1
UNITED STATES 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 September 30, 2000
[ ] 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: 0-27249
EZCONNECT, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 87-0284731
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2900 Townsgate Road, Suite 200, Westlake Village, CA 91361
- ---------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(805) 557-9906
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- ------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), Yes [X] No [ ] and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, was 4,324,342 shares of common stock, par value $0.001, as of December
20, 2000.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EZConnect Inc (the "Company") has included the consolidated balance sheets of
the Company (a development stage company) as of September 30, 2000
(unaudited), and June 30, 2000 (the end of the Company's most recently
completed fiscal year), and unaudited consolidated statements of operations
and cash flows for the three months ended September 30, 2000 and for the
periods from September 23, 1999 (inception) through September 30, 1999 and
cumulative from September 23, 1999 (inception) through September 30, 2000,
together with unaudited condensed notes thereto. The accompanying unaudited
financial statements have been prepared in accordance with the instructions to
Form 10-QSB pursuant to the rules and regulations of the Securities and
Exchange Commission and, therefore, do not include all information and
footnotes necessary for a complete presentation of the financial position,
results of operations, cash flows, and stockholders' deficit in conformity
with accounting principles generally accepted in the United States. In the
opinion of management, the consolidated financial statements reflect all
adjustments, all of which are normal recurring adjustments, necessary to
fairly present the financial condition, results of operations, and cash flows
of the Company for the interim periods presented. The financial statements
included in this report on Form 10-QSB should be read in conjunction with the
audited financial statement of the Company and the notes thereto included in
the annual report of the Company on Form 10-KSB for the year ended June 30,
2000.
3
CONSOLIDATED FINANCIAL STATEMENTS
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, June 30,
2000 2000
------------- ------------
(Unaudited)
Current assets (Note C)
Cash $ 18,267 $ 53,134
Employee advances 815 -
Prepaid expenses - 14,192
------------- ------------
Total current assets 19,082 67,326
Equipment, at cost (Note C) 39,099 27,349
Less accumulated depreciation (7,813) (5,600)
------------- ------------
31,286 21,749
Equity investment in Encore (Note H) 350,000 -
------------- ------------
$ 400,368 $ 89,075
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Trade accounts payable $ 188,478 $ 89,046
Accrued liabilities 26,834 134,817
Notes payable to stockholders (Note D) 450,000 100,000
Line of credit to stockholders (Note C) 832,966 535,530
------------- ------------
Total current liabilities 1,498,278 859,393
COMMITMENTS AND CONTINGENCIES (Notes C and F)
STOCKHOLDERS' DEFICIT (Note B)
Preferred stock, $0.001 par value;
5,000,000 shares authorized, 0 shares
issued and outstanding - -
Common stock, $0.001 par value;
45,000,000 shares authorized,
8,686,047 and 8,680,657 shares
issued and outstanding, respectively 8,686 8,680
Additional paid-in capital 3,410,867 3,124,455
Deficit accumulated during
the development stage (4,517,463) (3,903,453)
------------- ------------
Total stockholders' deficit (1,097,910) (770,318)
------------- ------------
$ 400,368 $ 89,075
============= ============
The accompanying notes are an integral part of these statements.
4
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Cumulative
September 23, from
1999 September 23,
Three Months (Inception) 1999
Ended through through
September 30, September 30, September 30,
2000 1999 2000
------------ ------------ ------------
Revenues $ - $ - $ -
Interest income - - 501
Other income 1,268 - 1,268
------------ ------------ ------------
TOTAL REVENUES 1,268 - 1,769
Operating expenses
Consulting expense for stock options $ - - 1,924,599
Interest recognized on beneficial conversion
feature (Notes C and D) 273,755 - 913,863
Salaries 191,293 - 556,652
Compensation expense for stock options - - 291,750
Administrative expenses 75,275 56 274,645
Professional fees 37,977 3,000 212,282
Consulting 10,000 6,500 152,340
Website and logo development - 12,560 97,499
Interest for stock options - - 46,200
Interest 24,765 150 41,589
Depreciation 2,213 - 7,813
------------ ------------ ------------
TOTAL EXPENSES 615,278 22,266 4,519,232
------------ ------------ ------------
Loss before income taxes (614,010) (22,266) (4,517,463)
Income taxes (Note E) - - -
------------ ------------ ------------
NET LOSS $ (614,010) (22,266) (4,517,463)
============ ============ ============
Loss per common share (Note G)
Basic $ (.07) $ (22.26) $ (0.46)
Diluted $ (.07) $ (22.26) $ (0.46)
Weighted-average common and dilutive
common equivalent shares outstanding (Note G)
Basic 8,685,089 1,000 8,572,918
Diluted 8,685,089 1,000 8,572,918
The accompanying notes are an integral part of these statements.
