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: March 31, 2001
[ ] 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
ENCORE WIRELESS, 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) 557-9946
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- ------------------------------------------------------------------------------
(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 5,760,383 shares of common stock, par value $0.001, as of June 20,
2001.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated 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' equity in conformity with accounting principles
generally accepted in the United States of America. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the results of operations,
financial position, and cash flows have been included.
These consolidated condensed financial statements and the related notes
thereto 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 December 31, 2000.
Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that can be expected for the year ending
December 31, 2001.
3 ENCORE WIRELESS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
ASSETS
March 31, December 31,
2001 2000
------------ ------------
Current assets
Cash $ 50,201 $ 76,806
Restricted cash 100,000 100,000
Accounts receivable, net of allowance for
doubtful accounts of $275,000 and $150,000 at
March 31, 2001 and December 31, 2000,
respectively 541,523 710,727
Prepaid expenses 37,480 32,347
------------ ------------
Total current assets 729,204 919,880
EQUIPMENT, at cost
Less accumulated depreciation of $14,276
and $11,291 at March 31, 2001 and December 31,
2000, respectively 35,214 37,761
GOODWILL, net of amortization of $1,732,783
and $86,639 at March 31,2001 and December 31,
2000, respectively - 1,646,144
------------ ------------
$ 764,419 $ 2,603,785
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Trade accounts payable $ 713,629 $ 744,078
Accrued liabilities 350,420 411,595
Notes payable to stockholders 85,000 135,000
------------ ------------
Total current liabilities 1,149,050 1,290,673
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT)
Series A Convertible
preferred stock, $0.001 par value; 3,000,000
shares authorized, 785,875 shares issued and
outstanding 786 786
Common stock, $0.001 par value; 45,000,000
shares authorized, 5,760,383 and 4,404,384
shares issued and outstanding at March 31, 2001
and December 31, 2000, respectively 5,760 4,404
Additional paid-in capital 8,442,133 7,083,489
Accumulated deficit (8,833,310) (5,775,567)
------------ ------------
Total stockholders' equity (deficit) (384,631) 1,313,112
------------ ------------
$ 764,418 $ 2,603,785
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
ENCORE WIRELESS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
---------------------------
2001 2000
------------ ------------
Net sales $ 779,493 $ -
Cost of goods sold 621,632 -
------------ ------------
Gross profit 157,861 -
Expenses
Selling and shipping expenses 236,906 54,325
General and administrative expenses 575,694 212,610
Research and development - 46,463
Stock in lieu of consulting compensation 10,000 461,729
Compensation expense for stock options (Note E) 706,667 37,500
Goodwill impairment (Note D) (1,646,144) -
------------ ------------
Total operating expenses 3,175,411 812,627
------------ ------------
Loss from operations (3,017,550) (812,627)
Other income (expense)
Interest and other income - 982
Interest expense (15,055) (15,620)
Interest expense on beneficial conversion
feature (25,138) (286,514)
Interest expense for stock options - (46,200)
Equity recapitalization expense - -
------------ ------------
(40,193) (347,352)
------------ ------------
Loss before income taxes (3,057,743) (1,159,979)
Income taxes - -
------------ ------------
NET LOSS $ (3,057,743) $ (1,159,979)
============ ============
LOSS PER SHARE - BASIC AND DILUTED $ (0.57) $ (0.13)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES (NOTE H) 5,381,539 8,660,424
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
ENCORE WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the period December 31, 2000 through March 31, 2001
(Unaudited)
Preferred stock Common stock Additional
-------------------- -------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
--------- --------- --------- --------- ---------- ---------- ----------
Balance at December 31, 2000 785,875 $ 786 4,404,384 $ 4,404 $7,083,489 $(5,775,567) $1,313,112
Interest expense recognized from
offer to convert note payable at
beneficial rates (Note F) - - - - 25,138 - 25,138
Issuance of common stock upon
conversion of a shareholder
note payable and related
accrued interest (Note F) - - 133,333 133 58,062 - 58,195
Issuance of common stock for
services (Note F) - - 176,000 176 109,824 - 110,000
Issuance of common stock for
services (Note F) - - 13,333 13 9,987 - 10,000
Issuance of common stock options
below market (Note E) - - - - 706,667 - 706,667
Issuance of common stock per
subscription agreement - - 1,033,333 1,034 448,966 - 450,000
Net loss - - - - - (3,057,743) (3,057,743)
--------- --------- --------- --------- ---------- ---------- ----------
Balance at March 31, 2001 785,875 786 5,760,383 5,760 8,442,133 (8,833,310) $ (384,631)
The accompanying notes are an integral part of these consolidated financial
statements.
