SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
SECOND AMENDMENT
[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
---------------------------
(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:
20,760,321 Common Share Equivalents as of January 24, 2000
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
VOICE MOBILITY INTERNATIONAL, INC.
FORM 10-QSB
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
<PAGE>
PART I. FINANCIAL INFORMAITON
Item 1. Financial Statements
VOICE MOBILITY INTERNATIONAL, INC.
A Development Stage Company
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
As at Unaudited
September 30, December 31,
1999 1998
$ $
- --------------------------------------------------------------------------------
ASSETS
Current
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
Other Receivables 24,755 8,370
Prepaid expenses 23,621 17,116
Inventory 113,555 14,919
- --------------------------------------------------------------------------------
Total current assets 324,037 145,328
Equipment and leasehold improvements
(net of accumulated depreciation
and amortization; 1999 - $104,960; 1998 - $45,577) 312,260 133,848
- --------------------------------------------------------------------------------
Total Assets $636,297 $279,176
================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current
Accounts payable and accrued liabilities 206,754 88,592
Employee related payables 69,723 36,870
Deferred revenue 64,796 -
Note payable, current portion (note 3) 5,705 792,323
Due to Acrex Ventures Ltd. - 419,592
Due to shareholder - 239,642
- --------------------------------------------------------------------------------
Total current liabilities 346,978 1,577,019
Note payable (note 3) 617,345 -
- --------------------------------------------------------------------------------
Total liabilities $964,323 $1,577,019
Commitments and contingencies (note 5)
Stockholders' deficiency (note 4)
Common stock 11,051 59
Preferred stock 1
Additional paid-in capital 7,797,278
Accumulated development state deficit (8,181,505) (1,373,141)
Other accumulated comprehensive income 45,149 75,239
- --------------------------------------------------------------------------------
Total stockholders' deficiency (328,026) (1,297,843)
================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $636,297 $279,176
================================================================================
See accompanying notes
2
<PAGE>
VOICE MOBILITY INTERNATIONAL, INC.
A Development Stage Company
CONSOLIDATED STATEMENT OF OPERATIONS
Expressed in U.S. Dollars
<TABLE>
<CAPTION>
Unaudited
Three Months Ended Nine Months Ended Accumulated
September 30, September 30, Development
------------------- ----------------- Stage
1999 1998 1999 1998 Deficit
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Sales $ 15,553 $ 53,113 $ 99,725 $ 118,990 $1,108,302
Less cost of sales (11,450) (434) (45,018) (59,161) (687,033)
- --------------------------------------------------------------------------------------------
4,103 52,679 54,707 59,829 421,269
Operating Expenses
Sales and Marketing 125,924 24,987 1,325,900 51,638 1,747,996
Research and Development (note 6) 423,002 53,602 2,536,753 141,567 2,894,963
General and Administrative 316,947 106,107 1,956,213 310,366 2,825,891
Acquisition fee for recapitalization
(note 1) 200,000 200,000
Interest Expense 11,431 6,839 54,204 24,296 143,924
- --------------------------------------------------------------------------------------------
Loss before extraordinary items (873,201) (138,856) (6,018,363) (468,038) (7,391,505)
- --------------------------------------------------------------------------------------------
Extraordinary loss on settlement
of debt (note 3) - - (790,000) - (790,000)
- --------------------------------------------------------------------------------------------
Net loss for the period (873,201) (138,856) (6,808,363) (468,038) (8,181,505)
Currency translation gains (losses) (30,008) - (30,090) - 45,149
- --------------------------------------------------------------------------------------------
Net comprehensive loss (903,209) (138,856) (6,838,453) (468,038) (8,136,356)
============================================================================================
Loss per common share before
Extraordinary loss - basic and
diluted (note 4) $(0.05) $(0.02) $(0.38) $(0.07)
Loss per common share - basic and
diluted (note 4) (0.05) (0.02) (0.43) (0.07)
============================================================================================
Weighted average number of common
stock equivalents 17,329,054 6,600,000 15,812,447 6,600,000
============================================================================================
</TABLE>
See accompanying notes
3
<PAGE>
VOICE MOBILITY INTERNATIONAL, INC.