5
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Cumulative
September 23, from
1999 September 23,
Three Months (Inception) 1999
Ended through through
September 30, September 30, September 30,
2000 1999 2000
------------ ------------ ------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (614,010) $ (22,266) $(4,517,463)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 2,213 - 7,813
Issuance of stock options for compensation - - 1,924,599
Interest expense recognized on beneficial
conversion features of line of credit and
stockholder notes payable 273,755 - 913,863
Issuance of stock options for compensation - - 291,750
Issuance of stock for services and compensation 12,663 - 45,263
Issuance of stock options in lieu of interest - - 46,200
Changes in assets and liabilities
Employee advances (815) - (815)
Prepaid expenses and other assets 14,192 (2,327) -
Trade accounts payable 99,432 3,350 188,398
Accrued liabilities (107,983) - 26,834
------------ ------------ ------------
Total adjustments 293,457 1,023 3,443,905
------------ ------------ ------------
Net cash used in operating activities (320,553) (21,243) (1,073,558)
------------ ------------ ------------
Cash flows from investing activities-
Purchase of equipment (11,750) (4,348) (39,099)
Purchase of equity investment in Encore (350,000) - (350,000)
------------ ------------ ------------
Net cash used in investing activities (361,750) (4,348) (389,099)
Cash flows from financing activities
Proceeds from draws on line of credit
to stockholder 297,436 - 832,966
Proceeds from the issuance of notes payable
to stockholders 350,000 30,000 485,000
Proceeds from the issuance of note to affiliate
prior to merger - - 30,000
Stock subscriptions received - - 169,000
Principal payment on notes payable to stockholders - - (38,417)
Cash obtained in reverse merger - - 615
Stock issued for cash - 1,760 1,760
------------ ------------ ------------
Net cash provided by financing activities 647,436 31,760 1,480,924
------------ ------------ ------------
Net (decrease) increase in cash (34,867) 6,169 18,267
Cash at beginning of period 53,134 - -
------------ ------------ ------------
Cash at end of period $ 18,267 $ 6,169 $ 18,267
============ ============ ============
(Continued)
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EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
(Unaudited)
Three months ended September 30, 2000 and
September 23, 1999 (Inception) through September 30, 1999 and
Cumulative from September 23, 1999 (Inception) through September 30, 2000
Supplemental disclosures of cash flow information
- -------------------------------------------------
The Company paid no cash for interest or income taxes during the periods.
Noncash investing and financing activities
- ------------------------------------------
During the period from September 23, 1999 (inception) through September 30,
1999, the Company purchased $11,950 in property and equipment through the
issuance of capital lease obligations.
Recapitalization
- --------------------------------
On September 30, 1999, the Company merged with EZConnect USA, Inc. in a
transaction accounted for as a reverse acquisition (recapitalization). Net
assets received through the non-cash recapitalization were as follows:
Cash $ 615
Notes receivable 30,000
Notes payable to stockholder (3,417)
Accounts payable and accrued liabilities (80)
Stock Subscriptions receivable 169,000
---------------
Net assets received 196,118
Par value of stock issued in connection with
recapitalization (8,659)
Amount recorded as additional paid-in capital in
connection with recapitalization (187,459)
---------------
$ -
===============
Beneficial conversion feature of convertible debt
- ------------------------------------------------
As discussed in Notes C and D - the Company recognized charges related to the
beneficial conversion feature of the line of credit and notes payable to
stockholders issued during the three months ended September 30, 2000. The
beneficial conversion feature is determined by the difference between the
market value of the common stock and the conversion rate of the debt up to the
amount of debt issued. The beneficial conversion feature is recognized as
interest expense over the period corresponding to the time restrictions on
conversion of the debt into stock. The beneficial conversion resulted in a
non-cash charge recorded as additional interest expense of $273,755 and
$913,863 for the three months ended September 30, 2000 and cumulative from
inception (September 23, 1999) through September 30, 2000, respectively.
