================================================================================
-------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the period ended June 30, 2002.
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _______ to _______
Commission file number 333-86331
UNIVERSE2U INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0433489
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30 West Beaver Creek Road,
Suite 109, Richmond Hill, ON, Canada L4B 3K1
(Address of Principal (Zip Code)
Executive Offices)
(905) 881-3284
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the 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 common equity as
of June 30, 2002: 40,966,200 shares of Common Stock, $.00001 par value.
================================================================================
INDEX Page #
Part I. UNIVERSE2U INC. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 1
Interim Consolidated Balance Sheet - June 30, 2002. 3
Interim Consolidated Statements of Deficit for the six fiscal
months ended June 30, 2002 and June 30, 2001. 4
Interim Consolidated Statements of Operation for the six fiscal
months ended June 30, 2002 and June 30, 2001. 5
Interim Consolidated Statements of Operations for the three
Fiscal months ended June 30, 2002 and June 30, 2001 6
Interim Consolidated Statements of Cash Flows for the six fiscal
months ended June 30, 2002 and June 30, 2001 7
Notes to Interim Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis Of Financial Condition and
Results of Operations 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 35
Item 3. Defaults upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION.
Unaudited Consolidated Financial Statements
Quarter ended June 30, 2002.
The consolidated financial statements for the six months ended June 30, 2002
include, in the opinion of management, all adjustments (which consist only of
normal recurring adjustments) necessary to present fairly the results of
operations for such period. Results of operations for the six months ended June
30, 2002, are not necessarily indicative of results of operations that will be
realized for the year ending December 31, 2002.
Universe2U Inc.
Unaudited Interim Consolidated Financial Statements
June 30, 2002
(expressed in U.S. dollars)
Review Engagement Report
To the Shareholders of
Universe2U Inc.
We have reviewed the interim consolidated balance sheet of Universe2U Inc. as at
June 30, 2002, and the interim consolidated statements of deficit, and cash
flows for the six month period and the consolidated statements of operations
for the three month and six month periods then ended. Our review was made
in accordance with generally accepted standards for review engagements and
accordingly consisted primarily of enquiry, analytical procedures and
discussion related to information supplied to us by the Company.ss
A review does not constitute an audit and consequently we do not express an
audit opinion on these financial statements.
Based on our review nothing has come to our attention that causes us to believe
that these financial statements are not, in all material respects, in accordance
with generally accepted accounting principles in the United States.
The Company has incurred losses to date, has a deficit, to June 30, 2002 of
$(16,844,764), has a working capital deficiency of $3,705,573 and used
$1,459,382 of cash for operating activities during the period. In addition, the
Company has been unable to meet its payroll obligations, trade obligations, and
long-term debt commitments as they become due. These factors raise substantial
doubt on the Company's ability to continue as a going concern. The accompanying
consolidated interim financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence as a result of the Company's inability to locate
sufficient financing (see notes 1 and 12).
"Moore Stephens Cooper Molyneux LLP"
Chartered Accountants
Toronto, Ontario
August 13, 2002
1
Part I. UNIVERSE2U INC. FINANCIAL INFORMATION
Unaudited Interim Consolidated Balance Sheet
June 30, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (note 4) $ 771,055
Accounts receivable (net of allowance for doubtful accounts of $256,377) 111,869
Due from officers and directors (note 3) 25,952
Inventory 9,662
Prepaid expenses and deposits 246,008
- -------------------------------------------------------------------------- -------------
1,164,546
Deferred charges (note 12a) 842,813
Capital assets (at cost less accumulated amortization of $483,880) 529,905
- -------------------------------------------------------------------------- -------------
$ 2,537,264
========================================================================== =============
Liabilities
Current liabilities
Bank indebtedness (note 5) $ 664,160
Accounts payable and accrued liabilities 3,410,908
Income taxes payable 52,208
Deferred revenue 21,091
Current portion of loans payable (note 6) 721,752
- -------------------------------------------------------------------------- -------------
4,870,119
Loans payable (note 6) 268,076
Convertible debenture (note 7) 344,450
- -------------------------------------------------------------------------- -------------
5,482,645
- -------------------------------------------------------------------------- -------------
Commitments and contingencies (note 11) -
- -------------------------------------------------------------------------- -------------
Shareholders' equity
Share capital (note 8)
Authorized: 100,000,000 Common shares, $0.00001 par value
Issued and outstanding: 40,966,200 Common shares 409
Additional paid in capital (net of share issuance costs of $341,237) 15,893,536
Accumulated other comprehensive income (219,562)
Deposit on net asset acquisition (note 12c) (1,775,000)
Deficit (16,844,764)
- -------------------------------------------------------------------------- -------------
(2,945,381)
- -------------------------------------------------------------------------- -------------
$ 2,537,264
========================================================================== =============
The accompanying notes are an integral part of these consolidated financial
statements.
2
Unaudited Interim Consolidated Statement of Deficit
For the six month periods ended June 30, 2002 and June 30, 2001
(expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------- --------------
Deficit, beginning of periods $ (13,964,156) $ (4,661,716)
Net loss for the periods (2,880,608) (4,711,305)
- -------------------------------------------------------------------- --------------
Deficit, end of periods $ (16,844,764) $ (9,373,021)
==================================================================== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
Unaudited Interim Consolidated Statement of Operations
For the six month periods ended June 30, 2002 and June 30, 2001
(expressed in U.S. dollars)
2002 2001
- ------------------------------------------------------------------------ --------------
Revenue $ 95,347 $ 936,040
Cost of sales 358,510 1,248,958
- ------------------------------------------------------------------------ --------------
Gross (loss) (263,163) (312,918)
- ------------------------------------------------------------------------ --------------
Expenses
Selling, general and administration 1,201,772 2,353,866
Stock based compensation (note 8) 499,332 1,755,215
Interest and financing costs 760,722 110,553
Amortization of goodwill (note 4) 120,946
Depreciation and amortization 34,673 115,292
- ------------------------------------------------------------------------ --------------
2,617,445 4,334,926
- ------------------------------------------------------------------------ --------------
Loss from operations (2,880,608) (4,647,844)
Share of loss of significantly influenced investment - (63,461)
- ------------------------------------------------------------------------ --------------
Loss before provision for income taxes (2,880,608) (4,711,305)
Provision for income taxes - -
- ------------------------------------------------------------------------ --------------
Net loss for the periods $(2,880,608) $(4,711,305)
======================================================================== ==============
Net loss per share - basic (note 10) $ (0.07) $ (0.13)
======================================================================== ==============
Weighted average shares outstanding 39,579,600 36,967,831
======================================================================== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
Unaudited Interim Consolidated Statement of Operations
For the six month periods ended June 30, 2002 and June 30, 2001
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Revenue $ 58,121 $ 297,224
Cost of sales 98,595 480,549
- ------------------------------------------------------------------- ------------
Gross (loss) (40,474) (183,325)
Expenses
Selling, general and administration 437,072 956,525
Stock based compensation (note 8) 87,410 862,255
Interest and financing costs 347,336 72,068
Amortization of goodwill (note 4) 120,946 -
Depreciation and amortization 13,844 58,602
- ------------------------------------------------------------------- ------------
1,006,608 1,949,450
- ------------------------------------------------------------------- ------------
Loss from operations (1,047,082) (2,132,775)
Share of loss of significantly influenced investment - (49,301)
- ------------------------------------------------------------------- ------------
Loss before provision for income taxes (1,047,082) (2,182,076)
Provision for income taxes - -
- ------------------------------------------------------------------- ------------
Net loss for the periods $(1,047,082) $(2,182,076)
=================================================================== ============
Net loss per share - basic (note 10) $ (0.03) $ (0.06)
=================================================================== ============
Weighted average shares outstanding 39,456,569 37,134,440
=================================================================== ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
Unaudited Interim Consolidated Statement of Cash Flows
For the six month periods ended June 30, 2002 and June 30, 2001
(expressed in U.S. dollars)
2002 2001
- ---------------------------------------------------------------------------- --------------
Cash flow from operating activities
Net loss for the periods $ (2,880,608) $ (4,711,305)
Items not affecting cash
Amortization of capital assets and goodwill 182,899 144,571
Amortization of deferred charges 174,375 -
Stock option compensation (note 8) 499,332 1,755,215
Issuance of warrants 5,288 -
Equity loss of significantly influenced investment - 63,461
Loss on disposal of capital assets 57,647 -
- ----------------------------------------------------------------------------- --------------
(1,961,067) (2,748,058)
Other sources (uses) of cash from operations
Decrease in accounts receivable 26,709 1,108,361
Decrease in inventory 24,012 119,474
(Increase) decrease in prepaid expenses and deposits (107,713) 42,500
Increase in accounts payable and accrued liabilities 537,586 563,511
Increase in deferred revenue 21,091 -
- ----------------------------------------------------------------------------- --------------
(1,459,382) (914,212)
- ----------------------------------------------------------------------------- --------------
Cash flow from investing activities
Purchase of capital assets (89,714) (29,364)
Proceeds on disposal of capital assets 41,888 -
- ----------------------------------------------------------------------------- --------------
(47,826) (29,364)
- ----------------------------------------------------------------------------- --------------
Cash flow from financing activities
Repayments on long-term debt (150,465) (11,503)
Proceeds from issue of share capital - 961,187
Increase in bank indebtedness 642,988 12,433
Increase in related party advances 19,092 75,663
Proceeds from loans payable 1,075,340 -
Repayments on loans payable (85,512) -
Proceeds from convertible debenture 500,000 -
- ----------------------------------------------------------------------------- --------------
2,001,443 1,037,780
- ----------------------------------------------------------------------------- --------------
Effect of exchange rate changes on cash 276,820 (22,185)
- ----------------------------------------------------------------------------- --------------
Increase in cash 771,055 72,019
Cash and cash equivalents, beginning of periods - 21,216
- ----------------------------------------------------------------------------- --------------
Cash and cash equivalents, end of periods $ 771,055 $ 93,235
============================================================================= ==============
Supplemental cash flow information
Cash paid during the periods for:
Income taxes $ - $ -
Interest $ 83,378 $ 110,553
Non-Cash investing and financing activities during the periods for:
Trade obligations settled with 55,277 Common shares $ 21,841 $ -
Financing fees settled with 1,283,953 Common shares $ 540,386 $ -
============================================================================= ==============
6
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2002
(expressed in U.S. dollars)
- --------------------------------------------------------------------------------
1. Basis of Presentation and Consolidation
- --------------------------------------------------------------------------------
Going concern basis of presentation
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States. This assumes
that Universe2U Inc. (the "Company") will be able to realize its assets and
discharge its liabilities in the normal course of business. Should the Company
be unable to continue as a going concern as a result of the inability to locate
sufficient financing, it may be unable to realize the carrying value of its
assets and to meet its liabilities as they become due.
