SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-24426
C-PHONE CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEW YORK 06-1170506
- ------------------------------- ------------------
(State or other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
6714 Netherlands Drive
Wilmington, North Carolina 28405
------------------------------------
(Address of principal executive offices)
(910) 395-6100
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
8,990,092 shares of common stock as of July 13, 2000.
Transitional Small Business Disclosure Form Yes [ ] No [X]
C-PHONE CORPORATION
FORM 10-QSB
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of May 31, 2000 (unaudited) 3
and February 29, 2000
Statements of Operations for the three months
ended May 31, 2000 and 1999 (unaudited) 4
Statements of Cash Flows for the three months
ended May 31, 2000 and 1999 (unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II. OTHER INFORMATION
10
Item 4. Changes in Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
C-PHONE CORPORATION
BALANCE SHEETS
May 31, 2000 February 29, 2000
------------ -----------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,828,396 $ 2,367,633
Restricted cash 150,000 150,000
Accounts receivable, net of allowance for doubtful
accounts of $80,000 at May 31, 2000 (unaudited)
and $83,086 at February 29, 2000 333,860 210,497
Inventories, net 1,005,807 1,051,804
Prepaid expenses and other current assets 80,510 89,689
------------ ------------
Total current assets 3,398,573 3,869,623
Property and equipment, net 84,729 105,116
------------ ------------
Total assets $ 3,483,302 $ 3,974,739
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 220,922 $ 255,551
Accrued expenses 242,101 240,741
Deferred revenue 1,150 --
------------ ------------
Total current liabilities 464,173 496,292
Shareholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized;
8,990,092 and 8,980,092 shares, respectively, issued
and outstanding at May 31, 2000 (unaudited) and
February 29, 2000 89,901 89,801
Paid-in capital 29,903,111 29,878,836
Accumulated deficit (26,973,883) (26,490,190)
------------ ------------
Total shareholders' equity 3,019,129 3,478,447
------------ ------------
Total liabilities and shareholders' equity $ 3,483,302 $ 3,974,739
============ ============
The accompanying notes are an integral part of the financial statements.
3
C-PHONE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended May 31,
2000 1999
----------- -----------
Net sales $ 379,834 $ 385,870
Other revenue 1,575 --
----------- -----------
Total revenue 381,409 385,870
Cost of goods sold 252,229 377,851
----------- -----------
Gross profit 129,180 8,019
----------- -----------
Operating expenses:
Selling, general and administrative 486,180 845,258
Research, development and engineering 156,036 191,778
----------- -----------
Total operating expenses 642,216 1,037,036
----------- -----------
Operating loss (513,036) (1,029,017)
Interest income 29,343 42,688
----------- -----------
Net loss $ (483,693) $ (986,329)
=========== ===========
Per-share data:
Basic and diluted net loss per
common share $ (0.05) $ (0.12)
=========== ===========
Weighted average number of common
shares outstanding 8,989,331 7,978,605
=========== ===========
The accompanying notes are an integral part of the financial statements.
4
C-PHONE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended May 31,
--------------------------
2000 1999
----------- -----------
Cash flows from operating activities:
Net Loss (483,693) $ (986,329)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 20,387 27,999
Bad debt (recoveries) expense, net (17,736) 1,843
Changes in operating assets and liabilities:
Accounts receivable (105,627) (201,321)
Inventories 45,997 53,411
Prepaid expenses and other current assets 9,179 14,620
Other assets -- (16,108)
Accounts payable (34,629) 181,063
Accrued expenses 1,360 (63,956)
Deferred revenue 1,150 --
----------- -----------
Net cash used in operating activities (563,612) (988,778)
Cash flows from investing activities:
Equipment purchases -- (13,365)
Net cash used in investing activities -- (13,365)
Cash flows from financing activities:
Proceeds from issuance of common stock 24,375 --
----------- -----------
Net cash provided by financing activities 24,375 --
----------- -----------
Net decrease in cash and cash equivalents (539,237) (1,002,143)
----------- -----------
Cash and cash equivalents, beginning of period 2,367,633 4,602,752
----------- -----------
Cash and cash equivalents, end of period $ 1,828,396 $ 3,600,609
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MAY 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of our company have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10- QSB and
Item 310(b) of Regulation SB. Accordingly, these financial statements do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of our management, these financial statements include all
adjustments necessary to present fairly, in all material respects, the
information set forth in these financial statements. Our operating results
for the three month period ended May 31, 2000 are not necessarily
indicative of the results that may be expected for our current fiscal year,
which will end on February 28, 2001. These financial statements should be
read in conjunction with our audited financial statements and the notes
thereto included in our Annual Report on Form 10-KSB for our previous
fiscal year, which ended on February 29, 2000.