Stock issued for services
- -------------------------
During the three months ended September 30, 2000 and 1999 and cumulative from
inception (September 23, 1999) through September 30, 2000, the Company issued
5,390 and 26,623 shares of stock to various parties for compensation and
services received at a total value of $12,663 and $47,023, respectively. The
value of the expense recognized was based on the market value of the stock
issued.
The accompanying notes are an integral part of these statements.
7
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended September 30, 2000 and
September 23, 1999 (Inception) through September 30, 1999 and
Cumulative from September 23, 1999 (Inception) through September 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of EZConnect,
Inc. ("The Company")have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
statements and with the instructions to Form 10-QSB and Article 10 of
Regulation SX. Accordingly, these financial statements do not include all of
the information and footnote disclosures required by accounting principles
generally accepted in the United States for complete financial statements.
These financial statements and footnote disclosures should be read in
conjunction with the audited financial statements and the notes thereto
included in the Company's annual report on Form 10-KSB for the year ended June
30, 2000. In the opinion of management, the financial statements reflect all
adjustments, (consisting only of normal recurring adjustments) necessary to
fairly present the financial position as of September 30, 2000 and June 30,
2000 and its results of operations and cash flows of the Company for the three
months ended September 30, 2000 and for the periods from inception (September
23,1999) through September 30, 1999 and cumulative from inception (September
23, 1999) through September 30 2000. The results of operations for the three
months ended September 30, 2000, may not be indicative of the results that may
be expected for the year ending June 30, 2001.
NOTE B - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has generated
net losses of $4,517,463 since inception (September 23, 1999), and has an
accumulated stockholders deficit of $1,097,910 at September 30, 2000. In
addition the Company's current liabilities exceed its current assets by
$1,479,196 as of September 30, 2000. The Company's continuation as a going
concern is dependent on its ability to meet its obligations, to obtain
additional financing as may be required and ultimately to attain
profitability.
The Company is a development stage enterprise and has not yet generated any
revenue through September 30, 2000. In June of 2000, the Company entered into
a letter of intent to merge with Encore Wireless Inc. (Encore), and to
continue developing the capability to become a private label wireless
provider. Subsequent to the merger, the Company's ability to develop
profitable operations is dependent on building a subscriber base and obtaining
sufficient funds or financing for the acquisition of subscriber equipment and
the required infrastructure. The Company plans to convert outstanding debt
into stock in order to reduce the liabilities of the Company. In addition, the
Company intends to reduce overhead costs by consolidating management with
Encore once the merger is completed.
8
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended September 30, 2000 and
September 23, 1999 (Inception) through September 30, 1999 and
Cumulative from September 23, 1999 (Inception) through September 30, 2000
NOTE C - LINE OF CREDIT
During 2000, the Company obtained a line of credit from a stockholder for up
to $1,500,000 bearing interest at 10 percent. The line of credit is
convertible into stock at the option of the debt holder at $1.00 per share.
At any time the market price of the stock is higher than the conversion rate
on the day of draw on the line of credit, the difference between the price to
convert and the market price of the stock (limited to the amount of debt
issued) is considered a beneficial conversion feature. The beneficial
conversion feature is recorded as an additional non-cash charge to interest
expense and is recognized in the period when the debt becomes convertible into
stock. The beneficial conversion resulted in an increase of interest expense
of $273,755 and $809,285 and an effective interest rate on the line of credit
of approximately 140 and 170 percent for the three months ended September 30,
2000 and cumulative from September 23, 1999 (inception) through September 30,
2000. The Company had outstanding balances of $832,966 and $535,530 in
borrowings against the line at September 30 and June 30, 2000, respectively.
