SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number: 0-26813
INCALL SYSTEMS, INC.
--------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 91-1932068
------ ----------
(State of Incorporation) (IRS Employer ID No.)
388 Market Street, Suite 500 San Francisco, CA 94111
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Address of Principal Executive Offices - Zip Code
(866) 605-8852
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
As of June 30, 2002 there were 5,822,592 shares of the Issuer's common stock
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
inCALL SYSTEMS, INC.
(formerly iCall Systems, Inc.)
(a development stage company)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
inCALL SYSTEMS, INC.
(formerly iCall Systems, Inc.)
(a development stage company)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
ASSETS -------- ----------
CURRENT
Cash and cash equivalents $ 17,137 $ 130,066
Accounts receivable 66,318 12,439
Prepaid expenses 110,995 64,759
------- -------
194,450 207,264
ADVANCES TO ICCP 1 1
FIXED ASSETS (Note 3) 121,980 92,582
VOIP TECHNOLOGY (Note 4) 600,000 -
GOODWILL (Note 5) 633,317 633,317
-------- ----------
$1,549,748 $ 933,164
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable and accrued liabilities $ 282,482 $ 82,696
Due to related parties 30,961 -
Convertible notes payable (Note 6) 1,120,643 892,243
-------- ----------
1,434,086 974,939
DEFERRED INCOME TAX 14,833 14,833
-------- ----------
1,448,919 989,772
COMMITMENTS AND CONTINGENCIES (Notes 1 and 9)
STOCKHOLDERS' EQUITY
Capital stock (Note 7)
Authorized: 65,000,000 common shares with
$0.001 par value
10,000,000 Preferred A shares
Issued and outstanding: 5,822,592
(December 31, 2001 - 5,456,926) common shares 1,700 957
Additional paid-in capital 2,208,345 854,161
Obligation to issue shares (Note 5) - 215,002
Accumulated other comprehensive income (loss) (40,018) -
Deficit accumulated during development stage (2,069,198) (1,126,728)
-------- ----------
100,829 (56,608)
-------- ----------
$1,549,748 $ 933,164
-------- ----------
The accompanying notes are an integral part of these interim consolidated
financial statements
inCALL SYSTEMS, INC.
(formerly iCall Systems, Inc.)
(a development stage company)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
October 20,
1998
3 Months Ended 6 Months Ended (Inception)
------------------ ----------------- to June 30,
2002 2001 2002 2001 2002
--------- ------- ------- ------ ----------
REVENUE $ 104,359 $ - $ 221,359 $ - $ 291,977
COST OF REVENUE 51,573 - 113,939 - 113,939
NET REVENUE 52,786 - 107,420 - 178,038
EXPENSES
Consulting 257,200 30,263 352,953 30,263 466,004
Depreciation 6,029 - 13,029 - 24,474
General and admin. 324,353 48,780 568,800 48,780 970,367
Marketing 50,000 - 50,000 - 50,000
Interest 16,266 6,223 30,108 9,787 57,351
Investor relations (15,000) 10,934 35,000 10,934 131,708
Write down of advances
to ICCP - 56,000 - 395,999 532,499
--------- ------- ------- ------ ----------
638,848 152,200 1,049,890 495,763 2,232,403
--------- ------- ------- ------ ----------
OPERATING LOSS (586,062) (152,200) (942,470) (495,763)(2,054,365)
INCOME TAX - DEFERRED - - - - (14,833)
--------- ------- ------- ------ ----------
NET LOSS FOR THE
PERIOD $(586,062) $(152,200)$(942,470)$(495,763)$(2,069,198)
--------- ------- ------- ------ ----------
BASIC NET LOSS PER
SHARE $ (0.05) $ (0.00) $ (0.08) $ (0.01)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 11,698,994 47,364,220 11,332,835 48,674,828
The accompanying notes are an integral part of these interim consolidated
financial statements
inCALL SYSTEMS, INC.
(formerly iCall Systems, Inc.)