As at June 30, 2002, the Company has incurred significant losses and has a
deficit to date of $(16,844,764), has a working capital deficiency of $3,705,573
and used $1,459,382 of cash for operating activities during the period. In
addition, the Company has been unable to meet its payroll obligations, trade
obligations, and long-term debt commitments as they become due as a result of
their cash flow deficiency.
Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary in order to make the financial statements not
misleading have been included. Results for the six months ended June 30, 2002
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-KSB filed on April 15, 2002 for the year ended December 31,
2001.
Basis of consolidation
These financial statements have been prepared on a consolidated basis and
include 100% owned subsidiaries' assets and liabilities as well as the revenues
and expenses arising from their respective incorporation or acquisition dates.
Investments in entities over which the Company has significant influence but not
control are accounted for under the equity method of accounting.
2. Foreign Exchange
- --------------------------------------------------------------------------------
The Company's Canadian operations are self-sustaining and therefore their assets
and liabilities are translated into U.S. dollars, the basis of presentation of
these financial statements, using the period end rate of exchange. Revenue and
expenses of such operations are translated using the average rate of exchange
for the period. The related foreign exchange gains and losses arising on
translation of the Company's Canadian operations are included in shareholders'
equity until realized.
7
3. Transactions with Related Parties
- --------------------------------------------------------------------------------
As of June 30, 2002, the following balances were due from related parties:
Officers and directors $ 25,952
The amounts due to and from officers and directors are non-interest bearing, due
on demand and have no fixed repayment terms.
4. Goodwill
- --------------------------------------------------------------------------------
On May 14, 2002, the Company completed the transaction with Wisper Inc. The
Company acquired broadband connectivity customers, supply contracts, agent
agreements, and the equipment serving those customers which include: (i) a
wireless network with towers in Brampton, Mississauga, and Georgetown, Ontario;
(ii) know how on deploying fixed wireless ISM networks; (iii) customer care and
trouble ticket application; (iv) sales agent agreements; and (v) strategic
agreements with key suppliers such as Bell Nexxia and Futureway Communications.
The customer base provides the Company with over $344,000 CDN in recurring
annual revenue. The physical assets have a current net book value of
approximately $136,000 CDN.
This transaction was accounted for under the purchase method of accounting.
Results of operations of the acquired business are included in the accompanying
financial statements since the date of acquisition. In accordance with SFAS 142
goodwill is not amortized on an annual basis but instead tested for impairment.
At June 30, 2002, the value of goodwill was considered to be impaired and
written off to income.
Inventory $ 9,662
Prepaid deposits 19,786
Capital assets 89,714
Current liabilities (76,157)
Goodwill 120,946
- ----------------------------------------------------
Total consideration $ 163,951
====================================================
In exchange for the Wisper Network assets, Wisper Inc. (CDNX: WIP) will receive
up to a maximum total of $364,054 CDN worth of Universe2U Inc. shares and cash,
subject to shareholder approval. The terms of the deal do not require the
Company to pay the cash or shares upfront, however, the Company will be assuming
a net of $115,470 CDN of liabilities associated with the assets and wholesale
expenses of the acquired business. The Company will pay $180,000 CDN in cash or
shares over a 12-month period and the balance of $68,584 in shares with a
one-year trade restriction. The Agreement has provisions for additional purchase
price adjustments. In addition, some of Wisper's key staff, associated with
broadband deployment will join the Company.
8
5. Bank Indebtedness
- --------------------------------------------------------------------------------
The Company's credit facility provides for an operating line to a maximum of
$2.5 million CDN that must be fully secured by cash deposits, a $1 million CDN
contract forward facility, and credit cards with a spending limit of $50,000.
As at June 30, 2002, the operating line of $1,000,000 CDN was being fully
utilized. In addition to the cash deposits, the Company has provided the
following additional security for the credit facilities: (i) a general security
agreement over accounts receivable, inventory, intangible assets, and capital
assets; (ii) a general postponement of all claims; (iii) an assignment of All
Risk Business Insurance; and (iv) corporate cross guarantees from all
subsidiaries. The operating line bears interest at the bank's prime lending
rate plus 0.5% if the facility is fully utilized and supported by cash deposits
and at prime plus 1.5% if the cash deposits are maintained at less than $2.5
million CDN. The month end prime rate as at June 30, 2002 was approximately
4.25% (2001 - 6.25%).
6. Loans Payable
- --------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------- ----------------
Loan payable, bearing interest of 45,000
Common shares of the Company, balance
due at maturity of February 18, 2002.
Loan provides for a 60-day extension
upon payment of a fee of $10,000 CDN .
Penalty provisions require a payment of
500,000 Common shares if loan is not
repaid by the end of the first 60-day
period and an additional 250,000 Common
shares if the loan is not repaid by the
end of the second 60-day period. $ 49,951 $ -
Loan payable, bearing monthly interest
payments of $8,834 CDN, balance due at
maturity of August 15, 2002. In
addition, the Company must provide the
lender with 5,500 Common shares of the
Company for each day the loan is
outstanding to a maximum of 1,000,000
Common shares. The loan also provides
for a 10% monthly payment penalty in the
event of default at maturity and a
payment of 3 months interest for early
termination of the loan. $ 527,635 $ -
Note payable, non-interest bearing,
principal payments of $15,000 CDN due
monthly with balance due at maturity of
May 14, 2003 (note 4). $ 144,166 $ -
- -------------------------------------------------------- ----------------
Subtotal $ 721,752 $ -
- -------------------------------------------------------- ----------------
6. Loans Payable - continued
- --------------------------------------------------------------------------
Subtotal $ 721,752 $ -
9
Loan payable bearing interest at 8% per
annum compounded monthly. The loan may
be drawn down in increments of between
$10,000 and $50,000 to a maximum of
$500,000. Any and all outstanding
amounts shall be repaid in full on the
earlier of (i) such date as the Company
has adequate reserves as determined by
the Audit Committee; or (ii) July 27,
2003. The Company shall also issue
warrants to the lender under the loan
agreement in the amount corresponding to
the fair market value of the Company's
Common stock as of the date of each draw
down under the loan agreement. Each of
such warrants shall be exercisable at
fair market value for 1.15 shares of
restricted Company Common stock. 268,076 -
- -------------------------------------------------------- ----------------
989,828 -
Less: Current portion 721,752 -
- -------------------------------------------------------- ----------------
$ 268,076 $ -
======================================================== ================
7. Convertible Debenture
- --------------------------------------------------------------------------------
On June 25, 2002, the Company received cash of $500,000 in exchange for a one
year Convertible Debenture ("Debenture") convertible into shares of the
Company's $0.00001 par value common stock and a separate Common Stock Warrant
("Warrant") for the purchase of 500,000 shares of common stock. The Debenture
is due June 25, 2003 and provides for accrual of interest at a rate of 12% per
annum payable quarterly in cash or shares at the option of the Company.