The remaining credit available as of September 30, 2000 is $667,034. The line
of credit is collateralized by all of the Company's assets.
NOTE D - NOTES PAYABLE TO STOCKHOLDERS
The Company has three uncollateralized notes payable to stockholders in the
aggregate amount of $450,000 with an interest rate of 10 percent. Of the
notes, $100,000 in notes are convertible into stock at the option of the debt
holder at $1.00 per share. The market price of the stock was higher than the
conversion rate on the day of issuance. The difference between the price to
convert and the market price of the stock is considered a beneficial
conversion feature. The beneficial conversion feature is recorded as an
additional non-cash charge to interest expense and is recognized in the period
when the debt becomes convertible into stock. For the period cumulative from
September 23, 1999 (inception) through September 30, 2000, the beneficial
conversion feature resulted in an increase in interest expense of $104,578 and
an effective interest rate on the notes of approximately 218 percent.
Subsequent to September 30, 2000 all outstanding notes were converted to stock
(Note H).
NOTE E - INCOME TAXES
The Company has sustained net operating losses in all periods presented.
There were no deferred tax assets or income tax benefits recorded in the
financial statements for net deductible temporary differences or net operating
loss carryforwards because the likelihood of realization of the related tax
benefits cannot be established. Accordingly, a valuation allowance has been
recorded to reduce the net deferred tax asset to zero and consequently, there
is no income tax provision or benefit for the period presented. The increase
in the valuation allowance was $126,915 and $1,326,577 for the three months
ended September 30, 2000 and cumulative from September 23, 1999 (inception)
through September 30, 2000, respectively.
9
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended September 30, 2000 and
September 23, 1999 (Inception) through September 30, 1999 and
Cumulative from September 23, 1999 (Inception) through September 30, 2000
NOTE E - INCOME TAXES - CONTINUED
As of September 30, 2000, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $3,556,577 that expire though 2020.
Utilization of the net operating losses is dependent on the profitable
operations of the Company.
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain officers of the Company.
Total salaries covered by these agreements is $808,000 annually over the next
three years. The agreements also include bonuses totaling $860,000 over the
next three years and stock option clauses upon meeting specified business
objectives and time requirements. Subsequent to September 30, 2000, the
Company entered into settlement agreements for several of these agreements
that were terminated. (Note H).
NOTE G - LOSS PER COMMON SHARE
The following data show the shares used in computing loss per common share
including dilutive potential common stock.
Cumulative
from
September September
Three 23, 1999 23, 1999
months (Inception) (Inception)
ended through through
September September September
30, 2000 30, 1999 30, 2000
-------------- --------- -----------
Common shares outstanding
during the entire period 8,680,657 1,000 1,000
-------------- --------- -----------
Weighted-average common
shares issued during the period 4,632 - 8,571,918
-------------- --------- -----------
Weighted-average number of common
shares used in basic EPS 8,685,089 1,000 8,572,918
-------------- --------- -----------
Dilutive effect options - - -
-------------- --------- -----------
Weighted-average number of common
shares and dilutive potential
common stock used in dilutive EPS 8,685,089 1,000 8,572,918
============== ========= ===========
Shares from the exercise of all outstanding options were not included in the
computation of diluted loss per share because their inclusion would have been
antidilutive for all periods presented.
10
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended September 30, 2000 and
September 23, 1999 (Inception) through September 30, 1999 and
Cumulative from September 23, 1999 (Inception) through September 30, 2000
NOTE H - SUBSEQUENT EVENTS
Subsequent to September 30, 2000, the Company entered into various agreements
that allowed for implementing a plan of recapitalization that provides for (1)
the cancellation of shares and options held by former affiliates and other
shareholders; (2) the issuance of new shares and options in settlement and
release of claims against the Company; and (3) the issuance of shares to
certain creditors of the Company for the conversion of outstanding debt.