2. RESTRICTED CASH
Our restricted cash consists of a certificate of deposit in a bank, which
is collateral for a letter of credit in the amount of $150,000. The letter
of credit expires September 2, 2000, and was issued to our contract
manufacturer to secure our obligations under our agreement with it.
3. STOCK OPTIONS
As of May 31, 2000, options for 536,850 shares of our common stock were
outstanding under our 1994 Amended and Restated Stock Option Plan. Of such
options, 93,900 are non-qualified options exercisable at prices ranging
from $0.8438 to $7.00 per share, depending upon the date of grant, and
442,950 are incentive stock options exercisable at prices ranging from
$0.8438 to $10.375 per share, depending upon the date of the grant. As of
May 31, 2000, 83,420 shares of our common stock had been issued upon
exercise of options granted under this plan. Due to vesting provisions,
only options to acquire 197,340 shares of our common stock were exercisable
as of May 31, 2000. The following table summarizes certain information with
respect to exercisable options as of this date:
Number of
Range of Exercisable
Exercise Price Options
- ------------------------------ -------------------
$2.69 - $3.00 57,051
$3.13 - $4.50 71,784
$5.95 - $6.91 28,901
$7.00 - $7.50 19,000
$8.38 - $10.38 20,604
-------------------
197,340
4. NET LOSS PER SHARE
We calculate our earnings or loss per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share, which requires
the presentation of "basic" earnings per share and "diluted" earnings per
share on the face of our statement of operations. Basic earnings per share
is computed by dividing the net income (loss) available to common
shareholders by the weighted average number of outstanding common shares.
The calculation of diluted earnings per share is similar to the calculation
of basic earnings per share, except that the denominator includes dilutive
common stock equivalents such as stock options and warrants. Common stock
options and warrants are not included for the three months ended May 31,
2000 and May 31, 1999, as they would be anti-dilutive.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
We are engaged primarily in the engineering, manufacturing and marketing of
video conferencing systems. Our video conferencing products are designed to
operate primarily over either a regular, analog telephone line or ISDN, a type
of digital telephone line, and are available in configurations for the U.S.
market as well as most international markets.
We distribute our products primarily to the business market and for special
applications such as health care and security services. We sell our products
primarily to resellers and system integrators.
In January 2000, we restructured our operations to reduce our ongoing
operating expenses, and announced that we were exploring certain strategic
initiatives and increasing our focus on developing major OEM, distribution and
licensing relationships.
We have incurred significant losses during each of our last three fiscal
years. Until market acceptance of our products is established, which we cannot
assure you will occur, we expect to continue to incur significant losses due to
our current and anticipated level of operating expenditures.
Recent Equity Offerings
Agreement with Sovereign. On September 18, 1998, we entered into a private
equity credit agreement with Sovereign Partners, L.P. Pursuant to the agreement,
Sovereign agreed to purchase our common stock during the 18-month period ending
on September 30, 2000, subject to extension by mutual agreement. From time to
time during the term of the agreement, but no more frequently than once every 30
days, we can require Sovereign to purchase between $500,000 and $1,000,000 of
our common stock until all these purchases total $5,000,000. The purchase price
for each share will equal 85% of the average closing bid price of our common
stock during the five trading days immediately preceding the day we notify
Sovereign of a purchase obligation. We have registered 1,500,000 shares of our
common stock to sell to Sovereign. As of May 31, 2000, we had sold 1,001,487
shares to Sovereign for gross proceeds of $1,500,000.
Sovereign' obligation to purchase shares of our common stock is subject to
certain conditions (any of which can be waived, but only by Sovereign),
including:
o The average closing bid price of our common stock being at least $1.00 per
share for the 20 trading days preceding the date of our notice of purchase
to Sovereign.
o Our common stock continuing to be traded on The Nasdaq Stock Market.
o The total number of shares of common stock that we may sell to Sovereign
under the agreement cannot exceed 1,543,765 shares, unless we first obtain
shareholder approval as required by the rules of The Nasdaq Stock Market.
o The number of shares of common stock we may sell to Sovereign on any draw
date, when aggregated with all other shares then owned by Sovereign, cannot
exceed 9.9% of our total common stock then outstanding.
o A current prospectus must then be available to permit Sovereign to publicly
resell the shares of common stock that it acquires from us. As we have
registered only 1,500,000 shares for resale by Sovereign, we cannot sell
them more than this amount without registering additional shares.
As we have sold Sovereign in excess of $1,000,000 of our common stock under
the agreement, we have the right to terminate the agreement without any further
obligation to Sovereign.
7
Sovereign has agreed not to engage in any short sales of our common stock,
except after it receives a purchase notice from us, and then only for the number
of shares of common stock covered by our purchase notice.