A Development Stage Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
Expressed in U.S. Dollars
<TABLE>
<CAPTION>
Nine months ended September 30 Unaudited
Accumulated
Development
1999 1998 Stage
$ $ $
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss for the period ($6,808,363) ($468,039) (8,181,505)
Non cash items included in loss for the period
Depreciation and amortization 59,383 24,799 104,960
Interest accrued on note payable 10,358 18,438 28,395
Acquisition fee for recapitalization 200,000 - 200,000
Stock issued on settlement of amounts due to MTT 500,000 - 500,000
Extraordinary loss on settlement of Ibex notes payable 790,000 - 790,000
Stock option compensation 3,890,938 - 3,890,938
Increase in allowance for doubtful accounts 861 - 21,791
- ---------------------------------------------------------------------------------------------------
(1,356,823) (424,802) (2,645,421)
Change in accounts receivable (16,656) (52,592) (114,627)
Change in accounts payable and other payables 151,015 (44,238) 276,477
Change in inventory (98,636) 19,145 (113,555)
Change in prepaid expenses (6,505) (2,835) (23,621)
Change in deferred revenue 64,796 - 64,796
- ---------------------------------------------------------------------------------------------------
Cash used in operating activities (1,262,809) (505,322) (2,555,951)
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of equipment & leasehold improvements (237,795) (88,288) (417,220)
- ---------------------------------------------------------------------------------------------------
Cash used in investing activities (237,795) (88,288) (417,220)
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes payable, net 30,817 231,819 1,044,655
Increase in advances from Acrex Ventures Ltd. 733,456 405,079 1,154,000
Issuance of capital stock - - 59
Cash proceeds on exercise of warrants 823,333 - 823,333
- ---------------------------------------------------------------------------------------------------
Cash provided by financing activities 1,587,606
636,898 3,022,047
- ---------------------------------------------------------------------------------------------------
Effect of foreign currency on cash (30,090) (38,566) 45,149
- ---------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 56,912 4,722 94,025
Cash and cash equivalents, beginning of period 37,113 2,332 -
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $94,025 $7,054 94,025
===================================================================================================
Supplemental disclosures of cash information
Cash paid during the period for interest $54,204 $24,296 $143,924
Supplemental disclosure of non cash investing and financing activities
Stock issuance on conversion of debt 250,000 -
Warrants issued in settlement of Ibex notes payable 167,000 -
Warrants issued in settlement of Ernest Gardiner notes payable 33,000 -
Stock and warrants issued to Acrex investors 1,264,000 -
===================================================================================================
See accompanying notes
</TABLE>
4
<PAGE>
VOICE MOBILITY INTERNATIONAL, INC.
A Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expressed in U.S. Dollars
Unaudited as at and for the period ended September 30, 1999
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Description of business
Voice Mobility International, Inc., (the 'Company') is a Nevada corporation
engaged in the development of unified voice messaging software. The Company is
in its development stage.
The Company incurred an operating loss of $6,808,363 for the nine months
ended September 30, 1999 [nine months ended September 1998 - $468,038; year
ended December 31, 1998 - $930,598; year ended December 31, 1997 - $168,739],
and had a working capital deficiency of $22,941 as at September 30, 1999
[December 31, 1998 - $1,431,691; December 31, 1997 - $482,758]. The ability of
the Company to continue as a going concern is dependent upon the ability of the
Company to obtain necessary financing to complete its research and development
and attain profitable operations.
Recapitalization of the Company
These consolidated financial statements are the continuing financial
statements of Voice Mobility Inc. ("VMI"), a company incorporated under the laws
of the Canada Business Corporations Act in 1993. Through a series of
transactions in June 1999, VMI was recapitalized and acquired the net assets of
Voice Mobility International, Inc. ("VMII") [formerly Equity Capital Group,
Inc.] an inactive United States company traded on the NASD OTC Bulletin Board.
[a] History of VMI
Prior to the reverse acquisition of VMII, the shareholders of VMI had been
negotiating to acquire Acrex Ventures Inc. ("Acrex") an inactive public company
trading on the Vancouver Stock Exchange (VSE) with no assets or liabilities.
Pending approval of this transaction by the VSE, Acrex and VMI entered into four
private placements for proceeds totalling Canadian $2,022,500 (US$1,400,000).
The net proceeds of US 1,264,000 were advanced to VMI to fund operations. Under
these arrangements stock subscriptions in the private placements entitled
investors to 1 common stock of Acrex and 1 warrant entitling the holder to
acquire 1 common stock of Acrex. At the time of this arrangement the fair value
of the warrants was determined to be nominal since the exercise price of these
warrants exceeded the fair value of the VMI common stock. This arrangement
between Acrex and VMI expired on March 31, 1999. In connection with the
acquisition of VMII, the Acrex investors agreed to assign all proceeds from the
four private placements to VMII and contribute an additional $.02 per share for
an aggregate $200,000, in exchange for common stock and common stock warrants
with terms and conditions substantially identical to the warrants that would
have been issued by Acrex to the subscribers of its four private placements.
