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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
INNOFONE.COM, INC.
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(Name of Small Business Issuer in its charter)
NEVADA 98-020313
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
600 NORTH PINE ISLAND ROAD, SUITE 450, PLANTATION, FLORIDA 33324
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (954) 315-0341
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
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(Title of Class)
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TABLE OF CONTENTS
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Description of Business...........................................................................................1
Risk Factors......................................................................................................9
Management's Discussion and Analysis of Financial Condition and Results of Operations............................18
Description of Property..........................................................................................23
Security Ownership of Certain Beneficial Owners and Management...................................................23
Directors, Executive Officers, Promoters and Control Persons.....................................................25
Executive Compensation...........................................................................................27
Certain Relationships and Related Transactions...................................................................29
Description of Securities........................................................................................29
Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters..................32
Legal Proceedings................................................................................................33
Changes in and Disagreements with Accountants....................................................................33
Recent Sales of Unregistered Securities..........................................................................33
Indemnification of Directors and Officers........................................................................35
Index to Financial Statements....................................................................................36
Financial Statements............................................................................................F-1
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ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
On June 26, 1998, we acquired Innofone Canada Inc. (formerly APC
Telecom Inc), a federally chartered Canadian company, in a stock-for-stock
exchange pursuant to an Agreement and Plan of Reorganization dated June 12,
1998 among Innofone.com, Innofone Canada and the shareholders of Innofone
Canada. As a result of the exchange, Innofone Canada became a wholly owned
subsidiary of Innofone.com. Innofone.com issued to the shareholders of Innofone
Canada 5,000,000 shares of its common stock, par value $.001 per share and
5,000,000 shares of its Series A, Convertible Preferred Stock.
Innofone.com, originally Propaint Systems, Inc., was incorporated in
Nevada in 1995. However, until the merger in June 1998, it was essentially a
"shell" company with no assets or operations.
Currently, all of our operations our conducted through our Canadian
operating subsidiary, Innofone Canada. We have two other subsidiaries, but they
do not conduct operations at this time.
Innofone Canada Inc. was incorporated in April 1998 for the purpose of
reselling traditional long distance and Internet telephony services to the
Canadian small business and residential markets. It had agreements in place that
allowed it to resell traditional long distance service over the Sprint Canada
network to potential customers.
As part of our original business plan, we targeted small business
customers through an internal sales team that would directly market our long
distance services door to door. We also focused on acquiring new residential
customers through the same direct, door to door marketing activities. In order
to offer our customers lower long distance telephone rates than those charged by
major service providers, we developed a strategic relationship with the Canadian
division of ACS - Affiliated Computer Services of Dallas Texas, ACS Toronto
(formerly ACS-Datex), to develop a Canadian exclusive software program called
Guaranteed Lowest Rate (GLR-TM-), which would rate and compare long distance
calling patterns for our clients against Bell, Sprint and AT&T.
We also intended to build a business and residential long distance
customer base to the point where we could feasibly carry our customers' long
distance calls over the Internet. In September 2000, after two years of testing
and upgrading of our Internet Telephony equipment, we abandoned this strategy
due to call quality problems and development costs. While we still own the
Internet Telephony equipment, we have no plans to launch a direct to market PC
to Phone service at this time. Instead, we are seeking a partner to provide
financing and management of these potential operations.
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DESCRIPTION OF BUSINESS
Strategy
We currently offer residential and small business long distance
telephone services, calling cards, Internet access and cellular services through
strategic "partnerships" with industry leaders in the financial, retail and
Internet markets. Typically, we combine our services into bundles and our
partners market our bundle of services to their own customer or membership bases
as part of value-added or benefits programs. We believe that our partners
benefit from these arrangements because they can offer attractively priced
telephony services to their customers. We benefit from strong brand name
recognition and the customer's perception that he or she is buying services from
a company with which he or she has a prior relationship. We believe that our
relationships with strategic partners also make it easier for us to collect
charges for our services from the customer base.
STRATEGIC PARTNERSHIPS
VISA DESJARDINS
In April 2000, we launched our first bundled service offering to Visa
Desjardins, the credit card division of Quebec's largest financial institution.
Innofone, through the Desjardins program branded "Visez Juste," began offering
bundled service products to the Visa Desjardins credit card holders. The program
offers Visa cardholders long distance, calling cards and cellular phone
services. As of November 2000 we also will begin offering dial-up and high speed
Internet access through the Visez Juste program. As of September 30, 2000, more
than 33,000 customers had signed up for the Visez Juste program.
The Visez Juste program is offered directly by Visa Desjardins to its
credit cardholders, although it is being managed by Innofone. Visez Juste-TM-
is a trademark of Visa Desjardins.
Under our arrangement with Visa Desjardins, we receive payment directly
from Visa Desjardins approximately five days after the billing. Charges are
reflected on the customer's credit card. We earn revenues on the long distance
billings by charging Visa Desjardins's customers a higher price for long
distance services than we are charged. We are operating as a merchant for Visa
Desjardins, so we pay them a service charge of 1.75% on all charges for long
distance and cellular telephone charged to their customers. Also, Visa
Desjardins earns a commission of 4% on all revenue from customers signed for our
long distance and cellular services.
In addition to describing our services in inserts included in the
cardholder's monthly bill, Visa Desjardins is telephoning its credit card
account holders to market our services. For any account that is signed up this
way, we pay Visa Desjardins $20 per account.
CANADIAN IMPERIAL BANK OF COMMERCE
CIBC BIZSMART PROGRAM. In May 2000 the Canadian Imperial Bank of
Commerce ("CIBC") announced its plans to offer to small businesses in Canada
access to no-fee online daily banking, plus lowest price guarantees or
special discounts on products purchased through their bizsmart.com shopping
portal. Innofone entered into arrangements to provide long distance telephone
services, calling card services and cellular and PCS services on bizsmart.com.
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bizsmart.com features a series of links to discounted services
offerd by selected service providers. Service providers, such as Innofone,
have created customized versions of their web sites for bizSmart members to
offer discounts to bizSmart members. bizSmart and SmartRate are trademarks of
CIBC.
In September 2000, we launched our second bundled services offering
through bizsmart under the trademark name SmartRate. We provide services on
the following basis: we compare the rates charged by major national long
distance and cellular service providers under their most competitive offers
using our proprietary software product. bizsmart members receive the lowest
rate/highest value solution for each service enrolled in plus a 10% discount
(5% in the case of cellular services). We review the service plans and rates
of the services on a monthly basis to ensure that they are still the most
competitive and that the rates are still the lowest rates. bizSmart members
are billed directly by Innofone, rather than by CIBC. We provide SmartRate
services to registered members of bizsmart only.
We pay commissions to CIBC each month based on the number of active
accounts. An "active" account is one for which Innofone rendered a usage
summary in the month. CIBC will be paid a commission on long distance
revenues of 2%, once we have 20,000 accounts. The commission rate increases
as the number of accounts increases, to a maximum of 6% when we have over
100,000 accounts. For cellular service the commission is 1% after we have
20,000 customers, which increases as we add new customers to a maximum of 4%
after 80,000 accounts are active.
CIBC MERCHANT PROGRAM. In July 2000, we signed a Memorandum of
Understanding with another division of the CIBC, Merchant Card Services (MCS).
In January, we expect to launch a program offering the same product offerings as
we do to the Visa Desjardins and Bizsmart customers. This program, however,
targets credit card merchants; it offers the same rate and compare analysis for
the small business segment of the market, and includes long distance, cellular
and Internet services.
MCS currently has some 100,000 merchant members across Canada. In
January we plan to begin an outbound telemarketing program through the Equinox
call center in an effort to sign up customers through this program.
Under this program, we bill the participating merchant customers
directly. Initially, they will pay us directly. However, we plan to implement a
system that will enable the amounts payable to be deducted as pre-authorized
debits from the merchants' bank accounts with CIBC. At that time, the total
monthly costs of our services will be shown on the merchants' Visa statements
sent by CIBC.
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CURRENT SERVICES AND PRODUCTS
The following are the components of our bundled services program, or
the various products that we offer through our strategic partnerships.
LONG DISTANCE SERVICE
Our long distance service guarantees that the customer receives the
best long distance rate available every month. The major telephone companies
offer several different rate plans. In addition, the best plan one month might
not be the best plan in another month due to variations in calling patterns.
Thus, under traditional calling programs it is virtually impossible to secure a
plan that will offer the lowest available rate every month.
When the customer receives his bill each month from Innofone, his long
distance calls are priced based on the rates charged by Bell, Sprint and Primus.
The customer is charged the lowest of the three plans. Visa Desjardins and CIBC
customers receive an additional 10% discount. We may offer the 10% discount to
the customers of future partners depending on the size of the customer base.
