SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended September 30, 1999.
[ ] Transition report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the transition period from to
Commission File Number: 0-27387
VOICE MOBILITY INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 33-0777819
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701-543 Granville Street, Vancouver, British Columbia, Canada V6C 1X8
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(Address of principal executive offices)
(604) 482-0000
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(Issuer's telephone number)
(Not Applicable)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1)filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
17,559,420 Common Shares as of November 15, 1999
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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VOICE MOBILITY INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART - I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1
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PART I. FINANCIAL INFORMAITON
Item 1. Financial Statements
VOICE MOBILITY INTERNATIONAL, INC.
Consolidated Balance Sheets
As at September 30, 1999 and December 31, 1998
(Unaudited)
September 30, December 31,
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1999 1998
- ------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $94,025 $37,113
Accounts receivable (net of allowance
for doubtful debts: 1999 - $21,791;
1998 - $20,930) 68,081 67,810
Notes Receivable 110,000
Prepaid expenses 23,621 17,116
Inventory 113,555 14,919
- --------------------------------------------------------------------------------
409,282 136,958
Equipment and leasehold improvements
(net of accumulated depreciation
and amortization; 1999 - $104,960;
1998 - $45,577) 312,260 133,848
- --------------------------------------------------------------------------------
Total Assets $721,542 $270,806
================================================================================
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities
Accounts payable and accrued liabilities 206,754 117,092
Other payables 44,968
Deferred revenue 64,796
Current portion on long-term debt 5,705
Notes payable 792,323
Due to Acrex Ventures Ltd. 419,592
Due to shareholders 239,642
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322,222 1,568,649
Long-term debt 617,345
- --------------------------------------------------------------------------------
Total Liabilities $939,567 $1,568,649
Stockholders' Equity
Common stock 11,051 59
Preferred stock 1
Additional paid-in capital 5,929,145
Retained earnings (Deficit) (7,026,705) (1,373,141)
Stock to be issued 823,333
Currency translation gains (losses) 45,149 75,239
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Total Stockholders' Equity (Deficiency) (218,026) (1,297,843)
================================================================================
Total Liabilities and Stockholders' Equity (Deficiency) $721,542 $270,806
================================================================================
See notes to the interim consolidated financial statements.
2
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VOICE MOBILITY INTERNATIONAL, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
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1999 1998 1999 1998
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Sales $ 15,553 $ 53,113 $ 99,725 $ 118,990
Less cost of sales (11,450) (434) (45,018) (59,161)
- --------------------------------------------------------------------------------
4,103 52,680 54,708 59,829
Operating Expenses
Sales and Marketing 125,924 24,987 1,325,900 51,638
Research and Development 423,002 53,602 2,371,953 141,567
General and Administrative 316,947 106,107 1,956,213 310,366
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865,874 184,697 5,654,067 503,572
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Loss before other items (861,771) (132,017) (5,599,359) (443,743)
Interest expense (11,431) (6,839) (54,204) (24,296)
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(11,431) (6,839) (54,204) (24,296)
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Loss ($873,201) ($138,856)($5,653,563) ($468,039)
================================================================================
Loss per share (0.07) (0.24) (0.44) (0.81)
================================================================================
Weighted average number
of shares outstanding 12,705,655 578,750 12,705,655 578,750
================================================================================
See notes to the interim consolidated financial statements.
3
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VOICE MOBILITY INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
For the nine months ending September 30, 1999 and September 30, 1998
(Unaudited)
Nine Months Ended
September 30,
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1999 1998
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OPERATING ACTIVITIES
Loss for the period ($5,653,563) ($468,039)
Non cash items included in loss for the period
Depreciation and amortization 38,454 24,799
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(5,615,109) (443,240)
Change in accounts receivable 50,723 (52,590)
Change in accounts payable 111,693 (10,220)
Change in inventory (98,638) 19,145
Change in prepaid expenses (6,503) (2,835)
Change in accrued liabilities (23,701) (37,957)
Change in taxes payable 16,468 3,938
Change in deferred revenue 64,796
Change in current portion of long-term debt 5,705
- --------------------------------------------------------------------------------
(5,494,566) (523,760)
INVESTING ACTIVITIES
Acquisition of equipment &
leasehold improvements (237,795) (88,288)
FINANCING ACTIVITIES
Decrease in notes payable (277,602) 231,819
Decrease in advances from Acrex Ventures Ltd. (419,592) 405,079
Decrease in advances from shareholders (136,973) 18,438
Increase in notes receivable - Acrex Ventures Ltd. (110,000)
Increase in common stock 11,051
Increase in preferred stock 1
Change in currency translation gains/(losses) (30,090) (38,566)
Stock option compensation 3,890,938
Increase in stock to be issued 823,333
Increase in additional paid-in capital 2,038,207
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5,789,273 616,770
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Increase (decrease) in cash and cash equivalents 56,912 4,722
Cash and cash equivalents, beginning of period 37,113 2,332
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Cash and cash equivalents, end of period 94,025 7,054
================================================================================
See notes to the interim consolidated financial statements.
