U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2001
------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act For the
transition period from ____________________ to ____________________
Commission File Number: 028836
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Paradigm Advanced Technologies, Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 33-0692466
---------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30 Leek Crescent, Suite 103, Richmond Hill, Ontario. L4B 4N4 CANADA
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(Address of Principal Executive Offices)
(905) 764-3701
--------------
(Issuer's Telephone Number, Including Area Code)
25 Leek Crescent, Richmond Hill, Ontario. L4B 4B3 CANADA
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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
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As of November 8, 2001 the issuer had 115,112,702 shares of its common
stock issued and outstanding.
Traditional Small Business Disclosure Format (check one):
Yes No X
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3
Part I - Financial Information
Item 1. Financial Statements
PARADIGM ADVANCED TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
TABLE OF CONTENTS
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 5 - 6
Consolidated Statements of Operations for the three months and nine months ended
September 30, 2001 and 2000 7
Consolidated Statements of Cash Flows for the three months and nine months ended
September 30, 2001 and 2000 8 - 9
Consolidated Statements of Stockholders' Equity for the nine months ended
September 30, 2001 and years ended December 31, 2000 and 1999 10 -11
Notes to Consolidated Financial Statements 12 - 28
4
PARADIGM ADVANCED TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
AS AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
(1) September 30, December 31,
2001 2000
(unaudited) (audited)
$ $
ASSETS
CURRENT ASSETS
Cash and cash equivalents 232,247 1,453,858
Accounts receivable 411,521 85,322
Prepaid expenses and deposits 162,893 251,451
Inventory 160,030 91,296
----------- -----------
TOTAL CURRENT ASSETS 966,691 1,881,927
CAPITAL ASSETS (note 4) 384,478 167,095
INTELLECTUAL PROPERTY (note 5) 13,149,223 14,240,400
INVESTMENTS (note 9) 613,550 613,550
----------- -----------
$15,113,942 $16,902,972
=========== ===========
5
PARADIGM ADVANCED TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
AS AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
September 30, December 31,
2001 2000
(unaudited) (audited)
$ $
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 3,369,958 1,741,016
Loans payable (note 6) 275,673 671,653
------------ ------------
3,645,631 2,412,669
------------ ------------
LONG TERM LIABILITIES
Promissory Note Payable (note 7) 1,360,000 --
------------ ------------
TOTAL LIABILITIES 5,005,631 2,412,669
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 8)
Share Capital
Authorized
250,000,000 shares of Common Stock at $0.0001 par value
Issued and outstanding stock
111,121,371 shares as of September 30, 2001 11,112 --
77,973,829 shares as of December 31, 2000 -- 7,797
Additional paid-in capital 78,569,522 66,316,298
Cumulative other comprehensive income (note 13) 203,763 15,461
DEFICIT (68,676,086) (51,849,253)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,108,311 14,490,303
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,113,942 $ 16,902,972
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
PARADIGM ADVANCED TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Cumulative
since For the three months ended For the nine months ended
inception September 30, September 30,
2001 2000 2001 2000
$ $ $ $ $
REVENUE
Sales and royalties 1,313,360 751,616 10,000 1,141,356 10,000
Interest 72,730 3,669 17,532 18,236 21,361
----------- ---------- ----------- ----------- -----------
1,386,090 755,285 27,532 1,159,592 31,361
----------- ---------- ----------- ----------- -----------
OPERATING EXPENSES
Cost of sales 1,182,270 550,123 -- 742,414 --
Research and development 21,682,354 469,256 194,214 6,045,116 15,124,385
Selling, general and
administration 41,714,459 5,614,938 23,342,472 9,095,631 24,367,598
Interest 2,617,985 15,092 70,884 917,942 297,897
Amortization 1,935,108 399,967 318,262 1,185,322 345,032
Write-off of investment in
subsidiary 930,000 -- -- -- --
----------- ---------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 70,062,176 7,049,376 23,925,832 17,986,425 40,134,912
----------- ---------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (68,676,086) (6,294,091) (23,898,300) (16,826,833) (40,103,551)
Loss per share (0.06) (0.37) (0.18) (0.78)
=========== =========== =========== ===========
Weighted average common share
outstanding during period 102,030,512 63,111,076 91,166,133 50,376,885
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
PARADIGM ADVANCED TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
AS AT SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Cumulative For the nine For the nine
since months ended months ended
inception September 30, September 30,
2001 2000
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period (68,676,086) (16,826,833) (40,103,551)
Items not requiring an outlay of cash
Amortization of capital assets 1,935,108 1,185,322 345,032
Research and development included
in acquisitions 18,816,666 4,940,000 14,516,666
Options issued to consultants 24,602,162 -- 20,992,417
Options issued to employees with
strike price below market price 2,434,650 -- 1,660,250
Common stock and options issued in
payment of expenses 5,137,716 4,957,139 387,486
Conversion feature on settlement of loans 351,520 -- --
Fair value of cashless warrants granted 393,966 -- --
Amortization of conversion feature on
debentures 773,858 680,000 --
Patent license fee 29,000 -- --
Common stock issued on acquisition
of patent license 19,500 -- --
Exercise of stock options & warrants (22,337) -- --
Increase in warrants regarding prior
period adjustments 160,541 -- --
Write-off of investment in subsidiary 930,000 -- --
Patent license write-off 129,393 -- 129,392
Capital assets written off 31,059 -- --
Net changes in non-cash working
capital items related to operations
Miscellaneous receivables (425,950) (339,973) (54,372)
Inventory (168,523) (76,347) (39,421)
Prepaids and deposits (289,768) 117,092 (33,058)
Accounts payable 3,531,829 1,783,588 572,335
----------- ---------- ----------
NET CASH FLOWS FROM OPERATING
ACTIVITIES (10,305,696) (3,580,012) (1,626,824)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans payable 1,408,504 (100,000) 1,000,000
Proceeds of common stock issuance 10,390,449 2,544,786 3,272,704
----------- ---------- ----------
NET CASH FLOWS FROM FINANCING
ACTIVITIES 11,798,953 2,444,786 4,272,704
----------- ---------- ----------
8
PARADIGM ADVANCED TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
AS AT SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Cumulative For the nine For the nine
since months ended months ended
inception September 30, September 30,
2001 2000
$ $ $
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets (489,131) (251,530) (93,167)
Acquisition of intellectual property (30,937) -- (10,937)
Acquisition of equity investment (16,050) -- (16,050)
Acquisition of subsidiary (930,000) -- --
---------- ---------- ---------
NET CASH FLOWS FROM INVESTING
ACTIVITIES (1,466,118) (251,530) (120,154)
---------- ---------- ---------
Effect of foreign currency exchange
rate changes 205,108 165,145 (5,912)
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS FOR THE PERIOD 232,247 (1,221,611) 2,519,814
==========
Cash and cash equivalents - beginning of period 1,453,858 65
---------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD 232,247 2,519,879
========== =========
Cash and cash equivalents are comprised as follows:
Cash 232,247 1,552,344
Short-term investments -- 967,535
========== =========
CASH AND CASH EQUIVALENTS - END OF PERIOD 232,247 2,519,879
========== =========
INCOME TAXES PAID -- --
========== =========
INTEREST PAID -- --
========== =========
Note: See note 12 for supplemental information
The accompanying notes are an integral part of these consolidated financial
statements.