However, this will be individually negotiated with future strategic partners.
Customers who sign up for our long distance service are also sent a
calling card that is valid for long distance calls on the same plan.
We supply long distance telephone service to our customers over a
third party supplier network in Canada, through an agreement with Axxent
Corp. (formerly Optel Communications Corporation). Axxent, a full service
voice, data and internet provider, is also in the business of purchasing long
distance telephone service from major carriers, such as AT&T and Sprint, at
bulk rates and then reselling such service to smaller companies such as ours.
Innofone generates revenues from the reselling of long distance services. We
buy long distance services at a guaranteed rate and then resell the services
to our customers through the branded channels at a higher rate per minute.
We believe that Innofone has positioned itself well when buying long
distance services, and has significant purchasing power in the Canadian
marketplace due to its branded partner relationships with the credit card
companies. We believe that the rates Axxent charges us are substantially lower
than current market rates for a company of Innofone's size, mainly due to the
number of potential clients available through the channels and the anticipated
long distance traffic that these clients may generate for the carrier.
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GUARANTEED LOWEST RATE (GLR-TM-) PROGram
In the past, we offered our long distance services directly to
customers through our Guaranteed Lowest Rate (GLR-TM-) Program. This program was
identical in form to the one we now offer through Visa Desjardins and CIBC,
except that the customers did not get the extra 10% discount. Although we no
longer offer this program to new customers, we do continue to provide it for the
3,000 customers currently signed up for the program.
CELLULAR SERVICE
Customers who sign up for cellular services receive a bill each month
comparing the plans of Rogers Wireless, Bell Mobility, Clearnet and Microcell,
the four leading providers of cellular services in Canada, and they pay the
lowest of the four. Visa Desjardins and CIBC customers also receive an
additional a 5% discount. Our Agreement with Rogers Wireless, who provides the
cellular services we resell, does not provide for the additional discount for
future customers. However, we believe that we may be able to negotiate this
discount for future customers depending on the size of the customer base of the
relevant strategic partner.
We have contracted with Rogers Wireless Inc., Canada's leading cellular
phone provider, to provide all of the cellular phones, cellular airtime and
phone accessories to the customers of our branded program offerings.
Our agreement as a distributor for Rogers Wireless provides that
periodically, but not less often then every six months, Rogers and Innofone will
select a rate plan from Rogers retail pricing rate card and the retail pricing
rate card from three of Rogers's competitors.
We charge our customers for their actual use of Rogers's services:
o the applicable airtime and monthly service fees based upon the
lowest rate from the selected rate plans, plus
o charges for other call features, long distance, roaming, and
voicemail, less
o any additional discounts offered by us.
Rogers sends all of Innofone's customers cellular call records to ACS,
who handles our billing. ACS reviews the call records and determines the rates
to be billed for the calls. ACS then generates a bill and sends it to each
customer on Innofone's behalf. At the same time ACS provides Rogers with these
billing records. Rogers then bills Innofone an amount equal to 79% of the amount
the customers are billed, thus leaving Innofone with a 21% gross margin.
Rogers also provides Innofone, for resale to our customers, Nokia 5160
cellular telephones at a price of $99 per telephone. The $99 price of the phone
is billed directly to the customer's credit card and is payable to Rogers; we do
not pay for the phones in advance of the sale. Subsequent to signing the
agreement with us, Rogers also agreed to provide a $50 mail in rebate for all
new customers enrolled into the program.
Innofone's agreement with Rogers requires that we sign up a minimum of
5,000 new cellular telephone numbers (accounts) by April 20, 2001, 15,000 new
telephone numbers by April 20, 2002 and 25,000 new telephone numbers by April
20, 2003. If we do not sign up the required number of
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customers, we are required to pay Rogers $20 Can. for every customer we are
short. As of September 30, 2000 Innofone had enrolled approximately 1,200
customers into the cellular program.
INTERNET ACCESS
Through our agreement with Bell Sympatico, we recently launched an
offering of dial-up and high speed Internet access to the Visa Desjardins
cardholders through the Visez Juste program. The agreement also allows us to
market these services to CIBC credit card holders. We may also provide these
Internet programs through all of our future offerings of our bundled services
program. This will have to be separately negotiated, however, as our current
agreement is limited to CIBC and Visa Desjardins customers.
Customers who sign up for Internet services through the CIBC or VISA
Desjardin programs receive a 10% discount off Sympatico's monthly rate. They
also receive a 10% discount off installation.
We entered into an ISP affinity program agreement with Bell Actimedia
Inc, a major Internet player in the Canadian marketplace, under the brand name
Bell Sympatico. This agreement provides for Innofone to act as a distributor and
to offer to the customers of its brand partners high-speed and dial-up Internet
services.
Through Equinox Marketing Services, we provide outbound telemarketing
for the purpose of signing customers of the brand offerings to the Sympatico
Internet service. Sympatico handles all of the customer support beyond the
original sign-up of the customer. Sympatico is also responsible for the delivery
of all product installation discs, high-speed equipment and any required
literature. We are responsible only for customer sign-ups and inquiries as they
relate to the billing of the service.
Under the agreement, Bell Sympatico pays us a commission based on
their collected net billings, exclusive of taxes, for services provided
pursuant to the agreement.
FUTURE PRODUCTS AND SERVICES
We are currently working on a strategy to add gas and electric
utilities services to our core bundle of services. With the deregulation of gas
and electric services in specific regions within Canada, we consider utilities
to be a significant commodity to offer to our pre-existing and future customers
through branded channels. Currently we are negotiating for the supply of these
services, but we have not executed any formal agreements at this time.
Currently we only offer our services in Canada. However, the level of
acceptance of our current offerings and the lack of similar type offerings in
other countries has led us to begin researching the possibilities of expanding
our business into other countries. Due to the similarity of these services
throughout North America, we established an office in the United States for the
purpose of researching the viability of offering bundled services through
branded loyalty programs and market acceptance of our product offerings. If it
appears that there is a viable market for our products in the United States, we
plan to offer our services there. However, we cannot assure you that we will
market our products in the United States, or that if we do, our products will be
accepted or the business will be profitable. In addition, we will not launch any
branded programs outside of Canada without first securing adequate financing to
do so. We cannot assure you that we will be able to secure the necessary
financing.
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BILLING AND FULFILLMENT
ACS COMMUNICATIONS
ACS Communications Industry Services, Inc. performs our client billing
services by utilizing custom designed software. Under our agreement with them,
ACS handles not only routine functions including order entry, customer service
functions, accounting, sales tracking and receipts processing functions but also
provides other billing functions including invoice preparation and mailing. ACS
also furnishes us with monthly management reports, which are comprised of
profit, loss, and margin reports, tax summaries, price per minute, rate program
and calling analyses, and other services.
We believe that the key selling point for our services is our promise
to our subscribers that they will always receive a lower telephone bill from us
than they would receive from any of the major telephone carriers. We accomplish
this by utilizing exclusive customized software, supplied by ACS, which rates a
customer's long distance calls against selected plans from each of three major
Canadian telephone companies.
EQUINOX MARKETING SERVICES
Equinox Marketing Services is a bilingual call center operating from
offices in Montreal, Canada which handles all customer service inquiries on our
behalf. They have been trained on all aspects of our program offerings and our
billing software, which they can access through the Internet, using the ACS
billing system. They are set up to handle all inbound calls, which can be from
customers having questions about their bills, or from Visa Desjardins customers
who have received an insert with their Visa statement and may have questions
about the program.
Equinox also handles our outbound telemarketing program. We provide
Equinox with the names and phone numbers of customers of the branded Visa
programs along with pre-approved telephone scripts provided by Visa. Using this
database of customers, Equinox contacts each individual Visa cardholder and
offers the program's long distance and cellular phone services. Since the launch
of Visez Juste outbound telemarketing in May 2000, the program has consistently
achieved in excess of a 27% acceptance rate and continues to enroll some 500
clients into the program daily.
In July 2000 Visa Desjardins agreed to give us access to their full
credit card base of over 1,200,000 cardholders for the purpose of outbound
telemarketing.
WATTS DISTRIBUTION SERVICES, LTD.
Watts Distribution Services Ltd. provides fulfillment services for all
of our client enrollment needs, into the branded programs.
Innofone and its brand partners provide Watts with a pre approved
fulfillment package design and layout that is distributed to all new clients
enrolled into the program. Watts creates the welcome kits including a welcome
letter, calling card (where ordered), calling card international guide and long
distance terms and conditions for long distance subscribers. For clients
enrolling in the cellular phone program, Watts provides the cellular phone,
cellular user guide and cellular terms and conditions for
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cellular subscribers.
