SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(X) Quarterly Report pursuant to Section 13 or l5 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30,2001
OR
( )Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-28514
YAPALOT COMMUNICATIONS HOLDINGS INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 98-0160284
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(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification Number)
4884 Dufferin Street, Unit 1, Toronto, Ontario M3H 5S8
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(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: 416-736-8882
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N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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: 20,000,000 shares of Common Stock,
par value $0.001 per share were outstanding as of November 19, 2001.
INDEX
PAGE
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Part I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheet as of September 30, 2001 4
Interim Consolidated Statement of Operations for the period
ended September 30, 2001 and from date of inception to September
30, 2000 5
Interim Consolidated Statement of Changes in Shareholders'
Equity for the nine month period ended September 2001
and from date of inception to December 31, 2000 6
Interim Consolidated Statement of Cash Flows for the period ended
September 30, 2000 and from date of inception to September 30, 2000 7
Notes to Interim Consolidated Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis or Plan of Operation 11
Part II. Other Information
Item 5. Other Information 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
YAPALOT COMMUNICATIONS HOLDINGS INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(Stated in U.S. Dollars)
September 30 December 31
2001 2000
------------- ------------
A S S E T S
CURRENT
Cash $ 2,536 $ 151,835
Accounts receivable 49,618 1,248
Sales taxes receivable - 27,574
Due from shareholder (Note 4) 30,459 24,408
Prepaid and sundry 9,687 -
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$ 92,300 $ 205,065
CAPITAL ASSETS (Note 3) 862,686 1,060,173
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$ 954986 $ $1,265,238
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L I A B I L I T I E S
CURRENT
Accounts payable and accrued liabilities $ 781,933 $ 599,603
Current portion of bank term loan (Note 4) 34,479 34,479
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$ 816,412 $ 634,082
BANK TERM LOAN, Less current portion (Note 4) 79,267 133,739
SHAREHOLDERS' ADVANCES (Note 5) 301,111 301,111
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$ 1,196,790 $ 1,068,932
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SHAREHOLDERS' DEFICIT
SHARE CAPITAL ISSUED AND PAID UP (Note 6) $ 20,000 $ 20,000
CAPITAL IN EXCESS OF PAR VALUE 1,033,806 1,016,983
CUMULATIVE TRANSLATION ADJUSTMENT (37,989) (41,462)
DEFICIT (1,257,621) (799,215)
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$ (241,804) $ 196,306
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$ 954,986 $ 1,265,238
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3
YAPALOT COMMUNICATIONS HOLDINGS INC.
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(Unaudited)
(Stated in U.S. Dollars)
For the Period Ended
September 30 September 30
2001 2000
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REVENUE $ 660,706 $ 17,523
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EXPENSES
Selling, general and administrative expenses $ 862,273 $ 406,208
Bank charges and interest 28,887 16,463
Amortization 227,952 34,909
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$ 1,119,112 $ 457,580
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NET LOSS $ (458,406) $ (421,823)
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OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment $ 3,473 $ -
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DEFICIT - Beginning of period $ (799,215) $ -
NET LOSS FOR THE PERIOD (458,406) (421,823)
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DEFICIT - End of period $ (1,257,621) $ (421,823)
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LOSS PER COMMON SHARE (Note 7) $ (0.02) $ (0.03)
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 20,000,000 16,179,774
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See accompanying notes.
4
YAPALOT COMMUNICATIONS HOLDINGS INC.
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Stated in U.S. Dollars)
Accumulated
Common Shares Capital in Other
Paid Up Excess of Accumulated Comprehensive
Number Amount Par Value Deficit Loss Total
-------- --------- ------------ ------------- --------------- ----------
FROM INCEPTION TO DECEMBER 31, 2000
ISSUE OF COMMON SHARES
Founder shares issued at inception 16,000,000 $ 16,000 - $ - $ - $ 16,000
Shares issued in August,2000 4,000,000 4,000 996,000 - - 1,000,000
Net loss - - - (799,215) - (799,215)
Foreign currency translation adjustments - - - - (41,462) (41,462)
Imputed interest on shareholder loans 20,983 20,983
BALANCE - December 31, 2000 20,000,000 $ 20,000 1,016,983 $(799,215) $(41,462) $ 196,306
FROM JANUARY 1, 2001 TO September 30, 2001
Net loss - - - (458,408) - (458,406)
Foreign currency translation adjustments - - - - 3,473 3,473
Imputed interest on shareholder loans 16,823 16,823
BALANCE - September 30, 2001 20,000,000 $ 20,000 1,033,806 $(1,257,621) $ (37,989) $ (241,804)
See accompanying notes.