4
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VOICE MOBILITY INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Information
September 30, 1999
Note 1 - Nature of Operations and Basis of Presentation
The accompanying financial information of Voice Mobility International,
Inc. and its wholly owned subsidiary, Voice Mobility, Inc., are unaudited. In
the opinion of the company's management, the consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the consolidated financial information set forth
herein. Results of consolidated operations for the three-month and nine-month
periods ended September 30, 1999 are not necessarily indicative of future
financial results.
The interim consolidated financial statements have been prepared by
management on a going concern basis, which contemplates the realization of
assets and the discharge of liabilities in the normal course of business for the
foreseeable future. The Company has incurred significant losses and negative
cash flow from operations and has an accumulated deficit of $7,026,705 at
September 30, 1999 [December 31, 1998 - $1,297,843]. The Company's ability to
continue as a going concern is in doubt and is dependent upon achieving a
profitable level of operations and, if necessary, obtaining additional
financing. These interim consolidated financial statements do not give effect to
any adjustments which would be necessary should the Company be unable to
continue as a going concern and therefore be required to realize its assets and
discharge its liabilities in other than the normal course of business and at
amounts different from those reflected in the accompanying interim consolidated
financial statements.
Certain notes and other information have been condensed or omitted from the
interim consolidated financial statements presented in this Quarterly Report on
Form 10-Q. Accordingly, these consolidated financial statements should be read
in conjunction with the Company's Form 10-SB Registration Statement filed on
November 8, 1999.
These consolidated financial statements are the continuing financial
statements of Voice Mobility International, Inc. ("VMII"), a non-operating
Nevada corporation, formed October 2, 1997, the common stock of which trades on
the Over the Counter Bulletin Board. On June 24, 1999, VMII acquired all of the
outstanding common stock of Voice Mobility Inc. ("VMI"), a Canadian company,
engaged in the development of unified voice messaging software. After the
acquisition, the accounting entity continued under the name of Voice Mobility
Inc. [Voice Mobility International, Inc. and Voice Mobility Inc are collectively
referred to as the "Company".]
A) Pursuant to share purchase agreements dated April 1, 1999 and June 24,
1999, the stakeholders of VMI acquired 8,293,000 shares of VMII common stock and
the right to acquire an additional 6,600,000 shares of VMII common stock in
exchange for $200,000 and all the capital stock of VMI. As a result of this
transaction, the shareholders of VMI effectively acquired 14,893,000 common
stock of VMII which represents a controlling interest of approximately 96%. This
transaction is considered an acquisition of VMII (the accounting
subsidiary/legal parent) by VMI (the accounting parent/legal subsidiary) and has
been accounted for as a purchase of the net assets of VMII by VMI in these
consolidated financial statements because VMII had no business operations or
operating assets at the time of acquisition. Accordingly, this transaction
represents a recapitalization of VMI, the legal subsidiary.
These consolidated financial statements are issued under the name of VMII,
but are a continuation of the financial statements of the accounting acquirer,
VMI. VMI's assets and liabilities are included in the consolidated financial
statements at their historical carrying amounts. Operating results to June 24,
1999, are those of VMI. At June 24, 1999, VMII had no assets and no liabilities.
For purposes of this acquisition, the fair value of the net assets of VMII of
$-0- is ascribed to the 578,750 previously outstanding shares of common stock of
VMII deemed to be issued in the acquisition.
B) At August 30, 1998, Acrex Ventures Inc. ("Acrex"), an inactive public
company trading on the Vancouver Stock Exchange, filed an application to the
Vancouver Stock Exchange to approve the 100% acquisition of VMI. Acrex had been
financing VMI's operations through a series of promissory notes to VMI since
December, 1997, when Acrex and VMI initially agreed to the acquisition. On March
31, 1999, the share acquisition agreement between Acrex and VMI pursuant to
which Acrex would acquire 100% of the capital stock of VMI expired.
