U.S. 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 SEPTEMBER 30, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
______________
COMMISSION FILE NUMBER: 33-68570
eConnect
(Exact name of registrant as specified in its charter)
Nevada 43-1239043
(State or jurisdiction of incorporation I.R.S. Employer
or organization) Identification No.)
1010 N. Central Ave.
Glendale, California 91202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (310)435-6583
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 Par Value
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), and (2) been subject to such filing requirements
for the past 90 days. Yes X No.
As of January 13, 2003, the Registrant had 139,437,059 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS 3
BALANCE SHEET AS OF SEPTEMBER 30, 2002 3
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2002 4
STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2002 5
STATEMENTS OF CASH FLOW FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2002 6
NOTES TO FINANCIAL STATEMENTS 8
ITEM 2. PLAN OF OPERATION 14
PART II - OTHER INFORMATION 15
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 17
2
eCONNECT
BALANCE SHEET
(UNAUDITED)
September 30,
2002
--------------
ASSETS
Current assets
Inventory $ 165,680
--------------
Total current assets 165,680
Fixed assets, net 131,275
Other assets
Other assets 1,554
--------------
Total other assets 1,554
--------------
Total assets $ 298,509
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank overdraft $ 33,522
Accounts payable 2,419,197
Accrued liabilities 3,288,434
Due to related parties 2,549,447
Legal settlement liability 2,608,200
Advance on equity funding line --
Notes payable 1,641,868
--------------
Total current liabilities 12,540,668
--------------
Total liabilities 12,540,668
Commitments and contingencies --
Stockholders' deficit
Common stock; $.001 par value; 910,000,000
shares authorized, 99,687,059 shares issued
and 98,285,693 shares outstanding 98,286
Additional paid-in capital 205,426,429
Other receivable (194,600)
Accumulated deficit (217,572,274)
--------------
Total stockholders' deficit (12,242,159)
--------------
Total liabilities and stockholders' deficit $ 298,509
==============
See Accompanying Notes to Financial Statements
3
eCONNECT
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenue $ 615 $ 689 $ 9,626 $ 2,293
Cost of revenue 1,710 -- 6,014 --
------------- ------------- ------------- -------------
Gross income (loss) (1,095) 689 3,612 2,293
Operating expenses
Stock based compensation and expenses 643,173 2,004,402 46,202,181 7,355,302
Bad debts 20,483 44,101 20,483 44,101
Consulting 151,059 368,638 1,097,633 713,082
Public relations & advertising 25,612 15,201 398,202 98,361
Professional fees 27,803 3,112 108,887 344,769
Research and development 500 15 26,890 54,315
Wages 68,209 388,340 232,595 1,387,704
Amortization and depreciation 55,518 262,784 101,005 934,252
General and administrative 195,832 159,528 602,481 636,937
------------- ------------- ------------- -------------
Total operating expenses 1,188,189 3,246,121 48,790,357 11,568,823
------------- ------------- ------------- -------------
Net loss from operations (1,189,284) (3,245,432) (48,786,745) (11,566,530)
Other income (expense)
Interest income -- -- -- 18,659
Interest expense (30,174) (154,070) (107,149) (344,993)
Loss on investments -- -- -- (233,770)
Cancellation fee -- -- -- (526,212)
Legal settlement -- (145,026) (4,014,909) (1,884,732)
------------- ------------- ------------- -------------
Total other income (expense) (30,174) (299,096) (4,122,058) (2,971,048)
------------- ------------- ------------- -------------
Net loss before provision for income taxes (1,219,458) (3,544,528) (52,908,803) (14,537,578)
Provision for income taxes -- -- (800) --
------------- ------------- ------------- -------------
Net loss from continuing operations (1,219,458) (3,544,528) (52,909,603) (14,537,578)
Discontinued operations
Loss from discontinued gaming operations
from January 1, 2001 to June 30, 2001
(net of income tax benefit which is fully
allowed for) -- -- -- (215,086)
Estimated loss on disposal of gaming operations
including losses during the phase-out period
(net of income tax benefit which is fully allowed for) -- -- -- (96,661)
------------- ------------- ------------- -------------
-- -- -- (311,747.00)
Net loss $ (1,219,458) $ (3,544,528) $(52,909,603) $(14,849,325)
============= ============= ============= =============
Earning per share
Loss from continuing operations $ (0.03) $ (1.03) $ (2.84) $ (5.13)
Loss from discontinued operations -- -- -- (0.08)
Loss from abandonment of gaming operations -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (0.03) $ (1.03) $ (2.84) $ (5.21)
============= ============= ============= =============
Basic and diluted weighted average
common shares outstanding 46,120,364 3,430,585 18,647,008 2,836,334
============= ============= ============= =============