For those customers who subscribe to both services, all pieces are
included in the welcome kit. Watts is also responsible for the activation of the
cellular phone prior to sending it out to customers in their welcome kit.
PATENTS & TRADEMARKS
We have made application to secure several trademarks for the purpose
of branding its bundled service offerings to clients through its original direct
to market sales and more recently through its branded channel partners. We will
continue to develop our trademark strategies to ensure our first to market
brands are protected.
We have no patents or patents pending at this time.
EMPLOYEES AND KEY RELATIONSHIPS
As of September 30, 2000, we employ eight full-time employees at our
Canadian offices through our subsidiary, Innofone Canada. We plan to hire two
additional employees at our Canadian offices over the next twelve months as our
customer base increases. We do not foresee any substantial increase in employee
requirements, due to the strategic outsourcing of operations to our suppliers
and billing and fulfillment service providers.
Innofone.com employs only its three executive team members, consisting
of Ron Crowe, Chairman & VP, Larry Hunt President & CEO, and Rick Quinney, CFO.
We plan to hire a new CFO to replace Mr. Quinney, although he will continue to
be CFO of Innofone Canada. Otherwise, we have no immediate plans to hire any
additional employees.
The success of our marketing program has been largely dependent on the
services of a marketing consultant, Doug Burdon, who has an extensive background
in the design and development of branded loyalty programs. On November 30, 1999,
we engaged the services of Mr. Burdon to manage our marketing effort. Under the
terms of our original agreement with Mr. Burdon, which expired on March 31,
2000, Mr. Burdon was to receive a royalty equal to 2% of gross revenues
generated from any accounts he facilitates in establishing for us. Mr. Burdon
had the right to exchange the royalty for stock options on or before November
30, 2001, and he has already elected to convert this royalty into 2.75 million
options. See "Security Ownership of Certain Beneficial Owners and Management"
for a description of Mr. Burdon's options. On April 5, 2000 we entered into a
new agreement with Mr. Burdon, superceding the November 30, 1999 agreement.
Under the terms of the revised agreement, Mr. Burdon was not to receive any
royalties but would receive options of up to 5,500,000 shares of common stock,
at an exercise price of $0.50 per share, subject to the satisfaction of the
conditions described in "Security Ownership of Certain Beneficial Owners and
Management".
We granted Mr. Burdon options covering 2,750,000 shares in connection
with his efforts in facilitating Innofone's business arrangement with Visa
Desjardins, described below. 1,437,500 of these options are currently
exercisable, with the remaining 1,312,500 shares becoming exercisable over the
next eighteen months. Mr. Burdon may be granted additional options for 2,750,000
shares, which options will become exercisable over a period of 18 months, upon
the execution of a second agreement with Canadian Imperial Bank of Commerce VISA
for use of Innofone's services.
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In addition, until September 30, 2000, we paid Mr. Burdon $8,250 per
month as an advisory fee. We are negotiating a new contract with Mr. Burdon
through our subsidiary in the United States, but we have not yet determined the
terms of that agreement.
Mr. Burdon is not an employee of Innofone and is free to work with
other companies, including our competitors.
We believe that our employee relations are excellent. We provide each
employee with industry standard employee benefits, including health coverage and
an employee stock option plan.
COMPETITION
We compete with many companies in the increasingly competitive
telecommunications industry, including some of the largest corporations in the
world. Bell Canada continues to dominate the Canadian market. The other large
competitors are Sprint Canada, AT&T and, MCI/WorldCom, Inc.
GOVERNMENT REGULATIONS
Except for the requirement that we have a Class A License to provide
international telecommunications services, which has been obtained by Innofone
Canada, there are no Canadian regulations that materially affect our business.
In the event we decide to offer our services in other countries, we will have to
comply with any applicable local laws.
Innofone programs deliver the best price/value proposition and the
bundled solution. Innofone programs offer a unique underlying `Core value
benefit' message - `Compare and Save'. The current bundle of products and
services include: residential and small business long distance, calling cards,
Internet access and cellular services. We intend to add utilities offerings to
our bundle of services in the near future. In addition, we may add home
security, local telephone service and cable television services to our product
offerings at a later date. While we are considering adding these services,
however, we have not started developing plans to offer them and there are no
contracts or negotiations in place regarding these services.
RISK FACTORS
Investing in our common stock involves substantial risk. Investors
should carefully consider the risks described below and the other information in
this registration statement, including our financial statements and the related
notes, before purchasing our common stock. The risks and uncertainties described
below are not the only ones facing us. Additional risks not presently known to
us or that we currently consider insignificant may also impair our business
operations in the future. You should not purchase our common stock unless you
can afford the loss of your entire investment.
Our business, financial condition and plan of operations could be
materially adversely affected by any of the following risks. The trading
price of shares of our common stock could decline due to any of these risks,
and you might lose all or part of your investment. This registration
statement also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from
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those anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by us described below or elsewhere in this
document.
RISKS RELATED TO OUR FINANCIAL CONDITION
OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION.
Our independent auditors' report on our financial statements
includes additional comments for U.S. readers which indicates that there
exists certain factors that raise substantial doubt as to our ability to
continue as a going concern. These factors are further explained in the notes
to our financial statements. The financial statements do not contain any
adjustments that might result from this uncertainty. Among the reasons cited
as raising substantial doubt about our ability to continue as a going concern
is the fact that we have no current sources of financing. While we are
attempting to arrange private sources of financing, there can be no assurance
that we will be able to do so. You should read the auditors' report and the
additional comments and examine our financial statements.
Many investment bankers and investors view companies with a "going
concern" qualification as less desirable for investment. Accordingly, we may
have a more difficult time raising equity capital or borrowing capital on
acceptable terms or at all. Our suppliers also might be less willing to extend
credit. In addition, our potential strategic partners might be less willing to
enter into a relationship with us that allows us to offer our services to their
members if they believe that we will not be viable enough to provide service,
support, back-up, and follow-on products when needed. Our potential customers
might be less willing to purchase our services for similar reasons. Furthermore,
we might be disadvantaged in recruiting employees who might be concerned about
the stability of employment with us. Therefore, the "going concern"
qualification can have severe adverse consequences to us.
WE CANNOT ENSURE THAT ADDITIONAL FUNDS WILL BE AVAILABLE TO US ON REASONABLE
TERMS, OR AT ALL.
We will need additional funding to continue and expand our business and
to carry out our business plan. We currently do not have any revolving loans or
lines of credit. In addition, while we are attempting to arrange funding through
private equity investments and other sources, we cannot assure you that these
efforts will be successful. We cannot assure you that we will be able to obtain
the funds necessary to continue and expand our business on acceptable terms, or
at all.
WE HAVE NOT BEEN OPERATING VERY LONG AND HAVE A HISTORY OF INCURRING LOSSES
WHICH MAY MAKE IT DIFFICULT TO FUND OPERATIONS.
We have a limited operating history on which you can evaluate our
business and prospects, and we have not yet commenced some of the services that
we intend to offer in the future. We have incurred net losses since our
inception. For the year ended June 30, 2000, we incurred net losses of
approximately $4,817,280. Our ability to achieve and sustain profitable
operations depends on many circumstances, including our ability to establish
effective distribution channels, market demand, pricing and competition in the
telecommunications industry in the countries where we operate and intend to
operate. If we do not achieve and sustain profitability, our ability to respond
effectively to market conditions, to make capital expenditures and to take
advantage of business opportunities could be negatively affected. In addition,
our prospects must be considered in light of the risks encountered by companies
like us developing products and services in new and rapidly evolving markets.
Our failure to perform in these areas could have a material adverse effect on
our business, plan of operations and financial condition.
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RISKS RELATED TO OUR BUSINESS
WE ARE RELIANT UPON THE CONTINUED SERVICES OF DOUGLAS BURDON, WHO IS AN
INDEPENDENT CONTRACTOR.
In November 1999, we entered into an agreement with Douglas Burdon
pursuant to which Mr. Burdon marketed our services to banking and other
institutions in Canada. Mr. Burdon's efforts were instrumental in facilitating
our current arrangement with Visa Desjardins and CIBC. Please refer to "Business
- Employees and Key Relationships", "Business - Strategic Partnerships - Visa
Desjardins" and "Business - Strategic Partnerships - Canadian Imperial Bank of
Commerce" for a further description of these arrangements. Mr. Burdon is not an
employee and therefore is free to work with other companies, including our
competitors, and can help them design competing, similar business plans. In
addition, if our relationship with Mr. Burdon was terminated, it could
negatively affect our relationships with any strategic partners that were
introduced to us through Mr. Burdon.