The Debenture is convertible into the Company's common stock at a conversion
price of the lesser of (1) $0.50 per share and (2) 55% of the average of the
lowest three intra-day trading prices during the twenty trading days immediately
preceding the applicable conversion date. The beneficial conversion feature was
ascribed a value of $73,250 which was reported as a discount against the
debenture.
The Warrants give the holder the right to purchase 500,000 shares of the
Company's common stock at an exercise price of $0.30 per share subject to an
anti-dilution provision. The Warrants are exercisable on the date of grant and
expire on June 25, 2004. The Warrants were assigned a value by the Company
equal to approximately $0.16 per warrant or $82,300 based on the exercise price
of the warrant and the trading price of the Company's common stock at the date
of grant.
10
7. Convertible Debenture - continued
- --------------------------------------------------------------------------------
The Debentures bear a mandatory prepayment penalty of 130% of the principal and
all accrued interest being prepaid plus any other amounts owing under the
Debentures. The Company's right to prepay without penalty expires 30 days after
issuance of the Debentures.
The Debentures are secured by a second charge on all of the Company's assets and
3,000,000 shares of common stock owned by the Company's Chairman, pending
entering into a subordination agreement with the existing primary lender,
Laurentian Bank of Canada.
The investors committed to purchase additional Debentures in the amount of
$1,000,000 on the same terms as above. The first installment of $500,000 was
due within 10 days of the Company filing a Registration Statement which was
received on August 9, 2002 and the second installment of $500,000 is due within
days following the effective date of such Registration Statement.
8. Share Capital
- --------------------------------------------------------------------------------
Stock options
On June 9, 2000, the Board of Directors adopted the Company's 2000 Equity
Incentive Plan ("the Plan"). The Plan provides for the potential grant of
options and other securities to employees, directors and consultants of the
Company and its subsidiaries. The purpose of the Plan is to provide an
incentive to such persons with respect to Company activities. The terms of the
awards under the Plan are determined by a Board appointed committee. The Plan
was approved and ratified by the shareholders within twelve months of the
adoption date. Under the terms of the Plan as approved by the shareholders,
1,500,000 shares of common stock may be issued, with replenishment available
under the Plan each year at the discretion of the Board (or the committee of the
Board) up to an amount equal to 10% of the Company's outstanding stock. As of
June 30, 2002, 3,142,500 (2001 - 1,027,048) options were granted or outstanding
under the Plan. Such options have been granted at exercise prices ranging from
$0.01 to $1.00 per share and as of June 30, 2002, options to purchase 959,750
(2001 - NIL) shares of common stock of the Company were vested.
As of June 30, 2002, an aggregate of 2,033,250 (2001 - 2,296,250) non-Plan stock
options were outstanding that had been granted to employees, directors and
consultants of the Company and its subsidiaries. Such options had been granted
at exercise prices ranging from $0.01 per share to $0.75 per share and as of
June 30, 2002, options to purchase 1,433,250 (2001 - 980,000) shares of common
stock of the Company were vested.
11
8. Share Capital - continued
- --------------------------------------------------------------------------------
The Company accounts for stock-based compensation under the provisions of APB
No. 25 "Accounting for Stock Issued to Employees" for issuances to employees and
directors, for services as a director, and, accordingly, recognizes compensation
expense for stock option grants to the extent that the estimated fair value of
the stock exceeds the exercise price of the option at the measurement date.
Issuances to consultants are accounted for under the fair value method of SFAS
123. During the period, certain options were re-priced from original exercise
prices of between $3.75 to $5.00 to $0.75 per share as a result of market
conditions. The re-priced options are accounted for using variable plan
accounting as prescribed by FIN 44. This non-cash compensation expense is
charged against operations ratably over the vesting period of the options or
service period, whichever is shorter, and was $499,332 for the period (2001 -
$1,755,215). In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the fair value of each fixed option granted is estimated on the
date of grant using the Black-Scholes option pricing model, using the following
weighted average assumptions:
Option assumptions 2002 2001
- ----------------------------------------------- --------
Dividend yield $ - $ -
Expected volatility 75% 75%
Risk free interest rate 4.70% 4.90%
Expected option term 1.2 5.0
Fair value per share of options granted $ 1.76 $ 2.69
- ------------------------------------------------ --------
Compensation expense recorded under FAS No. 123 would have been approximately
$2,886,890 for 2002 (2001 - $2,455,233), increasing the loss per share by $0.06
in 2002 (2001 - $0.02).
As at June 30, 2002, details of options outstanding were as follows:
Outstanding Exercisable
- --------------------------------------------------------------------------------------
weighted average weighted average
number exercise price number exercise price
- --------------------------------------------------------------------------------------
December 31, 2000 1,661,000 $0.95 1,188,250 $0.06
Granted 2,253,762 $2.72 1,162,500 $0.66
Exercised (263,547) $0.44 - $ -
Expired (546,214) $3.08 - $ -
- --------------------------------------------------------------------------------------
December 31, 2001 3,105,001 $1.90 2,350,750 $0.36
Granted 2,689,863 $0.58 25,000 $0.01
Exercised (477,363) $0.45 - $ -
Expired (141,751) $2.73 - $ -
- --------------------------------------------------------------------------------------
June 30, 2002 5,175,750 $0.41 2,375,750 $0.36
12
8. Share Capital - continued
- --------------------------------------------------------------------------------
As at June 30, 2002, stock options expire as follows:
- ---------------------------------------------------------------------------------
number exercise number
outstanding price exercisable
- ---------------------------------------------------------------------------------
2004 400,000 $ 0.01 400,000
2005 788,250 $ 0.09 788,250
2006 567,500 $ 0.75 567,500
2007 1,140,000 $ 0.63 620,000
2008 1,280,000 $ 0.46 -
2009 850,000 $ 0.31 -
2010 100,000 $ 0.51 -
2011 50,000 $ 0.51 -
- ---------------------------------------------------------------------------------
5,175,750 $ 0.41 2,375,750
As at June 30, 2002, details of share purchase warrants outstanding were as
follows:
- ---------------------------------------------------------------------------------
number weighted average
outstanding exercise price expiry date
- ---------------------------------------------------------------------------------
621,500 $ 5.00 2002
377,257 $ 4.96 2003
671,663 $ 0.57 2004
18,505 $ 0.66 2005
375,000 $ 4.00 2006
- ---------------------------------------------------------------------------------
2,063,925 $ 2.81
- ---------------------------------------------------------------------------------
13
8. Share Capital - continued
- --------------------------------------------------------------------------------
Continuity of stockholders' equity
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
accumulated
additional comprehen- other comp-
common par paid in sive income rehensive
shares value capital (loss) income (loss) deficit total
- --------------------------------------------------------------------------------------------------------------
December 31, 2000 36,758,500 $367 $6,330,042 $(75,138) $(4,661,716) $1,593,555
- --------------------------------------------------------------------------------------------------------------
Net loss for the period - - - (9,302,440) - (9,302,440) (9,302,440)
Exchange differences - - - 216,461 216,461 - 216,461
Total comprehensive
(loss) (9,085,979)
Private placements 343,452 3 915,252 - - 915,255
- 915,251
Conversion of liability 671,992 7 624,650 - - 624,657
Exercise of options 263,547 3 263,698 - - 263,701
Financing commitment
fee (note 12a) 375,000 4 1,162,496 - - 1,162,500
Deposit on net asset
acquisition (note 12c) 500,000 5 1,774,995 - - 1,775,000
Stock option
compensation - - 2,425,519 - - 2,425,519
Issuance of warrants - - 785,428 - - 785,428
- --------------------------------------------------------------------------------------------------------------
December 31, 2001 38,912,491 $389 $14,282,080 $141,323 $(13,964,156) $ 459,636
- --------------------------------------------------------------------------------------------------------------
Net loss for the period - - - (2,880,608) - (2,880,608) (2,880,608)
Exchange differences - - - (360,885) (360,885) - (360,885)
Total comprehensive
(loss) (3,241,493)
Conversion of liability 55,277 - 21,841 - - 21,841
Exercise of options 714,479 7 389,072 - - 389,079
Financing fees 1,283,953 13 540,373 - - 540,386
Stock option
compensation - - 499,332 - - 499,332
Issuance of warrants - - 87,588 - - 87,588
Beneficial conversion
feature on debenture - - 73,250 - - 73,250
- --------------------------------------------------------------------------------------------------------------
June 30, 2002 40,966,200 $409 $15,893,536 $(219,562) $(16,844,764) $(1,170,381)
- --------------------------------------------------------------------------------------------------------------
14
On April 11, 2002, the Board of Directors approved the Company's proposed
Refinancing Plan to raise additional capital through private financing. The key
component of the Refinancing Plan was to temporarily reduce the number of
publicly tradable Company shares by requesting the Company's stockholders submit
their shares of common stock to a voluntary lockup for a period of one year.