See Accompanying Notes to Financial Statements
4
eCONNECT
STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
Common Stock
--------------------- Additional Total
Number of Paid-in Other Accumulated Stockholders'
Shares Amount Capital Receivable Deficit Deficit
----------- --------- ------------- ----------- -------------- --------------
Balance, December 31, 2001 4,719,316 $ 4,719 $ 154,434,273 $ -- $(164,662,671) $ (10,223,679)
Common shares issued for cash to Alpha Venture
Capital, Inc., net of offering costs of $266,674 266,688 267 462,533 -- -- 462,800
Common shares issued in satisfaction of advance
on equity funding line 16,667 17 49,983 -- -- 50,000
Common shares issued for cash, net of
offering costs of $301,678 1,217,106 1,217 865,238 -- -- 866,455
Common shares issued for cash related to exercise of
options and warrants, $0.01 278,000 278 282,972 -- -- 283,250
Common shares issued in satisfaction of due to
related party 30,173,846 30,174 480,606 -- -- 510,780
Common shares issued for stock based compensation 32,872,311 32,872 2,192,062 -- -- 2,224,934
Warrants granted for services -- -- 43,854,730 -- -- 43,854,730
Common shares issued for accounts payable 5,542,500 5,543 145,293 -- -- 150,836
Common shares issued for settlement liability 5,005,000 5,005 2,049,995 -- -- 2,055,000
Common shares issued for other receivable 18,000,000 18,000 176,600 (194,600) -- --
Common shares issued in satisfaction of notes
payable, including interest of $122,517 and
accrued liabilities of $36,900 194,259 194 432,144 -- -- 432,338
Net loss -- -- -- -- (52,909,603) (52,909,603)
----------- --------- ------------- ----------- -------------- --------------
Balance, September 30, 2002 98,285,693 $ 98,286 $ 205,426,429 $ (194,600) $(217,572,274) $ (12,242,159)
=========== ========= ============= =========== ============== ==============
See Accompanying Notes to Financial Statements
5
eCONNECT
STATEMENTS OF CASH FLOW
(UNAUDITED)
For the nine months ended
September 30,
--------------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss $(52,909,603) $(14,849,325)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortization and depreciation 101,005 934,252
Stock based compensation 46,202,181 7,355,302
Cancellation fee -- 526,212
Loss on investments -- 233,770
Estimated loss on disposal of gaming operations -- 96,661
Changes in operating assets and liabilities:
Change in accounts receivable -- 14,258
Change in inventory 14,339 --
Change in deposit 24,819 (210,999)
Change in receivable from equity funding line -- 243,900
Change in other assets 368,955 81,929
Change in bank overdraft 3,299 --
Change in accounts payable 442,521 533,235
Change in accrued liabilities 253,117 599,323
Change in due to consultants -- 24,000
Change in due to related parties 416,678 1,042,172
Change in deferred revenue (674) --
Change in legal settlement liability 3,258,500 1,640,000
------------- -------------
Net cash used by operating activities (1,824,863) (1,735,310)
Cash flows from investing activities:
Purchase of fixed assets (4,642) (41,798)
------------- -------------
Net cash used by investing activities (4,642) (41,798)
Cash flows from financing activities:
Proceeds from issuance of notes payable 399,000 337,500
Principal payments on notes payable (182,000) (906,000)
Proceeds from issuance of common stock 1,612,505 2,332,601
------------- -------------
Net cash provided by financing activities 1,829,505 1,764,101
------------- -------------
Net change in cash -- (13,007)
Cash, beginning of period -- 13,007
------------- -------------
Cash, end of period $ -- $ --
============= =============
Supplemental disclosure of cash flow:
Cash paid for interest $ 46,105 $ 107,000
============= =============
Cash paid for taxes $ -- $ --
============= =============
See Accompanying Notes to Financial Statements
6
eCONNECT
STATEMENTS OF CASH FLOW (CONTINUED)
(UNAUDITED)
For the nine months ended
September 30,
----------------------------
2002 2001
----------- -----------
Schedule of non-cash investing and financing activities:
62,500 common shares issued in satisfaction
of accounts payable $ 117,956 $ --
============ ===========
20,000 common shares issued in satisfaction
of due to related parties $ 30,780 $ --
============ ===========
5,000 common shares issued in satisfaction
of settlement liabilities $ 5,000 $ --
============ ===========
68,000 common shares issued in satisfaction of notes payable,
not including interest of $28,997 $ 97,921 $ --
============ ===========
153,846 common shares issued in satisfaction
of due to related parties $ 300,000 $ --
============ ===========
16,667 common shares issued in satisfaction
of advance on equity funding line $ 50,000 $ --
============ ===========
126,259 common shares issued in satisfaction of notes payable,
not including interest of $93,520 and accrued liabilities of $36,900 $ 175,000 $ --
============ ===========
