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, 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 5,860,383 shares of common stock, par value $0.001, as of November
15, 2001.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed 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 and nine month periods ended September
30, 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 Condensed Balance Sheets
(Unaudited)
ASSETS
September 30, December 31,
2001 2000
------------ ------------
Current assets
Cash $ 134,984 $ 76,806
Restricted cash - 100,000
Accounts receivable, net of allowance for
doubtful accounts of $615,000 and $150,000 at
September 30, 2001 and December 31, 2000,
respectively 50,500 710,727
Prepaid expenses 45,853 32,347
------------ ------------
Total current assets 231,337 919,880
EQUIPMENT, at cost
Less accumulated depreciation of $20,246
and $11,291 at September 30, 2001 and December 31,
2000, respectively 30,373 37,761
GOODWILL, net of amortization of $1,732,783
and $86,639 at September 30,2001 and December 31,
2000, respectively (Note D) - 1,646,144
------------ ------------
$ 261,710 $ 2,603,785
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Trade accounts payable (Note F) $ 1,238,285 $ 744,078
Accrued liabilities 477,382 411,595
Notes payable to stockholders 180,000 135,000
------------ ------------
Total current liabilities 1,895,667 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, 5,860,383 and 4,404,384
shares issued and outstanding at September 30, 2001
and December 31, 2000, respectively 5,860 4,404
Additional paid-in capital 8,462,835 7,083,489
Accumulated deficit (10,103,438) (5,775,567)
------------ ------------
Total stockholders' equity (deficit) (1,633,957) 1,313,112
------------ ------------
$ 261,710 $ 2,603,785
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
ENCORE WIRELESS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------- ------------
Net sales $ 136,498 $ - $ 1,504,267 $ -
Cost of sales 233,561 - 1,419,259 -
------------ ------------ ------------ ------------
Gross profit (loss) (97,063) - 85,008 -
Expenses
Selling and shipping expenses 10,519 - 315,109 -
General and administrative expenses 692,322 316,758 1,662,218 1,107,545
Stock in lieu of consulting compensation - - 10,000 32,600
Compensation expense for stock options(Note E) - - 706,667 573,527
Goodwill impairment (Note D) - - 1,646,144 -
------------ ------------ ------------ ------------
Total operating expenses 702,841 316,758 4,340,138 1,713,672
------------ ------------ ------------ ------------
Loss from operations (799,904) (316,758) (4,255,130) (1,713,672)
Other income (expense)
Interest and other income - 1,268 - 1,352
Interest expense (485) (24,765) (47,603) (39,249)
Interest expense on beneficial conversion
feature - (273,755) (25,138) (913,863)
Interest expense for stock options - - - (46,200)
------------ ------------ ------------ -------------
(485) (297,252) (72,741) (997,960)
------------ ------------ ------------ -------------
Loss before income taxes (800,389) (614,010) (4,327,871) (2,711,632)
Income taxes - - - -
------------ ------------ ------------ -------------
NET LOSS $ (800,389) $ (614,010) $ (4,327,871) $ (2,711,632)
============ ============ ============ =============
LOSS PER SHARE - BASIC AND DILUTED $ (0.14) $ (0.07) $ (0.77) $ (0.31)
============ ============ ============ =============
WEIGHTED AVERAGE NUMBER OF SHARES (NOTE H) 5,765,939 8,685,089 5,635,953 8,660,424
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
ENCORE WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the period January 1, 2000 through September 30, 2001
(Unaudited)
Preferred stock Common stock Additional
-------------------- -------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
--------- --------- --------- --------- ---------- ---------- ----------
Balance at January 1, 2001 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 shareholder
notes payable and related
accrued interest (Note F) - - 233,333 233 78,764 - 78,997
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
for compensation (Note E) - - - - 706,667 - 706,667
Issuance of common stock per
subscription agreement (Note E) - - 1,033,333 1,034 448,966 - 450,000
Net loss - - - - - (4,327,871) (4,327,871)
--------- --------- --------- --------- ---------- ---------- ----------
Balance at September 30, 2001 785,875 $ 786 5,860,383 $ 5,860 $8,462,835$(10,103,438)$(1,633,957)
========= ========= ========= ========= ========== ========== ==========
The accompanying notes are an integral part of this consolidated financial
statement.
