion and have not yet been
determined. The market value of the Company's common stock at the grant date was
$0.23. The fair value associated with these options totaled $42,500 and was
recorded as non-cash compensation during the three month period ended March 31,
2001.
As further described in Legal Proceedings, the Company entered into a Settlement
agreement with Charles Yang on March 23, 2000. Pursuant to the terms of the
agreement, the Company agreed to pay Mr. Yang $400, 000 in cash in installments
by July 23, 2001, and issue Mr. Yang 400,000 shares of the Company's common
stock. The Company recorded $180,000 in expense related to this settlement
during the three months ended March 31, 2001. The fair value of the stock issued
was $80,000 and is recorded as non-cash compensation in the statement of
operations.
D. Risk Factors
There are risks and uncertainties as described in the Company's Annual Report on
Form 10KSB facing our company. Additional risks not presently known to us or
that we currently consider insignificant may also impair our business operations
in the future. Our business, financial condition and plan of operations could be
materially adversely affected by any of the risks detailed in our Annual Report.
The trading price of shares of our common stock could decline due to these
risks.
10
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On March 23, 2001, the Company entered into a Settlement Agreement and Mutual
General Release (the "Settlement Agreement") with Charles Yang to resolve all
claims and disputes between the Company and Mr. Yang, including all claims
relating to Mr. Yang's employment by and separation from the Company. Pursuant
to the terms of the Settlement Agreement, the Company agreed to pay Mr. Yang
$400, 000 in cash in installments by July 23, 2001, and issue Mr. Yang 400,000
shares of the Company's common stock.
ITEM 2 - CHANGES IN SECURITIES
Not applicable
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
Exhibit No.
99.1 Settlement Agreement and Mutual General Release between Charlie Yang
and ePHONE Telecom, Inc., dated March 23, 2001. (Previously filed)
(b) Reports on Form 8-K.
On April 13, the registrant filed with the Commission a current report
on form 8-K which disclosed the appointment of Carmine Taglialatela Jr.
as President and Chief Operating Officer effective April 1, 2000.
On April 16, the registrant filed with the Commission a current report
on form 8-K to disclose the Settlement Agreement and Mutual General
Release entered into between the registrant and Charles Yang, a former
President of the Company.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ePHONE Telecom, Inc.
(Registrant)
By /s/ Robert G. Clarke
- ------------------------------------------------
(Robert G. Clarke, Chairman of the Board)
Date: August 14, 2001
- ------------------------------------------------
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In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ August 14, 2001
- ------------------------------------------------
(Carmine Taglialatela, CEO, Director)
(Principal Executive Officer)
Date: August 14, 2001
- ------------------------------------------------
By /s/ Charlie Rodriguez
- ------------------------------------------------
(Charlie Rodriguez, Chief Financial Officer)
(Principal Financial and Accounting Officer)
Date: August 14, 2001
- ------------------------------------------------
By /s/ John Fraser*
- ------------------------------------------------
(John Fraser, Director)
Date: August 14, 2001
- ------------------------------------------------
By /s/ Walter Pickering*
- ------------------------------------------------
(Walter Pickering, Director)
Date: August 14, 2001
- ------------------------------------------------
*By: Charlie Rodriguez
------------------------
Attorney-in-Fact
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