5,480,000 common shares issued in satisfaction of accounts payable $ 32,880 $ --
============ ===========
5,000,000 common shares issued in satisfaction
of settlement liabilities $ 2,050,000 $ --
============ ===========
30,000,000 common shares issued in satisfaction of
of due to related parties $ 180,000 $ --
============ ===========
18,000,000 common shares issued for other receivable $ 194,600 $ --
============ ===========
25,015 common shares issued for receivable
from equity funding line $ -- $ 243,900
============ ===========
311,000 common shares issued for prepaid
consulting services $ -- $5,266,550
============ ===========
80,000 common shares issued in satisfaction
of due to related parties $ -- $3,696,243
============ ===========
24,000 common shares issued in satisfaction
of due to consultants $ -- $2,020,447
============ ===========
20,000 common shares issued in satisfaction of
due to related party related to exercise of warrants
with a strike price of $0.04 $ -- $ 85,000
============ ===========
167,199 common shares issued in satisfaction
of advance on equity funding line $ -- $1,497,477
============ ===========
376,732 common shares issued in satisfaction of
due to related party, not including interest of $681,951 $ -- $2,161,366
============ ===========
Warrants granted in satisfaction of promissory
note payable, not including interest of $265,447 $ -- $ 60,000
============ ===========
33,333 common shares issued in satisfaction of
promissory note payable, not including interest
of $51,950 $ -- $ 100,000
============ ===========
11,600 common shares issued in satisfaction of
accrued interest $ -- $ 78,708
============ ===========
20,000 common shares issued in satisfaction of
settlement liability $ -- $ 257,072
============ ===========
See Accompanying Notes to Financial Statements
7
eCONNECT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with Securities and Exchange Commission requirements for interim financial
statements. Therefore, they do not include all of the information and
footnotes required by accounting principles generally accepted in the
United States for complete financial statements. The financial statements
should be read in conjunction with the Forms 10-KSB for the year ended
December 31, 2001 of eConnect (the "Company").
The interim financial information is unaudited. In the opinion of
management, all adjustments necessary to present fairly the financial
position as of September 30, 2002 and the results of operations and cash
flows presented herein have been included in the financial statements.
Interim results are not necessarily indicative of results of operations
for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
1-FOR-100 REVERSE STOCK SPLIT - During July 2002, the Company's Board of
Directors adopted a resolution whereby it approved a 1-for-100 reverse
stock split of the issued and outstanding shares of common stock.
Accordingly, the accompanying financial statements have been retroactively
restated to reflect the 1-for-100 reverse stock split as if such forward
stock split occurred as of the Company's date of inception.
2. LEGAL SETTLEMENT LIABILITIES
a. 3PEA TECHNOLOGIES, INC. - During June 2002, the Company reached a
settlement with 3Pea Technologies, Inc., a company substantially
owned by the son-in-law of Thomas S. Hughes, former Chief Executive
Officer and Director of the Company, whereby the Company agreed to
issue 5,000,000 shares of the Company's common stock valued at
$2,050,000 and two installments of $190,000 to be made during July
2002. During August, the Company issued the 5,000,000 shares in
satisfaction of the $2,050,000 settlement liability. However, the
son-in-law of Thomas S. Hughes is disputing the shares claiming they
satisfy other consulting services provided by 3Pea Technologies,
Inc. The Company does not acknowledge any such consulting contract
and plans to review legal options regarding this matter. As of
September 30, 2002, the Company's legal settlement liability balance
to 3Pea Technologies, Inc. totaling $380,000 has been included as
part of the legal settlement liability of $2,608,200 at September
30, 2002.
b. FORMER PRESIDENT AND CHIEF OPERATING OFFICER FOR THE COMPANY -
During March 2002, the Company made an installment payment of
$30,000 to the former president and chief operating officer of the
Company. As of September 30, 2002, the Company had a remaining
unpaid balance of $820,000 which has been included as part of legal
settlement liabilities totaling $2,608,200.
8
eCONNECT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
2. LEGAL SETTLEMENT LIABILITIES (continued)
c. GOLDSTAKE ENTERPRISES, INC. - During the nine months ended September
30, 2002, the Company made installment payments totaling $126,500 to
Goldstake Enterprises, Inc. As of September 30, 2002, the Company
had a remaining unpaid balance of $353,200 which has been included
as part of the total legal settlement liability of $2,608,200 at
September 30, 2002.