5
YAPALOT COMMUNICATIONS HOLDINGS INC.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Stated in U.S. Dollars)
For the Period Ended
September 30 September 30
2001 2000
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CASH FROM (USED IN) OPERATIONS
Net loss $ (458,406) $ (421,823)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Amortization 227,952 34,909
Non-cash imputed interest 16,823 -
Changes in assets and liabilities relating to operations
Accounts receivable (48,370) -
Accounts payable and accrued liabilities 182,330 288,337
Prepaid and sundry assets 17,887 (7,427)
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NET CASH FROM (USED IN) OPERATIONS $ (61,784) $ 106,004
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CASH USED IN INVESTING ACTIVITIES
Purchase of capital assets $ (30,465) $ (659,355)
Incorporation costs paid - (3,845)
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NET CASH USED IN INVESTING ACTIVITIES $ (30,465) $ (663,200)
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CASH FROM FINANCING ACTIVITIES
Advances from shareholders $ - $ 471,587
Loan proceeds (54,472)
Amounts due from shareholder (6,051) -
Capital shares issued - 1,016,000
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NET CASH FROM (USED IN) FINANCING ACTIVITIES $ (60,523) $ 1,487,587
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EFFECT OF EXCHANGE RATE CHANGES ON CASH $ 3,473 $ (111,675)
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NET INCREASE (DECREASE) IN CASH DURING THE PERIOD $ (149,299) $ 606,708
CASH - Beginning of period 151,835 -
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CASH - End of period $ 2,536 $ 605,277
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YAPALOT COMMUNICATIONS HOLDINGS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,2001
(Unaudited)
(Stated in U.S. Dollars)
The financial information for the period ended September 30, 2001 presented in
this Form 10-QSB has been prepared from accounting records of Yapalot
Communications Holdings Inc. (the "Company") without audit. The information
furnished reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results of this interim period. The
results of operations for the period ended September 30, 2001 are not
necessarily indicative of the results to be expected for a full year.
1. NATURE OF OPERATIONS
Yapalot Communications Holdings Inc. was incorporated under the laws of the
State of Delaware on April 6, 2000 and has adopted a fiscal year end of
December 31. The Company's activities consist of the development and
deployment of Voice Over Internet Protocol (VoIP) network services around
the world as well as developing different communications solutions utilizing
VoIP technology.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Consolidation
These interim consolidated financial statements present the combination
of the interim financial statements of Yapalot Communications Holdings
Inc., a United States company, and its wholly-owned subsidiary, Yapalot
Communications Inc., a company incorporated under the laws of the
Province of Ontario, Canada on March 8, 2000.
b) Basis of Financial Statements
These interim consolidated financial statements are stated in United
States dollars, the "reporting currency". The consolidated transactions
of Yapalot Communications Holdings Inc. have been recorded in Canadian
dollars, the "functional currency", and have been restated into United
States dollars at the period end exchange rates for balance sheet items
and the average exchange rate for the period for revenues, expenses,
gains and losses. Translation adjustments to the reporting currency are
included in equity.
c) Capital Assets and Amortization
Capital assets are carried at acquisition cost less accumulated
amortization. Amortization is provided annually by the Company at rates
intended to amortize the assets over their estimated useful lives as
follows:
Computer equipment - 30% Declining balance basis
Computer software - 100% Declining balance basis
Furniture and fixtures - 20% Declining balance basis
Leasehold improvements - 20% of cost
Network communications equipment - 20% Declining balances basis
Where the Company determines that circumstances indicate that the
carrying value of certain capital assets may not be recoverable, the
Company's policy is to write the asset down to an estimate of the future
cash flows expected to result from the use of the asset and its eventual
disposition. Such an impairment loss will be charged to operations in
the current year.
d) Revenue Recognition
The Company records its revenue from customer contracts as services are
provided.
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YAPALOT COMMUNICATIONS HOLDINGS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,2001
(Unaudited)
(Stated in U.S. Dollars)
e) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
f) Start-up and Other Pre-operating Expenses
Start-up and pre-operating expenses incurred by the Company are expensed
as incurred.
g) Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", which was adopted by the
Company. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in an entity's financial
statements. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources.
h) Earnings (Loss) Per Share
Earnings (loss) per common share is based on the weighted average number
of common shares outstanding during the period.
i) General
These financial statements have been prepared in accordance with Unites
States generally accepted accounting principles (GAAP), as they relate
to these financial statements.