9
PRADIGM ADVANCED TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Additional
Common Stock Paid-In
Shares Amount Capital Deficit
---------- ------------ ------------ ------------
Balance at December 31, 1998 29,796,662 $ 2,980 $ 4,780,945 $ (4,824,132)
Loss for the year (873,771)
Debentures redeemed 200,000 20 9,980
---------- ------------ ------------ ------------
Balance at December 31, 1999 29,996,662 3,000 4,790,925 (5,697,903)
Loss for the year (46,151,350)
Exercise of stock options and
warrants 15,419,592 1,542 2,423,617
Issued for cash 3,961,090 396 1,235,490
Debentures redeemed 8,141,250 814 442,511
Issued on acquisition of
PowerLOC 3,650,000 365 13,876,301
Issued on acquisition of
patent license 100,000 10 48,490
Issued for other consideration 2,305,235 230 180,353
Patent acquisition 8,700,000 870 19,782,630
Issued for WorldLink USA LLP 3,700,000 370 429,130
Loan converted to stock 2,000,000 200 499,800
Options issued to consultants 24,383,917
Options issued for patent rights 4,350,000
Options issued to employees 1,754,650
Subscriptions receivable (9,240,000)
Conversion feature on loans &
debentures 396,518
Fair value of warrants
exercised 393,966
Common stock payable 568,000
---------- ------------ ------------ ------------
Balance at December 31, 2000 77,973,829 7,797 66,316,298 (51,849,253)
10
PRADIGM ADVANCED TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Additional
Common Stock Paid-In
Shares Amount Capital Deficit
----------- ------------ ------------ ------------
Balance at December 31, 2000 77,973,829 7,797 66,316,298 (51,849,253)
Loss for the period (16,826,833)
Exercise of stock options and
warrants 550,000 55 27,445
Issued for cash 13,174,934 1,318 2,802,086
Subscriptions receivable (276,118)
Issued on acquisition of NaftEL assets 3,000,000 300 4,999,700
Issued for Worldlink acquisition 4,800,000 480 --
Options issued to consultants 3,801,200
Warrant feature on debentures 680,000
Conversion feature on loans &
Debentures 19,000
Promissory Note (1,360,000)
Issued in payment of expenses 4,840,032 484 1,189,051
Loan converted to stock 3,479,476 348 272,528
Issued for other consideration 3,303,100 330 98,327
----------- ------------ ------------ ------------
Balance at September 30, 2001 111,121,371 $ 11,112 $ 78,569,517 $(68,676,086)
=========== ============ ============ ============
11
PARADIGM ADVANCED TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. BUSINESS OVERVIEW
Paradigm Advanced Technologies, Inc. (the "Company") is a
technology development company incorporated in Delaware on January
12, 1996. The Company owns the licensing rights to a broad based
patent (United States Patent No. B1 5,043,736) that covers the
process by which satellite location signals are transmitted over a
cellular network to a base unit. The Company is developing a
complete location based commerce solution, using a proprietary
system architecture that includes mobile units that integrate
global positioning system (GPS) receivers along with wireless
cellular transceivers, as well as tracking servers. The Company is
also developing navigation and mapping technologies which compress
detailed street maps on devices with limited onboard memory.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Use of estimates
These consolidated financial statement have been prepared in
accordance with generally accepted accounting principles in the
United Stated of America. Because a precise determination of
assets and liabilities, and correspondingly revenues and expenses,
depend on future events, the preparation of consolidated financial
statements for any period necessarily involves the use of
estimates and assumptions. Actual amounts may differ from these
estimates. These consolidated financial statements have, in
management's opinion, been properly prepared within reasonable
limits of materiality and within the framework of the accounting
policies summarized below.
b) Principles of Consolidation
The Company's consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been
eliminated. Consolidation commenced with the effective dates of
the acquisition of the operations of the wholly-owned subsidiaries
and these consolidated financial statements include the financial
results of the wholly-owned subsidiaries to September 30, 2001.
c) Cash and Cash Equivalents
Cash and cash equivalents consist of cash balances with banks and
short-term investments with maturities of less than three months.
12
d) Capital assets
Capital Assets are recorded at cost less accumulated depreciation.
Amortization is provided using the following annual rates:
Furniture and Fixture - 20% - declining balance method
Computer Equipment - 30% - declining balance method
Computer software - 50% - straight-line method
Leasehold improvements - over the initial term of the lease
e) Intellectual Property
Intellectual property is recorded at cost less accumulated
amortization. Amortization is provided over their estimated useful
lives. Patent Rights are amortized over 10 years using the
straight-line method
f) Investments
The Company has a 50% non-controlling investment in a private company,
which is accounted for using the equity method of accounting. Under the
equity method, the pro-rata share of the investee's earnings since
acquisition is recorded as income and added to the carrying value of
the investment shown on the balance sheet. Dividends received are
considered a return of capital and are accordingly deducted from the
carrying value of the investment. The Company monitors this investment
for impairment and makes appropriate reductions in carrying values when
appropriate.
g) Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and loans payable approximates fair value at the
period end.
h) Foreign Currency Translation
Wholly-owned subsidiaries of the Company maintain their books and
records in Canadian dollars and New Israeli Shekels. Foreign currency
transactions are reflected using the temporal method. Under this
method, all monetary items are translated into the home currency at the
rate of exchange prevailing at balance sheet date. Non-monetary items
are translated at historical rates. Income and expenses are translated
at the rate in effect on the transaction dates. Transaction gains and
losses are included in the determination of earnings for the year.
The translation of the consolidated financial statements of these
wholly-owned subsidiaries from their respective foreign currencies into
United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using closing exchange rates in
effect at the balance sheet date and income and expense accounts are
translated using an average exchange rate prevailing during each
reporting period. No representation is made that the foreign amounts
could have been or could be realized at the conversion rates.
Adjustments resulting from the translation are included in cumulative
other comprehensive income in stockholders' equity.
13
i) Loss per Share
The Company has adopted Financial Accounting Standards No.