During June 2002, the Company reached an additional settlement with
Goldstake Enterprises, Inc. and Las Vegas International Basketball
League Franchise, LLC, whereby the Company agreed to pay $1,000,000
with interest commencing on August 1, 2003 at an annual interest
rate of 8%. Monthly payments of $25,000 were scheduled to commence
on August 1, 2002. As of September 30, 2002, the additional
settlement of $1,000,000 has been included as part of legal
settlement liabilities totaling $2,608,200. Pursuant to the
settlement agreement, the Company issued 300,000 shares of the
Company's common stock and will issue up to 30,000,000 additional
shares of the Company's common stock to satisfy all remaining debts
totaling $1,353,200 as of September 30, 2002, between the Company
and Goldstake Enterprises, Inc.
d. OTHER SETTLEMENTS - During the nine months ended September 30, 2002,
the Company made installments totaling $20,000 related to other
settlements. As of September 30, 2002, the Company had a remaining
unpaid balance of $55,000 which has been included as part of the
total legal settlement liability of $2,608,200 at September 30,
2002.
3. STOCK BASED COMPENSATION
For the three months ended September 30, 2002 and 2001, the Company
incurred expenses resulting from stock warrants and common stock issued
totaling $643,173 and $2,004,402, respectively. For the nine months ended
September 30, 2002 and 2001, the Company incurred expenses resulting from
stock warrants and common stock issued totaling $46,202,181 and
$7,355,302, respectively. The following table summarizes the Company's
stock based compensation activities based on the accounts shown on the
statements of operations:
Three months ended September 30, Nine months ended September 30,
---------------------------------------------- -----------------------------------------------
2002 2001 2002 2001
---------------------- ---------------------- ----------------------- ----------------------
Consulting $ 643,173 $ 1,564,517 $ 2,147,015 $ 6,161,915
Penalty fee -- -- 292,500 --
Legal settlement -- -- 337,735 --
Finance fee -- -- 43,203,730 --
Interest -- 439,885 221,201 1,193,387
---------------------- ---------------------- ----------------------- ----------------------
Total stock based
compensation $ 643,173 $ 2,004,402 $ 46,202,181 $ 7,355,302
====================== ====================== ======================= ======================
9
eCONNECT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES - As of September 30, 2002, due to related parties
totaling $2,549,447 are comprised of the following:
Common stock due to ET&T related 65,220 shares provided by
ET&T for use by the Company $ 163,846
Advances from ET&T, unsecured, bearing no interest 119,170
Advances from Alliance Equities (company controlled by Richard
Epstein, a significant stockholder of the Company), unsecured,
bearing
no interest 117,508
Deposit related to the purchase of eCashPad terminals 250,000
Value of remaining 18,000 common stocks and warrants for 25,000
shares of the Company's common stock to be issued to Paul Egan (a
stockholder of the Company) related to the fiscal year
1999 acquisition of Top Sports, S.A. 261,228
Advances from an affiliate, unsecured, due on demand and bearing
no interest 709,785
Advances from Paul Egan, unsecured, due on demand, and bearing
no interest 927,910
---------------
Total due to related parties $ 2,549,447
===============
SATISFACTION OF DUE TO RELATED PARTIES - During February 2002, the Company
issued 153,846 shares of the Company's common stock to satisfy balances
due Richard Epstein and Alliance Equities (hereafter referred to as
"Alliance"), totaling $300,000. During July 2002, the Company issued
30,000,000 shares of the Company's common stock to satisfy balances due
Alliance totaling $180,000. For the nine months ended September 30, 2002,
the Company borrowed an additional $297,508 from Alliance. As of September
30, 2002, the balance due Alliance totaled $117,508. For the nine months
ended September 30, 2002, the Company borrowed and additional $297,508
from Alliance.
RICHARD EPSTEIN STOCK WARRANTS - During February 2002, Richard Epstein
exercised stock warrants to purchase 680,000 shares of the Company's
common stock for $68,000.
During May 2002, Richard Epstein was granted 60,599,106 (post reverse
stock split) warrants to purchase shares of the Company's common stock for
50% of the closing bid price and expire one year from grant date for a
finance fee. The Company estimates the fair value of Mr. Epstein's stock
warrants granted by using the Black-Scholes option pricing-model with the
following weighted average assumptions; no dividend yield; expected
volatility of 318%; risk free interest rates of 1.79%; and expected lives
of 6 months. Accordingly, the Company recorded interest expenses under
SFAS No. 123 relating to non-statutory stock warrants that became
exercisable upon grant for $43,203,730 as of September 30, 2002.