3. CAPITAL ASSETS
Accumulated Net Net
Cost Amortization 2001 2000
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Computer equipment $ 146,919 $41,774 $105,145 $ 139,835
Computer software 72,867 53,104 19,763 52,355
Furniture and fixtures 67,152 12,931 54,221 63,417
Leasehold improvements 71,000 14,518 56,482 66,434
Network communication equipment 852,893 225,818 627,075 738,132
$1,210,831 $348,145 $ 862,686 $1,060,173
4. BANK TERM LOAN
One of the founding shareholders, Mr. Barzakay, arranged for a Canadian
Small Business Loan for the Company, as part of his initial advance to the
Company. As the Company is liable for the debt and interest repayments, the
loan facility has been reflected as long term debt of the Company. However,
as part of the intial funding agreement with the Company, Mr. Barzakay has
agreed to reimburse the Company annually for all principal and interest
payments. The loan is repayable in monthly payments of CDN$4,165 plus
interest at the Royal Bank prime rate plus 1.5 percent. The loan matures in
March,2005 and is personally guaranteed by Mr. Barzakay. The moneys that are
to be reimbursed to the Company are included in the amount due from a
shareholder. This balance is being offset with salary amounts that have been
accrued toward Mr. Barzakay in connection with his employment agreement with
the Company.
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5. SHAREHOLDERS' ADVANCES
The balances due to shareholders are non-interest bearing, however in
accordance with generally accepted accounting policies, an interest rate of
7% was imputed in this non arms length arrangement. The imputed interest is
charged to operations and credited to stockholders' equity. The individual
shareholder advance amounts are as follows:
Marilyn Benlolo $ 301,111
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6. SHARE CAPITAL
Authorized
50,000,000 Common shares at $.001 par value
Issued
20,000,000 Common shares at $.001 par value $ 20,000
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7. LOSS PER COMMON SHARE
Loss per common share is calculated as the loss for the period divided by
the weighted average number of the Company's common stock outstanding.
Diluted loss per share does not differ from basic loss per share.
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Item 2. Management's Discussion and Analysis or Plan of Operation
This report contains statements that are not historical facts which are "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as
amended. The Company's results involve risks and uncertainties that could cause
actual to differ from projected results. Such statements address activities;
events or developments that we expect, believe, project, intend or anticipate
will or may occur, including such matters as future capital, business
strategies, expansion and growth of our operations and future net cash flows.
Factors that could cause actual results to differ materially are described
throughout this statement. Cautionary disclosures include, among others: general
economic conditions, the markets for and market price of our services, the
strength and financial resources of our competitors, our ability to find and
retain skilled personnel, the results of financing efforts and regulatory
developments and compliance. We disclaim any obligation to update or revise any
forward-looking statement to reflect events or circumstances occurring hereafter
or to reflect the occurrence of anticipated or unanticipated events, other than
as required by law.
Overview
We are a Voice Over IP telecommunications Company whose objective is to create
shareholder value by developing operations and proprietary assets that generate
sustainable revenues and which yield long-term growth potential. Our operations
are located primarily in North America.
During the next few years, we expect to continue to implement our growth
strategy. Our growth strategy includes a global deployment of the Yapalot
Network through the following: (i) allow us to gain strategic position by
deploying Network Gateways in different parts of the world, (ii) improve asset
productivity, and (iii) improve growth potential in both emerging technologies
and key targeted vertical market sectors. To increase market share, we may also
attempt to acquire key competitors, as well as companies and assets that may
have important products and synergies with our existing operations and products.
Previous filings have talked about a franchise program. This program has not
materialized and as such the services of Michael Seruya were not utilized.
Significant Developments
For the fiscal period ended September 30, 2001, we completed the launch of ten
initial gateways at a cost of $1,000,000. We have delayed the launch of the
previously proposed 22 additional gateways pending adequate financing of
approximately $2,500,000. The ten initial gateways were financed using the
private funds of our founding shareholders. We believe that we will generate
sufficient positive cash flow from operations to meet operating requirements.
This belief is founded on our current customer base revenue stream. Yapalot may
acquire Clarent equipment at reduced prices and favorable installment payment
terms on each Gateway, which will allow for future development.
Management has also put plans into effect to significantly build the current
monthly customer acquisition base to approximately 700. This growth is not
expected to materialize until Q2 2002. The customer growth is expected to be
accomplished through a planned increase in advertising expenditures in the 1st
quarter, as well as a hiring program for additional staff. The Company had
entered into a merger agreement with Internet VIP but as of November 13, 2001,
management of Internet VIP has decided not to proceed with the merger. If
Yapalot does not generate sufficient positive cash flow to meet cash
requirements, we may, from time to time, seek to raise capital from additional
sources, including setting up lines of credit, project specific financings and
public or private debt or equity financings. However, there can be no assurance
that we will be able to obtain any sort of financing on commercially acceptable
terms, if at all. 10
We are a holding Company and have no independent operating history other than
through Yapalot Communications. Inc.