The Company sought to obtain a minimum of 29 million shares for inclusion in the
lockup representing approximately 80% of all outstanding Company shares. Any
decision whether to enter into financing arrangements during the effective
period of the lockup agreement will be at the sole discretion of the Board of
Directors. During the effective period of the lockup, stockholders
participating in the lockup may not engage in any of the following:
a. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend, or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any derivative securities,
b. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock or any derivative securities, or
c. make any open market transactions relating to shares of common stock or any
derivative securities and will not make any demand for or exercise any
right with respect to, the registration of any shares of common stock or
any derivative securities.
Effective June 6, 2002, certain of our existing stockholders holding an
aggregate of 32,829,765 shares of stock, including shares underlying then
outstanding options, agreed to lock-up their shares and options. The Lock-up
Agreement generally prohibits sales of such shares until April 30, 2003, subject
to certain exceptions.
9. Information on Operating Segments
- --------------------------------------------------------------------------------
General description
The Company's subsidiaries were organized into operating segments based on the
nature of products and services provided and into geographical segments based on
the location of customers. The Company's operations were classified into four
reportable operating segments; Fiber Construction and Maintenance Services
("FC&MS"), Fiber Network and System Engineering and Design ("FN&SED"), Sales and
Marketing ("S&M"), and Network Services ("NS") and also into two reportable
geographic regions; Canada and the United States. In the current year, the
Company is no longer organized into operating segments.
The FC&MS segment was responsible for building and maintaining the telecom
infrastructure including long-haul network builds, regional networks, community
networks, and in-building networks. The focus was on physical infrastructure to
support telecommunications encompassing fiber, wireless and copper based
telecommunications.
15
9. Information on Operating Segments - continued
- --------------------------------------------------------------------------------
The FN&SED segment was responsible for all engineering and design activities
including permits, designs, mapping, GIS, structural design, engineered
drawings, network design, equipment specifications, research and development and
the securing and perfecting of rights of ways.
The S&M segment was responsible for all direct sales, which involve the sale of
telecom infrastructure products to telecommunication companies,
telecommunication services on behalf of telecommunications companies and
services on behalf of the right of way owners. The segment also acted as broker
for sales of rights of ways.
The NS segment was a support service for the other operating segments.
The accounting policies of the segments are the same as those described in the
Company's annual financial statements. The Company evaluated financial
performance based on measures of gross revenue and profit or loss from
operations before income taxes. The following tables set forth information by
operating segment as at, and for the six month period ended June 30, 2001.
Information by operating segment as at and for the six month period ended June
30, 2001:
- ----------------------------------------------------------------------------------------------------
FC&MS FN&SE S&M NS Total
- ----------------------------------------------------------------------------------------------------
Revenue $ 294,746 231,520 306,984 102,790 $ 936,040
Interest expense $ 17,463 (2,702) (10,220) 11,060 $ 15,601
Amortization of
capital assets $ 59,857 12,465 7,867 56,864 $ 137,053
Loss before
income taxes $(1,583,050) (292,079) (382,064) (518,572) $(2,775,765)
Total assets $ 872,948 191,014 126,000 781,189 $ 1,971,151
Capital assets $ 427,763 112,433 50,979 662,968 $ 1,254,143
Capital asset additions $4,245 - - 6,598 $ 10,843
Reconciliations to consolidated results as at and for the six month period ended June 30, 2001
- -------------------------------------------------------------------------
Segmented Corporate Total
- -------------------------------------------------------------------------
Revenue $ 936,040 - $ 936,040
Loss before income taxes $(2,775,765) (1,935,540) $(4,711,305)
Total assets $ 1,971,151 1,869,517 $ 3,840,668
Capital assets $ 1,254,143 41,535 $ 1,295,678
Capital asset additions $ 10,843 18,521 $ 29,364
16
9. Information on Operating Segments - continued
Geographic information
Information by geographic region as at and for the six-month period ended June 30, 2002:
- ---------------------------------------------------------------------------------------
Canada United States Total
- ---------------------------------------------------------------------- ----------------
Revenue $ 95,347 - $ 95,347
Interest expense $ 65,462 17,916 $ 83,378
Amortization of capital assets $ 56,789 5,164 $ 61,953
Income (loss) before income taxes $ (1,867,234) (1,013,374) $ (2,880,608)
Total assets $ 2,456,300 80,964 $ 2,537,264
Capital assets $ 510,911 18,994 $ 529,905
Capital asset additions $ 89,714 - $ 89,714
- ------------------------------------------------------------------- ----------------
Information by geographic region as at and for the six-month period ended June
30, 2001:
Canada United States Total
- ------------------------------------------------------------- ---------------
Revenue $ 889,585 46,455 $ 936,040
Interest expense $ 66,380 44,173 $ 110,553
Amortization of capital assets $ 140,763 3,808 $ 144,571
Loss before income taxes $(2,640,776) (2,070,529) $(4,711,305)
Total assets $ 2,030,036 1,810,632 $ 3,840,668
Capital assets $ 1,267,482 28,196 $ 1,295,678
Capital asset additions $ 24,379 4,985 $ 29,364
- ------------------------------------------------------------- ---------------
Revenues are attributed to countries based on location of customers.
10. Earnings per Share
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per
Shares" which requires companies to report basic and fully diluted earnings per
share ("EPS") computations effective with the Company's quarter ending December
31, 1997. Basic EPS excludes dilution and is based on the weighted-average
common shares outstanding and diluted EPS gives effect to potential dilution of
securities that could share in the earnings of the Company. Diluted EPS has not
been presented as it is anti-dilutive as a result of having incurred losses in
each period. Options that may potentially dilute EPS in the future are listed
in note 8.
17
10. Earnings per Share - continued
- --------------------------------------------------------------------------------
Six months ended June 30
2002 2001
- --------------------------------------------------------------------------------
Basic EPS Computation:
Net loss for the periods $(2,880,608) $(4,711,305)
Weighted average outstanding shares 39,579,600 36,967,831
Basic EPS $ (0.07) $ (0.13)
11. Commitments and Contingencies
Lease commitments
At June 30, 2002, the Company's total obligations, under various operating
leases for equipment and occupied premises, exclusive of realty taxes and other
occupancy charges, are as follows:
2002 $ 100,669
2003 25,767
2004 14,532
2005 14,532
------------------------------------------
Total $ 155,500
------------------------------------------
The Company was in arrears with respect to several of their operating lease
commitments at year-end. Arrears payments plus accrued interest are included in
current liabilities as at June 30, 2002.
Contractual commitments
On April 8, 2002, the Company executed a Marketing Agreement with EBI
Communications, Inc. ("EBI") where it became a reseller for the EBI's Voice over
IP service and their Least Cost Routing Gateway. The Company has the right to
market and sell the products to the worldwide markets directly or through other
agents. The product will be sold under a private label and brand the products
as Universe2U - Least Cost Router, Voice2U, or other such name. It is
contemplated that the two parties will work collaboratively on product
development; with the Company providing product feature input/packaging and EBI
doing the technical research and development. There are two conditions
precedent for this Agreement to become binding on the parties: (i) EBI and
Universe2U must work together to secure financing for $750,000, at terms
acceptable to both parties and (ii) to set up the necessary back office to
support the generation of LCRR, marketing cost and fund the inventory. There is
to be final acceptance testing of the product by the Company. Active marketing
of the product is expected to commence in June 2002.
18
11. Commitments and Contingencies - continued
- --------------------------------------------------------------------------------
Employment contracts
The Company has employment agreements and arrangements with its executive
officers and certain management personnel. The majority of agreements continue
until terminated by the executive or the Company and do not provide for
severance payments of any kind upon termination. The agreements include a
covenant against competition with the Company, which extends for a period of
time after termination for any reason. As of June 30, 2002, the minimum annual
commitment under these agreements was approximately $208,000.