128,"Earnings per Share" ("FAS 128"). FAS 128 [Confirm that this
shouldn't be called SFAS 128 instead, as below]requires presentation of
basic and diluted earnings or loss per share. The Company has
potentially dilutive shares, but, because the Company has a loss, the
potentially dilutive shares are deemed anti-dilutive and only the basic
loss per share is presented. Loss per share is computed by dividing net
income by the weighted average number of shares outstanding during the
period.
j) Income taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109 [You should probably
state the title of SFAS 109], which requires recognition of deferred
tax assets and liabilities for the future tax consequences of events
that have been include in the consolidated financial statements or tax
returns. Deferred income taxes are provided using the liability method.
Under the liability method, deferred income taxes are recognized for
all significant temporary differences between the tax and financial
statement bases of assets and liabilities.
Current income tax expense (recovery) is the amount of income taxes
expected to be payable (recoverable) for the current year. A deferred
tax asset and/or liability is computed for both the expected future
impact of differences between the financial statement and tax bases of
assets and liabilities and for the expected future tax benefit to be
derived from tax losses. Valuation allowances are established when
necessary to reduce deferred tax asset to the amount expected to be
"more likely than not" realized in future returns. Tax law and rate
changes are reflected in income in the period such changes are enacted.
k) Stock-based compensation plan
In December 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation" was issued. It introduced the use of a fair value-based
method of accounting for stock-based compensation. It encourages, but
does not require, companies to recognize stock-based compensation
expenses to employees based on the new fair value accounting rules.
Companies that choose not to adopt the new rules will continue to apply
the existing accounting rules continued in Accounting Principles Board
Opinion No. 25, "Accounting for stock issued to employees". However,
SFAS No. 123 requires companies that choose not to adopt the new fair
value accounting rules to disclose pro forma net income and earnings
per share under the new method. The Company has adopted the disclosure
provisions of SFAS No. 123.
For the nine months ended
September 30,
---------------------------
2001 2000
----------- -----------
$ $
Net loss applicable to common shares
- US GAAP
Reported (16,826,833) (40,103,551)
Pro-forma (18,658,999) (54,755,632)
Basic loss per common share:
Reported (0.18) (0.78)
Pro-forma (0.20) (1.09)
14
l) Research and Development
Research and development costs, other than capital expenditures, but
including acquired research and development costs, are charged against
income in the period incurred.
m) Revenue recognition
Revenues from the sale of products are recognized upon shipment of the
goods and the passage of title to the customer.
License fees are recognized as income over the term of the applicable
licenses.
n) Comprehensive income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
This standard requires companies to disclose comprehensive income in
their consolidated financial statements. In addition to items included
in net income, comprehensive income includes items currently charged or
credited directly to stockholders' equity, such as foreign currency
translation adjustments.
o) Government assistance
Government assistance towards research and development expenditures has
been received as grants from National Research Council Canada,
Industrial Research Assistance Program and in the form of investment
tax credits. All assistance is credited against the related
expenditures, when received.
p) Inventory
Inventories are valued at the lower of cost, calculated on an average
cost basis, or market determined by the selling price less a normal
gross margin.
q) Long-Lived assets
The Company has adopted the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". SFAS No. 121 requires that long-lived assets to be held
and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Management used its best estimate of the
undiscounted cash flows to evaluate the carrying amount and has
determined that no impairment has occurred.
r) Concentration of Credit Risks
The Company's receivables are unsecured and are generally due in 30
days. Currently, the Company's customers are primarily purchasers of
location devices. As of September 30, 2001, two customers combined
comprised 68% of the company's revenues. The Company has only recently
commenced generating revenue. As revenues and the number of customers
increase, the risk from concentration of credit will likely decrease.
s) Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." In June
2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging
15
Activities, an amendment of FASB Statement No. 133." SFAS No. 133, as
amended, establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative instrument's fair value be recognized
currently in earnings unless specific cash flow hedge accounting
criteria are met, in which case the change is recognized in "Other
Comprehensive Income". Special accounting for qualifying fair value
hedges allows a derivative instrument's gains and losses to offset
related changes in fair value of the hedged item in the income
statement, to the extent effective. To qualify for cash flow or fair
value hedge accounting, SFAS No. 133 requires that a company must
formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133, as amended,
is effective for fiscal years beginning after June 15, 2000. SFAS No.
133 cannot be applied retroactively. The adoption of this standard will
not have a material impact on the Company's financial position, results
of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in
financial statements. The Company adopted SAB 101 as required by
December 31, 2000 and the adoption did not have a material impact on
the company's financial position, results of operations or cash flows.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This statement is effective for transfers and servicing
of financial assets and extinguishment of liabilities occurring after
March 31, 2001. SFAS No. 140 also includes provisions that require
additional disclosures in financial statements for fiscal years ending
after December 15, 2000. This statement is not expected to have a
material impact on the Ccompany's financial position, results of
operations or cash flows.
Accounting Pronouncements The Financial Accounting Standards Board
("FASB") Emerging Issues Task Force ("EITF") has reached a consensus
with respect to Issue No. 00-14, "Accounting for Certain Sales
Incentives," including point of sale coupons, rebates and free
merchandise. The consensus included a conclusion that the value of such
sales incentives that results in a reduction of the price paid by the
customer should be netted against revenue and not classified as a sales
or marketing expense. The statement is not expected to have material
impact on the company's financial position, results of operations, or
cash flow.
The provisions of the FASB's EITF Issue No. 00-10, "Accounting For
Shipping and Handling Fees and Costs," requires the Company to report
all amounts billed to a customer in a sale transaction as revenue,
including those amounts related to shipping and handling. The Company
has historically included such amounts in sales as required by the
EITF. Prior to such adoption, however, shipping and handling costs were
included in sales, marketing and distribution expenses.
In April 2001, the EITF reached a consensus with respect to EITF Issue
No. 00-25, "Vendor Income Statement Characterization of Consideration
to a Purchaser of the Vendor's Products or Services." The consensus
included a conclusion that consideration from a vendor to a retailer is
presumed to be a reduction to the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of
revenue when recognized in the vendor's income statement. That
presumption can be overcome, and the consideration may be characterized
as a cost, if certain conditions are met. Such reclassification will
reduce sales and gross margin, but will have no impact on operating
income or net earnings. The Company is currently evaluating the impact
of adoption of this EITF consensus.
16
Recently Issued Accounting Standards In June 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets." Under the new rules, goodwill
and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized
over their useful lives. The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July
1, 2001, the Company will apply the new accounting rules beginning
January 1, 2002. Management is currently assessing the financial impact
SFAS No. 141 and No. 142 will have on Consolidated Financial
Statements.