5
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VMII assumed Acrex's promissory note receivables from VMI and all amounts
payable to the investors of Acrex. The terms of the agreements between Acrex and
the investors in Acrex were essentially equal to the corresponding agreements
between VMII and those same investors. VMII's offer to the investors of Acrex
specifies the grandfathering of the "Acrex Subscription Agreements" whereby the
identical number of shares in VMII were issued for the funds subscribed; and the
warrants to purchase additional shares of VMII's common stock were translated
from Cdn$0.50 and Cdn$0.75 to US$0.35 and $US0.50 respectively, reflecting the
exchange rate between the currencies.
VMI's loans from Acrex were assigned to VMII in consideration for warrants
to purchase 4,793,000 shares of VMII's common stock that were components of the
Acrex Subscriptions Agreements. The right on the part of Acrex investors for
shares of common stock and common stock purchase warrants were replaced by
similar shares of common and warrants to purchase common stock of VMII and the
pricing of the shares and warrants were based on the last trading of Acrexs
stock which was "fair value" at that time. The VMII acquisition is essentially a
replacement of the Acrex acquisition. Loans advanced by Acrex were accordingly
settled.
C) By an agreement dated March 26, 1999 Maritime Tel & Tel Limited ("MTT"),
Acrex, and VMI agreed to recognize the expenditures of MTT on a joint test
project to a maximum amount of Cdn$500,000 (although it was understood by the
parties to that agreement that the MTT expenditures were in excess of
Cdn$500,000). It was agreed that VMI would not be required to reimburse MTT the
Cdn$500,000. In the event that VMI became a public company or was owned by a
public company then the amount must be settled by 1,428,571 shares of common
stock of the public entity. The identical terms of that agreement were assumed
by VMII.
On June 29, 1999, the Company issued 750,000 shares of its common stock to
Pacific Western Mortgage Corporation in settlement of a $250,000 loan. The
conversion parity for the settlement was identical to the original settlement
agreement with Acrex.
On June 29, 1999, the Company issued 500,000 and 101,000 warrants with an
exercise price of $0.35 to Ibex Investments Ltd. and Ernest Gardiner,
respectively, in settlement of $167,000 and $33,000 of notes payable. The terms
for the settlement were identical to the original settlement agreement with
Acrex.
The combined issued and outstanding common stock and additional paid-in
capital of the continuing consolidated entity as of June 24, 1999 is computed as
follows:
Existing share capital of VMI prior to acquisition $ 59
Ascribed value of the acquired common shares of VMII $ 0
Share capital of VMI as of June 24, 1999 $ 59
The number of outstanding shares of common stock of VMII as of June 24,
1999 is computed as follows:
Deemed share capital of VMII as of March 31, 1999 578,750
Shares of VMII deemed issued by VMI 8,293,000
Shares of VMII as of June 24, 1999 8,871,750
There is also outstanding one share of preferred stock which represents
voting rights of certain VMI shareholders. It is neither exchangeable nor
convertible into any other security.
6
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Note 2 - Significant Accounting Policy
The Company's significant accounting policies are as follows:
Research and development costs - Software Development Costs - Costs
incurred internally to develop computer software products and the costs to
acquire externally developed software products (which have no alternative future
use) to be sold, leased or otherwise marketed are charged to expense until the
technological feasibility of the product has been established. After
technological feasibility has been established and until the product is
available for general release, software development, product enhancements and
acquisition costs are capitalized. Amortization of capitalized costs is computed
on a product-by-product basis over (a) the period equal to the future revenue
stream of the product using the ratio that current revenues bears to the total
of current and future anticipated revenues of the product, or (b) the remaining
estimated economic life of the product (three years) using the straight-line
method, whichever method results in the greater amount. The Company periodically
evaluates its capitalized software costs for recoverability against anticipated
future revenues, and writes down or writes off capitalized software costs if
recoverability is in question.