Accordingly, in the financial statements the issuance of common stock and
warrants of VMII to Acrex investors has been reflected as a recapitalization of
VMI in the amount of $1,264,000. As at September 30, 1999 $110,000 remains
receivable from Acrex investors and has been presented as a reduction of share
capital.
During its development stage, VMI has received advances in the form of
notes payable from PWMC, a shareholder of VMI and Ernest Gardiner, an Acrex
investor. In March 1999, these parties agreed to settle amounts owing to them by
VMI as follows; the issuance of 750,000 shares of Acrex in settlement of
$250,000 (Cdn$375,000) of amounts owing by VMI to PWMC. The fair value of the
shares issued was determined by management to be Cdn$.50 per share. the
issuance of warrants entitling Ernest Gardiner to acquire 101,000 shares of
Acrex at Cdn$.50 per share, in settlement of $33,000 (Cdn$50,500) of amounts
owning to Ernest Gardiner. The fair value of the warrants was determined to be
equivalent to the debt settled.
[b] Reverse acquisition of VMII
Pursuant to share purchase agreements dated April 1, 1999 and June 24,
1999, the stakeholders of VMI, sold their interest, had transferred to them
125,000 shares of Common Stock of Equity Capital by the majority shareholder of
Equity Capital, and VMII acquired 100% of the issued and outstanding common
stock of VMI by issuing 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
stakeholders in Voice Mobility and Acrex (consisting of the original
shareholders of VMI, certain shareholders of Acrex, and the investors in the
Acrex private placement) effectively acquired 15,018,000 common stock
equivalents of VMII which represents a controlling interest of approximately
90%. 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. 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
$nil is ascribed to the 453,750 previously outstanding common stock of VMII
deemed to be issued in the acquisition. The additional $200,000 paid for this
transaction has been expensed in these financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
These unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
In the opinion of management, these unaudited interim financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of the results of operations for such periods
and the financial position at such date. Historical results are not necessarily
indicative of future results, and results for any interim period are not
necessarily indicative of results of a full year.
The Company's significant accounting policies are as follows:
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 revenue is recognized in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position SOP) 97-2, "Software
Revenue Recognition." For software contracts not requiring software
modification, the Company recognizes license revenue upon shipment of a product
to the client if a signed contract exists, the fee is fixed and determinable,
collection of resulting receivables is probable, and any uncertainties with
regard to customer acceptance are insignificant. For contracts with multiple
obligations (e.g. deliverable and undeliverable products, maintenance and other
services), the Company allocates revenue to each component of the contract based
on objective evidence of its fair value when it is determinable. The Company
recognizes revenue allocated to undelivered products when the criteria for
product revenue set forth above are met.
To the extent that objective evidence of fair value is not determinable,
the Company defers revenue until the earlier of the point at which (1)
sufficient evidence exists or (2) all elements of the arrangement have been
delivered. When the Company enters into a license agreement with a customer
requiring significant customization of the software products, the Company
recognizes revenue related to the license using contract accounting. Deferred
revenues represent the difference between amounts invoiced and amounts
recognized as revenues under software development and maintenance agreements.
Where vendor specific objective evidence exists, the revenue allocated to
maintenance fees is recognized ratably over the period during which the services
are performed.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Voice Mobility Inc. All
intercompany balances and transactions have been eliminated in consolidation.
Foreign currency
The functional currency of the Company is the Canadian dollar. These
financial statements have been presented in United States dollars. Accordingly,
all assets and liabilities of the Company denominated in foreign currencies are
translated at the year end exchange rates and revenues and expenses are
translated using a weighted average exchange rate for the applicable period. In
accordance with SFAS 52, any exchange gains and losses resulting are presented
as other accumulated comprehensive income.
Advertising
Advertising costs are charged to income as incurred.
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
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 and cash equivalents,
accounts receivable, accounts and other payables, notes payable, and a
shareholder loan. Unless otherwise stated the fair value of the instruments
approximates their carrying value.
Loss per share
Basic net loss per share is computed using the weighted-average number of
common shares and exchangeable shares outstanding, as described in Note 4.
Diluted loss per share is equal to the basic loss per share as the effect of the
stock options and warrants are anti-dilutive.
Cash and cash equivalents
Cash and cash equivalents includes cash and term deposits with original
maturities of 90 days or less, which have been recorded at amortized cost.