ET&T SUPER-VOTING RIGHTS - In February 2002, the board of directors of
eConnect passed a resolution granting ET&T super-voting rights in keeping
with the original formation of eConnect in February 1997. This allows
ET&T, which is controlled by Thomas S. Hughes, former president, former
director, and stockholder of the Company, to have a controlling vote on
issues before the Board of Directors. During December 2002, the board of
directors passed a resolution to rescind all super-voting rights granted
to ET&T (see Note 9).
10
eCONNECT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. RELATED PARTY TRANSACTIONS (continued)
PENALTY FEE - During February 2002, the Company issued 150,000 shares of
the Company's common stock to Alliance in satisfaction of a penalty
expense totaling $292,500. The Company agreed to pay Alliance a penalty of
150,000 shares due to delays in issuances of its common stock to Alliance.
5. STOCK OPTIONS
STOCK OPTIONS GRANTED TO CONSULTANTS - During January 2002, the Company
granted stock options to purchase 210,000 shares of the Company's common
stock with an exercise price equal to 50% of the closing bid price of its
common stock upon the date of exercise. These stock options were granted
in connection with a consulting agreement. The Company has estimated the
fair value of the warrant using the Black-Scholes pricing-model with the
following assumptions: no dividend yield; expected volatility of 297%;
risk free interest rates of 1.689%; and an expected life of 2 months.
Compensation under the grant totaled $651,000 for the nine months ended
September 30, 2002. During February and March 2002, the 210,000 options
were exercised for $215,250.
6. FORMATION OF SUBSIDIARY
eGS, INC. - During March 2002, the Company incorporated eGS, Inc. in the
State of Nevada to serve as the Company's internet agent for future state
regulated and licensed games of chance and skill. As of September 30,
2002, the Company owns approximately 70% of eGS, Inc. The remaining
balance of 30% had been distributed pursuant to a stock dividend to all of
its stockholders of record as of April 3, 2002. The stockholders received
one common share of eGS, Inc. for every 100 pre-reverse split share held
of the Company's common stock as of April 3, 2002. The Company intends to
maintain a majority ownership of eGS, Inc. eGS, Inc. is in the start-up
phase, therefore no revenue has been recorded and all start-up costs have
been expensed. As of September 30, 2002, eGS, Inc. has no assets or
liabilities.
7. Going Concern
The Company incurred a net loss of approximately $52,909,603 for the nine
months ended September 30, 2002. The Company's current liabilities exceed
its current assets by approximately $12,374,988 as of September 30, 2002.
These factors create substantial doubt about the Company's ability to
continue as a going concern. The Company's management has developed a plan
to complete the development of technology products and create their
respective markets to generate future revenues. The Company will also seek
additional sources of capital through the issuance of debt and equity
financing, but there can be no assurance that the Company will be
successful in accomplishing its objectives.
The ability of the Company to continue as a going concern is dependent on
additional sources of capital and the success of the Company's plan. The
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
8. OTHER MATTERS
PACIFIC NAKON - During July 2002, the Company received a letter of intent
from Pacific Nakon International, Inc. ("PNI") whereby PNI, in conjunction
with Valet, Inc. and Electronic Valet Systems, Inc., proposed the
following:
(i) PNI would provide ownership of all equity interests in Valet, Inc.
and Electronic Valet Systems, Inc. for the purpose of implementing
this business transaction in exchange for the Company providing and
installing 10,000 eCashPads
(ii) The parties will create a new corporation to serve as the repository
of the equity interest noted in the letter of intent with the
ownership being negotiated in not less than 20 banking days
11
eCONNECT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
8. OTHER MATTERS (continued)
(iii) PNI will issue to the Company $20,000,000 in asset backed corporate
debentures for the purpose of enhancing the balance sheet of
eConnect. Such bonds will have a term of seven years and shall earn
interest at 8.5% per year to be payable in arrears
(iv) All parties intend to pay a loan with an undisclosed balance and
provide two bonds for totaling $7,000,000 to acquire all assets
owned by F.F.S., LLC and their membership units (v) The Company will
issue 22,000,000 share of common stock to the participating parties
During July 2002 and September 2002, the Company issued 2,000,000 and
20,000,000 shares of the Company's common stock, respectively, to PNI in
exchange for the $20,000,000 debentures. During October 2002, the Company
rescinded its agreement with Pacific Nakon and returned $16,000,000 of the
debentures to PNI. The Company has requested PNI to return the 22,000,000
shares. Due to the Company returning only $16,000,000 in debentures to
PNI, the Company has recorded an other receivable totaling $194,600 for
18,000,000 shares as of September 30, 2002. The remaining $4,000,000
debentures were distributed for consulting services. Therefore, the
Company recognized consulting fees totaling $24,000 for the remaining
4,000,000 shares of the Company's common stock.