Revenue Recognition, Software Licenses - The Company recognizes the revenue
allocable to software licenses and specified upgrades upon delivery of the
software product or upgrade to the end user, unless the fee is not fixed or
determinable or collectibility is not probable. The Company considers all
arrangements with payment terms extending beyond twelve months and other
arrangements with payment terms longer than normal not to be fixed or
determinable. If the fee is not fixed or determinable, revenue is recognized as
payments become due from the customer. The Company's standard acceptance terms,
which are considered to be perfunctory, lapse after 30 days if the customer has
not formally rejected the software. The Company provides a reserve for estimated
returns under the standard acceptance terms at the time the revenue is recorded.
Arrangements that include acceptance terms beyond the Company's standard terms
are not recognized until acceptance has occurred. If collectibility is not
considered probable, revenue is recognized when the fee is collected. Revenue on
arrangements with customers which are not the ultimate users (distributors,
other resellers, etc.) is not recognized until the software is delivered to an
end user.
Postcontract Customer Support - Revenue allocable to Postcontract customer
support "PCS" is recognized on a straight-line basis over the period the PCS is
provided.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of VMII and its wholly owned subsidiary, VMI/
All intercompany balances and transactions have been eliminated in
consolidation.
Foreign Currency -- The financial information provided in these statements
are reported in United States dollars. Monetary assets and liabilities of the
Company denominated in foreign currencies are translated at the year-end
exchange rates. Retained earnings are translated using the average exchange rate
prevalent in the respective periods, and any differences are recognized on the
Balance Sheet as currency translation gains or (losses). Other assets,
liabilities, revenues and expenses are translated at the rates prevailing on the
respective transaction dates. Exchange gains and losses are recognized on income
Advertising -- Advertising costs are charged to income as incurred. We are
a company engaged in the development of unified voice messaging software and are
incurring advertising costs as a result of market development efforts.
7
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Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumption that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reporting period. Actual results could differ
from those estimates.
Equipment and leasehold improvements -- Equipment is recorded at cost and
depreciated over the estimated useful lives of the assets, commencing in the
year the assets are put into use, as follows:
Computer equipment 30% declining balance method
Computer software 100% declining balance method
Office equipment and furniture 20% declining balance method
Leasehold improvements 5 year straight line
One-half of the above rates is applied in the year of acquisition.
Financial instruments -- The Company's financial instruments consists of
cash, accounts receivable, notes receivable, accounts payable, notes payable and
a shareholder loan.
It is management's opinion that the Company is not exposed to significant
interest, currency or credit risk arising from its financial instruments
mentioned and that their fair values approximate their carrying values, unless
otherwise noted.
On June 30, 1999, the Company agreed to convert a note payable of $514,721
into a long-term debt instrument with interest at 10% per annum and no fixed
terms of repayment.
Weighted average loss per share -- The Company has adopted SFAS No 128,
"Earnings Per Share." Basic net loss per share is computed using the
weighted-average number of common shares outstanding during the period and
includes common shares issued subsequent to the period end for which all
consideration had been received prior to the period end and which no other
contingencies existed. Basic loss per share excludes any dilutive effects of
options. Diluted loss per share is equal to the basic loss per share as the
effect of the stock options is anti-dilutive. There are no other dilutive common
stock equivalent shares outstanding during the period. Common stock equivalent
shares are excluded from the computation if their effect is anti-dilutive
Cash and cash equivalents -- The Company has defined cash and cash
equivalents to include cash and term deposits with original maturities of 90
days or less.
Deferred Income Taxes -- The Company follows the deferral method of
accounting for income taxes. Under U.S. GAAP (Generally Accepted Accounting
Principles), the liability method is used in accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" (SFAS 109). SFAS 109 requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates that will be in effect for the year in which the differences
are expected to reverse.
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A valuation allowance has been recognized to offset deferred tax assets
arising from temporary differences, tax credits and non-capital loss
carryforwards, for which realization is uncertain.
Recent Pronouncements -- New accounting pronouncements having relative
applicability to the Company include Statements of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective for fiscal years beginning after June 15, 2000.
SFAS No. 133 requires that all derivative instruments be recorded on the
consolidated balance sheets at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company has not
considered the impact of SFAS 133 at this time.