In connection with this plan of recapitalization, stockholders returned
6,710,500 shares of common stock to the Company as authorized and unissued
shares. Holders of certain stock options also surrendered 5,416,000 options
to purchase common stock of the Company for cancellation.
Of these options, 4,013,000 were surrendered by certain terminated employees
in connection with the settlement of their employment agreements subsequent to
September 30, 2000. The Company settled these agreements for $34,000 in cash
and the issuance of 595,000 options to purchase common stock for any and all
claims.
Various consultants, stockholders and board members surrendered the remaining
1,403,000 options canceled. Subsequent to the cancellation of these options,
the Company issued new options to purchase 1,095,000 shares of the Company's
common stock to certain of these individuals.
Simultaneous with the plan of recapitalization, stockholders converted all
principal and accrued interest on notes due from the Company totaling
$1,248,795 for 1,248,795 shares of common stock of the Company.
Effective October 13, 2000, the Company issued an aggregate of 100,000 shares
to certain shareholders and affiliates of the Company in exchange for the
settlement and release of any and all claims relating to rights they may have
to acquire shares of the Company's common stock from former affiliates of the
Company.
Subsequent to September 30, 2000, the Company merged with Encore Wireless,
Inc. (Encore), a California company, wherein the Company acquired Encore for
$350,000 cash (advanced to Encore prior to September 30, 2000 and reflected as
an equity investment) and 2,500,000 shares of the Company's Series A
Convertible Preferred Stock. The acquisition was recorded as a purchase with
Encore continuing as a wholly-owned subsidiary of the Company. Of the
2,500,000 shares of the Company's Series A Preferred Stock issued to the
Encore shareholders, 1,875,000 shares have been placed in escrow and will be
released based on certain performance criteria. One-half of the shares placed
in escrow will be "earned-out" based on Encore achieving a minimum number of
subscribers and the other one-half of the shares placed in escrow shall be
"earned-out" based on certain shareholders' continued active involvement in
the operations of the Company.
11
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended September 30, 2000 and
September 23, 1999 (Inception) through September 30, 1999 and
Cumulative from September 23, 1999 (Inception) through September 30, 2000
NOTE H - SUBSEQUENT EVENTS
Subsequent to September 30, 2000, the Company initiated a private placement
arrangement to raise $1,500,000 through the sale of common stock with a
minimum placement of $1,000,000 as required by the Encore merger agreement.
As of the October 17, 2000 merger with Encore, the Company had successfully
raised the $1,000,000 minimum through the sale of 1,000,000 shares of common
stock to accredited investors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
- ---------------------------------------------------------
This report may contain "forward-looking" statements. The Company is
including this cautionary statement for the express purpose of availing itself
of the protections of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to all such forward-looking
statements. Examples of forward-looking statements include, but are not
limited to: (a) projections of revenues, capital expenditures, growth,
prospects, dividends, capital structure and other financial matters; (b)
statements of plans and objectives of the Company or its management or Board
of Directors; (c) statements of future economic performance; (d) statements of
assumptions underlying other statements and statements about the Company and
its business relating to the future; and (e) any statements using the words
"anticipate," "expect," "may," "project," "intend" or similar expressions.
Business in General
- -------------------
EZConnect, Inc. (the "Company" or "EZConnect") was organized under the laws of
the state of Nevada on September 21, 1999, in connection with an Agreement and
Plan of Reorganization (the "Acquisition Agreement") relating to the
acquisition of EZ Connect USA, Inc., a Utah corporation ("EZ") through a share
exchange. The Acquisition Agreement was approved by the board of directors
and shareholders of EZ and the board of directors of the Company, and was
approved by the Company's shareholders at a special meeting on October 15,
1999. The Company was formed to engage in the remote establishment and
disconnection of utility services and should be considered a start-up or
development stage business.
Following the acquisition of EZConnect USA, Inc. the board of directors
actively recruited qualified individuals to serve in senior executive
management positions and assist it in the further development of the Company's
business plan. After evaluating the Company's business plan and its viability,
management proposed to the board of directors that the Company pursue an
alternative, but related business strategy. That strategy involved entering
into the private label wireless service industry.