Legal proceedings
At June 30, 2002, the Company and its wholly owned subsidiaries are involved in
various suits, claims, proceedings, and investigations that arise from time to
time in the normal course of business.
Certain of the proceedings relate to wrongful dismissal actions brought against
the Company by former employees, claims of misappropriation of confidential
information by competitors, and claims of breach of contract by service
providers. The Company is unable to ascertain the ultimate aggregate amount of
monetary liability or operational impact of these identified legal proceedings
that seek damages of material or indeterminate amounts due to the current status
of the claims. The Company therefore cannot determine whether these actions
will, individually or in aggregate, have a material adverse effect on the
business, results of operations, and financial condition of the Company. No
amount has been accrued in the accounts in respect of these matters. The
defendants in these legal proceedings include the Company and certain named
directors and officers of the Company who intend to vigorously defend these
claims.
Other proceedings related to default judgments, orders to pay, statements of
claim, and small claims court actions served against the Company by secured and
unsecured suppliers and other service providers for unpaid accounts. The full
amount of all identified claims plus an estimate of interest and costs that may
be awarded has been accrued in the accounts in respect of these matters as at
June 30, 2002. The Company is working with the creditors to establish
suitable payment arrangements. Subsequent to the period end, several of the
secured creditors exercised their rights to repossess equipment and vehicles
provided to the Company.
19
12. Subsequent Events
- --------------------------------------------------------------------------------
Subsequent to the period end, the following transactions occurred:
(a) On August 1, 2001, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion") pursuant to which
Fusion agreed to purchase directly from the Company on each trading day
during the term of the agreement, $15,000 of common stock up to an
aggregate of $12.0 million. The agreement was to have an initial term of 40
months, but was subsequently extended to 52 months, with an optional
six-month extension at the Company's discretion. The purchase price of
shares of common stock will be equal to a price based upon future market
price of the common stock without any fixed discount to the market price.
The Company has the right to set a minimum purchase price at any time.
Fusion may not purchase shares under the agreement if Fusion or its
affiliates would beneficially own more than 4.9% of the aggregate
outstanding common stock immediately after the purchase. The Company has
the right to increase this limitation to 9.9%. Under the terms of the
agreement Fusion received 375,000 shares of common stock and warrants to
purchase 375,000 shares of common stock at an exercise price of $4.00 per
share, as a commitment fee. The combined fair value of the 375,000 shares
and the 375,000 warrants to purchase 375,000 shares of $1,162,500 is being
charged to operations over the term of the agreement.
The Company intends to utilize the Fusion facility upon registration of the
shares with the Securities and Exchange Commission that is expected to be
finalized subsequent to the period end.
(b) On March 13, 2001, the Company entered into a Common Stock Purchase
Agreement ("Purchase Agreement") for the purchase of 219,729 shares of
common stock for $550,000 with an investor. The Purchase Agreement contains
gross-up provisions so that in the event the Company's common stock trades
at a lower price than the original purchase price, additional shares of
common stock will be issued to the investor. All such shares are entitled
to registration rights. The Purchase Agreement also provided redemption
rights to the Company to redeem such shares. In order for the Company to
maintain its rights to continue the redemption provisions under the
Purchase Agreement, the Company is obligated to pay a monthly fee to the
investor. The Company and the investor agreed to continue the Company's
redemption rights on the shares beyond the originally contemplated period
of two months; however, the Company was unable to make requisite payments
after August 2001. The investor agreed to continue the Company's redemption
rights. In April 2002, the Company and the investor amended the Purchase
Agreement so that in consideration of the investor not exercising its gross
up or registration rights, the Company would make all payments in respect
of the past-due fees, of approximately $95,000, to maintain the Company's
rights to redeem the shares and in addition pay the investor a fee equal to
13.25% on the original purchase price of the shares for a period of up to 6
months. Upon such payments and payment of the original purchase price for
the shares, the Company may exercise its redemption rights at any time at
its sole discretion.
20
12. Subsequent Events - continued
- --------------------------------------------------------------------------------
(c) On December 14, 2001, the Company announced that it has executed a new Term
Sheet for the acquisition of substantially all of the operating assets of
Digital Global Internet Inc. ("DGI"), a Baltimore, Maryland based company.
The acquisition was originally expected to be completed within 75 days
however it has not yet closed. The Company had previously announced on June
12, 2001 the signing of a Term Sheet with DGI, however, the Company and DGI
were not able to come to mutually acceptable definitive terms on the basis
of that June 2001 Term Sheet.
21
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with our Condensed Consolidated
Financial Statements for the second quarter ended June 30, 2002.
Overview
- --------
We provide broadband connectivity and content delivery solutions to communities
that have traditionally been underserved by telecommunications companies. These
communities include municipalities, schools, hospitals and commercial,
governmental, industrial, and residential complexes whose location makes it more
difficult or costly to provide broadband access. We provide these communities
with consulting and management services for design, development, operation,
marketing, and sales. We have significantly reduced our costs while adding
additional industry experts to our team. The acquisition of Wisper Network's
broadband business has brought to us a network footprint in the Greater Toronto
Area. As a network partner, we work with communities to make their network
ventures successful. We provide wireless telecommunications services and resell
DSL service to small and medium-sized enterprises in communities that we believe
have traditionally been underserved by telecommunications providers. We intend
to expand our business by exploiting the anticipated increased connectivity of
our customers and offering a range of enhanced services including Internet-based
telephony under the name "voice2u" and managed e-community portals. We
currently have approximately 200 customers for our services, all of which are
located in Canada. Our activities are presently limited to Canada and the
United States. We are not a telecommunications carrier nor do we provide
regulated telecommunications services.
In early 2001, we commenced a strategic shift in our business strategy to our
present model. Prior to that time, we expected to build our relationships with
communities through our infrastructure expertise as our business primarily
involved design, construction and maintenance of broadband infrastructure as a
third party contractor for large telecommunications companies and electric
utilities building their own telecommunications network. While that business
resulted in multi-million dollar build-out contracts, it was dependent on the
health of the telecom industry and the financial health of our telecom
customers. It was also labor-intensive and limited in its ability to produce
recurring revenue streams from value-added products and services. Revenues from
design, construction, and maintenance services (and sales of related products)
were approximately $1.22 million in 2001 and $5.65 million in 2000. The
decrease reflects adverse conditions in the telecom market as well as our change
in business strategy. In connection with our new focus, we disposed of a number
of capital assets, reduced our employee base from approximately 180 employees to
our current level of 9 employees, and implemented other cost-cutting measures.
STRATEGY
- --------
Our goal is to become a leading telecommunications solutions provider. Our
strategy includes the following key elements:
- - "Partner" With Communities - Our goal is to be viewed as a partner with
communities in the successful deployment and operation of broadband
networks. We believe that access owners, including municipalities, can play
a key role in marketing broadband access and related products and services
to their constituents. We will seek mutually beneficial compensation
arrangements with these groups (e.g. co-branding/co-marketing agreements
and revenue-sharing arrangements) in order to motivate these groups to
promote broadband-based products and services to their constituents. We
intend to seek equity participation in certain projects. We also intend to
22
offer community portals, which would act as a vehicle through which
value-added features could be offered to community constituents. We refer
to our partnership with these groups as "SmartCommunities."
- Offer Comprehensive Broadband Solutions - Our goal is to provide the
management for complete broadband solutions including network design,
project management for network construction, broadband connectivity
through reseller arrangements, wireless connectivity installation,
Internet-based telephony, managed e-community portals, and a
comprehensive portfolio of broadband content and value-added services.
As a solutions integrator, we believe that our independence,
commitment to universal access and open networks and turnkey solutions
provide attractive and competitive attributes to our business.
- Target Underserved Communities - We will seek to exploit anticipated
growth in broadband access and related services, particularly among
smaller communities. A recent Nielson/NetRatings survey concluded that
44.8% of United States Internet broadband users live in the top 10
largest metropolitan areas. Further, the Gartner Group predicts that
broadband Internet access penetration will exceed 75% by 2005 up from
50% in 2002. Roughly, two-thirds of the North American population is
located smaller communities. In addition, some areas in major centers
are underserved. Thus, we expect the growth rate of broadband in
smaller communities to double that of the major metropolitan areas.
- Leverage Experience and Relationships - Our historical activities
designing, engineering, constructing, and maintaining networks for
communities have provided our management with valuable industry
experience and relationships in our target markets. It has also played
an important role in shaping our new business strategy. We intend to
leverage our industry experience and relationships to successfully
implement our business.