3. GOING CONCERN
The Company is in the initial stages of developing its market, has been
selling products and service since March of 2001, and has not yet
achieved profitability. The Company has incurred losses since its
incorporation in 1996. The Company has funded its operations to date
through the issuance of shares and debt.
The Company plans to continue its efforts to acquire equity partners,
to make private placements, and to seek both private and government
funding for its projects. In the period January 1, 2000 to December 31,
2000, the Company raised approximately $4,061,000 through the
exercising of stock options and warrants and through the issuance of
common shares for cash.
4. CAPITAL ASSETS
September 30, December 31,
2001 2000
------------- ------------
$ $
Furniture, fixtures and computers 481,169 199,639
Less: accumulated amortization (96,691) (32,544)
------- -------
384,478 167,095
======= =======
5. INTELLECTUAL PROPERTY
September 30, December 31,
2001 2000
------------- ------------
$ $
Patent Rights 14,954,437 14,924,437
Less: accumulated amortization (1,805,214) (684,037)
---------- ----------
13,149,223 14,240,400
========== ==========
Patent Rights - During the year ended December 31, 2000 the Company
issued 4,500,000 common shares, valued at $10,543,500 to acquire the
licensing rights to US Patent # B1 5,043,736. The patent is for a broad
based process patent, which covers the apparatus and method of
transmitting position information from satellite navigational signals
(such as GPS) over cellular systems to a base unit and displays the
location of a person or object, so equipped.
The vendor was also issued 4,200,000 common shares subject to an escrow
agreement, which the Company has recorded as a subscription receivable.
The vendor may, at any time after July 16, 2001, require the escrow
agent to sell the shares, and remit to the Company from the
17
proceeds at a price per share of $2.20, up to July 16, 2002, and that
amount plus $0.20 per share per year, thereafter.
The Company also issued 3,000,000 options for common shares for
services rendered in acquiring the licensing rights to the patent. The
fair value of the options granted was estimated at $4,350,000 on the
date of grant using the Black-Scholes pricing model using the following
assumptions:
Risk-free interest rate 6.7%
Dividend yield 0%
Expected life 4 years
Stock price volatility 100%
As the agreements terminated the previously owned agency rights to
license the use of the patent, the net book value of the patent agency
agreement was written off in the year ended December 31, 2000,
resulting in a charge to earnings of $129,393.
In February, 2001, as part of the acquisition of the assets of NaftEL
(note 9), the Company acquired six patents to which it allocated a
value of $30,000.
6. LOANS PAYABLE
Loans payable include loans amounting to $194,673 (December 31, 2000 -
$196,653) which are payable on demand and are secured by a pledge over
all the assets of the Company, with interest at a rate of prime plus
4%. Of these loans, $66,282 was owing to directors of the Company.
Accounts payable and accrued liabilities at September 30, 2001 includes
$52,479 of interest accrued on these loans. Interest expense for
related party loans for the three months ended September 30, 2001 is
$6,817 and for the nine months ended September 30, 2001 is $18,007.
7. PROMISSORY NOTE PAYABLE
On August 20, 2001 the Company issued a promissory note to the original
shareholders of PowerLOC for $1,360,000. The note has a 2 year term and
is secured by a pledge over all the assets of the Company. This note
relates to the acquisition of PowerLOC Technologies (see Note 10).
8. RELATED PARTY TRANSACTIONS
In February 2001, 2,000,000 shares were issued in payment of the loan
of $51,000 from a director and shareholder.
A loan of $225,000 (December 31, 2000 - $475,000) plus accrued interest
of $66,833 was converted into common stock at $ 0.11 per share on
September 24, 2001. In addition 5,281,340 warrants were issued at an
exercise price of $0.15 which are convertible into common shares before
September 24, 2004.
On August 25, 2001, two (2) directors and officers entered into the
following private placement transactions:
1,031,031 restricted shares and 2,062,062 warrants were issued for a
consideration of $ 113,413.
1,241,157 restricted shares and 2,482,314 warrants were issued for a
consideration of $ 136,587.
The above warrants have an exercise price of $ 0.15 and expire on
August 29, 2004.
On September 21, 2001 11,200,000 warrants were issued to an officer and
director at an exercise price of $ 0.05. The warrants expire on
December 31, 2004.
18
On September 21, 2001, 4,000,000 options at a strike price of $0.40
were issued to a director and officer. 1,000,000 options vest every 3
months and have an expiry date of 3 years. On September 21, 2001,
10,000,000 options at a strike price of $0.66 owned by a director and
officer were cancelled and 5,000,000 options were issued at a strike
price of $ 0.05. The vesting provisions of these options are to be
determined by the officers of the company.
On August 2, 2001 600,000 restricted shares were issued to a director
and officer in settlement of consulting fees valued at $90,000.
Any restricted shares issued by the Company may not be sold on the
public market until a registration statement that has been filed with
the Securities and Exchange Commission with respect to these shares has
become effective or two years have passed.
9. CAPITAL STOCK
On July 5, 2001, the shareholders approved an increase in the
authorized capital stock from 100,000,000 shares of Common Stock to
250,000,000 shares of Common Stock.
The Company has entered into a $10,750,000 equity financing facility
with an investment group. Under the terms of this facility $750,000 was
invested in the third quarter, through the issue of restricted shares,
while the remaining $10,000,000 equity financing facility is at the
option of the Company and is conditional on the effectiveness of a
registration statement that the Company will file with the Securities
and Exchange Commission. The equity financing facility will allow the
Company to sell, at its discretion, up to $10 million worth of common
shares of Paradigm's stock to the investor group over the next two
years.