(a development stage company)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
October 20,
Six Months ended June 30 1998 (inception
------------------------ to June 30,
2002 2001 2002
---------- ----------- -------------
(Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (942,470) $ (495,763) $(2,069,198)
Adjustments to reconcile net loss
to net cash used in operating
activities
- - depreciation 13,029 - 24,474
- - stock-based compensation 281,125 - 471,854
- - non-cash expenses 172,981 - 172,981
- - deferred income taxes - - 14,833
- - accrued interest on convertible notes 28,400 9,787 55,643
- - write down of advances to ICCP - 395,999 532,499
- - accounts receivable (53,879) - (66,318)
- - prepaid expenses (15,417) - (80,176)
- - accounts payable 239,603 15,116 322,298
- - due to related parties 36,144 - 36,144
CASH USED IN OPERATING ACTIVITIES (240,484) (74,861) (584,966)
CASH FLOWS FROM INVESTING ACTIVITIES
- - acquisition of fixed assets (42,427) (62,379)
- - advances to Internet Call
Centre Pte Ltd. ("ICCP") - (396,000) (532,500)
CASH FLOWS FROM FINANCING ACTIVITIES (42,427) (396,000) (594,879)
CASH FLOWS FROM FINANCING ACTIVITIES
- - proceeds from convertible
notes payable 200,000 475,000 1,065,000
- - proceeds from issuance of
common shares for cash 10,000 - 172,000
CASH FLOWS FROM FINANCING
ACTIVITIES 210,000 475,000 1,237,000
EFFECT OF FOREIGN EXCHANGE RATE
CHANGES ON CASH (40,018) - (40,018)
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (112,929) 4,139 17,137
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 130,066 - -
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 17,137 $ 4,139 $ 17,137
OTHER NON-CASH TRANSACTIONS:
During the period the Company issued 7,666 pre-split common shares at $2.40
per share for services, 28,000 pre-split common shares at $2.50 per share for
settlement of $45,000 of debt and for payment of $25,000 of services of which
$10,000 is prepaid; 30,000 pre-split common shares at $2.00 per share for
$60,000 of services of which $40,000 is prepaid; and 300,000 pre-split common
shares at $2.00 per share for acquisition of VOIP technology.
During the period the Company also issued 42,000 post-split common shares at
$1.20 per share for services, 286,670 post-split common shares for
acquisition of assets, and 40,000 post-split common shares at $1.25 for
services.
The accompanying notes are an integral part of these interim consolidated
financial statements.
inCALL SYSTEMS, INC.
(formerly iCall Systems, Inc.)
(a development stage company)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
- -------------------------------------------------------
inCall Systems, Inc. was incorporated as Altrex Incorporated on October 20,
1998, under the laws of the State of Nevada. The Company changed its name
to iCall Systems Inc. on January 22, 2001 to inCall Systems, Inc. on
February 8, 2002.
The Company is in its development stage and to date its activities have
been limited to capital formation and the development of its call centre
business. By agreement dated July 30, 2001 the Company acquired the
business and assets of 1st Call Pte Ltd., a Singapore-based call centre
provider. Refer to Note 5. On November 1, 2001 the Company commenced
business operations in Singapore through its new subsidiary inCall Systems
Pte Ltd. In February 2002 the Company acquired the assets and VOIP
technology developed by Vocalscape Communications Ltd. Refer to Note 4.
The Company is currently engaged in the strategic combining of internet
call centre providers into a larger organization, or network, which can
effectively compete with regional and national service providers.
The interim consolidated financial statements have been prepared on the
basis of a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. At June 30,
2002 the Company has a working capital deficiency of $1,239,636 and has
incurred losses since inception raising substantial doubt as to the
Company's ability to continue as a going concern. The Company's continued
operations are dependent on its ability to obtain additional financing,
settling its outstanding debts and ultimately to attain profitable
operations.
Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of
Regulation S-B. They do not include all information and footnotes required
by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there have been no
material changes in the information disclosed in the notes to the financial
statements for the year ended December 31, 2001 included in the Company's
Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission. The interim unaudited financial statements should be read in
conjunction with those financial statements included in the Form 10-KSB.
In the opinion of Management, all adjustments considered necessary for a
fair presentation, consisting solely of normal recurring adjustments, have
been made. Operating results for the six months ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of presentation
The accompanying financial statements are presented in United States
dollars and are prepared in accordance with accounting principles generally
accepted in the United States.
Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Vocalscape Networks Inc. incorporated in British
Columbia, Incall Systems (B.C.) Inc. incorporated in British Columbia,
inCall Systems Pte Ltd. incorporated in Singapore which commenced
operations on November 1, 2001, and inCall Systems Sdn Bhd incorporated in
Malaysia on December 12, 2001. All significant intercompany balances and
transactions are eliminated on consolidation.
Revenue recognition
The Company generates revenue from provision of call centre and related
services. Revenue is recognized when services are provided and collection
is reasonable assured..
Cash and cash equivalents
Cash and cash equivalents consists of cash on deposit and highly liquid
short-term interest bearing securities with maturities at the date of
purchase of three months or less.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses for
the periods that the financial statements are prepared. Actual amounts
could differ from these estimates.
Fixed assets
Fixed assets are recorded at cost. Depreciation is computed at the
following rates over the estimated useful lives of the assets:
Computer equipment 30% declining balance
Computer software 1 year straight-line
Furniture and fixtures 6 years straight-line
Office equipment 6 years straight-line
Leasehold improvements 6 years straight-line
VOIP technology 5 years straight-line
Goodwill and other intangible assets
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the
accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be
amortized and will be tested for impairment annually. The Company has
adopted the provisions of SFAS 142 for acquisition of goodwill and other
intangible assets after June 30, 2001. The adoption of SFAS 142 has no
impact on the results of operations for any periods previously reported.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", ("APB No. 25") and complies
with the disclosure provisions of Statement of Financial Accounting
Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"). Under APB No. 25, compensation expense is recognized based on the
difference, if any, on the date of grant between the estimated fair value
of the Company's stock and the amount an employee must pay to acquire the
stock. Compensation expense is recognized immediately for past services
and pro-rata for future services over the option-vesting period.