EZConnect is developing the capability to become a private label wireless
provider. On July 8, 2000, EZConnect entered into an Agreement and Plan of
Merger ("Merger Agreement") with Encore Wireless, Inc., a California
corporation ("Encore"), wherein EZConnect had the right to acquire Encore in a
stock and cash transaction, subject to certain closing conditions. Encore,
headquartered in Westlake Village, California, is a provider of private label
wireless Internet solutions to the marketplace. EZConnect completed the
acquisition of Encore on October 17, 2000.
13
Results of Operations for three months ended September 30, 2000 compared to
the period from September 23, 1999 (Inception) through September 30, 1999.
- ------------------------------------------------------------------------------
During its operating history EZConnect has had no revenues from the sale of
its services. EZConnect is developing the capability to become a private label
wireless provider, and on July 8, 2000 entered into a Merger Agreement with
Encore, a provider of private label wireless Internet solutions to the
marketplace. EZConnect completed the acquisition of Encore on October 17,
2000.
Corporate Expense. For the three month period ended September 30, 2000, total
operating expenses were $615,278, consisting mainly of interest expense for
the beneficial conversion feature on notes and line of credit of $273,755;
salaries of $191,293, and administrative expenses of $75,275. All other
operating expenses aggregated $74,955. The operating expenses for the three
month period ended September 30, 2000 were substantially higher than the
aggregate operating expenses of $22,266 for the comparative period ended
September 30, 1999 due in large part to the fact that the prior comparative
period represented only a 7 day period from inception (September 23,
1999)through September 30, 1999.
EZConnect has a line of credit for up to $1,500,000 from a
shareholder/director. The line of credit had a conversion feature that allowed
the shareholder/director to convert the principal and interest under the line
of credit into common stock at his option at $1 per share. Because of the
conversion feature of the line of credit, at any time the market price of the
common stock is higher than the conversion rate on the day of draw on the line
of credit, the difference between the price to convert and the market price of
the stock, up to the amount of the debt, is considered a beneficial conversion
feature. The beneficial conversion feature is recorded as additional interest
expense and is recognized at the time the debt becomes convertible into stock.
Therefore, for the period ended September 30, 2000, the beneficial conversion
resulted in an increase of interest expense of $273,755 and an effective
interest rate on the line of credit of approximately 140 percent. At
September 30, 2000, the Company had an outstanding balance of $832,966 in
borrowings against the line of credit, with $667,034 remaining credit
available. In October 2000, the shareholder/director exercised his right of
conversion under the line of credit, converting $832,966 of principal and
accrued interest into 832,967 shares of common stock.
At September 30, 2000, EZConnect had notes payable to other stockholders in
the aggregate of $450,000. Of these notes, $100,000 were immediately
convertible into stock at the option of the debt holder at $1 per share upon
issuance. The difference between the price to convert and the market price of
the common stock on the date the notes were issued and considered convertible
is a beneficial conversion feature recorded as additional interest expense
recognized when the debt becomes convertible into common stock. Subsequent to
September 30, 2000 all outstanding notes were converted to common stock.
During the three months ended September 30, 2000, EZConnect issued 5,390
shares of common stock in lieu of cash to certain non-affiliated third-party
vendors for services and compensation valued at $12,663.
14
Other Income. EZConnect had other income of $1,268 during the three month
period ended September 30, 2000 and no income for the period from September
23, 1999 (inception) to September 30, 1999.
EZConnect experienced a net loss of $614,010 for the three month period ended
September 30, 2000. The basic and diluted loss per share was $0.07 on the
weighted average number of shares outstanding of 8,685,089. EZConnect
experienced a net loss of $22,266 for the period from September 23, 1999
(inception) to September 30, 1999. The basic and diluted loss per share was
$22.26 on the weighted average number of shares outstanding of 1,000.
Liquidity and Capital Resources
- -------------------------------
During the three month period ended September 30, 2000, EZConnect financed
operations through draws against its line of credit and additional loans from
shareholders. EZConnect will require substantial additional working capital to
continue its business operations.