WE HAVE NOT ENTERED INTO A COMPREHENSIVE AGREEMENT WITH VISA DESJARDINS TO
PROVIDE OUR SERVICES TO THEIR CARDHOLDERS, WHICH REPRESENTS A SUBSTANTIAL
PORTION OF OUR CURRENT OPERATIONS.
We have not entered into a comprehensive agreement with Visa Desjardins
to provide our telecommunications services to its cardholders. Currently, we are
operating pursuant to a Memorandum of Understanding we signed with Visa
Desjardins that does not cover all material aspects of our arrangement. We are
presently negotiating a comprehensive agreement with Visa Desjardins; there can
be no assurance that a final, comprehensive agreement will be completed. If we
are unable to finalize a comprehensive agreement it is possible that disputes
could arise over terms of our arrangement with Visa Desjardins which could have
a material, adverse effect on our business. Furthermore, if no comprehensive
agreement is reached, Visa Desjardins may decide not to continue offering our
services to its cardholders, which would have a material, adverse effect on our
business.
OUR AGREEMENT WITH ROGERS WIRELESS INC. IMPOSES SUBSTANTIAL CONDITIONS ON US
WHICH WE MAY NOT BE ABLE TO SATISFY, CAUSING US TO MAKE SUBSTANTIAL PAYMENTS TO
ROGERS.
Our agreement with Rogers requires that we arrange for a minimum of
5,000 new telephone numbers accounts by April 20, 2001; 15,000 new accounts
by April 20, 2002; and 25,000 new accounts by April 20, 2003. If we do not
reach these minimums we are obligated to pay Rogers an amount equal to $20
Can. times the number of accounts we are short of the minimum. In addition,
we are required to deposit with Rogers a security deposit of $100,000 Can. If
we are unable to arrange a letter of credit, we would be forced to make a
cash deposit to satisfy the condition or risk Rogers terminating the
contract. At the date of this filing, this payment has neither been made nor
requested. The payment of $100,000 Can. at the present time would adversely
affect our ability to undertake other projects or fund other operations.
WE MAY FACE QUALITY AND CAPACITY PROBLEMS OVER OUR NETWORK UPON FAILURES BY
THIRD PARTIES ASSOCIATED WITH THE TELEPHONE AND INTERNET INFRASTRUCTURE.
Third parties maintain, and in many cases own, the phone lines and
other equipment that we use to provide our services. Some of these third parties
are national telephone companies. They may increase their charges for using
these lines at any time and decrease our profitability. They may also fail to
properly maintain their lines and disrupt our ability to provide service to our
customers. We are unable to control, manage or repair the infrastructure we are
dependent upon. Any failure by these third parties to maintain these lines and
networks that leads to a material disruption of our ability to provide service
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over telephone lines could discourage our customers from using our network,
which could have the effect of delaying or preventing our ability to become
profitable. Lack of performance or significant price changes by these
providers will also lead to a material disruption of our ability to offer our
products in an easy, efficient and cost effective manner, which could have
the effect of delaying or preventing our ability to become profitable.
Although our competitors face similar issues, we believe that we may be less
able to tolerate performance issues than they can and our business will be
hurt more because we do not have their financial strength, national market
presence or associated goodwill.
WE ARE DEPENDENT ON THIRD PARTIES FOR THE OPERATION OF OUR BUSINESS. IF THEY
DON'T PERFORM AS EXPECTED, OUR BUSINESS WILL BE HARMED.
All major facets of our present business operations, including
supplying long distance telephone services, billing and marketing, are
primarily managed by, and are dependent upon the services and technologies
of, outside contractors and independent sales representatives. The failure of
any of these parties to perform in accordance with the terms and conditions
of their contracts with us or to achieve forecasted levels of performance, as
the case may be, would harm our business. If this happens, we may not be able
to find others which are willing and able to carry out our business
operations and plans without any interruptions in our routine business
activities, or at all.
CUSTOMER ATTRITION MAY AFFECT OUR FINANCIAL PERFORMANCE.
Purchasers of our long distance services are not obligated to purchase
any minimum amount of our services, and can stop using our service at any time
and without penalty. Our customers may not continue to buy their long distance
telephone service through us or through independent carriers and marketing
companies that purchase services from us. If a significant portion of our
customers were to decide to purchase long distance service from other long
distance service providers, we may not be able to replace them. A high level of
customer attrition is common in the long distance industry, and our financial
results are affected by this attrition. Attrition is attributable to a variety
of factors, including our termination of customers for nonpayment and the
initiatives of existing and new competitors who, to attract new customers, may
o implement national advertising campaigns,
o utilize telemarketing programs, and
o provide cash payments and other forms of incentives.
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OUR FAILURE TO ACQUIRE, INTEGRATE AND OPERATE NEW TECHNOLOGY COULD HARM OUR
COMPETITIVE POSITION.
The telecommunications industry is characterized by rapid and
significant technological advancements and the related introduction of new
products and services. We do not possess significant intellectual property
rights with respect to all of the technologies we use and we are dependent on
third parties for the development of and access to new technology. The effect of
technological changes on our business plan cannot be predicted. In addition, it
is impossible for us to predict with any certainty whether demand for services
in our future markets will develop or will prove to be an economical and
efficient technology that is capable of attracting customer usage. Failure by us
to obtain and adapt to new technology in our future markets could have a
material adverse effect on our business and plan of operations.
GROWTH OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO MANAGE EXPANSION AND
DEVELOPMENT EFFECTIVELY.
Our business plan requires the expansion of our business and the
services we offer. Our ability to grow effectively will require us to
implement and improve our operating, financial and accounting systems and to
hire, train and manage new employees. Among other things, the continued
expansion and development of our business will also depend upon our ability
to:
o secure financing;
o install telecommunications infrastructure;
o obtain any required government authorizations;
o evaluate and penetrate potential new markets;
o hire enough qualified employees; and
o build an effective distribution channel.
In addition, we must perform these tasks in a timely manner, at
reasonable costs and on satisfactory terms and conditions.
Our expansion may involve acquiring other companies or assets. These
acquisitions could divert our resources and management and require integration
with our existing operations. Failure to effectively manage our planned
expansion could have a material adverse effect on our business, growth,
financial condition and plan of operations and the market price of our common
stock. We cannot assure you that we will be successful or timely in developing
and marketing service enhancements or new services that respond to technological
change, changes in customer requirements and emerging industry standards. Even
if we are successful, we cannot assure you that our lack of significant
experience with respect to a new service or market will not hinder our ability
to successfully capitalize on any such opportunity.
GIVEN THE RAPID CHANGES IN THE TELECOMMUNICATIONS INDUSTRY, IT IS LIKELY THAT
NEW LAWS AND REGULATIONS WILL BE PASSED TO REGULATE IT. SOME OF THESE NEW LAWS
MAY ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS.
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The nature and scope of existing or future laws in various
jurisdictions relating to the Internet is uncertain and may take years to
resolve. This uncertainty could expose us to substantial liability for which
we might not be indemnified. It is impossible to predict the regulatory
climate, controls, regulations and rules affecting telephone and
internet-related businesses. We are presently unaware of laws, regulations or
rules that prevent or restrict us from offering our services. It is possible,
however, that with the integration and merger of telecommunication,
computing, television and broadcast services, which some observers predict is
inevitable, laws, regulations and rules may be passed and promulgated that
could prevent or restrict us from pursuing our business. Any new or existing
legislation or regulation relating to the Internet could have a material
adverse effect on our business, plan of operations and financial condition.
Furthermore, such events, if not preventing or restricting our right to
pursue our business, could result in an increased competitive environment.
WE MAY NOT BE ABLE TO SUCCEED IN THE INTENSELY COMPETITIVE MARKET FOR OUR
SERVICES.
The market for long distance and cellular telephone service, as well as
for Internet dial-up services, is extremely competitive and will likely become
more competitive.
Intense competition in our markets can be expected to continue to put
downward pressure on prices and adversely affect our profitability. We cannot
assure you that we will be able to compete successfully against our competitors
and we may lose customers or fail to grow our business as a result of this
competition.
We compete against such companies as Bell Canada, AT&T, MCI/Worldcom
and Sprint, all of which are larger than we are and have substantially greater
customer bases, financial and marketing resources and goodwill than we do. The
main component of our business plan is providing a service which promises to
provide the lowest telephone rates of all major carriers; however, our larger
competitors have the resources to respond by offering a similar plan or even
undercutting our rate structure.
Furthermore, we face competition from a growing number of companies
that offer low-cost internet-based services. Moreover, various cable TV
operators in the United States have begun, and others have announced their
intention to begin, offering telephone service through existing cable TV
lines. These companies pose a substantial threat to traditional telephone
companies because of the cable TV industry's superior technology enabling
greater transmission capacity, versatility and speed. The impact of cable TV
companies entering the telephone business will increase competition, having
unpredictable effects on the industry in general, and upon us, in particular,
due to our lack of financial resources and customer bases as compared to the
larger, more-established telephone companies. These cable companies, as well,
have substantial subscriber bases and financial and marketing resources that
place our present and planned business operations at a serious competitive
disadvantage.