Inventory
Inventory is substantively comprised of hardware and nominal third party
software sold in conjunction with our software.
Deferred income taxes
The Company follows the liability method of accounting for income taxes.
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.
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. The Company has not considered the impact of SFAS
133 at this time.
3. NOTES PAYABLE
September 30, December 31,
1999 1998
$ $
- --------------------------------------------------------------------------------
Note payable to Ibex Investment Inc. ("Ibex") -
Interest at 10% per annum, due the earlier of
December 31, 2000 or the next equity financing
of VMII, denominated in Canadian dollars.
Collateralized by a general security agreement
over the assets of the Company. 623,050 754,317
Note payable to Ernest Gardiner -
Interest at the bank prime rate, unsecured and
no fixed terms of repayment. Bank prime
at December 31, 1998 was 6.75% - 38,006
- --------------------------------------------------------------------------------
623,050 792,323
less current portion 5,705 792,323
- --------------------------------------------------------------------------------
617,345 -
================================================================================
In conjunction with the reorganization of the Company the note payable to
Ernest Gardiner was settled in March 1999, in exchange for 101,000 warrants with
a fair value equivalent to the then carrying value of the notes payable.
3. NOTES PAYABLE (cont'd.)
On June 29, 1999, in settlement of a $167,000 loan and a revision to the
repayment terms of the note payable to Ibex. the Company issued 500,000 warrants
with an exercise price of $0.35. The Company has recorded an extraordinary loss
of $790,000 based on the difference between the fair value of the equity
instruments issued and the carrying value of the debt.
The fair value of the warrants granted to Ibex 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 0.892; and an expected life of one year.
4. SHARE CAPITAL
[a] Authorized
The Company is authorized to issue up to 50,000,000 shares of common stock,
par value $.001 per share, and 1,000,000 shares of preferred stock, par value
$.001 per share.
In connection with the recapitalization of VMI described in Note 1, Voice
Mobility Canada Limited (VM Canada) issued 6,600,000 VM Canada Exchangeable
Shares. VM Canada is a wholly owned subsidiary of VMII. Each VM Canada
Exchangeable Share is exchangeable for one VMII common share at any time at the
option of the shareholder, and will be exchanged no later than July 1, 2009, and
has essentially the same voting, dividend and other rights as one VMII common
share. A share of preferred voting stock, which was issued to a trustee in trust
for the holders of the VM Canada Exchangeable Shares, provides the mechanism for
holders of the VM Canada Exchangeable Shares to voting rights in VMII. The
Company considers each Exchangeable Share as equivalent to a share of its common
stock and therefore the Exchangeable Shares are included in the computation of
basic earnings per share.
As at September 30, 1999 the holders of the Exchangeable Shares are
entitled to 6,600,000 individual votes in all matters of Voice Mobility
International, Inc. As the Exchangeable Shares are converted into common stock
of the Company, the voting rights attached to the share of preferred voting
stock are proportionately reduced.
<PAGE>
4. SHARE CAPITAL (cont'd.)
[b] Stock Options
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 granted on June 29,
1999:
Number of common Exercise price Date of
shares issuable $ Expiry
- --------------------------------------------------------------------------------
Senior management 1,625,000 1.00 June 29, 2004
Employees 1,041,750 0.75 June 29, 2004
- --------------------------------------------------------------------------------
2,666,750
================================================================================
Subsequent to June 30, 1999 the following employee stock options were
granted:
Number of common Exercise price
Shares issuable $
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Total 310,000
================================================================================
The total options outstanding as at September 30, 1999 were 2,976,750 and
were exercisable upon this date. Consequently, 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
APB 25.