At September 30, 2000, EZConnect had current assets of $19,082 and current
liabilities of $1,498,278, for a working capital deficit of $1,479,196.
EZConnect had cash of $18,267 and its equity investment in Encore Wireless of
$350,000 (represents cash advanced toward the acquisition price). Net cash
used in operating activities was $320,553, which was funded primarily by draws
against the line of credit and loans from affiliates. At September 30, 2000,
EZConnect had net property and equipment of $31,286, after deduction of $7,813
in accumulated depreciation. EZConnect's property and equipment consists
mainly of office and computer equipment.
Management of EZConnect is aware of its ongoing cash requirements and
subsequent to September 30, 2000, implemented a recapitalization plan that is
intended to (i) reduce administrative expenses by consolidating management
with Encore; (ii) provide for up to $1,500,000 in equity funding through the
private placement of its common stock; and (iii) provided for the conversion
of approximately $1,250,000 in loans and accrued interest to equity through
the exercise of conversion features. Further, management will continue to seek
additional equity financing from existing shareholders and other investment
capital resources. However, there can be no assurance that such additional
financing will occur, or if it does occur, that it can be completed on terms
favorable to the Company. Because of EZConnect's limited financial resources,
it does not anticipate expending any substantial sums for new research and
development during the fiscal year ending June 30, 2001.
Impact of Inflation
- -------------------
Inflation did not have a material impact on EZConnect's operations during the
period ended September 30, 2000, and it is not expected to have a material
impact on EZConnect's or Encore's future operations.
Principal Customers
- -------------------
During the three month period ended June 30, 2000, EZConnect had no individual
customer that accounted for more than 10% of its revenues.
Seasonality
- -----------
Management knows of no seasonal aspects relating to the nature EZConnect's
business operations that had a material effect on the financial condition or
results of operation of the Company.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
During the three month period ended September 30, 2000, EZConnect issued 5,390
shares to certain non-affiliated third-party vendors for services and
compensation valued at $12,663. The shares issued in the foregoing
transactions were issued in reliance on the exemption from registration and
the prospectus delivery requirements of the Securities Act of 1933, as amended
(the "Securities Act"), set forth in Section 3(b) and/or Section 4(2) of the
Securities Act. The value of the securities was determined to be the fair
market value for the services provided.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the reporting period.
ITEM 5. OTHER INFORMATION
On October 17, 2000, EZConnect, Inc. ("EZConnect") finalized its Agreement and
Plan of Merger ("Merger Agreement") with Encore Wireless, Inc., a California
corporation ("Encore"), wherein EZConnect acquired Encore for $350,000 cash
and 2,500,000 shares of its Series A Preferred Stock. The acquisition was
structured as a stock-for-stock exchange pursuant to Section 368(a)(1)(B) of
the Internal Revenue Code. The securities issued in the acquisition were
issued in a private transaction in reliance on Section 4(2) of the Securities
Act of 1933, as amended. Encore is now a wholly-owned subsidiary of
EZConnect.
Of the 2,500,000 shares of EZConnect Series A Preferred Stock issued to the
Encore shareholders, 1,875,000 shares have been placed in escrow and will be
released based on certain performance criteria. One-half the shares placed in
escrow will be "earned-out" based on Encore achieving a minimum number of
subscribers and the other one-half of the shares placed in escrow shall be
"earned-out" based on the continued active involvement of certain shareholders
with the growth and development of Encore.
As a result of the acquisition of Encore, EZconnect is now a provider of
private label wireless Internet solutions. Encore offers its customers
wireless voice and data services throughout the United States made available
on the Sprint PCS (R) Nationwide Network. Encore's service provider
relationship with Sprint PCS assures Encore customers the availability of
nationwide digital wireless services on the Sprint PCS (R) Nationwide Network,
while being provided complete private label customer and back office support
by Encore. (See Current Report on Form 8-K, October 17, 2000).
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit No. SEC Ref. No. Title of Document
- ----------- ------------ -----------------
27 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None were filed during the three months ended September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EZCONNECT, INC.
[Registrant]
Dated: December 21, 2000 /S/Philip R. Lacerte, C.E.0.