WE MAY BE UNABLE TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO CONTINUE GROWING
OUR BUSINESS.
We will require significant amounts of additional capital to fund the
expansion of out network, develop additional business and services we intend to
offer, and for working capital.
The exact amount and timing of our future capital requirements will
depend upon many factors, including:
o the cost of developing and expanding our networks and services;
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o the development of new services;
o our ability to penetrate new markets;
o regulatory changes;
o the status of competing services;
o the magnitude of potential acquisitions, investments and strategic
alliances; and
o our plan of operations.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES MAY BE LIMITED.
The enforcement by investors of civil liabilities under the United
States federal securities laws may be adversely affected by the fact that all of
our officers and directors are not citizens of the United States and the
majority of our assets are located in Canada. There can be no assurance that (a)
U.S. stockholders will be able to effect service of process within the United
States upon such persons, (b) U.S. stockholders will be able to enforce, in
United States courts, judgments against such persons obtained in such courts
predicated upon the civil liability provisions of United States federal
securities laws, (c) appropriate foreign courts would enforce judgments of
United States courts obtained in actions against such persons predicated upon
the civil liability provisions of the federal securities laws, and (d) the
appropriate foreign courts would enforce, in original actions, liabilities
against such persons predicated solely upon the United States federal securities
laws.
RISKS RELATED TO OUR STOCK AND CAPITAL STRUCTURE
THE MARKET FOR OUR COMMON STOCK IS LIMITED AND IT MAY BE DIFFICULT FOR YOU TO
RESELL YOUR SHARES.
Our common stock is not traded on any securities exchange, on the
NASDAQ National Market or SmallCap Market, or on the OTC Bulletin Board, and
there is only a very limited trading market in our common stock in the
over-the-counter market in the United States. Currently, our common stock only
trades via the "pink sheets." Our common stock has not traded on the NASDAQ
since September 1, 1999. We have no plans to list our common stock on NASDAQ or
on any securities exchange in the near future; moreover, our common stock does
not qualify for a NASDAQ listing, or listing on any major stock exchange.
PENNY STOCK RULES LIMIT THE LIQUIDITY OF OUR COMMON STOCK.
Our common stock may now and in the future be subject to the penny
stock rules under the Securities Exchange Act of 1934. These rules regulate
broker-dealer practices for transactions in "penny stocks." Penny stocks
generally are equity securities with a price of less than $5.00. The penny stock
rules require broker-dealers to deliver a standardized risk disclosure document
that provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
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completing the transaction and must be given to the customer in writing before
or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction,
the broker and/or dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These additional penny stock
disclosure requirements are burdensome and may reduce the trading activity in
the market for our common stock. As long as our common stock is subject to the
penny stock rules, holders of our common stock may find it more difficult to
sell their shares.
YOUR INVESTMENT IN INNOFONE.COM MAY BE DILUTED.
We may issue a substantial number of shares of our common stock without
shareholder approval. It is likely that we will sell additional common stock or
other securities which are exchangeable for, or convertible into, common stock.
In addition, we have an outstanding loan due on December 31, 2000 which may be
converted into common stock at the holder's option. Any such issuance of
additional securities in the future could reduce an investor's ownership
percentage and voting rights in Innofone.com and further dilute the value of his
or her investment.
SINCE MANAGEMENT OWNS A CONTROLLING INTEREST IN INNOFONE, THEY COULD MAKE
DECISIONS THAT MAY BE IN THEIR OWN BEST INTERESTS BUT THAT MINORITY SHAREHOLDERS
FEEL ARE NOT IN THEIR BEST INTERESTS.
Our officers, directors, and principal shareholders, and their
family members and business associates, in the aggregate, beneficially own
approximately 60% of our outstanding common stock and voting rights attached
to 2,500,000 shares of preferred stock so that management and persons
affiliated with them presently have approximately 64% voting control of
Innofone. In addition, management and persons affiliated with them have the
right to acquire voting rights to an additional 7,500,000 shares of common
stock in the event all 2,500,000 shares of preferred stock are converted into
shares of common stock. See "Security Ownership of Certain Beneficial Owners
and Management." Our management is therefore able to exert substantial
influence over us and control most matters requiring shareholder approval,
including, without limitation, the election of directors, modification of our
capital structure, adoption of stock option plans and award of grants
thereunder, terms and conditions of a merger or consolidation of Innofone
with another company, and negotiation of the terms and conditions of a tender
offer for our common stock made by another company. Management could, for
example, block another person or company trying to buy all of our outstanding
common stock in a transaction in which shareholders would receive a premium
over the then current market value for their common stock.
In addition, this concentration of voting power could have a depressive
effect on the market price of the common stock.
MANAGEMENT'S RIGHT TO RECEIVE ADDITIONAL COMMON STOCK FROM THE CONVERSION OF
PREFERRED STOCK COULD RESULT IN THEIR CAUSING US TO PURSUE A BUSINESS STRATEGY
THAT MAY NOT BE DESIRABLE.
Management and founding shareholders who are either friends, family
members or business associates of management have the right to receive a maximum
of 7,500,000 shares of common stock pursuant to rights attached to 2,500,000
shares of preferred stock held by them. The holders of the preferred stock have
the right to convert the 2,500,000 shares of the preferred stock into common
stock
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when we have generated $7,000,000 Can. in revenues. See "Description of
Securities." Although management believes that its near-term goal of generating
revenues and expanding our customer base is in Innofone's best interests,
management's view may be in conflict with our overall objective of achieving
profitable operations. There is the risk to shareholders that Innofone could
pursue a business strategy of generating revenues that could result in
management increasing its stockholdings at the expense of achieving
profitability.
THE SALE OF LARGE AMOUNTS OF OUR STOCK INTO THE PUBLIC MARKET, OR THE PERCEPTION
THAT SUCH SALES COULD OCCUR, MAY HAVE A DEPRESSIVE EFFECT ON THE PRICE OF THE
MARKET PRICE OF THE COMMON STOCK.
All of our outstanding common stock is presently restricted from
resale. However, approximately 10,947,780 shares of our outstanding common stock
has been held for more than 2 years by non-affiliates and therefore may be
freely sold in reliance on Rule 144 of the Securities Act. An additional
10,954,970 shares of our common stock may be sold in compliance with certain
volume restrictions 90 days after this registration statement is effective, and
1,252,750 of these may be sold without these restrictions within the next year.
An additional approximately 1,680,004 shares of our common stock will become
eligible to be resold pursuant to Rule 144 in the next 12 months. You should
note that these figures do not take into account stock that may be issued
pursuant to outstanding warrants and options and upon the conversion convertible
promissory notes into common stock.
Assuming conversion of our outstanding preferred stock, and the
exercise of our existing warrants and options and options we plan to issue in
the near future, we will have a total of 47,462,258 shares of common stock
outstanding. All the shares of common stock received from conversion of the
preferred stock may be resold immediately in the public market, subject to
limitations on such resales by persons considered company affiliates under
federal securities laws.
As restrictions on resales end, and more common stock not subject to
resale restrictions is issued, the market price could drop significantly if the
holders of this common stock sell it or are perceived by the market as intending
to sell it.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following discussion in conjunction with the
financial statements and the notes thereto as well as the other financial
information included elsewhere in this filing.
OVERVIEW
On June 26, 1998 we acquired all of the outstanding stock of Innofone
Canada, a private company. Under the terms of the transaction, the shareholders
of Innofone Canada received 5,000,0000 shares of common stock and 5,000,0000
shares of preferred stock of us, or 83% of the total equity and voting power of
the combined company. Since the former shareholders of Innofone Canada
controlled us after the acquisition, the transaction between the two companies
has been accounted for as a re-capitalization of Innofone by Innofone Canada.
Application of re-capitalization accounting results in the consolidated
financial statements of the combined entity being issued under the name of our
legal parent (Innofone), but they are considered a continuation of the financial
statements of the legal subsidiary, Innofone Canada. Because Innofone Canada is
deemed to be the issuer for accounting purposes, its assets and liabilities are
included in the consolidated financial statements at their historical carrying
values. In addition, control of the net assets and operations is deemed to be
acquired by Innofone Canada and for the purposes of this transaction, the deemed
consideration is the net book value of Innofone as of June 26, 1998. A result of
the re-capitalization is that the continuing entity is deemed to be the issuing
company that is the legal subsidiary. Consequently, the comparative cumulative
figures for the Statements of Operations and Deficit and Changes in Financial
Position are from the date of the subsidiary's incorporation, April 24, 1998, to
June 30, 2000.