ELECTRONIC VALET SYSTEMS, INC. - During July 2002, the Company signed a
letter of intent to establish a strategic agreement to develop a money
transfer system between the United States and Mexico with Electronic Valet
Systems, Inc. Upon signing the letter of intent, the Company agreed to pay
$150,000 and issue 10,000,000 shares of the Company's common stock to
Abelardo Castillo, Sr. of Electronic Valet Systems, Inc. On August 15,
2002 the Company is required pay an additional $3,000,000 to Electronic
Valet Systems, Inc. with a final payment of $2,500,000 due 60 days from
date of the strategic agreement. In the event of any breach of the
agreement by the Company, the entire agreement will be cancelled without
notice and all consideration will not be reimbursed to the Company. As of
September 30, 2002, management of the Company has rescinded the agreement
and no additional commitments by either party is required.
TRANSACTION SYSTEMS, LLC - During July 2002, the Company signed a letter
of intent with Transaction Systems, LLC, whereby the Company desires to
acquire all membership units and an exclusive license for Merlin 2, ePos2,
and Gaming Software in consideration of registered shares valued at
$1,000,000 determined at the date of closing. Merlin2 is a web based
front-end system for the loading and sale of prepaid cards. ePos2 is a
point-of-sale software that allows prepaid cards to be sold and loaded in
real time via Merlin2 interface. Gaming Software supports Internet gaming
from the front-end to the back-end which allows casinos to create private
label accounts and can interface with Merlin2 and allow customers to move
their winnings to a debit card. As of September 30, 2002, management of
the Company has rescinded the agreement and no additional commitments by
either party is required.
eCONNECT FINANCIAL - During July 2002, the Company entered into an
agreement with Alan J. Conner & Associates to jointly form eConnect
Financial to operate an Internet Bank under a joint venture with
InterState Net Bank. eConnect Financial will issue sub prime credit cards,
credit insurance and open bank accounts through eCashPad users with Allan
J. Conner acting as the president. The Company shall fund $1,500,000 by
August 2, 2002 with $500,000 to be allocated towards the purchase of
capital stock in Interstate Net Bank and $1,000,000 allocated towards
operations of the venture. Additionally, the Company will grant 10,000,000
warrants to purchase shares of the Company's common stock for 25% below
the close bid price on the 15th day of each month for 12 months from the
effective date of the agreement. The venture will be divided into two
divisions: Division I consisting of the sub prime credit card division
with 70% owned by Allan J. Conner & Associates, 20% owned by the Company
and 10% owned by PNI; Division II consisting of the eCashPad universal
usage with 70% owned by the Company, 20% owned by Allan J. Conner &
Associates and 10% owned by PNI. The Company did not meet the funding
requirements pursuant to the agreement, therefore the agreement has been
cancelled and no additional commitments by Alan J. Conner & Associates are
required.
12
eCONNECT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
8. OTHER MATTERS (continued)
HALTED TRADING OF STOCK - On July 25, 2002, the SEC suspended trading of
the Company's common stock in connection with an investigation of the
Company's accuracy of several claims, including the claimed value of the
bonds PNI invested into the Company, the stated projected opening date of
eConnect Financial, and the value of a purchase order from another
company. The Company's common stock resumed trading on August 8, 2002;
however, from that date to the date of this report, the Company's common
stock has been trading on the National Quotation Bureau's Pink Sheets,
since brokerage firms who make a market in the Company's common stock on
the Over-The-Counter Bulletin Board ("OTCBB") are not willing to do so at
this time.
ALLEGATIONS OF VIOLATION OF SECURITIES LAW AND CONSENT DECREE OF 2000 - On
August 7, 2002, Thomas S. Hughes, former Chief Executive Officer and
Director of the Company, was served with a complaint by federal
authorities alleging i) contempt of court pursuant to a permanent
injunction issued on April 7, 2000 by issuing and/or approving issuance of
false and misleading press releases and failing to disclose material facts
in connection with the issuance of press releases and (ii) securities
fraud in connection with the purchase and sale of the Company's common
stock. Remedies sought in these proceedings include criminal and civil
penalties and a bar from service as an officer or director of a
publicly-traded company. During October 2002, Thomas S. Hughes resigned as
Chief Executive Officer and Director of the Company (see Note 9). The loss
of Mr. Hughes could have a material adverse impact on the Company's
business and financial condition.