The Company accounts for equity instruments issued in exchange for the
receipt of goods or services from other than employees in accordance with
SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force
in Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring or in Conjunction with Selling Goods or
Services" ("EITF 96-18"). Costs are measured at the estimated fair market
value of the consideration received or the estimated fair value of the
equity instruments issued, whichever is more reliably measurable. The
value of equity instruments issued for consideration other than employee
services is determined on the earlier of a performance commitment or
completion of performance by the provider of goods or services as defined
by EITF 96-18.
The Company has also adopted the provisions of the Financial Accounting
Standards Board Interpretation No.44, Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25
("FIN 44"), which provides guidance as to certain applications of APB 25.
FIN 44 is generally effective July 1, 2000 with the exception of certain
events occurring after December 15, 1998.
Financial instruments
The Company's financial instruments include cash and cash equivalents,
accounts payable and capital lease obligations. The fair values of these
financial instruments approximate their carrying values. Management
believes that the fair value of the debt approximates its carrying value.
Income taxes
The Company follows the liability method of accounting for income taxes.
Under this method, future tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax balances. Future tax assets and liabilities are measured
using enacted or substantially enacted tax rates expected to apply to the
taxable income in the years in which those differences are expected to be
recovered or settled. The effect on future tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
date of enactment or substantive enactment. A valuation allowance is
provided for deferred tax assets if it is more likely than not that the
Company will not realize the future benefit, or if the future deductibility
is uncertain.
Net loss per common share
Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Dilutive earnings per share
reflect the potential dilution of securities that could share in the
earnings of the Company. The accompanying presentation is only of basic
loss per share as the potentially dilutive factors are anti-dilutive to
basic loss per share.
Foreign currency transactions
The financial statements are presented in United States dollars. In
accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation", foreign denominated monetary assets and
liabilities are translated to their United States dollar equivalents using
foreign exchange rates that prevailed at the balance sheet date. Revenue
and expenses are translated at average rates of exchange during the year.
Related translation adjustments are reported as a separate component of
stockholders' equity, whereas gains or losses resulting from foreign
currency transactions are included in results of operations.
NOTE 3 - FIXED ASSETS
- ---------------------
June 30, December 31,
2002 2001
------- --------
Computer equipment and software $ 100,987 $ 64,517
Furniture and fixtures 6,821 3,163
Office equipment 25,196 22,897
Leasehold improvements 13,450 13,450
------- --------
146,454 104,027
Less: accumulated depreciation (24,474) (11,445)
------- -------
$ 121,980 $ 92,582
------- -------
NOTE 4 - VOIP TECHNOLOGY
- ------------------------
By agreement dated February 5, 2002 and completed March 26, 2002 the
Company acquired voice over internet protocol technology ("VOIP") developed
by Vocalscape Communications Ltd. from Blackwater Gold Corp, a British
Columbia, Canada company for $600,000 plus related equipment for $15,000.
The consideration was by way of $15,000 cash and 300,000 common shares of
the Company at $2.00 per share. As further consideration, for 24 months,
inCall will pay a royalty of 2% of gross revenue reported by the Company
and thereafter for 36 months the Company will pay a royalty of 1% of the
gross revenue reported by the Company, subject to a maximum of $250,000 per
year. The Company has the right to repurchase the 300,000 shares at a
price of $2.20 per share in the first year and at $2.40 per share in the
second year.
NOTE 5 - ACQUISITION OF BUSINESS ASSETS OF 1ST CALL PTE LTD.
- ------------------------------------------------------------
On July 30, 2001 the Company acquired all of the business assets of 1st
Call Pte Ltd. ("1st Call"), a Singapore-based call centre provider of
outsourced customer interactive services in Asia, in exchange for 478,261
shares of restricted common stock of the Company valued at $1.50 per share
for a purchase price of $717,391.
The business combination has been accounted for using the purchase method
of accounting as follows:
Assets acquired at fair value:
Fixed assets $ 84,074
Goodwill and other intangibles 633,317
-------
Purchase price $ 717,391
During 2001 the Company issued 334,926 shares in connection with this
acquisition. The remaining 143,335 shares were recorded as an obligation
to issue shares totalling $215,002. These shares were issued in June 2002
as 286,670 post-split common shares. Management has determined that as of
June 30, 2002 no impairment of goodwill has occurred.
NOTE 6 - CONVERTIBLE NOTES PAYABLE
- ----------------------------------
During the year ended December 31, 2001 the Company obtained loans secured
by convertible notes in the amount of $440,000 with Update Ltd. ("Update").