FOREIGN CURRENCY TRANSLATION
To June 30, 1998, our functional currency was the United States
dollar. To that date, substantially all of our operations had been undertaken
in United States dollars. For the years ended June 30, 2000 and 1999, our
functional currency changed to Canadian dollars. The effect of the change has
been applied prospectively from July 1, 1998, immediately subsequent to the
Innofone Canada transaction. We made this change in functional currency to
reflect the primary economic development for us being the Canadian dollar,
the primary currency in which our business is conducted.
Our reporting currency is United States dollars. The consolidated
statements of operations is translated into United States dollars using the
average exchange rate for the year. The consolidated balance sheets are
translated into United States dollars using the year-end exchange rate. The
translation gains or losses are included in the consolidated statement of
shareholders' deficiency as accumulated other comprehensive income or loss.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 2000.
REVENUES
Our revenue is generated primarily from reselling long distance
services at a higher rate than we pay for it. We are also generating revenues
from the resale of cellular services that we are offering as
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part of our services to the Visa Desjardins credit card customer base. For
cellular services, we earn a commission based on monthly cellular services.
However, cellular services revenues are currently less that 2% of our monthly
revenues.
We are charged for a customer's long distance calls by the carrier at
wholesale rates, negotiated through Axxent. We then charge our customers higher
rates than we pay. We are responsible for billing our customers and for
collecting payments from the customers. For Visa Desjardins customers, our
invoice is charged to the customers credit card, and we receive payment directly
from Visa Desjardins. In future periods, and subject to arranging additional
financing, of which there can be no assurance, we expect to continue to expand
our long distance customer base, while offering other services including prepaid
calling cards, internet services, home security services and utilities.
We showed strong revenue growth, with sales rising approximately 600%,
from $105,100 for the year ended June 30, 1999 to $736,127 for the year ended
June 30, 2000. This revenue growth is due entirely to our increase in the number
of billable long distance calling minutes by our expanding customer base. These
revenues are from the resale of long distance voice services to residential and
small and medium sized businesses through our Guaranteed Lowest Rate program.
Because we launched the Visa Desjardin project in the spring of 2000, very
little revenue from the Visa Desjardin project is included in our revenues for
the year ended June 30, 2000.
OPERATING EXPENSES
Our operating expenses consist of cost of services, selling, general
and administrative costs ("SG&A"), interest and financing costs, amortization
costs and compensation expense for options. Through June 30, 2000, cost of
services consisted of expenditures to the underlying carriers of the long
distance services that Innofone resells to its customers. The main carrier
selling services to us through the Axxent Agreement is Sprint Canada. SG&A costs
also include the personnel costs, the costs to acquire new customers, billing
costs, premises costs, call center costs, order fulfillment costs and other
related administrative expenses. Amortization expense includes depreciation and
amortization of capital assets including computer hardware, software and
web-site development costs, furniture and fixtures, leasehold improvements and
telephone and technical equipment.
COST OF SALES AND GROSS MARGIN. Our cost of sales increased
approximately 640% from $71,273 for the year ended 1999 to $528,603 for the year
ended 2000, contributing to an increase in gross profit from operations of
approximately from $33,827 for the year ended June 30, 1999 compared to $207,524
for the year ended June 30, 2000. This increase in gross profit was due to our
increase in sales and related costs of services. Our gross profit as a
percentage of sales, however, declined from 32% for the year ended June 30, 1999
to 28% for the year ended June 30, 2000. We attribute this decline in the gross
profit margin to the change in customer mix between the two periods. For the
year ended June 30, 1999, approximately 13% of our customer base consisted of
business customers generating approximately 52% of our monthly revenues. For the
year ended June 30, 2000, our business customers constituted only 4% of our
total customer base, generating approximately 33% of our total monthly revenue.
Profit margins are typically higher with business customers than with
residential customers because their calling patterns are concentrated during
daytime business hours where we are able to charge higher rates. Therefore, our
growth in residential customers has resulted in declining margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses increased by $1,620,734, or 235%, from $688,789 in 1999
to $2,309,523 in 2000. The primary reasons for this
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increase were increases in management and consulting fees, billing costs,
customer acquisition costs, call center costs, marketing and advertising costs
and order fulfillment costs.
Management and consulting fees increased approximately 91%, from
$180,000 in 1999 to $344,215 in 2000. Management and consulting fees generally
consist of remuneration for the three senior officers, Mr. Larry Hunt, Mr. Ron
Crowe, and Mr. Rick Quinney, and consulting fees to our primary marketing
consultant, Mr. Burdon. Payments to our senior officers increased approximately
36%, from $180,000 in 1999 as compared to $245,000 in 2000. In both 1999 and
2000, they agreed to take less than their employment contracts stipulated, with
the balance being accrued until cash flow permits. In addition, during our year
ended June 30, 2000 we began our payments to Mr. Burdon that amounted to
approximately $90,000 for the year.
Billing costs increased approximately 660%, from $61,391 in 1999 to
$466,678 in 2000. Billing costs are not only increasing as revenues are
increasing, but they also include a one-time charge of $270,000 paid to ACS,
the external billing company, for software changes to their billing engine to
accommodate the Visa Desjardin project.
Customer acquisition costs increased from $32,580 in 1999 to
$216,027 in 2000. Customer acquisition costs are ongoing commissions we paid
to independent sales agents in addition to one-time commissions we paid to
acquire new customers, including those in our Visa Desjardin program. During
fiscal 2000, we had a declining number of active sales agents, and
consequently, commissions to sales agents declined from 100% of acquisition
costs in 1999 to 21% of acquisition costs in 2000. The one time commission
cost paid to acquire a customer is generally $20 per new customer.
Call center costs were $0 in 1999 and $217,689 in 2000. These costs
include amounts paid to Equinox, who is our external call center in Montreal
established to do all customer service and outbound marketing for the Visa
Desjardin project. We had no call center in 1999.
Marketing and advertising costs increased approximately 1,017%, from
$27,286 in 1999 to $304,840 in 2000. This increase relates entirely to the
launch of the Visa Desjardin project in April 2000.
Order fulfillment costs increased from $0 in 1999 to $73,236 in 2000.
Order fulfillment costs consist of amounts paid to Watts Distribution, which is
responsible for sending welcome letters to new customers along with any products
that they may have ordered. During 1999, all customer fulfillment requirements
were handled
AMORTIZATION. Amortization expense represents the amortization of
capital costs for computer equipment, software, web-site development costs,
leasehold improvements, furniture and fixtures, and telephone and technical
equipment for a total of $94,585 for the year ended June 30, 2000 compared to
$56,075 for the year ended June 30, 1999. Amortization expense in 1999 included
a one-time charge for $23,729 that related to a franchise fee that was expensed
following the termination of a franchise agreement. Amortization expense
increased in fiscal 2000 due to amortization of new computer equipment costing
approximately $270,000, which was acquired at the end of fiscal 1999 and for
which no amortization expense was claimed in fiscal 1999. The increase is also
attributable to $35,549 of additional amortization claimed on web site
development costs and software costs for the HotCaller web site.
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INTEREST AND FINANCING CHARGES. Interest on long term debt represents
interest on the bank loan for a total of $11,094 for the year ended June 30,
2000 as compared to $15,037 for the year ended June 30, 1999. The decrease in
interest and financing charges is due to the declining bank debt. Other interest
and bank charges increased to $13,989 in the year ended June 30, 2000 compared
to $8,732 in 1999.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE DEBT. The embedded
beneficial conversion feature of the private debt offerings that we completed
during the fiscal year amounted to $1,312,750. This amount was expensed over
the period to the first date of conversion. The embedded beneficial
conversion feature is the difference between the market value of the
company's stock on the date when the convertible note was signed and the
conversion price of the subscription.
LOSS ON SALE OF INVESTMENT. On June 17, 1999, we sold our investment in
Canadian Telecom Resellers Alliance Inc. to Axxent Corporation and received
156,250 warrants to purchase 156,250 Class B non-voting shares in Axxent. The
warrants have been assigned no value and, consequently, a loss of $89,118 has
been recorded on the sale of the investment in fiscal 1999.
COMPENSATION EXPENSE FOR STOCK OPTIONS. Compensation expense for stock
options represents the difference between the fair value of stock options
granted during the year and the stock trading value on the date of grant. The
majority of this expense relates to options granted to Mr. Douglas Burdon, the
marketing consultant responsible for bringing the Visa Desjardin project to us.