STOCK DIVIDEND - During July 2002, the Company announced a 5% stock
dividend to stockholders on record as of July 23, 2002. Additionally, the
stock dividend of 45,223,898 shares is not subject to the 1-for-100
reverse split discussed in Note 1. Management of the company plans to
register a Form SB-2 with the Securities Exchange Commission. The Company
plans to distribute these shares upon the Securities Exchange Commission
declaring the registration statement effective.
9. SUBSEQUENT EVENTS
STOCK ISSUANCES - During October 2002, the Company issued 16,750,000
shares of the Company's common stock to various consultants valued at
$100,500.
Also during October 2002, the Company issued 10,000,000 shares of the
Company's common stock to ALC Capital, Inc. in exchange for a loan of
$100,000. Through the date of this report, the Company has not received
the funding and has placed an administrative hold with the stock transfer
agent on these shares. Management of the Company will take necessary
actions to collect the funding or have the shares returned.
Also in October, the Company issued 3,000,000 restricted shares of the
Company's common stock to Maximus Investments, Inc. in exchange for a loan
of $40,000. Through the date of this report, the Company has not received
the funding and has put a stop to the 3,000,000 share issuance. Management
of the Company will take necessary actions to collect the funding or have
the shares returned.
During November, the Company issued 5,000,000 shares of the Company's
common stock to Richard Epstein for satisfaction of due to related parties
totaling $30,000.
RESIGNATION OF THOMAS S. HUGHES - During October 2002, Thomas S. Hughes
resigned as Chief Executive Officer and Director of the Company.
RESCISSION OF ET&T super-voting rights - During December 2002, the
Company's board of directors passed a resolution whereby all super-voting
rights (see Note 4) held by ET&T, a company controlled by former Chief
Executive Officer Thomas S. Hughes.
13
ITEM 2. PLAN OF OPERATION
TWELVE MONTH PLAN OF OPERATION.
Over the next twelve months, the Company intends to continue pursuit of its
primary goal of realizing a meaningful mass of merchants, consumers and
transaction processors that utilize the Company's solutions. The Company plans
to position its solutions and services to these target constituents as a means
of:
o Reducing transaction related risks, including fraud, chargebacks and
repudiation
o Reducing transaction processing costs for merchants, processors and
acquirers
o Potentially reducing costs for card issuers
o Increasing convenience for consumers
o Increasing a sense of financial and identity security for consumers
o Increasing customer retention for merchants
o Increasing customer retention rates for processors
o Decreasing customer acquisition rates, and costs, for online merchants
To realize this goal, and effectively position the Company's solutions in the
marketplace, a number of supporting objectives must be accomplished. These goals
can be categorized into four functional areas, management, marketing, finance,
and product development. While growing the Company's capacity and effectiveness
in each of these areas is critical to realizing growth, the Company believes
that the most important objective is building a core management team that shares
common values. Specifically, the Company is looking to engage professionals as
officers and managers that represent a high degree of technical and professional
excellence, have built their careers and lives on a solid moral and ethical
foundation and have the passion and drive required to see new products, such as
those offered by the Company, become commercially successful. The Company began
undertaking steps to engage such a management team in the third quarter of 2002.
Another critical component of the Company's plans for the coming 12 months
involves building a sales and marketing infrastructure that complements its
products and industry. As a new type of product, in an evolving industry,
effectively building such an infrastructure is very challenging. The Company
believes that multiple parties stand to benefit from its eCashpad, Bank Eyes
Only and other remote, secure Point of Sale (POS) payment and transaction
processing solutions. While the number of potential beneficiaries perceived by
the Company suggests a number of opportunities, pursuing each of these
opportunities, and the channels required to successfully convert these
opportunities into revenue, involves substantial capital and savvy. The Company
plans to pursue partnerships with a mix of distribution channels over the next
twelve months in hopes of accelerating awareness, interest and desire for its
products amongst the perceived beneficiaries of its solutions and services.
14
Pursuing each of the Company's objectives will require additional financing.
Failure to attract a capable management and build an effective marketing
infrastructure will likely result in unfavorable terms for such financing, if
any such financing is available at all under such circumstances. To this end,
the Company plans to keep its organization focused on the primary goal
operational goals, with the hope that such a focus will expand the range of
financing alternatives available as milestones are met. There can be no
assurance that meeting the Company's operational milestones will in fact result
in the growth of its financing alternatives. The final functional area planned
to impact the Company's primary goal is product development. For much of the
Company's history, product development consumed a large share of available
resources, including financial and human capital. Although important
developments and updates to the Company's secure transaction and payment
processing solutions have occurred throughout the Company's history, a certain
degree of continued development will be required in the coming 12 months to
acquire and maintain the Company's anticipated competitive advantages.