The notes bear simple annual interest at 6%, with principal and interest
due on September 20, 2002. The notes give Update the option of converting
into restricted common shares at a conversion price equal to the lesser of
75% of the average closing price for the five trading days prior to
conversion or $1.25 per share. In the event of a default, (interest not
paid or debenture not paid at maturity) interest will continue to accrue on
the total amount then due at an annual interest rate of 12% plus a
collection fee of $10,000.
The Company also obtained additional loans secured by convertible notes for
an additional $625,000 with Update ($35,000 on June 19, 2001, $50,000 on
July 1, 2001, $40,000 on October 3, 2001, $20,000 on October 17, 2001,
$140,000 on November 15, 2001, $140,000 on December 12, 2001, $50,000 on
March 5, 2002, $50,000 on March 25, 2002, $50,000 on April 2, 2002 and
$50,000 on June 10, 2002). These notes have ten-month terms from the
funding date with simple annual interest at 6%, payable monthly. The notes
give Update the option of converting into restricted common shares at a
conversion price equal to the lesser of 60% of the average closing price
for the five trading days prior to conversion or $1.25 per share. In the
event of a default, (interest not paid or debenture not paid at maturity)
interest will continue to accrue on the total amount then due at an annual
interest rate of 12% plus a collection fee of $10,000.
All of the notes contain a restriction on future financings that the
Company shall not issue common stock for a price of less than $1.50 per
share without the written permission of the Lender for as long as any
principal remains outstanding. Further, the Company pledged all of its
assets as collateral for the loan. The Company also agreed to file a
General Security Agreement ("GSA"), or GSA-equivalent, to register this
security claim. As at June 30, 2002, interest of $55,643 has been accrued
and is included in the balance owing.
NOTE 7 - CAPITAL STOCK
- ----------------------
During the period the Company issued 30,000 pre-split common shares in
exchange for legal services of $40,000 and investor relations of $20,000,
7,666 pre-split common shares in exchange for consulting fees of $18,400,
and 28,000 pre-split common shares in exchange for investor relations
services valued at $70,000, of which $45,000 had been incurred prior to
December 31, 2001.
In addition, the Company issued 300,000 pre-split common shares for certain
assets and voice over internet protocol technology valued at $600,000.
Refer to Note 4.
Effective April 2, 2002 the Company authorized a forward split of its
common shares on a 2:1 basis resulting in an increase to the total issued
and outstanding number of shares of common stock to 11,609,852 shares.
During the period the Company also issued 10,000 post-split common shares
at $1.25 for cash of $10,000, 42,000 post-split common shares at $1.20 per
share for legal services, 286,670 post-split common shares for acquisition
of assets (refer to Note 5), and 40,000 post-split common shares at $1.25
for marketing services.
Stock options
During 2001 the Company granted options to acquire a total of 2,200,00
post-split shares of the Company's common stock to certain officers,
directors and employees of the Company and its subsidiaries. The options
were granted at an exercise price of $1.00 per share and vest evenly over
periods ranging from 6 months to 24 months from the date of each grant.
Effective March 15, 2002, the Company adopted a stock option plan, the 2002
Stock Option Plan (the "Plan"). The plan allows for the granting of
options to acquire shares of the Company's common stock in an amount not to
exceed 25% of the shares otherwise issued and outstanding. The Plan allows
for the granting of either Incentive Stock Options or Nonqualified Stock
Options at a price not less than 80% of the market value of the Company's
common stock for terms not to exceed 10 years. The vesting of the options
granted is at the discretion of the Company's Board of Directors. The plan
permits granting of options to employees, consultants, officers and
employee directors of the Company and any of its subsidiaries.
During 2002 the Company granted options to acquire a total of 132,000 post-
split shares of the Company's common stock to certain officers, directors
and employees of the Company and its subsidiaries. The options were
granted at an exercise price of $1.20 per share and vest evenly over 24
months from the date of each grant.
During 2002 the Company granted options to acquire 160,000 post-split
shares of the Company's common stock to a consultant of the Company. The
options were granted at an exercise price of $1.375 per share. Another
consultant was granted options to acquire 100,000 post-split shares of the
Company's common stock. The options were granted at an exercise price of
$1.36 per share and vest evenly over 12 months from the date of grant.
The following table summarizes information about stock options outstanding
as at June 30, 2002:
Options Outstanding Options Vested
----------------------- --------------
Market Weighted
Price at Average
Exercise Date of Number remaining Number
Price Grant Outstanding life Outstanding
-------- -------- ----------- --------- -----------
$ 1.00 $ 1.175 1,200,000 8.89 years 929,166
$ 1.00 $ 1.20 1,000,000 9.27 years 750,000
$ 1.20 $ 1.30 132,000 10.83 years 11,000
$ 1.375 $ 1.375 160,000 0.58 years 160,000
$ 1.36 $ 1.36 100,000 0.91 years 8,333
2,592,000 8.31 years 1,858,499
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of APB No. 25 and complies with the
disclosure provisions of SFAS No. 123. In accordance with SFAS No. 123 the
Company applies the fair value method using the Black-Scholes option-
pricing model in accounting for options granted to consultants. In
addition, the Company has adopted the provisions of FIN 44.