NET LOSS. We incurred losses of $4,817,280 for the year ended June 30,
2000 compared to a loss of $936,394 for the year ended June 30, 1999. However,
without giving effect to the compensation expense for options, the embedded
conversion feature of the convertible debt and the amortization expense, all of
which are non cash items, the net loss from operations for the year ended June
30, 2000 would have been $2,127,082.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the
proceeds from the sale and issuance of equity securities, loans from
stockholders and bank financing.
In 1999, we borrowed approximately $170,000 from a bank for the
acquisition of five internet gateways. The bank loan is secured by a General
Security Agreement that is a first charge on our assets. The loan bears
interest at the Royal Bank Prime plus 3% and is repayable at the rate of $3,418
per month. As of June 30, 2000, $88,478 remained outstanding on this loan.
As of September 30, 2000 Innofone had borrowed $244,177 from investors
and various stockholders. The stockholder loans are unsecured, non-interest
bearing, and are repayable in monthly installments of $1,220 beginning July 1,
2003 and ending in 2018.
From August 1999 through August 2000, we have funded operations
principally from private offerings of notes and common stock and have raised a
total of $1,956,600 from these offerings. Each note consists of an 8% unsecured
interest bearing promissory note, convertible into common stock. As of
September 30, 2000, $501,100 of these notes have been converted into 1,252,750
shares of common stock.
In connection with these offerings, we also issued warrants to purchase
common stock. There are currently outstanding warrants to purchase 4,118,750
shares of common stock at exercise prices of either
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$1.00 or $1.50 per share. If all the warrants are exercised, we would receive
$4,678,754 in net proceeds. However, we cannot assure you that any warrants will
be exercised.
Funds from these sources have been used for working capital to fund the
original testing of the internet telephony gateways, marketing and development
costs for the Visa Desjardins project, the acquisition of new customers and
other general corporate purposes.
Mr. Douglas Burdon, a marketing consultant for us, was instrumental
in bringing the Visa Desjardin business to Innofone, and as a result, he
received a total of 2,750,000 options to purchase our common stock at a price
of $0.50 per share. Mr. Burdon has indicated to management that he will be
exercising options to acquire 1,000,000 shares when our common stock begins
trading again on the OTC Bulletin Board. This would generate $500,000 in
working capital that could be used to help fund operations. However, there
can be no assurance that Mr. Burdon will exercise any or all of these options.
At September 30, 2000, we had $86,587 in cash. We are using these funds
to finance current operations. Our fixed monthly expenses are approximately
$92,000. If we hire a new Vice President of Finance, as discussed below, our
fixed monthly expenses will be approximately $100,000. We believe that the funds
currently on hand, combined with receivables in the amount of $245,952, should
provide sufficient capital to continue operations and meet our liabilities for
the next sixty days. In addition, $34,000 of our monthly expenses consists of
payments to our executive officers, who are willing to defer a portion of their
salaries, if necessary, due to lack of funds.
At June 30, 2000 we had insufficient cash to fund our operations for
the next twelve months. In addition, we currently have no sources of
financing. These circumstances caused our independent auditors to include
with their auditors' report additional comments for U.S. readers that state
that there is substantial doubt as to our ability to continue as a going
concern. See "Risk Factors--Our financial statements contain a "going
concern" qualification" and Note 1 to the Financial Statements for more
information regarding the going concern opinion. Due to our capital
situation, we have decided that we will not expend funds on new customer
acquisitions until we have new financing in place, or until our cash flows
from existing accounts are sufficient to cover our ongoing expenses and to
start acquiring new customers pursuant to our existing strategic
relationships. We currently expect that we will be in a position to resume
new customer acquisitions within the next 60 days.
Since September 1, 2000 we raised through three private placements
approximately $650,000 and have been relying on these funds to continue
operations. However, these funds will be insufficient to continue operations
over the next twelve months and undertake new projects.
At current levels, our current customer base will cover our ongoing
expenses, on a going-forward basis, within the next ninety days. However, the
revenues from these sources will not be sufficient to meet our liabilities as
they become due and to expand our offerings in accordance with our current
business plan. We estimate that we require $2,500,000 in additional financing -
$500,000 to establish the CIBC Merchant and Guaranteed Proof Programs, and the
balance to pay liabilities as they become due and acquire new customers under
both these and our existing offering programs. Accordingly, we are dependent on
securing additional financing, of which there can be no assurance.
We are currently negotiating to hire a Vice-President of Finance to
continue to explore financing opportunities for us. This individual is a
well-seasoned financial manager and we believe that this
22
<PAGE>
individual will be instrumental in assisting with our capital requirements.
There can be no assurance, however, that this individual will execute an
employment agreement with us or be successful in raising any of the required
capital necessary to assist in our continued growth.
The timing and amount of our capital requirements over the next twelve
months will depend on a number of factors, including the number of new customers
that are signed and the demand for our products and services. Continued
operations depend upon our ability to attain profitable operations and obtain
sufficient cash from external financing to meet our liabilities as they become
payable. These conditions cast substantial doubt on our ability to
continue as a going concern. However, we believe that if we are able to raise
the $2,500,000 we believe is necessary to continue operations according to our
business plan, this financing, combined with working capital that will be
obtained from operations, will be sufficient to meet our liabilities
and commitments as they become payable.
ITEM 3. DESCRIPTION OF PROPERTY
We do not own any real estate. We lease approximately 120 square feet
of office space, which houses our executive offices, at 600 North Pine Island
Road, Plantation, Florida. Average monthly rent is $1,100.
Innofone Canada, our operating subsidary, leases approximately 3,950
square feet of office space which houses their headquarters, executive
offices and administrative offices at 241 Applewood Crescent, Vaughan,
Ontario, Canada. Approximately 1,000 square feet of the premises are not
being used, and are available for future expansion. The lease commenced in
July 1998, and expires in July 2003, unless Innofone Canada exercises an
option to extend it for an additional five years. Average monthly rental and
associated expenses are $3,000 Can.
Management believes that its existing facilities are adequate for our
current needs.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables present information regarding the beneficial
ownership of our voting stock as of September 30, 2000, by:
o each of the individuals in the "Summary Compensation Table" above;
o each of our directors;
o each person, or group of affiliated persons, who is known by us to own
beneficially five percent or more of our common stock; and
o all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of
the SEC computing the number of shares beneficially owned by a person and the
percentage ownership of that person. Shares of common stock subject to
options currently exercisable or exercisable within 60 days after September
30, 2000 are considered outstanding for the purpose of computing the
percentage ownership of the person holding such options, but are not
considered outstanding when computing the percentage ownership of each other
person.
Except as indicated in the footnotes to these tables and pursuant to
state community property laws, each stockholder named in the table has sole
voting and investment power for the shares shown as beneficially owned by
them.
23
<PAGE>
Percentage of ownership of the common stock is based on 23,582,754 shares
of common stock outstanding on September 30, 2000. Percentage of ownership of
the Series A Convertible Voting Preferred Stock is based on 2,500,000 shares
outstanding on September 30, 2000. The Series A, Convertible Voting Preferred
Stock, depending upon the satisfaction of various factors described in
"Description of Securities - Preferred Stock", may be converted into a maximum
of 7.5 million shares of common stock and a minimum of 1.25 million shares of
common stock.
Unless otherwise indicated, the address of each of the individuals named
below is c/o Innofone.com, Incorporated, 600 North Pine Island Road, Suite 450,
Plantation, Florida 33324.
COMMON STOCK
<TABLE>
<CAPTION>
TITLE OF CLASS NAME AND ADDRESS OF AMOUNT & NATURE OF BENEFICIAL % OF CLASS
BENEFICIAL OWNER OWNER (1)
<S> <C> <C> <C>
Common Stock Larry Hunt 3,385,102 (2) 14.154%
Ronald Crowe 2,737,222 (3) 11.445%
Richard Quinney 3,481,751(4) 14.558%
Officers and Directors, as 9,604,075 40.157%
a Group
</TABLE>
(1) The amounts in this column do not include 1,875,000 shares of common stock
which may be issued upon conversion of 625,000 shares of preferred stock held by
Mr. Hunt, 1,394,535 shares of common stock which may be issued upon conversion
of 464,845 shares of preferred stock held by Mr. Crowe as defined in (2) below
and 1,875,000 shares of common stock which may be issued upon conversion of
625,000 shares of preferred stock held by Mr. Quinney as defined in (3) below.
The preferred stock is not convertible until certain revenue thresholds are met.
We do not anticipate that we will meet these thresholds within 60 days.
(2) These shares are held by TelTech Capital Management Corporation, a company
beneficially owned by Mr. Hunt.