Note 3 -- Employee Stock Option Plan
On June 29, 1999 a stock option plan was adopted by the Company authorizing
an aggregate amount of 5,000,000 stock to be purchased pursuant to the exercise
of options. The following stock options were issued on June 29, 1999:
Number of
shares issuable Exercise price ($)
---------------- ------------------
Senior Management 1,625,000 $1.00
Employees 1,041,750 $0.75
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Total 2,666,750
Subsequent to June 30, 1999 the following employee stock options were
granted:
Number of shares
of common stock issuable Exercise price
---------------------------- ------------------
July 1, 1999 40,000 $0.75
July 14, 1999 35,000 $0.75
August 3, 1999 70,000 $0.75
August 20, 1999 55,000 $2.63
August 23, 1999 25,000 $2.31
September 7, 1999 35,000 $0.75
September 18, 1999 50,000 $1.00
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Total 310,000
The total options outstanding as at September 30, 1999 were 2,976,750 and
were exercisable upon this date. A stock option compensation cost of $430,400
and $3,890,938 was determined for the three and nine months ended September 30,
1999 respectively using the intrinsic method in accordance with the Accounting
Principles Board Opinion number 25 (APB25). Had compensation cost been
determined based on the fair value at the grant dates for those options issued
to senior management and employees, consistent with the method described in SFAS
No. 123, the Company's loss for the nine months ended September 30, 1999 would
have been increased to the pro forma amount indicated below:
Loss As reported $5,653,563
Pro Forma $7,108,015
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The fair value of each option granted in the six months ended June 30, 1999
was estimated on the date of the grant using the Black Scholes option pricing
model with the following assumptions: no dividend yield; risk free interest rate
of 5.5%; expected volatility of 0.876 using the Company's closing stock price
for the 60 days traded beginning June 29, 1999; and an expected life of five
years.
No diluted loss per common share is provided as the options are considered
to be anti-dilutive.
Note 4 Inventories
Inventories are comprised of the following:
September 30, September 30,
1999 1998
------------- -------------
Computer equipment $113,555 $18,410
Computer equipment is substantively comprised of hardware and nominal third
party software sold in conjunction with our software.
Note 5 -- Contingencies
[i] Real estate lease commitments for the base rental payments for offices
are as follows:
$
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2000 42,470
2001 43,123
2002 41,163
2003 18,494
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145,250
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10
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Item 2. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the nine months ended September 30, 1999 and 1998
The following discussion should be read in conjunction with Consolidated
Financial Statements and related notes.
Certain statements contained in this section and elsewhere in this
registration statement regarding matters that are not historical facts are
"forward-looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995). Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. All statements which address
operating performance, events or developments that our management expects or
anticipates to incur in the future, including statements relating to sales and
earnings growth or statements expressing general optimism about future operating
results, are forward-looking statements. These forward-looking statements are
based on our management's current views and assumptions regarding future events
and operating performance. Many factors could cause actual results to differ
materially from estimates contained in our management's forward-looking
statements. The differences may be caused by a variety of factors, including but
not limited to adverse economic conditions, competitive pressures, inadequate
capital, unexpected costs, lower revenues, net income and forecasts, the
possibility of fluctuation and volatility of our operating results and financial
condition, inability to carry out marketing and sales plans and loss of key
executives, among other things.
Voice Mobility International, Inc. is a Vancouver-based unified messaging
company focused on emergent technologies for telecommunications providers. We
are engaged in the development of unified voice messaging software and
introduced our first retail "e-go" 4.0 in August 1999. Consequently all revenue
to date has been incidental in nature; the result of sales of products or
services from prototypes or the recovery of costs on abandoned services.
We market our lead product, e-go, both to telephone companies and Internet
service providers. e-go allows subscribers to use a single electronic mailbox to
store and retrieve voicemail, faxes, and e-mail from many types of devices,
including wireline and wireless phones, e-mail or Web browsers.
Results of Operations for the three-month periods ended September 30, 1999 and
September 30, 1998:
- --------------------------------------------------------------------------------
Sales - All sales over both periods is non-recurring sales of prototype
equipment and/or software that was in the beta stage of development. On October
2, 1999 we completed the first delivery of our e-go 4.0 system. Our customer had
pre-paid for the system delivery in September 1999. Accordingly, the transaction
was recognized as deferred revenue and will be recognized ratably over the term
of the contract.
Cost of sales - Cost of sales is comprised of software licenses, telephony
hardware, data and voice transmission costs, and installation costs. Cost of
revenue was $11,450 and $434 for the three month periods ended September 30,
1999 and 1998 respectively.