COMPARISON OF THE PERIOD ENDED SEPTEMBER 30, 2001 TO THE PERIOD ENDED SEPTEMBER
30, 2000.
During the nine months ended September 30, 2001, we maintained our current
customer base. No additional gateways were installed during this time. During
the nine months ended September 30, 2001, we increased our customer contracts by
1,056 subscribers. There are no print or media marketing initiatives at this
time, except a small telemarketing initiative to maintain customer loyalty and
acquire new customers. Staffing remains unchanged from Q1 2001. Our Q1 cost
cutting initiative is working to allow the Company to maintain its present
operations while the Company is seeking financing. While the Company seeks
additional financing, only payables integral to maintaining network operations
and customer satisfaction are being addressed. The cost cutting initiative that
started in Q1 2001 is coherent with current market trends of reducing overhead
and streamlining operations towards faster profitability. Many of today's
start-up companies are faced with the hard reality that investment banking
financing and VC financing is a lot more difficult to come by as these
institutions are more reluctant to invest as they have seen the NASDAQ and the
DOW decline so sharply. Institutions are listening to companies that can
demonstrate that they have the resolve to reduce costs, streamline operations,
and show a road to profitability sooner rather than later.
RESULTS OF OPERATIONS
For the 9 months ended September 30, 2001: During the period ended September 30,
2001, we increased our revenue activities, signing customers to contracted
revenues amounting to $660,706. Our resulting loss for this period of $458,406
reflects a nominal decrease in various corporate expenses in the period compared
with the prior periods, as operations continue to roll out. This period's loss
is largely a result of anticipated costs from professional advisors due to an
increase in the need for contract and agreement reviews and the ongoing cost of
utilizing the network systems in this period.
For the cumulative 18 months ended September 30, 2001
Our cumulative net loss of $1,257,621 for the eighteen months ended September
30, 2001 is largely a result of anticipated costs of $400,260 from the initial
advertising program, as well the development of a significant proportion of our
planned staffing level, resulting in administration and sales wages paid out
during this cumulative period of $505,457. The net loss for the current
cumulative period also reflects the accumulated cost of professional legal,
accounting and other services required to ensure our ongoing organizational
development meets the needs of our current and projected operations. The
accumulated amortization cost of capital assets of $348,145 also represents a
significant charge against revenues, due to the cumulative installation cost of
our gateways. Most other expenses have developed rather normally during this
period, considering our increased infrastructure requirements as we continue to
develop our client base and resulting operating costs.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are funds generated by loans from the founding
shareholders. Additional information on the loan agreement is described in note
4 to the Company's Consolidated Financial Statements.
Current assets totaled $92,300 at September 30, 2001 compared to $205,065 at
December 31, 2000. The decrease in current assets is attributable to the
utilization of cash for additional payments on gateway purchases, maintaining
our infrastructure as the business develops, and our acquisition of customer
service contracts to be collected over the current operating cycle. The current
assets are increased in the period by prepaid rental payments and by the net
servicing of the Small Business Loan owed by the Company, which had been
arranged by Yuval Barzakay. Pursuant to his agreement with the Company, Mr.
Barzakay is responsible for the principal and interest repayments. During the
nine months ended September 30, 2001, approximately $96,150 of accrued salary
owed to Mr. Barzakay was applied against the principal and interest repayments
owed by Mr. Barzakay in connection with the Small Business Loan. At September
30, 2001, we had cash of $2,536 and no short-term deposits. As customers pay for
the service by automatic credit card payments, we anticipate an orderly
collection of the balance of Accounts Receivable.
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As of September 30, 2001, current liabilities totaled $816,412 compared to
$634,082 at December 31, 2000. The increase is largely attributable to a reduced
level of payments against balances owing under the initial financing terms on
the gateway hardware received by us and from an increase in recent professional
fees as a result of the increasing amount of contracts and agreements that
require legal scrutiny.
Our operations are carried out in Canadian dollars. Our reporting currency is in
United States dollars. As indicated in the notes to this financial information,
any translation adjustment to the reporting currency would be included in
equity.
PART II. OTHER INFORMATION
Item 5. Other Information
The Company had entered into a merger agreement with Internet VIP but as of
November 13, 2001, management of Internet VIP has decided not to proceed with
the merger.
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.
YAPALOT COMMUNICATIONS HOLDINGS INC.
Dated: November 19, 2001
By /s/ Yuval Barzakay
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Yuval Barzakay, Chairman and
Chief Executive Officer
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