6 ENCORE WIRELESS, Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------------------------
2001 2000
------------ ------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (3,057,743) $ (1,159,979)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 4,237 2,955
Impairment of goodwill 1,646,144 -
Provision for allowances for
doubtful accounts 125,000 -
Issuance of stock options below market 706,667 37,500
Issuance of stock for services 10,000 461,729
Beneficial interest on conversion of note
payables 25,138 286,514
Issuance of stock for interest - 46,200
Changes in assets and liabilities
Accounts receivable 44,204 -
Prepaid expenses (5,133) -
Trade accounts payable 79,551 73,880
Accrued liabilities (52,980) 47,275
----------- -----------
Total adjustments 2,582,828 956,053
----------- -----------
Net cash used in operating activities (474,915) (203,926)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (1,690) -
Purchase of patents - (26,160)
----------- -----------
Net cash used in investing activities (1,690) (26,160)
Cash flows from financing activities
Stock options converted with cash 450,000 -
Proceeds from draws on line of credit - 183,329
Proceeds from notes payable to shareholders - 100,000
----------- -----------
Net cash provided by financing
activities 450,000 283,329
----------- -----------
Net increase (decrease) in cash (26,605) 53,243
Cash at beginning of period 176,806 -
----------- -----------
Cash at end of period $ 150,201 $ 53,243
=========== ===========
[Continued]
ENCORE WIRELESS, Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
Non-cash disclosure:
In January 2001, a $50,000 Note Payable plus $8,195 in accrued interest was
converted into 133,333 new common shares. Because the conversion was completed
at below market price of for the stock, an additional $25,138 of beneficial
interest upon conversion was recorded.
Options issued at market value in the prior year were converted into 176,000
common shares and funded in January 2001 with $110,00 in accrued professional
services rendered and recorded in 2000.
During the three month period ended March 31, 2001, asset disposition and
accumulated depreciation totaled $1,252.
The accompanying notes are an integral part of these consolidated financial
statements.
8
ENCORE WIRELESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company, without audit, has prepared the accompanying consolidated
financial statements. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
consolidated financial position, results of operation and cash flows at March
31, 2001 and for all periods presented have been made.
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. It
is suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's audited financial statements included in its Form 10-KSB for the
period ended December 31, 2000. The results of operations for the period ended
March 31, 2001 are not necessarily indicative of the operating results that
may be expected for the year ending December 31, 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
substantial net losses and has limited operating capital, with current
liabilities exceeding current assets by $419,845 at March 31, 2001. In
addition, Sprint PCS has notified the Company of its intent to terminate its
contract to provide wireless services. The Company's continuation as a going
concern is dependent on its ability to meet its obligations and obtain
additional financing required until it attains profitability. The Company's
ability to develop profitable operations is dependent on negotiating an
alternative arrangement as a wireless provider, building a subscriber base or
equivalent revenue source, and obtaining sufficient funds or financing for the
acquisition of subscriber equipment and the required infrastructure all at
rates favorable to the Company.
The Company has taken the following steps to revise its operating and
financial requirements in an effort to enable the Company with the ability to
continue in existence:
+ The Company is presently pursuing alternatives to the Sprint PCS
arrangement.
+ The Company has reduced administrative expenses by consolidating
management responsibilities and reducing labor costs.
+ The Company is seeking additional debt and equity funding from
principal and other interested parties.
+ The Company will provide for the conversion of selected loans and
other debt to equity.
See Note G - SUBSEQUENT EVENTS
9
ENCORE WIRELESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - MERGERS AND ACQUISITIONS
On October 17, 2000, EZConnect, Inc. acquired Encore Wireless, Inc. The
acquisition was recorded as a purchase with Encore continuing as a wholly-
owned subsidiary of EZConnect, Inc. Subsequent to the acquisition, the name of
EZConnect, Inc. was changed to Encore Wireless, Inc.
The comparative results of operations for the period ended March 31, 2000
included in the accompanying financial statements are those of EZConnect, Inc.
and its subsidiary. The table below reflects unaudited pro-forma combined
results of EZConnect, Inc. and Encore Wireless, Inc. as if the acquisition had
taken place at the beginning of the period presented below:
Three Months
ended
March 31,
2000
------------
Net sales $ -
Net loss (1,360,103)
Net loss per common share (0.16)
In management's opinion, these unaudited pro-forma amounts are not necessarily
indicative of what the actual combined results of operations might have been
if the acquisition had been effective at the beginning of the period
presented.
NOTE D GOODWILL IMPAIRMENT
In conjunction with the October 17,2000 acquisition of Encore Wireless, Inc.
by EZConnect, Inc., $1.7 million in goodwill was assigned to the value of the
assets of Encore, primarily associated with the favorable terms of the Sprint
reseller contract and the potential business opportunities it provided. Given
the notification by Sprint of its near-term intention to terminate this
agreement, management believes that the value assigned to goodwill is unlikely
to be realized. Hence, the value has been written down to zero.