The 2,200,000 options were granted to employees, officers and directors at
less than market value of the Company's common stock with a total intrinsic
value, being the excess of the quoted market price of the common stock over
the exercise price at the date the options are granted, of $410,000. In
accordance with the provisions of ABP No. 25, this additional compensation
will be recognized over the vesting period of the options of which $121,875
has been recorded in the period ended June 30, 2002 and $312,604 has been
recorded to date.
The 132,000 options were granted to employees, officers and directors at
less than market value of the Company's common stock with a total intrinsic
value, being the excess of the quoted market price of the common stock over
the exercise price at the date the options are granted, of $13,200. In
accordance with the provisions of ABP No. 25, this additional compensation
will be recognized over the vesting period of the options of which $1,100
been recorded in the period ended June 30, 2002.
In addition, the Company has recorded $150,400 of compensation expense
relating to the 80,000 options granted to a consultant which vested
immediately and $7,750 of a total of $93,000 of compensation relating to
the 100,000 options granted to a consultant which vest evenly over a period
of one year. These options were valued using the Black-Scholes option
pricing model with the following weighted average assumptions: risk free
interest rates of 4%; dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of 97% and a weighted
average expected life of the option of 1 year.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The fair value of each
option granted in 2002 was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted average
assumptions: risk free interest rates of 5%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common
stock of 28% and a weighted average expected life of the option of 2 years.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period. The Company's
pro-forma information relating to the granting and vesting of stock options
is as follows:
June 30, 2002 June 30, 2001
------------ -------------
Net loss - As reported $ (942,470) $ (495,763)
APB 25 compensation expense - As reported 122,975 -
SFAS 123 compensation expense - Pro-forma (439,300) -
Pro-forma $ (1,258,795) $ (495,763)
Pro-forma net loss per share
Basis and fully diluted - Pro-forma $ (0.11) $ (0.01)
NOTE 8 - RELATED PARTY TRANSACTIONS
- -----------------------------------
During the period consulting fees totalling $77,013 (2001 - $30,263) were
paid to three officers and directors of the Company. At June 30, 2002
$46,316 is owing to these parties and is included in accounts payable. In
addition, net cash advances of $15,061 were received from a director. And
additional $15,900 is owing to directors of inCall Systems Sdn Bhd. for
wages, expenses paid on behalf of the Company and cash advances.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Legal proceedings
A purported complaint is pending against the Company, Signature Stock
Transfer, Inc., inCall Systems, Inc., Kevin Nichols and Jane Doe Nichols v.
Jeffrey Bunch and Tracy Bunch, for declaratory judgment, injunctive relief
and money damages, filed in the Superior Court of Washington, Spokane
County. The complaint is based upon two shareholders both claiming
ownership of certain common shares of the Company. The plaintiffs purport
to be the record and beneficial owners of these share certificates.
The Company believes it is not a valid defendant and the Company believes
the complaint is without merit and frivolous. Management currently believes
that resolving these matters will not have a material adverse impact on the
Company's financial position or its results of operations.
Interest rate risk exposure
The Company has limited exposure to any fluctuation in interest rates.
Foreign exchange risk
The Company is subject to foreign exchange risk for sales and purchases
denominated in foreign currencies. Foreign currency risk arises from the
fluctuation of foreign exchange rates and the degree of volatility of these
rates relative to the United States dollar. The Company does not actively
manage this risk.
Agreement with Hewlett Packard Malaysia Sdn Bhd
During 2001 the Company entered into a strategic alliance with Hewlett
Packard Malaysia Sdn Bhd ("HP") requiring the Company to advance $54,000 to
HP as prepayment for rent expense on infrastructure being provided by HP.
The rent will be $3,000 per month over the life of the agreement and no
prepaid amounts will be refunded on early termination. In addition, HP
will be entitled to participate in the Malaysian operations of the Company,
to the extent of 12% of total revenue or 49% of operating profits,
whichever is greater.
NOTE 10 - INCOME TAXES
- ----------------------
The Company's has net operating loss carryforwards of approximately
$1,050,000 at June 30, 2002. These carryforwards will expire, if not
utilized, beginning in 2015. The potential tax benefit of these losses has
not been recorded as a full deferred tax asset valuation allowance has been
provided due to the uncertainty regarding the realization of these losses.
NOTE 11 - SUBSEQUENT EVENTS
- ---------------------------
Subsequent to June 30, 2002, the Company's wholly owned subsidiary
Vocalscape Networks Inc. (Vocalscape) entered into an agreement with Better
Call Home Inc., a privately held Nevada company. Under the terms of the
agreement Vocalscape granted international distribution rights of its Voice
Over the Internet Protocol (VoIP) to Better Call Home in exchange for 20%
equity in Better Call Home.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Part II
OVERVIEW
inCall Systems, Inc. was incorporated as Altrex Incorporated on October 20,
1998, under the laws of the State of Nevada. The Company changed its name
to iCall Systems Inc. on January 22, 2001 to inCall Systems, Inc. on
February 8, 2002.