6 ENCORE WIRELESS, Inc. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------ ------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (4,327,871) $ (2,711,632)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 10,207 6,318
Impairment of goodwill 1,646,144 -
Provision for allowance for
doubtful accounts 465,000 -
Issuance of stock options for compensation 706,667 573,527
Issuance of stock for services 10,000 45,263
Non-cash interest expense on beneficial
conversion of notes payable 25,138 913,863
Issuance of stock for interest - 46,200
Conversion of notes payable to stock 20,802 -
Changes in assets and liabilities
Accounts receivable 195,227 -
Prepaid expenses (13,506) (815)
Trade accounts payable 604,206 188,398
Accrued liabilities 73,982 18,990
----------- -----------
Total adjustments 3,743,867 1,791,744
----------- -----------
Net cash used in operating activities (584,004) (919,888)
----------- -----------
Cash flows from investing activities
Purchase of equipment (2,818) (12,813)
Advance to Encore - (350,000)
Purchase of patents - 9,010
----------- -----------
Net cash used in investing activities (2,818) (353,803)
----------- -----------
Cash flows from financing activities
Stock options converted with cash 450,000 -
Proceeds from draws on line of credit - 832,966
Proceeds from notes payable to stockholders 100,000 485,000
Principal payments on stockholder notes (5,000) (35,000)
----------- -----------
Net cash provided by financing
activities 545,000 1,282,966
----------- -----------
Net (decrease) increase in cash (41,822) 9,275
Cash at beginning of period 176,806 8,992
----------- -----------
Cash at end of period $ 134,984 $ 18,267
=========== ===========
[Continued]
7 ENCORE WIRELESS, Inc. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Non-cash investing and financing activities:
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
below market price for the stock, an additional $25,138 of interest expense
was recorded as a result of the beneficial conversion feature. Additionally,
in September 2001, a $20,000 note payable, plus accrued interest of $802, were
converted into 100,000 new common shares. The conversion was completed at
market.
Options for 176,000 common shares, issued at market value in the prior year,
were converted for $110,000 of accounts payable accumulated for consulting
expenses, rendered through 2000.
During the nine-month period ended September 30, 2001, asset dispositions and
associated accumulated depreciation totaled $1,252 and $10,207, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
8
ENCORE WIRELESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company, without audit, has prepared the accompanying consolidated
condensed financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the consolidated financial position, AT September 30, 2001 and December 31,
2000 and the consolidated results of operations and the consolidated cash
flows for the nine months ended September 30, 2001 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 three and
nine month periods ended September 30, 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 $1,664,330 at September 30, 2001. In
addition, effective August 18,2001, Sprint PCS terminated its contract with
the Company to provide wireless services(Note D). 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
alternative arrangements as a wireless provider, building a subscriber base or
equivalent revenue sources, 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 to continue in
existence:
+ The Company is presently pursuing alternatives to the Sprint PCS
arrangement.
+ In September 2001 the Company incorporated MobilSense, Inc.
MobilSense, Inc. is a wholly owned subsidiary of Encore Wireless, Inc. It is
developing software solutions targeted at tracking and managing vital company
statistics on employee usage of mobile devices. The Company is pursuing new
venture capital to complete development of the software and launch its product
and services.
+ In September 2001 the Company signed a management agreement to
provide management services to an emerging Voice-Over-Internet-Provider long
distance service. The contract is expected to provide approximately $150,000
in revenues over a six-month period starting in November 2001.
9
ENCORE WIRELESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - GOING CONCERN (Continued)
+ The Company has reduced labor costs by consolidating management
responsibilities. General and administrative expenses declined by $181,494 in
the three month period ended June 30, 2001 from the previous three month
period ended March 31, 2001, and declined further by $16,879 in the three
month period ended September 30, 2001.
+ The Company is seeking additional debt and equity funding from
principal shareholders and other interested parties. In September 2001, a
principal shareholder verbally agreed to advance a short-term bridge note in
the amount of $100,000 to sustain management until additional capital funding
can be obtained.
+ The Company will provide for the conversion of selected loans and
other debt to equity.
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 three and nine month periods
ended September 30, 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 periods
presented below:
Three Months Nine Months
ended ended
September 30, September 30,
2000 2000
------------ -------------
Net sales $ 458,823 $ 752,653
Net loss (861,949) (3,201,388)
Net loss per common share-
basic and diluted $ (0.10) $ ( 0.37)
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 periods
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
PCS reseller contract and the potential business opportunities it provided.
Given the termination of this agreement by Sprint PCS effective August 18,
2001, management believes that the value assigned to goodwill is unlikely to
be realized. Hence, the value has been written down to zero.
10
ENCORE WIRELESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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 were less
than the market price. The agreement provided 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
September 30, 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 the financing agreement was terminated.