The following table summarizes activity under the Company's stock
option plan:
Weighted
average
Number of Price per exercise
Options share price
----------- -------------- --------
Options outstanding, December 31, 1998 . 9,803,201 $0.05 - $ 0.40 $0.06
- - Options granted ...................... 13,235,000 $0.01 - $ 0.08 $0.05
----------- -------------- -----
Options outstanding, December 31, 1999 . 23,038,201 $0.01 - $ 0.40 $0.06
- - Options granted ...................... 31,725,666 $0.05 - $12.50 $1.58
- - Options expired ...................... (668,334) $0.05 - $ 3.00 $0.87
- - Options exercised .................... (5,613,867) $0.01 - $ 2.00 $0.06
----------- -------------- -----
- - Options outstanding, December 31, 2000 48,481,666 $0.05 - $12.50 $1.04
- - Options granted ...................... 30,689,287 $0.05 - $ 4.00 $0.94
- - Options cancelled .................... (14,149,000) $0.40 - $ 4.00 $0.78
- - Options expired ...................... (3,430,000) $0.25 - $ 4.00 $4.32
- - Options exercised .................... (350,000) $0.05 - $ 0.05 $0.05
----------- -------------- -----
Options outstanding, September 30, 2001 61,241,953 $0.05 - $12.50 $1.06
=========== ============== =====
19
The following warrants were outstanding at September 30, 2001:
Number of
Expiry date Price range Warrants
----------- ------------- ----------
2002 $0.10 - $0.25 5,500,000
2003 $0.04 - $2.50 8,778,667
2004 $0.05 - $1.00 26,138,216
2005 $0.40 - $2.75 1,487,323
2006 $0.42 - $0.45 9,100,000
2008 $1.00 - $9.00 10,000,000
2010 $1.00 12,500,000
----------
Total warrants outstanding 78,664,206
==========
Employee Stock Option Plan
The 1996 stock option plan provides for the grant of incentive stock
options for the purchase of the Company's shares of Common Stock to
officers, directors, employees and consultants of the Company or any
subsidiary corporation. The total number of shares which may be issued
under the plan is 10,000,000. A committee, appointed by the board of
directors, administers the plan. The committee sets the price at which
the option is granted, the dates on which it shall be exercisable and
the expiration date.
Consultants' Stock and Warrants
The Company issued to a Consultant 2,580,000 shares of common stock at
a price of 15 cents per share for payment of commissions due in the
amount of $387,000. In addition, the Company issued to that Consultant
5,160,000 warrants at a strike price of 42 cents per share of common
stock for these services. Subsequent to the end of the quarter, these
warrants were re-priced to a strike price of 5 cents per share.
In addition, the Company issued to its former law firm 610,000 shares
of common stock at a price of 40 cents per share in payment of legal
services rendered in the amount of $243,750.
20
10. BUSINESS ACQUISITIONS
a) NaftEL acquisition
In February 2001 the Company entered into an asset purchase agreement
to purchase all of the assets of an Israeli company, NaftEL
Technologies Ltd. ("NaftEL"). NaftEL is engaged in the development,
manufacturing and marketing of interactive navigational and fleet
management devices, including, inter alia, a map compression format,
and owns certain intellectual property rights pertaining thereto. The
Company will account for the acquisition using the purchase method.
Consideration given was as follows:
Issuance of 3,000,000 common shares @ $1.66 $5,000,000
==========
The purchase price has been allocated as follows:
Capital assets $ 30,000
Patents 30,000
Research and development expenses 4,940,000
----------
$5,000,000
==========
Included in the assets acquired was software and technology for the
interactive navigational and fleet management devices, including, inter
alia, a map compression format and intellectual property rights
pertaining thereto. These development costs were allocated to research
and development expenses in terms of FAS 2 (Accounting for Research and
Development Costs).
The agreement provides for additional consideration as follows:
o When 3,000,000 common shares above, or part thereof, become free
trading or eligible for registration, should the market value of
those shares at that time not be at least $1.66 each, up to a
maximum of 2,000,000 additional common shares will be issued in
order to, when combined with the 3,000,000 common shares issued,
bring the total market value of the consideration to $5,000,000.
o 10,000,000 warrants for common shares are held in escrow for the
vendors and are subject to a vesting schedule, based on the
Company achieving specified progressive revenue targets, ranging
from $1,000,000 to $5,000,000, from the commercialization of the
purchased assets. The exercise prices of the warrants range from
$1 to $9, based on the revenue targets achieved.
b) PowerLOC acquisition
21
On March 29, 2000, the Company completed the acquisition of 100% of
Power Point Micro Systems Inc. and PowerLOC Technologies Inc.(a Bahamas
company), ("PowerLOC"). The acquisition has been accounted for using
the purchase method. PowerLOC Technologies Inc. is a research and
development company that has developed a low-cost, miniature
mobile-location GPS unit that transmits its position to a base station
through existing PCS, pager or cellular phone wireless networks. Power
Point Micro Systems Inc. is an international telecommunications
consulting firm specializing in wireless and wireline, voice and data
systems integration. Consideration was as follows:
Cash $ 300,000
Issuance of 3,650,000 common shares @ market value of $1.72 6,278,000
Issuance of 1,350,000 exchangeable shares @ market value of $1.72 2,322,000
Issuance of 4,166,666 options for common shares @ market value of $1.42 5,916,666
Costs incurred 29,731
-----------
$14,846,397
===========
The definitions of beneficial ownership and the number of shares
outstanding apply to shares of common stock and exchangeable shares as
though they were the same security.
The purchase price was allocated to research and development expenses
in terms of FAS 2 (Accounting for Research and Development Costs).
PowerLOC Technologies Inc. (Bahamas) remains the owner of the location
technology acquired in the transaction and any improvements. Another
subsidiary of Paradigm, PowerLOC Technologies Inc. (an Ontario
corporation) is currently marketing and enhancing the technology under
license from PowerLOC.
The shares of the acquired companies have been pledged as security for
the performance of the Company under the terms of the agreement.
The fair value of the options granted was estimated on the date of
grant using the Black-Scholes pricing model using the following
assumptions:
Risk-free interest rate 6.7%
Dividend yield 0%
Expected life 3 years
Stock price volatility 100%
A loan of $640,000 to the vendor of PowerLOC has been advanced pursuant
to the acquisition agreement and treated as a reduction of paid in
capital. The repayment of this loan is contingent upon future share
price fluctuations of the 2,000,000 free trading common shares issued
as a result of the PowerLOC acquisition and which is included in the
3,650,000 common shares mentioned above.
In an agreement dated August 20, 2001between the Company and the
vendors, the Company acknowledged that such share price fluctuation
resulted in the Company being unable to achieve the minimum value of
the consideration required to be paid to the vendors. Accordingly, the
company agreed to provide a promissory note (see note 7) in the amount
of $1.36 million to be secured by the previously issued shares. Those
shares are being held by the vendors as partial security for the
repayment of this outstanding amount. Upon payment of the $1,360,000
the shares will be returned to treasury.
c) Worldlink acquisition
22
The Company entered into an agreement ("the Agreement") with Pangea Petroleum
Corporation ("Pangea") to form a strategic alliance. The primary activity of the
joint venture will be to act as an incubator in seeking out companies with
technologies in which WorldLink can make appropriate investments in new and
complimentary technologies. As part of the Agreement, the Company and Pangea
agreed as follows:
i) The Company acquired all of the Class B membership units of Worldlink
USA, L.L.C. ("Worldlink") for 7,500,000 common shares and 12,500,000
warrants, issued to WorldLink. Of the 7,500,000 common shares issued,
2,700,000 were issued in 2000 and 4,800,000 were issued in 2001. These
units represent 50% of the membership units of Worldlink. Worldlink is
a development stage company that owns or licenses video streaming, a
library of concerts and Audio Streaming Format production.
ii) Pangea acquired all of the Class A Membership Units of Worldlink in
exchange for 12,500,000 warrants of Pangea, issued to WorldLink. These
units also represent 50% of the membership units in Worldlink.
iii) The Company issued 1,000,000 common shares, valued at $35,000, in
payment of professional and consulting fees.
iv) In the event of the liquidation of Worldlink, the Class A membership
units have a liquidation preference in and to the Paradigm securities,
and the Class B membership units have a liquidation preference in and
to the Pangea securities.