The Company is in its development stage and to date its activities have
been limited to capital formation and the development of its call centre
business.
The Company offers an integrated suite of Customer Relations Management
(CRM) services, including Internet and telephony turnkey communications
solutions, to corporations and provides them with the ability to experience
increased customer retention, revenue and profitability.
Equipped with the latest in telephony and computer technologies, the
Company provides all forms of customer contact and interaction services -
ranging from telephone, fax and email management, to live interactive sales
assistance using VoIP, text chat, co-web browsing and customer self-service
- - from a single source, backed by a sophisticated knowledge base.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and segment data and in conjunction with
the Company's 10K filed April 15, 2002. Results for interim periods may not
be indicative of the results for the full year.
By agreement dated November 22, 2000 between the Company and the
shareholders of The Internet Call Centre Pte Ltd ("ICCP"), the Company
agreed to acquire all the issued and outstanding shares of ICCP in exchange
for the issuance of 6,500,000 restricted common shares, subject to certain
conditions and completion of due diligence. The Company subsequently
determined not to proceed with this acquisition, the agreement was not
consummated and the share exchange did not occur. During October 2001 the
parties mutually agreed to formally rescind the November 22, 2000
acquisition agreement. As a result of this rescission, the Company did not
carry out any operations until November 2001. Therefore, comparisons of
its quarter-end June 2001 and 2002 operating results are not meaningful and
detailed discussions of revenue and expenses exclude comparisons to our
quarter ended June 30, 2001.
ICCP was a private Singapore company, which was facilitating real-time
sales and customer service for companies doing business on the Internet.
During 2001, the Company advanced a total of $532,500 to ICCP to develop
its business, however, as the Company subsequently determined not to
proceed with this acquisition, the agreement was not consummated and the
share exchange did not occur. During October 2001, the parties mutually
agreed to formally rescind the November 22, 2000 acquisition agreement.
The Company was assigned the accounts receivables of ICCP on October 26,
2001 of approximately $70,000 as part of the rescission agreement and
recognized those accounts receivables in the fourth quarter 2001.
On July 30, 2001, the Company purchased the assets of privately held 1st
Call Pte Ltd, an 81 seat Singapore based call center provider of outsourced
call center services in Asia, in exchange for 478,261 shares of restricted
common stock of the Company valued at $1.50 per share for a purchase price
of $717,391.
This acquisition established the Company's call center facilities and
telephony expertise in Asia to service clients in preparation for planned
USA call center acquisitions. 1st Call provides its clients a range of
inbound/outbound telephony, Internet interactive chat, email and technical
help desk services. The 1st Call client list included Cisco Systems,
Hewlett-Packard, MCI WorldCom Asia, Microsoft Singapore, and Oracle
Singapore.
The business operations and assets of 1st Call were initially integrated
with the operations of ICCP. During the fourth quarter of 2001, the assets
and operations were relocated to separate premises as part of the terms of
the ICCP rescission. Accordingly, no revenue or expenses relating to the
operations of 1st Call have been included in the financial statements of
the Company until the fourth quarter of 2001.
On November 1, 2001, iCALL Systems formed a new Singapore subsidiary called
inCall Systems Pte Ltd and secured new office premises. The Company has
moved all the assets of 1st Call Pte Ltd into the new office premises to
operate under the name of inCall. Mr. Chin Tiong Seah, who was managing
director of 1st Call, is the managing director of inCall Systems. All of
the 1st Call permanent staff accepted employment with inCall Systems. All
of the existing contracts and customers of 1st Call been have transferred
to over to inCall Systems. Additionally, certain accounts of ICCP have also
elected to transfer their business to the services of inCall Systems.
HEWLETT-PACKARD STRATEGIC ALLIANCE
On September 6, 2001, the Company signed a 4-year strategic alliance
agreement with Hewlett-Packard Sales (Malaysia) Sdn Bhd ("HP"). Under the
terms of the agreement, HP Services Division will provide its clients with
the Company's integrated suite of Internet customer service solutions and
will incorporate the Company's capabilities into HP's Customer Interaction
Centers. HP has also committed to contract the Company to provide first
level technical support for HP products sold in Malaysia, which will
generate immediate revenue for the Company. In addition the HP agreement
will provide the Company with facility space, computer and office
equipment, and a ready to operate call center located in the HP data center
building in Malaysia. The Company will provide technology, processes and
management staff to operate the call center.
Additionally, HP has agreed to contract the Company to handle level 1
support calls for HP products sold in Malaysia. On December 12, 2001, the
Company formed a new Malaysian subsidiary called inCall Systems Sdn Bhd and
moved into new office premises in Hewlett-Packard's building. In
conjunction with Hewlett-Packard the Company began construction of its
Malaysian based call center.