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Operating Expenses
Sales & Marketing - Our sales and marketing costs consist primarily of
personnel, advertising, promotions, public relations, trade shows and business
development. Total costs were $125,924 and $24,987 for the three month periods
ended September 30, 1999 and September 30, 1998 respectively. The increase of
$100,937 in sales and marketing expense between the two periods is a result of
market development efforts.
Research and Development - Our research and development costs consist
primarily of personnel, data and voice transmission, and the lease of office
space. Research and development costs were $423,002 and $53,602 for the three
month periods ended September 30, 1999 and September 30, 1998 respectively. The
increase of $369,400 in research and development costs between the two periods
primarily reflects an employee stock option compensation cost of $284,900 that
was determined using the intrinsic method in accordance with "APB 25"
(Accounting Principles Board Opinion Number 25). The employee stock option costs
may occur in the future only when new research and development staff are hired
and subsequently issued employee stock options, or when bonus stock options are
issued to existing employees.
General and Administrative - Our general and administrative costs consist
primarily of personnel costs, professional and legal costs, consulting fees,
travel, and the lease of office space. General and administrative costs were
$316,947 and $106,107 for the three month periods ended September 30, 1999 and
September 30, 1998 respectively. The increase of $210,840 primarily reflects an
employee stock option compensation cost of $145,500 that was determined using
the intrinsic method in accordance with "APB 25." (Accounting Principles Board
Opinion Number 25). The employee stock option costs should occur only when new
general and administrative staff are hired and subsequently issued employee
stock options, or when bonus stock options are issued to existing employees and
senior management.
Interest Expense (Income), Net - Our interest expense is primarily related
to short-term debt. Interest expense (income), net was $11,431 and $6,839 for
the three month periods ended September 30, 1999 and September 30, 1998,
respectively. The increase of $4,592 in interest expense (income), net between
the two periods resulted from an increase in notes payable and shareholder
advances.
Income Taxes - Operating loss carryforwards will begin expiring in the year
2004. For reconciliation to U.S. GAAP purposes, a valuation allowance was
recognized for the year ending December 31, 1998 to offset deferred tax assets
arising from temporary differences, tax credits and non-capital loss
carryforwards, for which realization is uncertain. The amounts of and benefits
from our net operating loss carryforwards when we operated as Equity Capital
Group, Inc. have not been included as the net operating loss carryforwards may
be impaired or limited following changes in the ownership of our common stock.
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Fluctuations in Annual and Quarterly Results
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors, including:
1. the amount and timing of expenditures required to develop strategic
relationships to enhance sales and marketing;
2. changes in the growth rate of internet usage and acceptance by consumers of
unified messaging systems;
3. emergence of new services and technologies in the market in which we
compete; and
4. fluctuations of foreign currency exchange rates.
We face foreign currency exchange risk as a majority of our revenue is
denominated in U.S. currency and a majority of operating costs are incurred in
Canadian currency. Significant fluctuations in the foreign exchange between U.S.
and Canadian currency will result in fluctuations in our annual and quarterly
results.
Liquidity and Capital Resources
We have incurred substantial operating losses, net losses and negative cash
flow since inception. For the nine months ended September 30, 1999 and 1998 we
had an operating loss of $5,653,563 and $468,039 respectively. We had a negative
cash flow from operating and investing activities of $5,732,361 and $612,048 for
the nine month periods ended September 30, 1999 and 1998 respectively. Our total
negative cash flow for the year is budgeted at $4,200,000 and another $7,200,000
of cash is required for the year 2000. In the past, cash requirements were met
by notes payable, shareholder loans or stock subscriptions. Over the next
several months we expect to receive the proceeds on exercise of a portion of the
$2,156,500 of warrants issued. As of September 30, 1999, $823,333 was received
on the exercise of these warrants. All future cash requirements should be
financed by the equity markets.
We did not have any material commitments for capital expenditures as of the
end of the reported period. Our budgeted capital expenditures for the fiscal
year ending December 31, 1999 is approximately $404,000. We made $237,795 in
capital expenditures during the nine month period ended September 30, 1999,
compared to $88,288 during the comparable period of the prior fiscal year. We
are under no legal obligation to purchase the remaining budgeted capital
expenditures for the fiscal year ending December 31, 1999.
Our remaining capital expenditures are for the purpose of business
operations and research and development activities. The source of funds to pay
for the budgeted capital expenditures are expected to come from proceeds of
outstanding warrants.