Under a related registration rights agreement, we have agreed to maintain
effectiveness of a registration statement for the resale by Sovereign of the
shares it purchases from us. If we fail to maintain effectiveness of the
registration statement after we have sold our shares to Sovereign and before
Sovereign resells such shares, Sovereign may require us to pay a penalty equal
to 1% of the purchase price of the shares of common stock then held by Sovereign
for each 30-day period that the registration statement is not effective.
In connection with the agreement, we issued to Cardinal Capital Management,
Inc., as finder, a two-year warrant expiring September 18, 2000 to purchase
100,000 shares of our common stock at an exercise price of $8.00 per share. If
the closing sales price of our common stock exceeds $10.00 for five consecutive
trading days, we may give Cardinal notice of our intention to redeem the
warrant. If Cardinal does not exercise the warrant prior to the redemption date
specified in our redemption notice, we may redeem the warrant for $1,000. The
shares of our common stock issuable to Cardinal upon exercise of this warrant
have not been registered for sale under the Securities Act, although we may
register these shares in the future. We also paid Cardinal a cash fee of $30,000
when we entered into the agreement and have agreed to pay Cardinal an additional
cash fee equal to 6% of the dollar amount of any sales of common stock to
Sovereign under the agreement, with our initial $30,000 payment to be credited
against this fee. To date, we have paid Cardinal a total of $90,000 in cash
fees.
RESULTS OF OPERATIONS
FISCAL QUARTER ENDED MAY 31, 2000 (FIRST QUARTER OF FISCAL 2001) AS COMPARED TO
FISCAL QUARTER ENDED MAY 31, 1999 (FIRST QUARTER OF FISCAL 2000)
Revenues. Net sales decreased 2% to $379,834 in the first quarter of fiscal
2001 from $385,870 in the first quarter of fiscal 2000. Other revenue during the
first quarter of fiscal 2001 was $1,575, which consisted primarily of training
fees. There was no such other revenue during the first quarter of fiscal 2000.
As a result of the foregoing, our total revenues decreased 1% to $381,409 in the
first quarter of fiscal 2001 from $385,870 in the first quarter of fiscal 2000.
During the first quarter of fiscal 2001, 54% of total revenues were derived from
a single customer, while no single customer was responsible for more than 24% of
total revenues during the first quarter of fiscal 2000.
Cost of revenue. Cost of goods sold decreased 33% to $252,229, or to 66% of
net sales, in the first quarter of fiscal 2001 from $377,851, or 98% of net
sales, in the first quarter of fiscal 2000. The decrease in cost of goods sold
was the result of higher margins on our newer products and our decision to more
heavily rely on contract manufacturers to manufacture and assemble most of our
products. There was no cost directly associated with other revenue in the first
quarter of fiscal 2001.
Gross profit. Gross profit increased to $129,180, or 34% of revenues,
in the first quarter of fiscal 2001 from $8,019, or 2% of revenues, in the first
quarter of fiscal 2000. The increase in gross profit was primarily the result of
the lower cost of good sold, as discussed above.
Selling, general and administrative. Selling, general and
administrative expenses decreased 42% to $486,180, or 127% of revenues, in the
first quarter of fiscal 2001 from $845,258, or 219% of revenues, in the first
quarter of fiscal 2000. In January 2000, we made the decision to focus more on
developing OEM and licensing arrangements and less on building our own
distribution channels. Our change in focus allowed us to significantly reduce
headcount and expenses. As the result of our restructuring, selling, marketing
and customer support expenses decreased 54% to about $187,000 in the first
quarter of fiscal 2001 from about $408,000 in the first quarter of fiscal 2000
and administration and general expenses decreased 27% to about $317,000 in the
first quarter of fiscal 2001 from about $435,000 in the first quarter of fiscal
2000. We had net bad debt recoveries of about $18,000 in the first quarter of
fiscal 2001 as compared to a net bad debt expense of about $2,000 in the first
quarter of fiscal 2000.
8
Research, development and engineering. Research, development and
engineering expenses decreased 19% to $156,036, or 41% of revenues, in the first
quarter of fiscal 2001 from $191,778, or 50% of revenues, in the first quarter
of fiscal 2000. The decrease was primarily the result of a reduction in
personnel and related development expenses due to the previous completion of the
development of our current products. All of these costs were charged to
operations as incurred and were funded by our cash reserves. While we expect to
continue to invest significant resources during the foreseeable future in
engineering and the development of enhancements to our existing products, we
anticipate that these expenses for fiscal 2001 will be less than the comparable
fiscal 2000 levels.
Operating loss. As a result of the factors discussed above, our
operating loss decreased 50% to $513,036 in the first quarter of fiscal 2001
from $1,029,017 in the first quarter of fiscal 2000.