- Grow Through Qualified Acquisitions and Strategic Relationships - We
intend to pursue business partnering, acquisitions, and other
strategic relationships to expand our customer base, our ability to
offer turnkey solutions and geographic presence. We believe that the
communication services industry is highly fragmented, consisting of a
large number of smaller, regional businesses and presents significant
opportunities for consolidation. We plan to target those businesses
with high quality management and strong performance records and to
integrate such acquired operations into our organization.
Our Company is the product of an acquisition, completed on May 17, 2000, in
which Paxton Mining Corporation, a Nevada corporation, acquired all of the
outstanding shares of Universe2U Inc. In connection with the acquisition, the
management of our Company changed and our Company's name became Universe2U.
Before the acquisition, under the name Paxton Mining Corporation, we were an
early stage development company organized to acquire, explore, and develop
mining properties. Following the acquisition, we ceased any mining-related
activities.
OPERATING SEGMENTS
Operations are evaluated based on two reportable geographic segments: Canada
and the United States. Prior to the Company's refocus of its business,
operations were organized into segments based on the nature of products and
services provided. The Company's operations were classified into four
reportable operating segments:
23
- - Fiber Construction and Maintenance Services ("FCMS") is responsible for
building and maintaining the telecom infrastructure including long-haul
network builds, regional networks, community networks, and in-building
networks. The focus is on physical infrastructure to support
telecommunications encompassing fiber, wireless and copper based
telecommunications.
- - Fiber Network and System Engineering and Design ("FN&SED") is responsible
for all engineering and design activities including permits, designs,
mapping, GIS, structural design, engineered drawings, network design,
equipment specifications, research and development and the securing and
perfecting of rights-of-ways.
- - Sales and Marketing ("S&M") is responsible for all direct sales, which
involve the sale of telecom infrastructure products to telecommunication
companies, telecommunication services on behalf of telecommunications
companies and services on behalf of the right-of-way owners. The segment
also acts as broker for sales of rights-of-ways.
- - Network Services ("NS") is a support service for the other operating
segments.
Following the refocus the Company is no longer organized into reportable
operating segments other than geographic segments.
24
RESULTS OF OPERATIONS
Certain accounts in the prior period financial statements have been reclassified
for comparative purposes to conform to the presentation adopted in the current
period financial statements.
REVENUES
Total revenues decreased $239,000, or 80% to $58,000 for the three months ended
June 30, 2002 from $297,000 for the three months ended June 30, 2001. Total
revenues decreased $841,000, or 90% to $95,000 for the six months ended June 30,
2002 from $936,000 for the six months ended June 30, 2001. The decrease is
largely attributable to a reduction in the volume of network design,
engineering, construction, and maintenance work from our third party contracting
activities. We believe that the reduction in volume of work is principally
attributable to poor overall conditions in the network engineering and
construction markets. In addition, we changed our business strategy to focus on
further developing our SmartCommunity model. Approximately 80% of the revenue
generated in the three months ended June 30, 2002 is attributable to new
business model.
COST OF SALES
Cost of sales decreased $382,000 or 79%, to $99,000 for the three months ended
June 30, 2002 from $481,000 for the three months ended June 30, 2001. Cost of
sales decreased $890,000 or 71%, to $359,000 for the six months ended June 30,
2002 from $1,249,000 for the six months ended June 30, 2001. The decrease
corresponds to the decrease in revenue, which is offset by the fact, that some
of the Company's cost of sales are fixed. These fixed costs include equipment
rental, lease commitments for equipment, amortization costs, salaries to
engineers, and trade staff. In the short term, we are unable to reduce these
costs proportionally with the reduction of the revenue.
GROSS PROFIT
Gross profit for the three months ended June 30, 2002 was a negative $40,000
(-70% of revenues) versus a negative $183,000 (-62% of revenues) in 2001. Gross
profit for the six months ended June 30, 2002 was a negative $263,000 (-276% of
25
revenues) versus a negative $313,000 (-33% of revenues) in 2001. The decrease
in gross profit reflects the inactivity in the construction area while
continuing to pay the lease costs of the equipment and other continued fixed
costs as the Company continued to refocus its business strategy.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administration expenses decreased $519,000, or 54%; to
$437,000 for the three months, ended June 30, 2002 from $957,000 for the three
months ended June 30, 2001. Selling, general and administration expenses
decreased $1,152,000, or 49%; to $1,202,000 for the six months, ended June 30,
2002 from $2,354,000 for the six months ended June 30, 2001. The decrease is
largely attributed to our shift in business strategy and associated reductions
in administrative, executive, management and other support salaries, and their
associated overhead expenses and a reduction in printing and other office costs.
STOCK BASED COMPENSATION
Stock based compensation expense for the three months ended June 30, 2002 was
$87,000 versus $862,000 for the three months ended June 30, 2001. Stock based
compensation expense for the six months ended June 30, 2002 was $499,000 versus
$1,755,000 for the six months ended June 30, 2001. The Company accounts for
stock-based compensation under the provisions of APB No. 25 "Accounting for
Stock Issued to Employees" and accordingly, recognizes compensation expense for
stock options to the extent the estimated fair value of the stock exceeds the
exercise price of the option at the measurement date. Issuances to consultants
are accounted for under the fair value method of SFAS 123. During the period,
options to purchase an aggregate of 2,095,875 were re-priced from their original
exercise prices of between $3.75 to $5.00 to $0.75 per share as a result of
market conditions. The re-priced options are accounted for using variable plan
accounting as prescribed by FIN 44. The compensation expense is charged against
operations ratably over the vesting period of the options or the service period,
whichever is shorter. As at June 30, 2002, there were 5,175,750 stock options
outstanding with a weighted average exercise price of $0.41.
INTEREST AND FINANCING COSTS
Interest and financing increased $277,000 or 384% to $347,000 for the three
months ended June 30, 2002, from $72,000 for the three months ended June 30,
2001. Interest and financing increased $650,000 or 585% to $761,000 for the six
months ended June 30, 2002, from $111,000 for the six months ended June 30,
2001. This was a direct result of increased financing necessary for capital
expenditures and to fund the operating losses. During the first six months of
the current year, the Company experienced cash flow shortages on a number of
occasions and had been unable to meet all of its payable obligations on a timely
basis. The company is late in remitting payroll withholding and sales taxes to
the tax authorities.
GOODWILL
In accordance with SFAS 142 goodwill is not amortized on an annual basis but
instead tested for impairment. At June 30, 2002, the value of goodwill $121,000
associated with Wisper transaction was considered to be impaired and written off
to income in the three months ended June 30, 2002. Although we were required to
write-off these assets, the acquisition of Wisper Network's broadband business
has brought to us a network footprint in the Greater Toronto Area and key
employees to implement our new model.
DEPRECIATION AND AMORTIZATION
26
Depreciation and amortization decreased $45,000 or 76% to $14,000 for the three
months ended June 30, 2002, from $59,000 for the three months ended June 30,
2001. Depreciation and amortization decreased $83,000 or 57% to $62,000 for the
six months ended June 30, 2002, from $145,000 for the six months ended June 30,
2001. The decrease was the result of a substantial reduction in capital assets
primarily in the construction divisions.
NET LOSS
The Company incurred losses before income taxes for the three months ended June
30, 2002 of $1.05 million compared to a loss before income taxes of $2.2 million
for the three months ended June 30, 2001. Non-cash stock based compensation
accounted for $87,000 of the loss in the three months ended June 30, 2002,
compared to $862,000 for the three months ended June 30, 2001. The Company
incurred losses before income taxes for the six months ended June 30, 2002 of
$2.9 million compared to a loss before income taxes of $4.7 million for the six
months ended June 30, 2001. Non-cash stock based compensation accounted for
$499,000 of the loss in the six months ended June 30, 2002, compared to
$1,755,000 for the six months ended June 30, 2001.
WORKFORCE
Since the beginning of the fiscal year, we adjusted our workforce from a peak of
19 people to our current level of 9.
LIQUIDITY AND CAPITAL RESOURCES
Our company has incurred losses since inception and, at June 30, 2002, has a
deficit as of $(16,844,764) and a working capital deficiency of $(3,705,573).
We have been unable to consistently meet our payroll obligations, trade
obligations, and long-term debt commitments as they become due. These factors
raise substantial doubt as to our ability to continue as a going concern. See
the Review Engagement Report on the Interim Consolidated Financial Statements
included herein as well as the Notes referred to in such report.
During the year, the Company experienced cash flow shortages on a number of
occasions and had been unable to meet all of its payable obligations on a timely
basis. Three of the operating operations were late in remitting payroll
withholding and sales taxes to the tax authorities.
Our operations have been funded to date through a combination of cash flow from
operations and equity and debt financings. Based on our current plan of
operation, we anticipate that our existing cash resources, including available
credit lines and existing credit commitments will not be sufficient to satisfy
our operations beyond the next 12 months.