Our operating expenses and capital expenditures for nine months ended
September 30, 1999 and September 30, 1998 have been entirely funded through debt
and equity financing. We anticipate that our operating expenses for the
remaining three months of the fiscal year ending December 31, 1999 to increase
as a result of increased sales and marketing activities, research and
development activities, as well as general and administrative activities.
13
<PAGE>
Our sales revenue has been nominal to date and only as a result of
providing customers with prototypes of our software to trial. We do not
anticipate any significant sales revenue for the remaining fiscal period ending
December 31, 1999. As a result, we anticipate our cash outflows to continue to
exceed our cash inflows in the short-term.
We anticipate our sales revenue to increase in the long-term as we increase
our sales and marketing activities and introduce new versions of our software
that are technologically feasible. We also expect our operating expenses to
increase in the long-term as a result of the increase in sales and marketing
activities, research and development activities, as well as general and
administrative activities. As a result we expect that our cash outflows to
exceed our cash inflows in the long-term.
Our liquidity is contingent on our raising money through equity financing
to meet our short term and long term needs.
Impact of Year 2000 Issue
Like many other companies, the Year 2000 issue creates risks for us. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any computer
software program or hardware that has date-sensitive software of embedded chips
may recognize a date using "00" as the year 1900 rather than the year 2000 which
could result in system failures or miscalculations causing disruptions to
operations and normal business activities.
We are a comparatively new company and as a result, the software and
hardware we use to operate our business have all been purchased or developed in
the last several years. While we cannot guarantee that we have eliminated all
risks related to the Year 2000, we can state that steps have been taken to
minimize the risks associated to the Year 2000 issue.
We have developed and implemented Year 2000 compliance plans related to both
our internal business operations, as well as our product compliance. With
respect to our Year 2000 plan we have ensured all of our hardware equipment and
software used in normal business operations are certified as Y2K compliant. Our
strategy involves maintaining an extensive inventory of any and all
computer-related systems and software, whether initially thought to be exposed
to the Y2K bug or not. An assessment is made of each inventory item identifying
potential risks or uncertainties. All hardware that is not Year 2000 compliant
is disposed of, and all software used is certified to be Year 2000 compliant
through written documentation provided by the vendor.
We are committed to providing releases of our software which are certified
as being Year 2000 compliant. We have developed all of the e-go software
internally and have ensured that all date fields are compatible to the year
2000. However, certain subcomponents may not have been properly engineered to
ensure date compatibility. Steps have been taken to confirm sub-components
compatibility, but this area still remains one of moderate risk. Third party
products that are bundled into our unified messaging systems have been
researched for Year 2000 compliancy, and all of the vendors have released
statements indicating they are fully Year 2000 compliant.
14
<PAGE>
The cost to address our Year 2000 issues has been minimal as most of our
development work has taken the Year 2000 issue into consideration from the onset
of the development of our product. We estimate that the costs to address our
Year 2000 issue to be approximately $100,000. This includes product development,
testing, as well as obtaining written documentation from vendors of our product
sub-components that they are Year 2000 compliant. The cost also includes the
cost of ensuring that the hardware and software used in internal operations are
Year 2000 compliant.
The risks that we face as a result of the Year 2000 issues include complete
interruption to our operations and development, however this risk has been
mitigated through our Year 2000 plan. Other risks include possible interruption
to communication for the users of our software. Users of our software include
our customers and ourselves. There is a risk of liability if our customer's
communication is interrupted resulting in adverse affects in their business
operations. In the worst case scenario a customer will lose the ability of
communicating by using our software, as well as possibly losing important stored
voice, fax, and email messages. If the loss is of significance to our customer,
there is the possibility of litigation and claims against our company.
We have prepared a contingency plan that covers worst case scenarios that
we may face. The plan covers how to deal with both internal systems that may be
affected by the Year 2000 issues, as well as how to deal with our product and
possible interruptions to its operation.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security-Holders
None.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOICE MOBILITY INTERNATIONAL, INC.
(Registrant)
By: /s/John J. Hutton
------------------
John J. Hutton,
President and Principal
Executive Officer
By: /s/William Krebs
--------------------
William Krebs,
Treasurer and Principal
Financial Officer
Dated: November 15, 1999
16
<PAGE>
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<LEGEND>
Financial Data Schedule September 30, 1999
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<NAME> Voice Mobility International, Inc.
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<FISCAL-YEAR-END> DEC-31-1999
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<PERIOD-END> SEP-30-1999
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