<PAGE>
4. SHARE CAPITAL (cont'd.)
[c] Warrants
As at September 30, 1999, the Company has the following common stock
warrants outstanding;
Exercise
Number of common price Date of
shares issuable $ Expiry
- --------------------------------------------------------------------------------
Class A warrants 1,200,000 0.35 December 29, 2000
Class B, C and D warrants 1,813,000 0.50 December 29, 2000
Class E warrants 601,000 0.35 December 29, 2000
- --------------------------------------------------------------------------------
3,614,000
================================================================================
[d] Loss per share
Loss per share was calculated in accordance with SFAS 128. The following
table sets forth the computation of basic earnings per share for the periods;
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
$ $ $ $
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator
Net loss per share before
extraordinary loss $(873,201) $(138,856) $(6,018,363) $(468,038)
Net loss per share $(873,201) $(138,856) $(6,808,363) $(468,038)
Denominator
Weighted average number of common
stock outstanding 10,729,054 - 9,212,447 -
Weighted average number of common
stock issuable on exercise of
exchangeable shares 6,600,000 6,600,000 6,600,000 6,600,000
- ---------------------------------------------------------------------------------------------------
Average number of common stock
equivalents outstanding 17,329,054 6,600,000 15,812,447 6,600,000
- ---------------------------------------------------------------------------------------------------
Basic and diluted loss per share before
extraordinary loss $(.05) $(.02) $(.38) $(.07)
Basic and diluted loss per share (.05) (.02) (.43) (.07)
===================================================================================================
</TABLE>
At September 30, 1999, the Company's 2,976,750 common shares issuable upon
the exercise of stock options and 5,394,000 common shares issuable upon the
exercise of warrants were excluded from the determination of diluted loss per
share as their effect would be antidilutive.
5. COMMITMENTS AND CONTINGENCIES
[i] Real estate lease commitments for the base rental payments for offices are
as follows:
$
- --------------------------------------------------------------------------------
2000 42,470
2001 43,123
2002 41,163
2003 18,494
- --------------------------------------------------------------------------------
145,250
================================================================================
[ii] Capital expenditures
As at September 30, 1999, the Company has committed to acquire computer
equipment at a cost of approximately $58,000.
[iii] Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties will be fully resolved.
6. MARITIME TEL & TEL LIMITED
By an agreement dated March 26, 1999 Maritime Tel & Tel Limited ("MTT"),
Acrex, and VMI agreed to recognize past contributions of MTT on a joint
development project to a maximum amount of Cdn$500,000 (US $335,200). It was
agreed that VMI would not be required to reimburse MTT the Cdn$500,000, unless
VMI became a public company or was owned by a public company. On March 26, 1999
it was determined this amount would be settled by the issuance of 1,428,571
shares of the public entity. The identical terms of the debt settlement
agreement involving Acrex were assumed by VMII. Under this arrangement MTT
received a beneficial conversion feature of $164,800, calculated at its
intrinsic value at the commitment date, which has been included as research and
development costs.
7. COMPARATIVE FIGURES
Certain of the comparative figures have been restated to conform to the
presentation adopted in these financial statements.
13
<PAGE>
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 three months ended September 30, 1999 and 1998
The following discussion should be read in conjunction with the unaudited
interim consolidated financial statements for the three-month ended September
30, 1999 and September 30, 1998.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this section and elsewhere in this
Quarterly report regarding matters that are not historical facts are
"forward-looking statements". 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.
Throughout this quarterly report, we refer to United States dollars
as "$" and to Canadian dollars as "Cdn$."
- --------------------------------------------------------------------------------
Sales - All sales over both periods are 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.
Cost of sales - Cost of sales is comprised of third party software
licenses, telephony hardware, data and voice transmission costs, and
installation costs. Cost of revenue was $45,018 and $59,161 for the nine month
periods ended September 30, 1999 and 1998 respectively.
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 $1,325,900 and $51,638 for the nine months periods
ended September 30, 1999 and September 30, 1998 respectively. The increase of
$1,274,262 reflects employee stock option compensation cost of $908,750 that was
determined using the intrinsic method in accordance with "APB 25" (Accounting
Principles Board Opinion Number 25).
The additional increase of $365,512 in sales and marketing expense between
the two periods is a result of an increase of $201,786 in sales and marketing
personnel, $95,216 in promotions, and $68,510 for participation in industry
trade shows. These costs have been incurred as result of market development
efforts.
Research and Development - Our research and development costs consist
primarily of personnel, data and voice transmission, and related facility costs.
Research and development costs were $2,536,753 and $141,567 respectively for the
nine months ended September 30, 1999 and September 30, 1998. The increase of
$2,395,186 in research and development costs from 1998 to 1999 primarily
reflects an employee stock option compensation cost of $1,553,500 that was
determined using the intrinsic method in accordance with "APB 25" (Accounting
Principles Board Opinion Number 25).
The additional increase of $841,686 in research and development costs
between the two periods is the result of an increase of $270,712 in personnel
costs, $22,562 in leased office space and utility costs, $30,430 in data and
voice transmission costs and $17,982 in general research and development costs.
$500,000 in research and development costs was recognized as a result of
fulfilling the contingent obligation settlement with MTT in an agreement dated
March 26, 1999. As a result of the acquisition of VMI, we were obligated to
issue 1,428,571 shares of our common stock valued at $500,000.