In an effort to improve our ability to obtain equity-based financing, effective
June 6, 2002, certain of our existing stockholders holding an aggregate of
32,829,765 shares of common stock, including shares underlying then outstanding
options, agreed to lock-up their shares and options pursuant to an agreement
each of them entered into with our company (the "Lock-up Agreement"). The
Lock-up Agreement generally prohibits sales of such shares until April 30, 2003,
subject to certain exceptions.
For the six months ended June 30, 2002, the Company's net cash used in operating
activities was $1,459,000 ($914,000 in 2001). This amount includes adjustments
for non-cash items comprised of depreciation and amortization of $83,000
($145,000 in 2001), stock option compensation of $499,000 ($1,755,000 in 2001),
amortization of deferred charges of $174,000 (Nil in 2001), the issuance of
warrants of $5,000 (Nil in 2001), and losses from significantly influenced
investments and disposals of capital assets totaling $58,000 ($63,000 in 2001).
27
For the six months ended June 30, 2002 net cash used in investing activities was
$48,000 principally attributable to the sale of capital assets. For the six
months ended June 30, 2001, net cash used in investing activities was $29,000,
which consisted of additions to property, plant, and equipment.
For the six months ended June 30, 2002, net cash provided by financing
activities of $2.0 million, included net proceeds from the increase in bank
indebtedness of $643,000 and net proceeds on term debt and convertible
debentures of $1,339,000 and a decrease in due from related parties of $19,000.
For the six months ended June 30, 2001 net cash provided by financing activities
of $1.0 million included net proceeds from the issue of share capital of
$961,000 offset by net repayments on long-term debt of $12,000, and an increase
in bank indebtedness of $12,000 and the net decrease in due from related parties
of $76,000.
Upon approval by Wisper Networks' shareholders of our planned acquisition of its
wireless network business, we will be committed to pay the purchase price as
follows: $364,000 CDN, of which $180,000 CDN is payable in 12 monthly
installments of $15,000 CDN in cash, or under certain circumstances, shares of
common stock at market value. In addition, we assumed liabilities as part of the
transaction, currently estimated at $115,000 CDN. The agreement also provides
for adjustments to the purchase price based upon annual recurring revenue during
the 60 days following the date of the agreement, May 14, 2002, which is
currently estimated to be $364,000 CDN. The resulting balance will be paid in
shares price at $0.69 on May 15, 2003, subject to registration with the Ontario
Securities Commission.
FUSION EQUITY LINE
On August 1, 2001, we entered into a common stock purchase agreement with Fusion
Capital Fund II, LLC pursuant to which Fusion agreed to purchase shares of our
common stock on each trading day during the term of the agreement in an amount
not to exceed $15,000 per day (unless our stock price exceeds $7.00 per share),
up to an aggregate of $12.0 million during the term of the agreement. The
agreement was to have an initial term of 40 months, but was recently extended to
52 months, with an optional six-month extension at our discretion. The purchase
price of the shares of common stock will be equal to the lowest sale price of
our common stock on the purchase date; or the average of the three (3) lowest
closing sale prices of our common stock during the fifteen (15) consecutive
trading days prior to the date of a purchase by Fusion.
We have the right to suspend or limit purchases and to terminate the agreement
at any time. Notwithstanding the foregoing, Fusion may not purchase shares of
common stock under the common stock purchase agreement if Fusion or its
affiliates would beneficially own more than 4.9% of our then aggregate
outstanding common stock immediately after the proposed purchase. If the 4.9%
limitation is ever reached, we have the option to increase this limitation to
9.9%. If the 9.9% limitation is ever reached, this limitation will not limit
Fusion's obligation to fund the daily purchase amount. Fusion must liquidate
holdings to remain below the 9.9% threshold, however it does not limit their
funding obligation.
We have the right to set a minimum purchase price ("floor price") at any time.
If our stock price trades at a level that results in a purchase price below the
floor price, Fusion will not be permitted or obligated to purchase our stock
under the agreement. Currently, the floor price is $2.50. We can increase or
decrease the floor price at any time upon one trading day prior notice to
Fusion.
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Fusion has agreed that neither it nor any of its affiliates shall engage in any
direct or indirect short-selling or hedging of our common stock during any time
prior to the termination of the common stock purchase agreement.
Fusion may terminate the common stock purchase agreement without any liability
or payment to the Company upon the occurrence of certain events including our
failure to maintain an effective registration covering resale of the purchased
shares, our failure to maintain trading in our common stock, in each case for
certain periods of time, our default of payment obligations in excess of $1
million, actual or threatened bankruptcy by us and our material breach of the
representations and warranties contained in the agreement.
In consideration for its commitment under the agreement, we issued to Fusion,
for no additional consideration, 375,000 shares of our common stock, and
warrants to purchase 375,000 shares of our common stock at an exercise price of
$4.00 per share. Unless an event of default occurs, Fusion must maintain
ownership of 375,000 shares of our common stock (i) for a period of 40 months
from the date of the common stock purchase agreement, or (ii) until such date as
the common stock purchase agreement is terminated.
Until the termination of the common stock purchase agreement, we have agreed not
to issue, or enter into any agreement with respect to the issuance of, any
variable priced equity or variable priced equity-like securities unless we have
obtained Fusion's prior written consent.
To gain Fusion's consent to proceed with the June 2002 Private Placement and in
consideration for Fusion's extension of the agreement term to 52 months, we
reduced the exercise price of the warrants to $1.00.
On July 31, 2002, we applied for an order granting withdrawal of its
Registration Statement on Form S-3, File No. 333-66940, filed with the
Securities and Exchange Commission on August 6, 2001, covering resale of the
shares to be purchased by Fusion. We intend to file a new registration
statement covering such shares following effectiveness of the pending
registration statement covering resale of the June 2002 private placement
shares. We will not be able to draw upon the Fusion facility until such
registration statement is declared effective.
PALM TRADING CREDIT FACILITY
In July 2001, we established a line of credit with Palm Trading Limited
("Palm"). We may draw upon the line of credit in one or more traunches in an
aggregate principal amount not to exceed $500,000 (the "Credit Line"). Each
draw down may be for a minimum of $10,000 up to a maximum of $50,000.
Outstanding balances accrue interest at a rate of 8% per annum, compounded
monthly. We may draw upon the credit line approximately once per month. The
line of credit shall be repaid on the earlier of such date as we have adequate
cash reserves, as determined by our Audit Committee, or July 27, 2003. Upon
each draw down under the line of credit, we are obligated to issue warrants to
Palm based on the following formula:
# of Warrants = (Funds Advanced / 20-day Average Trading Price) * 15%
Each warrant is exercisable at a price that is 15% greater than the 20-day
average trading price prior to the date of issuance. For financial statement
purposes, the fair value of the warrants is estimated on the date of grant using
the Black-Scholes pricing model. At June 30, 2002, 37,386 warrants had been
issued in connection with this loan.
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LAURENTIAN BANK CREDIT FACILITY
On February 22, 2002, we established a credit facility with Laurentian Bank of
Canada. The facilities provide for an operating line of credit up to $2.5
million CDN, a $1 million CDN contract forward facility, and credit cards with a
$50,000 spending limit. The line of credit is to be fully secured by cash
deposits. The line of credit bears interest at the bank's prime lending rate
plus 0.5% if the facility is fully utilized and supported by cash deposits and
at prime plus 1.5% if the cash collateral is less than $2.5 million CDN. In
addition, we have provided Laurentian Bank a general security interest covering
substantially all of our assets, as well as corporate cross guarantees from our
subsidiaries.
At June 30, 2002, $800,000 CDN was being utilized under the line of credit. To
fund the cash collateral, on February 15, 2002 we borrowed $800,000 CDN from
1463549 Ontario Inc., an unrelated third party investor. The loan requires
monthly interest only payments of $8,834.34 CDN and matures on August 15, 2002.
The loan bears a 10% monthly payment penalty in the event of default at maturity
and a penalty for early termination equal to three months of interest. We
agreed to pay all costs associated with establishing the loan. We also agreed
to issue to the lender, upon maturity or earlier repayment and for no additional
consideration, 5,500 shares of our common stock for each day the loan is
outstanding up to a maximum of 1,000,000 shares. These shares do not bear
registration rights.
As part of the credit facility with Laurentian, we obtained a $1,000,000 CDN
contract forward facility. The facility permits us to borrow up to 70% of the
value of the contracts the bank deems is qualified.