To date Hewlett-Packard has invested approximately $220,000 dollars in the
establishment of the Malaysian center. To date, inCall Systems has invested
approximately $80,000 and intends to invest an additional $50,000 in
completing the center.
VOCALSCAPE ACQUISITION
During February 2002, the Company completed the acquisition of the assets
of privately held Vocalscape Networks Inc. (www.vocalscape.com). The
acquisition of Vocalscape's Voice over Intenet Protocol (VoIP) and
electronic Customer Relationship Management (eCRM) solutions was a major
milestone for inCall Systems' strategic plan for rapid growth. In September
of 2001, TMC Labs bestowed its Innovation award and Editor's Choice award
to Vocalscape's own VocalConnect citing, "[VocalConnect] is designed to
help bring resolution to the 'abandoned shopping cart syndrome' prevalent
in e-commerce. It does so by allowing the customer to either request a Web
chat session or click on the phone button to speak directly to a Customer
Service Representative."
inCall Systems acquired the assets of Vocalscape from Blackwater Gold
Corporation (BWG) for a combination of stock and cash. Under the terms of
the agreement, inCall Systems paid $15,000cash and 300,000 shares, valued
at $2.00 per inCall share, issued under Rule 144 and carrying a 24-month
legend. inCall may repurchase the shares at $2.20 per share for the first
12 months and $2.40 per share during months 13 to 24. Royalties are payable
to Blackwater Gold Corporation by inCall Systems at the rate of 2% of gross
revenue reported by inCall Systems for a 24 month period, followed by 1% of
gross revenue for a 36 month period (the maximum cumulative royalties paid
in any inCall Systems fiscal year shall not exceed $250,000.00).
New technologies like Vocalscape's eCRM products are in the early stage of
market adoption. The Company has chosen a strategy of leveraging its newly
acquired technology through bundling agreements in order to increase
penetration and awareness in the market. These key strategic partnerships,
which allow the Company to bundle its technology with that of its partners,
serve to increase product awareness while at the same time generating
revenue at a minimal cost.
ARTICULATE ACQUISITION
June 23, 2002, the Company completed the acquisition of the business and
customer contracts of Articulate Customer Care Sdn Bhd ("Articulate"), a
Malaysian based call center provider of outsourced customer interactive
services for Asia.
Under the terms of the acquisition agreement, Articulate received shares of
inCall Systems common stock in exchange for 100% of the customer contracts
of Articulate. Some of Articulate's blue chip customers include American
Express and ExxonMobil. The Company has recorded the acquisition of these
contracts as a marketing expense.
The Articulate purchase is a continuation of the Company's planned
strategic growth and acquisition strategy in both the Pacific Rim and the
continental United States. The Company's other most recent call center
acquisition was the assets and customers of 1st Call Ptd Ltd of Singapore
in July of 2001. inCall Systems has identified and is in discussions with
other call center acquisition targets in both Asia and North America.
OPERATIONS
Revenues for the three months ended June 30, 2002 were $104,359. Revenues
were primarily generated from Company's Singapore and Malaysian operations.
The Company's customer list includes Cisco, Hewlett-Packard, Sun
MicroSystems, Exxon and American Express.
Cost of Revenues for the three months ended June 30, 2002 was $51,573
resulting in a Net Revenue of $52,786. Cost of revenues consisted primarily
of salaries payable to call center staff.
Consulting consisted of compensation for officers and directors of the
Company who focused on seeking suitable acquisition companies, developing
business plans and fund raising activities. Consulting expenses for the
three months ended June 30, 2002 were $257,200.
General and Administrative expenses consist primarily of rent, phone and
fax and other office expenses. General and Administrative expenses for the
three months ended June 30, 2002 were $324,353
Marketing expenses for the three months ending June 30, 2002 was $50,000
and consisted primarily of inCall Systems common stock issued in exchange
for 100% of the customer contracts of Articulate.
Interest for the three months ended June 30, 2002 was $13,842 consisting of
accrued interest on the Company's convertible notes.
Investor relations for the three months ended to June 30, 2002 consisted of
profiling the Company in investment papers and the professional services of
investment relations firms and personnel. During the period, expense
recoveries for investor relations were ($15,000) where this credit is
attributable to an overpayment of investor relations expenses in the
previous quarter.
Total Operating Expenses for the three months ended June 3, 2002 were
$638,848, resulting in an Operating Loss of $586,062. Basic Net Loss per
Share amounted to $0.05 for the three months ended June 30, 2002.
Revenues for the six months ended June 30, 2002 were $221,359. Revenues
were primarily generated from Company's Singapore and Malaysian operations.
Cost of Revenues for the six months ended June 30, 2002 was $113,939
resulting in a Net Revenues of $107,420. Cost of revenues consisted
primarily of salaries payable to call center staff.