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
$1,956,213 and $310,366 for the nine months ended September 30, 1999 and
September 30, 1998. The increase of $ 1,645,847 primarily reflects an employee
stock option compensation cost of $1,428,688 that was determined using the
intrinsic method in accordance with "APB 25." (Accounting Principles Board
Opinion Number 25).
The additional increase of $217,159 in general and administrative costs
between the two periods is the result of an increase of $81,364 in personnel
costs, $47,605 in professional and legal costs, $46,736 in consulting fees,
$16,208 in lease of office space, and $25,246 in general administrative costs.
General and administrative costs as a percentage of revenue increased between
the two periods as a result of increases in expenses over the same periods. We
anticipate that general and administrative costs will continue to grow in the
foreseeable future as we implement our market growth strategies.
Interest Expense (Income), Net - Our interest expense is primarily related
to short-term debt. Interest expense (income), net was $54,204 and $24,296 for
the nine month periods ended September 30, 1999 and September 30, 1998,
respectively. The increase of $29,908 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. 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.
Extraordinary Loss
In March 1999 VMI and Acrex agreed to a loan settlement transaction with
Ibex Investments Ltd. ("Ibex"). Pursuant to these understandings VMII issued
warrants to purchase 500,000 shares of Common Stock to Ibex in settlement of a
loan made by Ibex to VMI in the principal amount of Cdn$250,000, (one warrant
for every Cdn$0.50 invested, with an exercise price of $0.35). The original loan
agreement did not provide for the settlement of debt with equity instruments.
Consequently an extraordinary loss of $790,000 has been recorded based on the
difference between the fair value of the equity instruments issued and the
carrying value of the retired debt. The fair value of the warrants was estimated
using the Black Scholes option pricing model (see Note 3 of the unaudited
interim consolidated financial statements).
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.
15
<PAGE>
Liquidity and Capital Resources
Since the shift in the focus of our business to the development of Windows
NT platform based products in early 1998 our sales revenue has been less than
$158,000 and only as a result of sales of prototypes or the recovery of costs on
abandoned services. 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 over the next 12 months.
Our liquidity over the next 12 months is contingent on our raising money through
equity financings to meet our short term needs. On June 30, 1999 we had
5,394,000 warrants outstanding that would, upon exercise, provide the Company a
total of $2,366,850 in equity financing. As at January 24, 2000 the Company
received a total of $1,448,333 from the exercise of 3,110,000 warrants. If the
remaining 2,284,000 warrants are exercised we will receive $918,517 which would
be sufficient to provide the Company with the liquidity necessary to fund its
anticipated working capital and capital requirements for the next three months.
However, there can be no assurance that the remaining warrants will be
exercised.
Our budgeted capital expenditures for the fiscal year ending December 31,
1999 was approximately $404,000 of which $237,795 has been spent and we are
committed to purchase $58,000 of research and development equipment (See note 5
of the unaudited interim consolidated financial statements). We are under no
legal obligation to purchase the remaining budgeted capital expenditures.
We currently anticipate that cash flow from operations will increase in the
long-term as we increase our sales and marketing activities and introduce new
versions of our software that are technologically feasible. However, we also
anticipate our operating expenses will also 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. To the
extent that available funds from operations are insufficient to fund the
Company's activities, the Company may need to raise additional funds through
public and private financing. No assurance can be given that additional
financing will be available or that, if available, it an be obtained on terms
favorable to the Company and its stockholders. Failure to obtain such financing
could delay or prevent the Company's planned expansion, which could adversely
affect the Company's business, financial condition and results of operations. If
additional capital is raised through the sale of additional equity or
convertible securities, dilution to the Company's stockholders could occur.
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.
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.
17
<PAGE>
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.
18
<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/James J. Hutton
------------------
James J. Hutton,
Chief Executive Officer
By: /s/William Krebs
--------------------
William Krebs,
Treasurer and Principal
Financial Officer
Dated: February 11, 2000
19
<PAGE>
<TABLE> <S> <C>
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Financial Data Schedule September 30, 1999
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<CIK> 0001094816
<NAME> Voice Mobility International, Inc.
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<SECURITIES> 0
<RECEIVABLES> 114,627
<ALLOWANCES> 21,791
<INVENTORY> 113,555
<CURRENT-ASSETS> 324,037
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<TOTAL-ASSETS> 636,297
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<COMMON> 278,267
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<TOTAL-LIABILITY-AND-EQUITY> 636,297
<SALES> 99,725
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<CGS> 45,018
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