JUNE 2002 CONVERTIBLE DEBT FINANCING
On June 25, 2002, we entered into an agreement with AJW Partners, LLC, New
Millennium Capital Partners II, LLC, Pegasus Capital Partners, LLC, and AJW/New
Millennium Offshore, Ltd. for the private placement of $1,500,000 principal
amount of secured convertible debentures. The debentures are convertible into
shares of our common stock in accordance with an agreed upon formula (see
below). Under the agreement, the investors purchased an aggregate of $500,000
principal amount of debentures on June 25, 2002, the second installment of
$500,000 was paid on August 9, 2002, within 10 days of our filing this resale
registration statement and the remaining and the investors are committed to
purchase the balance of $500,000 within 10 days following the effective date of
such registration statement. For each $1.00 principal amount of debentures
purchased, the investors will also receive a warrant to purchase one share of
our common stock, resulting in warrants to purchase an aggregate of 1,500,000
shares of our common stock being issued upon completion of the investors' full
funding commitment. The warrants are exercisable in full on the date of grant
at an exercise price $0.30 per share (subject to antidilution adjustment) and
expire June 25, 2005.
We intend to utilize the proceeds of the financing for launching voice2u, our
Internet-based telephony product, expanding our wireless network, marketing and
sales promotion, internal corporate infrastructure development, and general
working capital requirements.
The primary terms of the debentures are as follows:
- Entire principal amount will mature on June 25, 2003.
- The debentures bear interest at 12% per annum with interest payments
due quarterly, payable in cash or shares of Common Stock at our option
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- The debenture holders have the option to convert any unpaid principal
(plus accrued and unpaid interest and other amounts owing under the
debentures) into shares of our common stock at any time after the
original issue date at the then applicable conversion price (subject
to certain limitations).
- The conversion price per share in effect on any conversion date shall
be the lesser of (i) $0.50 per share and (ii) 55% of the average of
the lowest three intra-day trading prices during the twenty trading
days immediately preceding the applicable conversion date.
- The debentures bear a mandatory prepayment penalty of 130% of the
principal and all accrued interest being prepaid (plus any other
amounts owing under the debentures). Our right to prepay the
debentures expires 30 days after issuance of the debentures.
- The Debentures are secured by all of our assets as well as the assets
of our subsidiaries. Pending entering into of a subordination
agreement with our existing primary lender, Laurentian Bank of Canada,
the Debentures are also secured by 3,000,000 shares of Common Stock
owned by Mr. Angelo Boujos, our Chairman, and a principal stockholder
of our company.
- The Debentures include significant penalties if we fail to pay amounts
owing under the Debentures in a timely manner and if we otherwise
breach our obligations under the Debentures.
The shares of common stock issuable upon conversion of the Debentures and
exercise of the Warrants have been included in a registration statement for
resale by the selling security holders pursuant to a registration rights
agreement between us and the selling security holders. The registration
statement has not yet been declared effective.
OTHER
As of June 30, 2002, we were owed, on a net basis, an aggregate of approximately
$26,000 from officers and directors. Amounts due to and from officers and
directors are non-interest bearing, due on demand and have no fixed repayment
term.
At June 30, 2002, we owed approximately $50,000 under a loan from the FSC Group
that was originally scheduled to mature on February 18, 2002. The loan bore
interest of 45,000 shares of common stock. Due to cash constraints, we continue
to extend the maturity of the loan to and thereby became obligated pursuant to
the terms of the loan to issue an aggregate of 750,000 additional shares of
common stock to the lender.
On April 1, 2002, we entered into a loan agreement with Invicta Financial
pursuant to which we agreed to reimburse that entity for $20,000 it paid in July
2001 to list our common stock on the Third Tier of the Frankfurt Stock Exchange.
Under the agreement, we agreed to repay the full $20,000 plus interest at 13.25%
per annum and origination fees of $22,000. We may repay the loan at any time
and the loan does not have a maturity date.
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GOING CONCERN CONSIDERATIONS
The Company has incurred losses to date and has a deficit, to date, of
$(16,844,764) and a working capital deficiency of $(3,705,573). In addition, we
have been unable to consistently meet our payroll obligations, trade
obligations, and long-term debt commitments as they become due. These factors
raise substantial doubt on the Company's ability to continue as a going concern.
The liquidity of the Company has been adversely affected by continuing losses
and shortage of cash resources. The Company continues to seek financing both in
the form of debt and equity and its ability to continue as a going concern is
dependant on the success of these efforts. Please refer to Note 1 of, and the
Review Engagement Report on, the Combined Financial Statements for the six
months ended June 30, 2002. The Management believes that the availability of
the Laurentian Bank Credit Facility, $1.5 million private placement financing,
the Palm Trading Credit Facility, and Fusion financing facility may alleviate
some of the Company's cash flow needs, however, there can be no assurance in
this regard.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have no items that relate to "trading portfolios." We did not
include trade accounts payable and trade accounts receivable in the "other than
trading portfolio" because their carrying amounts approximate fair value. We
may from time to time enter into interest rate protection agreements.
We are subject to market risks due to fluctuation in foreign currency exchange
rates as the Company reports in US dollars yet the bulk of the corporation's
assets are located in Canada. We have not made significant use of financial
instruments to minimize the exposure to foreign currency fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
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Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations", that supersedes APB Opinion 16 and various related
pronouncements, was effective for all business combinations initiated after June
30, 2001. In general, SFAS 141 states that all business combinations are
accounted for as purchase transactions with the pooling-of-interests method
being no longer acceptable. In addition, SFAS 141 establishes new rules
concerning recognition of intangible assets arising in a purchase business
combination and requires enhanced disclosure of information in the period in
which a business combination is completed. The Company will adopt this standard
on all future acquisitions.
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill, and Other
Intangible Assets" supersedes APB Opinion 17 and related interpretations and is
effective for the Company on January 1, 2002. In general, SFAS 142 establishes
new rules on accounting for goodwill and other intangible assets acquired in a
business combination. In addition, SFAS 142 reaffirms that intangibles acquired
in other than a business combination be initially recognized at fair value and
that the costs of internally developed intangible assets be charged to expense
as incurred. The adoption of this standard is not expected to have a material
impact on the Company.
Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" replaces SFAS 121 and provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets, SFAS 144 also expands the scope of
a discontinued operation to include a component of an entity, and it eliminates
the current exemption to consolidation when control over a subsidiary is likely
to be temporary. The standard is effective for us as of January 1, 2002. The
adoption of this standard is not expected to have a material impact on our
company.
FORWARD LOOKING STATEMENTS
Statements included in this quarterly report on Form 10-QSB which are not
historical in nature, are intended to be, and are hereby identified as
"forward-looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements may be identified by words including "anticipate", "await",
"envision", "foresee", "aim at", "believe", "intends", "estimates", "expect",
"anticipate" and similar expressions. The Company cautions readers that
forward-looking statements, including without limitation, those relating to the
Company's future business prospects, are subject to significant risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Readers are directed to the
Company's registration statement on Form SB-2 filed in July 2002 and other
filings with the U.S. Securities and Exchange Commission for additional
information and a presentation of the risks and uncertainties that may affect
the Company's business and results of operations.
33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in legal proceedings previously
reported in the Company's periodic reports filed with the U.S. Securities and
Exchange Commission. The Company and/or its affiliates are party to a number of
lawsuits. Litigation in general can be expensive and disruptive to normal
business operations and the results of complex legal proceedings are difficult
to predict. The Company believes it has defenses in each of the suits currently
pending against it and intends to vigorously contest each of the matters. An
unfavorable resolution of one or more of the currently ongoing lawsuits could
adversely affect the business, results of operations, or financial condition.
Further information regarding status of pending proceedings may be found in the
Company's annual report on Form 10-KSB for the year ended December 31, 2001 as
well as the Company's registration statement on Form SB-2 filed with the
Commission in July 2002.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information.
In April 2002, we entered into a marketing agreement with EBI Communications,
Inc. pursuant to which EBI agreed to supply us with its gateway devices designed
to enable users to communicate over EBI's Internet-based telephony least cost
routing network. Under the agreement, we acquired worldwide rights to market
and sell the devices and least cost routing service on a private label basis
under our own brand name, voice2u. Our rights are nonexclusive; subject to our
right to convert the agreement to an exclusive basis during the first year upon
payment of an agreed sum to EBI. The agreement became effective on June 25,
2002.
Item 6. Exhibits and Reports
Reports on Form 8-K:
On July 2, 2002, we filed a current report on Form 8-K with the U.S. Securities
and Exchange Commission relating to a $1.5 million funding commitment.
Exhibits:
Exhibit No. Description of document
- ----------- ------------------------------------------------------------
99.1 Certification Of Chief Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. 1350.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSE2U INC.