Consulting consisted of compensation for officers and directors of the
Company who focused on seeking suitable acquisition companies, developing
business plans and fund raising activities. Consulting expenses for the six
months ended June 30, 2002 were $352,953.
General and Administrative expenses consist primarily of rent, phone and
fax, legal, accounting and other office expenses. General and
Administrative expenses for the six months ended June 30, 2002 were
$568,800.
Marketing expenses for the three months ending June 30, 2002 was $50,000
and consisted primarily of inCall Systems common stock issued in exchange
for 100% of the customer contracts of Articulate.
Interest for the six months ended June 30, 2002 was $30,108 consisting of
accrued interest on the Company's convertible notes.
Investor relations for the six months ended to June 30, 2002 consisted of
profiling the Company in investment papers and the professional services of
investment relations firms and personnel. During the period, expenses for
investor relations were $35,000.
Total Operating Expenses for the six months ended June 3, 2002 were
$1,049,890, resulting in an Operating Loss of $942,470. Basic Net Loss per
Share amounted to $0.08 for the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
In six months ended June 30, 2002, the Company has financed operations
principally through cash generated by convertible notes. For the period
June 30, 2002, the Company raised a total of $200,000 in further notes.
Net cash used in operating activities was $240,484 for the three months
ended June 30, 2002 and consisted primarily of accounts payable, fees due
to related third parties and accrued interest on convertible notes
Net cash provided by financing activities was US $167,573 for the six
months ended June 30, 2002. Net cash, provided by financing activities for
the six months ended June 30, 2001, was attributable to proceeds generated
from convertible notes of $200,000 plus the proceeds from issuance of
common shares of $10,000. Investing activities consisted of acquisition of
fixed assets, totaling $42,427.
The Company anticipates that its current cash and cash equivalents and cash
generated from operations, if any, will not be sufficient to satisfy its
liquidity requirements for at least the next 12 months. The Company will
require additional funds prior to such time and will seek to sell
additional equity or debt securities or seek alternative sources of
financing. If the Company is unable to obtain this additional financing, it
may be required to reduce the scope of its planned sales and marketing and
product development efforts, which could harm its business, financial
condition and operating results. In addition, the Company may require
additional funds in order to fund more rapid expansion, to develop new or
enhanced services or products or to invest in complementary businesses,
technologies, services or products. Additional funding may not be available
on favorable terms, if at all.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A purported complaint is pending against the Company, Signature Stock
Transfer, Inc., inCall Systems, Inc., Kevin Nichols and Jane Doe Nichols v.
Jeffrey Bunch and Tracy Bunch, for declaratory judgment, injunctive relief
and money damages, filed in the Superior Court of Washington, Spokane
County. The complaint is based upon two shareholders both claiming
ownership of certain common shares of the Company. The plaintiffs purport
to be the record and beneficial owners of these share certificates.
The Company believes it is not a valid defendant and the Company believes
the complaint is without merit and frivolous. Management currently believes
that resolving these matters will not have a material adverse impact on the
Company's financial position or its results of operations.
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) During the quarter ended June 30, 2002, there were no reports on form
8-K.
(b) The Company filed the following reports on Form 8-K during the three
months ended March 31, 2002.
(1) inCall Systems acquired the assets of Vocalscape from Blackwater
Gold Corporation ("BWG") for a combination of stock and cash. Under the
terms of the agreement, inCall Systems will pay $15,000 cash and 300,000
shares, valued at $2.00 per inCall Systems' share, issued under Rule 144 of
Regulation S and will carry a 24-month restrictive legend. inCall Systems
has the right to repurchase the shares at $2.20 per share for the first 12
months and $2.40 per shares during months 13 to 24. Royalties are payable
to
Blackwater Gold Corporation by inCall Systems at the rate of 2% of gross
revenue reported by inCall Systems for a 24-month period, followed by 1% of
gross revenue for a 36-month period (with the maximum cumulative royalties
paid in any inCall Systems fiscal year not to exceed $250,000).
The acquisition of Vocalscape's Voice over Internet Protocol (VoIP) and
electronic Customer Relationship Management (eCRM) solutions is a large
component of inCall Systems' strategic growth plan.
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.
inCall Systems, Inc.
Dated: September 5, 2002 /s/ Marc Crimeni
----------------
Marc Crimeni
CEO, Director
/s/ Ron McIntyre
----------------
Ron Mc Intyre
President
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-QSB for the six-month
period ended June 30, 2002 of INCALL SYSTEMS, INC., a Nevada corporation
(the "Company"), as filed with the Securities and Exchange Commission on the
date hereof (the "Quarterly Report"), I, Marc Crimeni, Chairman and Chief
Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Quarterly Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in this Quarterly Report fairly presents, in
all material respects, the financial condition and results of operation of
the Company.
/s/ Marc Crimeni
----------------
Marc Crimeni, Chairman and
Chief Executive Officer
September 10, 2002