In May, 2001 a group of stockholders loaned the Company $20,000 in working
capital to satisfy certain professional services fees. The note includes an
interest rate of 12% per annum and is convertible into common stock of the
Company at market on the date of conversion. In September, 2001, the note and
accrued interest of $802 were converted, at market, into 100,000 shares of
common stock.
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
officers of the Company 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 AND DEBT TRANSACTIONS
On January 1, 2001, the Company's board of directors approved the conversion
of a $50,000 note and accrued interest payable in the amount of $8,195 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 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 recognized $25,138, the
difference between the market price and the conversion price, as additional
interest expense.
On January 1, 2001, 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, as
payment for the outstanding liability.
On March 30, 2001, certain stockholder 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), as payment for these services.
11
ENCORE WIRELESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE F EQUITY AND DEBT TRANSACTIONS(CONTINUED)
In May, 2001 a stockholder loaned the Company $100,000 in working capital to
continue operations. The note is due in one year at an interest rate of 12%
per annum.
In September, 2001, a $20,000 shareholder note payable, and accrued interest
of $802 thereon, were converted, at market, into 100,000 shares of common
stock.
In September 2001, a principal shareholder agreed to advance a short-term
bridge note, in the fourth quarter of 2001, in the amount of $100,000 to
sustain management until additional capital funding can be obtained. This note
will carry an interest rate of 12% per annum, and will be due and payable four
months after funding.
NOTE G - 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 September 30,
2001 2000
-------------- -------------
Common shares outstanding entire period 5,760,383 8,680,657
Net weighted average common shares issued
during period 5,556 4,632
-------------- -------------
Weighted average number of common
shares used in basic and diluted EPS 5,765,939 8,685,089
============== =============
Nine Months Ended September 30,
2001 2000
-------------- -------------
Common shares outstanding entire period 4,404,384 8,655,792
Weighted average common shares issued
during period 1,231,569 4,632
-------------- -------------
Weighted average number of common
shares used in basic and diluted EPS 5,635,953 8,660,424
============== =============
For the three and nine-month periods ended September 30, 2001 and 2000 all
outstanding options and convertible debt were excluded from the computation of
diluted EPS because to do so would have been anti-dilutive. For the three and
nine-month periods ended September 30, 2001 and 2000, there were 4,055,000 and
980,000 options outstanding, respectively. For the three and nine-month period
ended September 30, 2000, there was $283,329 in convertible debt outstanding.
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 and nine-month periods ended September 30,
2001 represented losses of $800,389 and $4.3 million, respectively.
Comparison with the same periods 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 and nine month periods ended September 30,
2001.
The nine month period loss included a $1,646,144 provision to record
impairment of goodwill reflecting the cancellation by Sprint PCS of its
agreement with Encore Wireless, Inc. and $706,667 to record expenses
associated with options issued below market to an officer of the Company.
Excluding these two expenses, the loss from operations was $1.9 million.
Revenues were $136,498 and $1,504,267 during the three and nine-month periods
ended September 30, 2001, reflecting a declining wireless subscriber base in
the latter part of the nine-months ended September 30, 2001. Management
believes that limited capital resources severely hampered the Company's
ability to market its services in the early part of the nine-month period
reported, contributing to lower net subscriber adds than initially expected by
Management. Sprint's cancellation notice contributed to the decline and
ultimate loss of the entire subscriber base in the latter half of the period,
as reflected in the declining revenues in the last three months.
Cost of sales during the three and nine-month periods ended September 30,
2001, including the cost for new handsets, were $233,561, or 171% of revenues,
and $1,419,259, or 94% of revenues, respectively, contributing to respective
gross profit (loss) margins of $(97,063), or (71%), and $85,008, or 6%.
Handset sales were subsidized to entice new subscribers. Sales of new handsets
were recorded at cost, net of subsidies that were charged to marketing
expense. Handset sales were non-existent in the latter part of the nine-month
period, as marketing was discontinued as a result of Sprint's decision to
discontinue service. Recurring revenues declined as expected and profit
margins declined, accordingly.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Selling and shipping expenses were $315,109 for the nine months ended
September 30, 2001, yet were less than $11,000 for the latter three months
during the period, reflecting the curtailment of new marketing efforts.
Selling and shipping expenses were primarily comprised of handset subsidies,
$153,360 occurring in the first three months of the year. These expenses were
essentially non-existent during the latter half of the nine-month period
reflecting the decline in marketing efforts. The balance in expenses included
channel marketing commissions, shipping and postage, and marketing materials.