The acquisition has been accounted for using the purchase method. The assets of
Worldlink acquired and the consideration given by the Company are summarized as
follows:
a) Assets acquired (50% interest):
Equipment $ 1,000
Investments 612,550
$613,550
b) Consideration given:
8,500,000 common shares $297,500
12,500,000 warrants 300,000
Costs incurred 16,050
$613,550
The fair value of the options granted was estimated on the date of grant using
the Black-Scholes pricing model using the following assumptions:
Risk-free interest rate 6.6%
Dividend yield 0%
Expected life 10 years
Stock price volatility 100%
11. LEGAL PROCEEDINGS
23
Legal proceedings have been threatened against the company by an individual
claiming an entitlement to 400,000 shares for services rendered. The
Company believes that this claim is without merit and intends to vigorously
defend any such lawsuit should it be filed against the Company. It is
neither possible at this time to predict the outcome of any lawsuit,
including whether the Company will be forced to issue shares, or to
estimate the amount or range of potential loss, if any.
12. GOVERNMENT ASSISTANCE
Under an agreement with National Research Council Canada, Industrial
Research Assistance Program, a project was approved in 2000 for
Precommercialization Assistance of up to $327,000 for research and
development. This contribution will be repayable in the form of a royalty
of 1% of gross revenues for the year ending December 31, 2004, and is
limited to a maximum of $490,000. If the full amount of the assistance is
not repaid at January 1, 2005 the royalty continues until the earlier of
full repayment, or for ten years.
No amounts have been accrued with regard to this project as the conditions
for repayment have not yet been met.
Government assistance has been applied to reduce research and development
expense as follows:
For the three months ended For the nine months ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
$ $ $ $
Research and development 475,391 194,214 6,317,337 15,134,447
Government assistance 6,135 0 272,221 10,062
------- ------- --------- ----------
469,256 194,214 6,045,116 15,124,385
======= ======= ========= ==========
24
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-monetary transactions:
For the nine For the nine
months ended months ended
September 30, 2001 September 30, 2000
------------------ ------------------
$ $
Shares issued for acquisitions 5,000,000 8,600,000
Options and warrants issued for acquisitions - 5,916,666
Shares issued for redemption of convertible debentures - 241,325
Loan converted to stock 272,876 -
Stock issued for other consideration 142,740 -
Promissory Note 1,360,000 -
Shares issued for other consideration 98,657 -
14. COMPREHENSIVE LOSS
For the three months ended For the nine months ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
$ $ $ $
Net loss 6,294,091 23,898,300 16,826,833 40,103,551
Foreign currency translation adjustment (190,534) 5,912 (188,302) 5,912
--------- ----- --------- -----
6,103,557 23,904,212 16,638,531 40,109,463
========= ========== ========== ==========
The components of cumulative other comprehensive income are as follows:
Cumulative other comprehensive income - December 31, 1999 -
Foreign currency translation adjustments for the year ended
December 31, 2000 15,461
-------
Cumulative other comprehensive income - December 31, 2000 15,461
Foreign currency translation adjustments for the nine months ended
September 30, 2001 188,302
-------
Cumulative other comprehensive income - September 30, 2001 203,763
=======
25
15. COMMITMENTS
The Company leases premises under an operating lease with a ten year term.
Rent expense during the nine months ended September 30, 2001 was $177,247
(1999 - $23,251). Minimum lease commitments under the lease at September
30, 2001 were:
2001 $ 21,416
2002 85,664
2003 85,664
2004 85,664
2005 85,664
Thereafter 483,807
-------
$847,879
=======
On June 14, 2001 the Company entered into a four-year license agreement for
digital map data. The license fees are based on a variety of factors with a
minimum annual fee of $500,000 per annum.
16. INCOME TAXES
The tax effect of significant temporary differences representing deferred
tax assets is as follows:
September 30, December 31,
2001 2000
------------ -----------
$ $
Deferred tax assets:
Operating loss carry-forwards 6,460,000 2,822,000
Valuation allowance (6,460,000) (2,822,000)
Net deferred tax assets - -
The Company has determined that realization is not likely and therefore a
valuation allowance has been recorded against this deferred income tax
asset.
The Company's statutory and effective tax rate is 34%.
The Company has certain non-capital losses of $18,700,000 available, which
can be applied against future taxable income and which expire from 2007 to
2022.
26
17. SEGMENTED INFORMATION
The Company operates in a single industry segment; the sale of GPS based
location and navigation technology and the Company is managed as a single
business unit.
Revenue by Geographic Area is determined based on the customer's location.
The Revenue by geographic area is as follows:
September 30, December 31,
2001 2000
------------ -----------
North America 799,656 30,096
South America 341,700 15,286
--------- ------
Total Revenue 1,141,356 45,382
========= ======
The company's accounting records do not readily provide information on net
income by geographic area. Management is of the opinion that the proportion
of net income based principally on sales, presented below, would fairly
present the results of operations by geographic area for the period ended
September 30, 2001. In the year ended December 31, 2000 all loss is
attributable to North America
September 30, December 31,
2001 2000
------------ -----------
North America (11,789,204) (46,151,350)
South America (5,037,629) -
---------- ----------
Net Loss (16,826,833) (46,151,350)
========== ==========
There are no material total assets located outside of North America.
27
The Board of Directors authorized the repricing 20,000,000 options held by a
company held by a Director of the Corporation.
The Board of Directors authorized the issue of 1,200,000 warrants held by a
consultant for postponement of a debt of $1.36 million relating to the
acquisition of PowerLOC as well as the repricing of 5,160,000 warrants
previously issued
The Board of Directors confirmed the issue of 300,000 shares per month for each
month of 2001 for a total of 3,600,000 shares to a consultant for certain
consulting services. The cost of these shares as it relates to the period ended
September 30, 2001 has been treated as an expense in the current period.