NOTE E - OPTION GRANTS
In January 2001, the Company entered into a financing agreement to sell up to
$1 million in shares of restricted common stock to Philip Lacerte and Robert
Proznik, two of the Company's directors, at prices per share that may
represent discounts from the market price. The agreement provides for the
Company to sell 666,667 shares of common stock for $250,000 ($0.375 per share)
on January 2, 2001 and additional shares in increments of $250,000 in March,
May, and July of 2001 for the lower of $0.50 per share or 50% of the closing
bid price per share on the date of purchase. The Company issued 1,033,333
shares of common stock pursuant to collecting $450,000 through this agreement
in the period ended March 31, 2001. Additional compensation expense for stock
options of $706,667 was recorded in conjunction with the issuance of this
financing agreement. Because of Sprint's intention to cancel its agreement
with the Company, the balance of this financing agreement has been terminated.
10
ENCORE WIRELESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company accounts for stock options granted to consultants in accordance
with Statement of Financial Accounting Standards #123 and related
interpretations. The value of such services is based on the fair value at the
date of grant calculated using the Black-Scholes option pricing model or the
value of the services rendered, whichever is more readily determinable.
During January 2001, the Company granted 625,000 options to employees and one
consultant at prices ranging from $0.65 to $0.88 per share which represented
the market price for the common stock on the date of such grants.
NOTE F EQUITY TRANSACTIONS
The Company's board of directors approved the conversion of a $50,000 note and
accrued interest payable to Inter-Pro Property Corporation (USA), an entity
controlled by Mr. Proznik, into restricted common stock at a conversion rate
of $0.375 per share. Effective January 1, 2001, this note was converted and
133,333 new common shares were issued. The market price for the Company's
common stock on the date of conversion was $0.625 per share.
The Company's board of directors approved the conversion of 176,000 options
for $110,000 of accounts payable accumulated for consulting expenses, rendered
through 2000. The options had a conversion rate of $0.625 per share, the
market price on the date of grant. Effective January 1, 2001, these options
were converted and 176,000 new common shares were issued, in lieu of payment
for the outstanding liability.
On March 30, 2001, certain shareholder relation's services were rendered at a
cost of $10,000. The Board approved the issuance of 13,333 shares of new
common stock at a conversion price $0.75 per share (the market price for the
shares), in lieu of payment for these services.
NOTE G SUBSEQUENT EVENTS
In May 2001, the Company dismissed 5 of its 8 employees and eliminated
services where possible in order to cut expenses while it seeks alternative
operating arrangements from that of the Sprint reseller arrangement.
NOTE H - LOSS PER COMMON SHARE
The following data show the weighted average number of shares outstanding used
in computing net loss per common share:
Three Months Ended March 31,
2001 2000
-------------- -------------
Common shares outstanding entire period 4,404,384 8,660,424
Net weighted average common shares issued
during period 977,155 -
-------------- -------------
Weighted average number of common
shares used in basic and diluted EPS 5,381,539 8,660,424
============== =============
11
ENCORE WIRELESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H- LOSS PER COMMON SHARE (Continued)
For the three-month periods ended March 31, 2001 and 2000 all of the options
and convertible debt that were outstanding were not included in the
computation of diluted EPS because to do so would have been anti-dilutive.
For the three month periods ended March 31, 2001 and 2000, there was no
convertible debt and 4,055,000 options outstanding and $283,329 in convertible
debt and 980,000 options outstanding, respectively.
12
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.
Discussion and Analysis of Financial Condition and Results of Operations
- ------------------------------------------------------------------------
Results of operations for the three-month period ended March 31, 2001
represented a loss of $3.1 million. The loss included a $1,646,144 provision
to record impairment of goodwill reflecting the announcement by Sprint in
April 2001 of its intention to cancel its agreement with Encore Wireless,
Inc., $706,667 to record expenses associated with below market options issued
to an officer of the Company, and $25,138 to record beneficial interest
expense associated with the conversion of a note payable into common stock at
below market. Excluding these three expenses, the operating loss was $679,794.
Comparison with the same period in the prior year is not considered
meaningful, since no operations were represented in the prior year, and the
intended business model at that time, which has since been abandoned, was not
inclusive of Encore Wireless, Inc. Therefore, this discussion will focus
solely on results in the three-month period ended March 31, 2001.