Each of the preceding objectives a great deal of risk, and no assurance can be
given that any of these objectives will be successfully met, or that meeting
such objectives will result in accomplishing the Company's primary goal. In
fact, the risks and costs of pursuing these objectives could potentially result
in material adverse impacts to the Company's financial position and results from
operations.
Forward Looking Statements.
This report contains "forward looking statements" within the meaning
of Rule 175 under the Securities Act of 1933, as amended, and Rule 3b-6 under
the Securities Act of 1934, as amended, including statements regarding, among
other items, the company's business strategies, continued growth in the
company's markets, projections, and anticipated trends in the company's business
and the industry in which it operates. The words "believe," "expect,"
"anticipate," "intends," "forecast," "project," and similar expressions identify
forward-looking statements. These forward-looking statements are based largely
on the company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the company's control. The company
cautions that these statements are further qualified by important factors that
could cause actual results to differ materially from those in the forward
looking statements, including, among others, the following: reduced or lack of
increase in demand for the company's products, competitive pricing pressures,
changes in the market price of ingredients used in the company's products and
the level of expenses incurred in the company's operations. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained herein will in fact transpire or prove to be accurate. The
company disclaims any intent or obligation to update "forward looking
statements."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 7, 2002, the Securities and Exchange Commission filed a civil
complaint against eConnect, Thomas D. Hughes, Richard Epstein and Alliance
Equities, alleging that false press releases were made, and seeking injunctive
relief and disgorgement. The respondents are vigorously contesting the
allegations.
Halted trading of stock - On July 25, 2002, the SEC suspended trading of the
Company's common stock in connection with an investigation of the Company's
accuracy of several claims, including the claimed value of the bonds PNI
invested into the Company, the stated projected opening date of eConnect
Financial, and the value of a purchase order from another company. The Company's
common stock resumed trading on August 8, 2002; however, from that date to the
date of this report, the Company's common stock has been trading on the National
Quotation Bureau's Pink Sheets, since relisting procedures for the
Over-the-Counter Bulletin Board ("OTCBB") have not yet been completed.
15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Sales of Unregistered Securities.
Sales of unregistered securities occurring on or before June 30, 2002, have been
previously reported.
ALC CAPITAL INC 7243-9 10/8/2002 10,000,000 valued at $60,000
MAXIMUS INVESTMENTS INC 7244-7 10/8/2002 3,000,000 $18,000
No commissions or fees were paid in connection with these sales. These
transactions were exempt from the registration requirements under the Securities
Act of 1933 based on Rule 506 of Regulation D, and similar provisions under
state securities laws and regulations by the fact that:
... The sales were made to sophisticated investors as defined in Rule 502;
... The information specified in paragraph (b)(2)(ii)(B) and paragraph
(b)(2)(ii)(C) of this section was provided to each investor;
... The company gave each purchaser the opportunity to ask questions and receive
answers concerning the terms and conditions of the offering and to obtain any
additional information that the Company possessed or could acquire without
unreasonable effort or expense that is necessary to verify the accuracy of
the information furnished;
... At a reasonable time prior to the sale of securities, the company advised the
purchasers of the limitations on resale in the manner contained in paragraph
Rule 502(d)(2) of this section;
... Neither the company nor any person acting on its behalf sold the securities
by any form of general solicitation or general advertising;
... The company exercised reasonable care to assure that the purchasers of the
securities are not underwriters within the meaning of section 2(11) of the
Securities Act of 1933 in compliance with Rule 502(d).
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits.
Exhibits included or incorporated by reference herein are set forth in the
attached Exhibit Index.
Reports on Form 8-K.
None
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
eConnect
Dated: January 13, 2002 By: /s/ Christopher A. Jenson
------------------------------------
Christopher A. Jenson, Chairman, CEO
/s/ Gilbert Serrano
----------------------------
Gilbert Serrano, Chief Operating Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher A. Jenson, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of eConnect, Inc. on Form 10-QSB for the quarterly period ended
September 30, 2002, fully complies with the requirements of Section 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Quarterly
Report fairly presents in all material respects the financial condition and
results of operations of eConnect, Inc.
By: /s/ Christopher A. Jenson
----------------------------
Christopher A. Jenson, Chairman, CEO
eConnect currently has no chief financial officer.
17
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Purchasing Agreement between the company and 3Pea Technologies, Inc.,
dated June 19, 2001 (incorporated by reference to Exhibit 10.56 of the
Form SB-2 filed on July 30, 2001).
18