The Board of Directors authorized the appointment of Gordon Sharwood as a
Director of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS
28
RESULTS OF OPERATIONS
The discussion below contains certain forward-looking statements (as such term
is defined in Section 21E of the Securities Exchange Act of 1934) that are based
on the beliefs of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. The Company's
results, performance and achievements in 2001 and beyond could differ materially
from those expressed in, or implied by, any such forward-looking statements. See
"Cautionary Note Regarding Forward-Looking Statements" below.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
The Company recorded revenue of $751,616 for the three months ended September
30, 2001 from the sales of its PowerLOC L-BIZ(tm) vehicle location products,
server and Destinator product, compared to $10,000 revenue from royalties for
the three months ended September 30, 2000.
The Company earned interest revenue of $3,669 for the quarter ended September
30, 2001 and $17,532 interest revenue for the quarter ended September 30, 2000.
The decreased interest revenue was due to the lower cash reserves in the third
quarter of 2001 as compared to 2000.
The Cost of Sales for the three months ended September 30, 2001 amounted to
$550,123 or 73.2% of revenue. There were no Cost of Sales for the three months
ended September 30, 2000.
Selling, General and Administration Expenses, before non-cash charges for the
three months ended September 30, 2001, were $1,996,662 as compared to $484,827
for the three months ended September 30, 2000. Operating expenses increased as a
result of the increase in PowerLOC activities which required the hiring of
additional staff and the acquisition of the business of NaftEL in February 2001.
The operation of the newly structured company that was formed as a result of the
acquisition of NaftEL contributed to the increase in expenses. The Company also
incurred higher corporate professional fees and patent related costs as it
significantly increased its activities relating to its operations and patent
licensing. In addition, the Company incurred significant costs related to the
issuance of shares and options to consultants. Selling, General and
Administration Expenses, after non-cash charges for the three months ended
September 30, 2001 were $5,614,938 as compared to $23,342,472 for the three
months ended September 30, 2000. The non-cash expenses comprised compensation
costs recorded for the issue of common stock and options to employees and
consultants.
Research and Development Expenses before non-cash charges for the quarter ended
September 30, 2001 were $469,256 as compared to $523,945 for the quarter ended
September 30, 2000. Research and Development Expenses, after non-cash charges
for the three months ended September 30, 2001 were $469,256 as compared to
$194,214 for the three months ended September 30, 2000. The non-cash expenses in
2001 comprised compensation costs recorded for the issue of common stock and
options to employees and consultants.
Interest expense for the quarter ended September 30, 2001 amounted to $15,092 as
compared to $70,884 for the quarter ended September 30, 2000. Interest expense
includes interest paid on secured and unsecured debt which decreased in the
third quarter of 2001 as compared to the third quarter of 2000.
Depreciation and amortization charges for the three months ended September 30,
2001 were $399,967 as compared to $318,262 for the three months ended September
30, 2000.
The net loss for the three months ended September 30, 2001 before non-cash
charges amounted to $2,275,847 as compared to a loss of $1,254,532 for the three
months ended September 30, 2000. The higher loss reflects the increased selling,
general and administration expenses incurred as a result of the increase in the
PowerLOC and Destinator activities and the acquisition of NaftEL as well as the
increased patent related expenses. Net Loss after non-cash charges amounted to
$6,294,091 for the three months ended September 30, 2001 and $23,898,300 for the
three months ended September 30, 2000 due to the
29
issuance of common stock and options to consultants, which is treated as an
expense and the amortization of the patent licensing rights.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
The Company recorded revenue of $1,141,356 for the nine months ended September
30, 2001, which was mainly derived from the sale of its PowerLOC L-BIZ(tm)
vehicle location products and server. The Company recorded $10,000 in royalty
revenues for the nine months ended September 30, 2000.
The Company earned interest revenue of $18,236 for the nine months ended
September 30, 2001 and $21,361 interest revenue for the nine months ended
September 30, 2000, due to the investment of cash received from the issuance of
common shares and from debt financing.
The Cost of Sales for the nine months ended September 30, 2001 amounted to
$742,414 or 65.0% of revenue. There were no Cost of Sales for the nine months
September 30, 2000.
Selling, General and Administration Expenses, before non-cash charges for the
nine months ended September 30, 2001 were $4,138,493 as compared to $1,198,053
for the nine months ended September 30, 2000. Operating expenses increased as a
result of the increase in PowerLOC activities which required the hiring of
additional staff, and the acquisition of the business of NaftEL in February
2001. Selling, General and Administration Expenses, after non-cash charges for
the nine months ended September 30, 2001 were $9,095,631 as compared to
$24,367,598 for the nine months ended September 30, 2000. The non-cash expenses
comprised compensation costs recorded for the issuance of common stock and
options to certain consultants.
Research and Development Expenses before non-cash charges for the nine months
ended September 30, 2001 were $1,105,116 as compared to $607,719 for the nine
months ended September 30, 2000 due to costs incurred on the development of the
Destinator product in the first and second quarter of 2001. Research and
Development Expenses, after non-cash charges for the nine months ended September
30, 2001 were $6,045,116 as compared to $15,124,385 for the nine months ended
September 30, 2000. The main non-cash charge for the nine months ended September
30, 2001 was a charge of $4,940,000 representing the cost of the NaftEL
acquisition, which was allocated to research and development expenses in
February 2001, while the expenses for the nine months ended September 30, 2000
includes a non-cash charge of $14,516,666 representing the cost of the PowerLOC
acquisition, which was allocated to research and development expenses in March
2000. The PowerLOC development costs were partly offset by the contribution of
$272,221 received from the National Research Council Canada, Industrial Research
Assistance Program.
Interest expense before non-cash charges for the nine months ended September 30,
2001 amounted to $237,942 as compared to $297,897 for the nine months ended
September 30, 2000, while Interest expense after non-cash charges for the nine
months ended September 30, 2001 amounted to $917,942 as compared to $297,897 for
nine months ended September 30, 2000. The non-cash charges for the nine months
ended September 30, 2001 comprise the cost of stock issued to pay certain
interest expenses.
Depreciation and amortization charges for the nine months ended September 30,
2001 were $1,185,322 as compared to $345,032 for the nine months ended September
30, 2000 due to the amortization of the patent licensing rights.
The net loss for the nine months ended September 30, 2001 before non-cash
charges amounted to $5,064,372 as compared to a loss of $2,072,308 for the nine
months ended September 30, 2000. The higher loss reflects the increased selling,
general and development expenses incurred as a result of the increase in the
PowerLOC and Destinator activities as well as the increased patent related
expenses. Net Loss after non-cash charges amounted to $16,826,833 for the period
ended September 30, 2001 as compared to $40,103,551 for the period ended
September 30, 2000 due to the expensing of the NaftEL and PowerLOC acquisitions
and the amortization of the patent licensing rights.