Revenues were $779,493 during the reported period, reflecting a growing
wireless subscriber base. Net subscribers increased by slightly less than
1,200 during the period. Management believes that limited capital resources
severely hampered the Company's ability to market its services, contributing
to lower net subscriber adds than earlier expectations. Cost of sales,
including the cost for new handsets, was $621,632, or 80% of revenues,
contributing a 20% gross profit margin, or $157,861. Handset sales are
subsidized to entice new subscribers. Sales of new handsets are recorded at
cost, net of subsidies that are charged to marketing expense. Recurring
airtime revenues were $624,000 during the three-month period, contributing
average gross profit margins of approximately 25%.
Sales and marketing expenses were $236,906 during the period, primarily
comprised of $153,360 in handset subsidies. The balance included channel
marketing commissions, shipping and postage, and marketing materials.
General and administrative expenses of $575,694 included approximately
$281,000 in wages and benefits. The balance of general and administrative
expenses included ordinary travel and entertainment, consulting and legal,
communications, office lease and supplies expenses.
13
Liquidity and Capital Resources
- -------------------------------
During the three month period ended March 31, 2001, the Company supplementally
financed operations through the issuance of common stock for cash and services
and the conversion of options for account payable. It is anticipated that the
Company will require substantial additional working capital to continue its
business operations over the balance of the fiscal year. As a result of
management's belief that Sprint PCS will terminate its resale agreement with
the Company, the Company's ability to obtain additional financing is not
considered likely, unless the Company can negotiate an economically feasible
alternative for a wireless network service provider.
At March 31, 2001, the Company had current assets of $729,204 and current
liabilities of $1,149,049, for a working capital deficit of $419,845. The
Company had cash of $50,201, restricted cash of $100,000, accounts receivable
net of allowance for doubtful accounts of $541,7523, and prepaid expenses of
$37,480. Net cash used in operating activities was $474,915, which was funded
primarily by the sale of stock for cash and the issuance of stock for
services. At March 31, 2001, the Company had net property and equipment of
$35,214, after deduction of $14,276 in accumulated depreciation. The
Company's property and equipment consists mainly of office and computer
equipment. In addition, as a result of the Company's belief that Sprint PCS
will terminate its resale agreement, the Company has recorded a goodwill
impairment of $1,646,144. Because at December 31, 2000, the Company had an
accumulated deficit of $5,775,567, a working capital deficit, limited external
financial resources, and has recently been notified of Sprint PCS's near-term
intention to terminate its resale agreement with Encore, the report of the
Company's auditor contained a modification as to the ability of the Company to
continue as a going concern.
Through March 31, 2001, the Company has incurred a cumulative net deficit of
$8,833,310 since inception. The Company expects to continue operating at a
loss until such time as it begins to receive sufficient revenues from
operations. The Company is unable at this time to predict whether actual
revenues received from operations will be sufficient to offset the costs and
expenses of operations for the corresponding periods. This condition will
likely worsen with the impending loss of the Sprint PCS agreement.
The Company continues to operate with limited capital resources. Until such
time as alternative operations can be secured, the Company will likely
continue to face difficulties in securing additional financing. Consequently,
it is uncertain whether working capital will be sufficient to maintain ongoing
operations through the remainder of the year.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2001, the Company entered into an agreement to sell shares of
restricted common stock to Philip Lacerte and Robert Proznik, two of the
Company's directors, at a price per share that represented a discount to the
market price. The agreement provides for the Company to sell 666,667 shares of
common stock for $250,000 ($0.375 per share) on January 2, 2001 and additional
shares in increments of $250,000 in March, May, and July for the lower of
$0.50 per share or 50% of the closing bid price per share on the date of
purchase. As of June 20, 2001, the Company had issued 1,033,333 shares of
common stock pursuant to collecting $450,000 through this agreement.
In January 2001, the Company's board of directors has approved the conversion
of a $50,000 note and accrued interest payable to Inter-Pro Property
Corporation (USA), an entity controlled by Mr. Proznik, into 133,333 shares of
restricted common stock at a conversion rate of $0.375 per share.
On December 29, 2000, the Company's board of directors approved the conversion
of 176,000 options for $110,000 of accounts payable accumulated for consulting
expenses, rendered through 2000. The options had a conversion rate of $0.625
per share, the market price on the date of grant. In January 2001, these
options were converted and 176,000 common shares were issued, in lieu of
payment for the outstanding liability.
On March 30, 2001, certain shareholder relation's services were rendered at a
cost of $10,000. The Board approved the issuance of 13,333 shares of new
common stock at a conversion price $0.75 per share (the market price for the
shares), in lieu of payment for these services.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit No. SEC Ref. No. Title of Document
- ----------- ------------ -----------------
None.
(b) REPORTS ON FORM 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
ENCORE WIRELESS, INC.
Date: June 21, 2001 By /S/ M.G. Meador, Jr., C.F.O.
[Principal Accounting Officer and
Authorized Signatory of the Company]