General and administrative expenses were $1,662,218 for the nine-month period
ended September 30, 2001, $692,322 of which occurred in the latter three-
months of the nine-month period. Excluding a bad debt expense recorded during
the three months ended September 30, 2001 in the amount of $315,000, expenses
were $377,322 in the three month period ended September 30, 2001, compared to
$394,201 and $595,695 in the three month periods ended June 30, 2001 and March
31, 2001, respectively. The declining trend in quarterly operating expenses
reflected management's efforts to scale back staff and curtail discretionary
expenses in light of Sprint's decision to cancel service to the Company's
subscriber base. The Company terminated 6 of 9 employees in April 2001 and
reduced outside consulting expenses. General and administrative expenses
included salaries and wages, ordinary travel and entertainment, consulting and
legal, communications, office lease and supplies expenses.
Liquidity and Capital Resources
- -------------------------------
During the nine month period ended September 30, 2001, the Company
supplemented and financed operations through the issuance of common stock for
cash and services, new shareholder loans, and the conversion of options for
accounts 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 the termination by Sprint PCS of
its resale agreement with the Company effective August 18, 2001, the Company's
ability to obtain additional financing as a wireless services wholesaler is
not considered likely. Unless the Company can negotiate an economically
feasible alternative for a wireless network service provider and re-emerge
profitably as a software-services company, liquidity will continue to decline
and jeopardize the Company's future as a going concern.
At September 30, 2001, the Company had current assets of $231,337 and current
liabilities of $1,895,667, for a working capital deficit of $1,664,330. The
Company had cash of $134,984. There was a letter of credit commitment of
$100,000 listed as restricted cash at December 31, 2000. This letter of
credit was drawn down and forfeited to Sprint in July 2001 in conjunction with
the cancellation of their contract. Accounts receivable net of allowance for
doubtful accounts were $50,500 and prepaid expenses of $45,853. Net cash used
in operating activities was $584,004 during the nine-months ended September
30, 2001, and was funded primarily by cash from stock options exercised, new
short-term notes and the issuance of stock for services.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
At September 30,2001, the Company had net property and equipment of $30,373,
after deduction of $20,246 in accumulated depreciation. The Company's
property and equipment consists mainly of office and computer equipment. In
addition, as a result of the termination by Sprint PCS of 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 of $1,664,330, limited external
financial resources, and has recently had it's resale agreement with Sprint
PCS terminated, the report of the Company's auditor contained a modification
as to the ability of the Company to continue as a going concern.
Through September 30, 2001, the Company has incurred a cumulative net deficit
of $10,103,438 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 loss of the Sprint PCS agreement.
The Company has taken the following steps to revise its operating and
financial requirements in an effort to enable the Company to continue in
existence:
+ The Company is presently pursuing alternatives to the Sprint PCS
arrangement.
+ In September 2001 the Company incorporated MobilSense, Inc.
MobilSense, Inc. is a wholly owned subsidiary of Encore Wireless, Inc. It is
developing software solutions targeted at tracking and managing vital company
statistics on employee usage of mobile devices. The Company is pursuing new
venture capital to complete development of the software and launch its product
and services.
+ In September 2001 the Company signed a management agreement to
provide management services to an emerging Voice-Over-Internet-Provider long
distance service. The contract is expected to provide approximately $150,000
in revenues over a six-month period starting in November 2001.
+ The Company has reduced labor costs by consolidating management
responsibilities. General and administrative expenses declined by $181,494 in
the three month period ended June 30, 2001 from the previous three month
period ended March 31, 2001, and declined further by $16,879 in the three
month period ended September 30, 2001.
+ The Company is seeking additional debt and equity funding from
principal shareholders and other interested parties. In September 2001, a
principal shareholder verbally agreed to advance a short-term bridge note in
the amount of $100,000 to sustain management until additional capital funding
can be obtained. The Company will provide for the conversion of selected loans
and other debt to equity.
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 available to maintain ongoing
operations through the remainder of the year ending December 31, 2001.
16
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 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 a price per share that were less
than the market price. The agreement provided 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
September 30, 2001. Because of Sprint's intention to cancel its agreement with
the Company, the balance of the financing agreement was terminated.
In January 2001, the Company's board of directors approved the conversion of a
$50,000 note and accrued interest payable in the amount of $8,195 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, as payment for
the outstanding liability.
On March 30, 2001, certain stockholder relation's services were rendered at a
cost of $10,000. The Board approved the issuance of 13,333 shares of common
stock at a conversion price $0.75 per share (the market price for the shares),
as payment for these services.
In September 2001, a shareholder note in the amount of $20,000, plus accrued
interest of $802, were converted into 100,000 shares on new common stock, at
market.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
17
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: November 27, 2001 By /S/ Kevin Hamilton., President
[Principal Financial Officer and
Authorized Signatory of the Company