LIQUIDITY AND CAPITAL RESOURCES
30
The Company had cash and cash equivalents on hand of $232,247 at September 30,
2001. The Company raised in excess of $2,500,000 cash during the nine months
ended Sept 30, 2001 and $4,000,000 cash during the year ended December 31, 2000,
through cash paid to exercise stock options and warrants and through the
issuance of shares of Common Stock. On June 28, 2001 the Company entered into a
$10,750,000 equity financing facility with an investment group. Under the terms
of this facility $750,000 was invested in the third quarter, through the issue
of restricted shares, while the remaining $10,000,000 equity financing facility
is conditional on the effectiveness of a registration statement that the Company
will file with the U.S. Securities and Exchange Commission. The equity financing
facility allows the Company to sell, at its sole discretion, up to $10 million
worth of common shares of Paradigm's stock to the investor group over the next
two years. The Company has raised additional funds subsequent to the quarter end
and intends to raise additional funds on an as-needed basis to finance its
future activities through the issuance and sale of additional shares of stock
and the assumption of additional debt and government funding. The Company has
put into place a facility for receivables financing and is in the final stages
of negotiating purchase order financing to facilitate the fulfillment of its
orders. The Company does not have any commitments for capital expenditures and
believes that its current cash balances will be sufficient to meet its operating
and development needs for at least the next three months. If the Company has not
obtained additional financing prior to that time it will need to delay or
eliminate some of its development and other activities.
PLAN OF OPERATIONS
In March, 2000, the Company acquired PowerLOC , a company involved in designing,
manufacturing and selling a comprehensive, complete end-to-end asset tracking
and management solution that allows for the monitoring and control of mobile
assets such as a vehicle or assets that are stationary or are in transit.
Combining current software, hardware and communications technology, the
L-Biz(TM) Tracker system is a component based, open architecture platform that
is capable of working with virtually any wireless communications protocol, map
database format and set of customer-specific business rules.
In September 2000, the Company acquired the licensing rights to a broad based
patent (US Patent #B1 5,043,736) which covers an invention comprising a portable
locating unit useful both as a cellular telephone and portable global
positioning system that provides latitude and longitude information remotely to
a base unit display. The system includes a small hand held receiver that
receives signals from a satellite GPS and timing and computing circuits to
provide location information signals. The hand held unit also includes a modem
and transmitter to a cellular telephone network, which is connected to the base
unit computational system and display. The location of an individual or object
can thus be determined at the remote station through the use of the cellular
telephone network.
On February 19, 2001, the Company announced that it had acquired all of the
navigation technology and intellectual property of NaftEL. NaftEL develops and
markets navigation system software, enabling detailed street maps to be viewed
on devices with limited on-board memory. This technology also provides graphic
or voice commands on portable computers, hand held devices and cellular phones
to enable dynamic navigation for persons and vehicles which will allow for the
compressing of detailed maps onto a variety of smart devices including smart
phones and PocketPC devices. Following this acquisition, by improving the
technology acquired from NaftEL, the Company announced the launch of the
Destinator(TM) navigation product in July 2001. The Destinator(TM) product turns
these smart devices into comprehensive, user friendly, portable vehicle and
pedestrian navigation systems.
The Company is increasing its development activities relating to the vehicle and
personal GPS tracking devices and plans to negotiate additional distribution or
sales representation agreements with location service providers and systems
integrators to distribute these products. The Company has negotiated a number of
agreements whereby companies have acquired the tracking solution and will
continue to pursue additional opportunities for sales of both the tracking
solution and the associated hardware. The Company commenced shipment of the
Destinator(TM) product in July 2001. The Company plans to aggressively market
this product internationally. In addition, the Company intends to continue
pursuing parties to license Patent# B1 5,043, 736 and to encourage infringing
parties also to sign licensing agreements.
31
The Company does not currently have any intentions to acquire a plant or any
significant equipment, as the Company has subcontracted a portion of its
manufacturing activities, with plans to have the balance of these activities
subcontracted at some point in the future. The Company plans to hire additional
technical, marketing, sales and administrative employees in 2001 and is also
considering the acquisition of companies or businesses with complimentary
technologies or business models.
RESEARCH AND DEVELOPMENT
A significant amount of time and effort was placed on research and development
at the Company's inception. The Company has hired a number of software and
hardware engineers for its PowerLOC and Destinator businesses and also uses
contractors and third party companies to continue its research and development
activities. The Company may hire additional engineers and is planning, as
required, to increase its research and development activities in order to
increase the capabilities of its existing location tracking and navigation
solutions for a variety of applications.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements that reflect the Company's
current expectations about its future operating results, performance, and
opportunities that involve substantial risks and uncertainties. When used in
this Form 10-QSB, the words "anticipate," "believe," "estimate," "plan,"
"intend," and "expect," and similar expressions, as they relate to the Company
or its management, are intended to identify such forward-looking statements.
These forward looking statements are based on information currently available to
the Company and are subject to a number of risks, uncertainties, and other
factors that could cause the Company's actual results, performance, prospects,
and opportunities to differ materially from those expressed in, or contribute to
such differences include, but are not limited to, limited capital resources,
lack of operating history, intellectual property rights, reliance on one product
line for revenue, and other factors discussed under "Risk Factors." in the
Company's Form 10-KSB which was filed on April 2, 2001. Except as required by
the federal securities law, the Company does not undertake any obligation to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date of this Form 10-QSB or for any other
reason.
32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 5, 2001 the Company held its annual meeting of stockholders. At the
annual meeting, the Company's stockholders elected three directors to serve
until the next annual meeting and until their respective successors are elected
and qualified. At the annual meeting, the Company's stockholders also approved
and adopted a proposal to change the Company's authorized common stock from
100,000,000 shares to 250,000,000 shares. The votes for directors were as
follows:
Votes
-----------------------
For Withheld
---------- -------
David Kerzner 73,206,352 3,300
Eduardo Guendelman 73,197,752 11,900
David Ghermezian 72,996,402 213,250
The votes to approve and adopt the change the Company's authorized common stock
from 100,000,000 shares to 250,000,000 shares were as follows:
For Against Abstain
------------------ ------------------ -----------------
72,329,184 939,028 36,790
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
none
(b) Reports on form 8-K.
[did not occur in last quarter]
33
SIGNATURES
Pursuant to the requirements 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.
Paradigm Advanced Technologies, Inc.
Date: December 27, 2001
By: /s/ Eduardo Guendelman
------------------------------------------------
Eduardo Guendelman
President and Chief Executive Officer
By: /s/ R. Charles Allen
------------------------------------------------
R. Charles Allen
Interim Chief Financial Officer and General Counsel
34