Interest. Interest income decreased 31% to $29,343 in the first quarter
of fiscal 2001 from $42,688 in the first quarter of fiscal 2000, as a result of
a decrease in available cash for investments due to the continued use of our
cash to fund operations.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from the proceeds of sale of
our securities. See "Recent Equity Offerings" for information concerning recent
sales to Sovereign.
At May 31, 2000, we had working capital of $2,934,400, as compared to
$3,373,331, at February 29, 2000, a decrease of $438,931. Our cash and cash
equivalents were $1,828,396 at May 31, 2000, as compared to $2,367,633 at
February 29, 2000. Our invested funds consisted primarily of overnight
repurchase agreements for discount notes issued by the United States Treasury or
United States government agencies. Our restricted cash consisted of a $150,000
certificate of deposit pledged by us to a bank to secure a letter of credit
which expires in September 2000. During the first quarter of fiscal 2001, our
operating activities used $563,612 of net cash, primarily to fund operating
activities and our financing activities provided $24,375 of net cash from the
sale of 10,000 shares of our common stock (See Part II, Item 4 below).
We lease our facility and own our manufacturing equipment free from any
liens or other encumbrances. As of May 31, 2000, we had no material commitments
for capital expenditures.
Due to the restructuring of our operations to reduce ongoing operating
expenses and increasing our focus on attempting to develop major OEM,
distribution and licensing relationships, we expect that our current
expenditures for selling and marketing expenses will decrease from fiscal 2000
levels. While we expect to continue to expend resources for product development
and engineering, we currently anticipate that these expenditures will decrease
from the levels incurred in fiscal 2000. We also are exploring certain strategic
initiatives.
We believe that our current working capital, together with available
proceeds from our agreement with Sovereign, will be sufficient to meet our
projected operating needs and capital expenditures, at least through the end of
fiscal 2001. However, if our products gain significant market acceptance, we may
need to obtain additional working capital for the carrying of accounts
receivable and inventory. See "Factors That Could Effect Us - We Will Require
Significant Additional Capital To Become Profitable, Which Capital May Not Be
Readily Available" in Item 1. - "Description of Business." of our Annual Report
on Form 10-KSB for our fiscal year ended February 29, 2000. This would require
us to obtain even more working capital. We anticipate that these additional
funds should be available through one or more possible sources, including:
o the sale of our common stock pursuant to our agreement with Sovereign;
o a private placement of our common stock, preferred stock or debt
securities;
9
o the exercise of our outstanding warrants, if the market price of our
common stock were to exceed the exercise price of these warrants; and
o a public offering of our common stock.
At February 29, 2000, we estimate that we had available net operating
loss carryforwards of approximately $23,000,000 for Federal and state purposes,
which may be used to reduce future taxable income, if any. The Federal
carryforwards begin to expire in 2009 and the state carryforwards begin to
expire in 2001.
We do not believe that inflation has had a significant impact on our
sales or operating results, during the past three years.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this Quarterly Report on Form 10-QSB that
are "forward-looking statements" within the meaning of the Securities Act and
the Securities Exchange Act. Sometimes these statements contain words like
"may," "believe," "expect," "continue," "intend," "anticipate" or other similar
words. These statements could involve known and unknown risks, uncertainties and
other factors that might significantly alter the actual results suggested by the
statements. In other words, our performance might be quite different from what
the forward-looking statements imply. The following factors, as well as those
discussed above in this section, could cause our performance to differ from the
expectations implied by our forward-looking statements:
o inability to obtain capital for continued operations and the
development and commercialization of our products.
o inability to generate significant market acceptance of our products.
o failure to obtain new customers or retain existing large customers.
o inability to manage our growth.
o loss of our key employees.
o changes in general economic and business conditions.
o changes in industry trends.
We have no obligation to release publicly the result of any revisions
to any of our "forward-looking statements" to reflect events or circumstances
that occur after the date of this Quarterly Report or to reflect the occurrence
of other unanticipated events.
PART II. OTHER INFORMATION
Item 4. CHANGES IN SECURITIES
On March 3, 2000, we sold 10,000 shares of our common stock to Mr. Paul
Albritton, our President and Chief Executive Officer, at a price of $2.4375 per
share (the closing sales price on that day) in a private sale exempt from the
registration requirement of the Securities Act pursuant to Section 4(2) of the
Act.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
10
(b) REPORTS ON FORM 8-K
On March 10, 2000, we filed a Current Report on Form
8-K responding to Item 4 - Changes in Registrant's
Certifying Accountants" and Item 6 - "Other Events."
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
C-PHONE CORPORATION
Date: July 14, 2000 By: /s/ PAUL H. ALBRITTON
-----------------------------------------------
Paul H. Albritton
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 2000 By: /s/ KURT SVENDSON
-----------------------------------------------
Kurt Svendson
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
11