(3) This amount includes 78,125 shares owned by Merryl Crowe, Mr. Crowe's
spouse, and 915,038 shares owned by Merico Personnel Inc., which is owned by
Merryl Crowe. Mr. Crowe disclaims beneficial ownership of these shares.
(4) This amount includes 781,250 shares held by Mr. Quinney's wife, Angela
Quinney, and 781,250 shares held by a corporation owned by Mrs. Quinney. This
amount also includes 12,500 shares of common stock which may be issued upon
conversion of convertible notes held by Mr. Quinney's children.
In two separate option grants, we have granted to Mr. Douglas Burdon, a
marketing consultant to Innofone, options to purchase 5,500,000 shares of common
stock, at an exercise price of $0.50 per share. The first grant consisted of
2,750,000 shares. One million of these options were immediately exercisable,
with the balance being exercisable over a 18-month period. An additional 437,000
shares are currently
24
<PAGE>
exercisable and the balance become exercisable over the next eighteen months. In
addition, once we sign a second agreement with CIBC Visa, Mr. Burdon will have
the rights to the second grant of 2,750,000 options. These options will also
become exercisable, 12.5% every three months, over a 18-month period. As at
September 30, 2000, Mr. Burdon had not exercised any of these options.
SERIES A CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL AMOUNT & NATURE OF % OF CLASS
OWNER BENEFICIAL OWNER
<S> <C> <C> <C>
Series A, Voting Convertible Larry Hunt 625,000 25%
Preferred Stock
Ronald Crowe 464,845 (1) 18.594%
Richard Quinney 625,000 (2) 25%
Officers and Directors, as a 1,714,845 68.594%
Group
</TABLE>
(1) This amount includes 15,626 shares owned by Merryl Crowe , Mr. Crowe's
spouse. Mr. Crowe disclaims beneficial ownership of these shares.
(2) This amount includes 156,250 shares owned by Mr. Quinney's wife, Angela
Quinney, and 156,250 shares held by a corporation owned by Mrs. Quinney.
Management is unaware of any arrangements that may result in a change
of control of Innofone.com.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Ronald Crowe 61 Chairman of the Board of
Directors, Vice President of
Operations
Larry J. Hunt 42 President, Chief Executive
Officer, Director
Richard Quinney 51 Chief Financial Officer,
Director
Charles Blaquiere 41 President, Innofone
Canada Inc.
</TABLE>
25
<PAGE>
Directors were elected on June 26, 1998 and are expected to hold these
positions until the next annual general meeting of shareholders, scheduled to be
held later this year.
There are no arrangements or understandings among any of the directors
regarding their election as directors. Ronald Crowe is Rick Quinney's
brother-in-law, and he is also Larry Hunt's wife's uncle.
Ronald Crowe - In 1989, Mr. Crowe formed Metrowide Communications, a
company that offered a flat rate long distance service along with a per minute
long distance service primarily in the Greater Toronto Area. In 1995 Metrowide
Communications was sold to ACC Telecommunications. (ACC Telecommunications was
subsequently acquired by AT&T Canada) After the buyout, Mr. Crowe continued on
as a consultant to Metrowide to assist with the transition to the new owners
until the fall of 1995. As part of the sale of Metrowide, Mr. Crowe was subject
to a non-compete clause preventing him from doing business in the
telecommunications industry for a period of two years.
After leaving Metrowide, Mr. Crowe went into semi-retirement. In the
spring of 1996, he began working part-time on an internet related worldwide
yellow page directory project referred to as Yelp. Mr. Crowe worked on the Yelp
project with two other partners until the fall of 1997 when they decided to
abandon the project. After the expiration of the non-compete clause, in April
1998, Mr. Crowe, Larry Hunt and Richard Quinney started Innofone Canada Inc. Mr.
Crowe has been Vice President of Operations and Chairman since inception.
Larry J. Hunt - From June 1995 until June 1998, Mr. Hunt was the
President of Direct Quest Inc., a U.S. based Internet service provider,
providing, among other things, web-hosting, website design, and a multilingual
internet directory for communities throughout North America. While at Direct
Quest, he established internet service operations in Canada and the United
States. Mr. Hunt served as President, Chief Executive Officer and a director
since inception. In addition, he was president of Innofone Canada, our Canadian
operating subsidiary, from June 1998 through October 1999. He has also served as
Innofone Canada's Chief Executive Officer since June 1998.
Richard Quinney - From 1972 through early 1998 Mr. Quinney was employed
by KPMG (and its predecessor Peat Marwick Mitchell) in various capacities,
becoming a partner in 1981. In February 1998 Mr. Quinney resigned from KPMG and
entered into an affiliation with Collins Barrow, Chartered Accountants, through
his company Quinney & Associates pursuant to which Mr. Quinney is a trustee in
bankruptcy. Mr. Quinney only pursues this business through referrals from
Collins Borrow, and spends no more than 10% of his time on this business. He has
served as Chief Financial Officer and as a director of Innofone since our
inception on June 26, 1998.
Charles Blaquiere - Prior to joining Innofone in October 1999, Mr.
Blaquiere was Manager, Methods & Standards for Sprint Canada where he was
responsible for planning and forecasting resources to achieve revenue goals for
Sprint's Enterprise Customer Canadian subscribers. Prior to his employment with
Sprint, Mr. Blaquiere was Director of Operations with eForce from May 1998 to
February 1999 where he developed business strategy and progress requirements for
a long distance telephone marketing company. Prior eForce, Mr. Blaquiere had a
18 year career with Sears Canada, spending the last four years of the developing
and managing the national Sears Phone Plan.
26
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth all compensation for all periods
indicated for Mr. Larry Hunt who was, as of June 30, 2000, our chief executive
officer and for the two other executive officers of Innofone, Ronald Crowe and
Richard Quinney. No person received in excess of $100,000 for the year ended
June 30, 2000.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION
NAME PRINCIPAL POSITION YEAR SALARY SECURITIES
($) UNDERLYING OPTIONS
/SARS
<S> <C> <C> <C>
Larry Hunt CEO, President 6/30/00 100,000
President, CEO, COO 6/30/99 60,000
Ronald Crowe Chairman 6/30/00 100,000
Chairman and CEO, Vice 6/30/99 60,000
President for Operations
Richard Quinney CFO 6/30/00 60,000
CFO 6/30/99 36,000
</TABLE>
During the first two years of operation ending June 30, 2000, Larry
Hunt received $96,660 of his salary, with the balance of $63,340 in salary
accrued, Ron Crowe received $90,000 of his salary, with the balance of $70,000
in salary accrued, and Rick Quinney received $59,667 of his salary, with the
balance of $36,333 in salary accrued.
27
<PAGE>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED
OPTIONS/SARS AT FY-END IN-THE-MONEY
(#) OPTIONS/SARS AT
FY-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
<S> <C> <C>
Larry Hunt 250,000/0 $250,000/0
Richard Quinney 250,000/0 $250,000/0
Ron Crowe 250,000/0 $250,000/0
</TABLE>
We did not grant options during the fiscal year ended June 30, 2000. No
executive officer exercised any options during the fiscal year ended June 30,
2000.
EMPLOYEE STOCK COMPENSATION PLAN
We have adopted the 1997 Employee Stock Compensation Plan for
employees, officers, directors and advisors and reserved a maximum of 1,000,000
shares of common stock to be issued upon the grant of awards under the stock
compensation plan. The plan provides for stock compensation through the award of
shares of our common stock. The compensation committee, or in the absence of
such a committee the board of directors, administers the plan and has complete
discretion to determine when and to whom shares may be awarded under the plan,
and the number of shares to be awarded. A grant of shares may be made for cash,
property, services rendered or other form of payment constituting lawful
consideration under applicable law. Our stock compensation plan will
automatically terminate on January 17, 2002, unless we terminate sooner. In
addition, we may suspend or discontinue the plan at any time provided it does
not adversely affect the rights of any person granted an award under this plan
prior to that date. We have granted options to purchase 1,000,000 shares under
this plan, the maximum amount available. We do not intend to increase the number
of shares available under this plan, and therefore we will not issue any more
stock options under this plan.
COMPENSATORY STOCK OPTION PLAN
We have also adopted the 1997 Compensatory Stock Option Plan for
officers, employees, directors and advisors. We have reserved a maximum of
1,500,000 shares of common stock to be issued upon the exercise of options
granted under the stock option plan. The plan provides for the issuance of
non-statutory stock options for shares of common stock. The stock options issued
under this plan are not intended to qualify as "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code. Options covering
1,205,000 shares of common stock have been granted under the plan. We are in
28
<PAGE>
the process of amending the plan to allow for the additional shares.
Our stock option plan will automatically terminate on January 7, 2007, unless we
terminate it sooner. In addition, we may amend, alter or discontinue the plan at
any time provided it does not adversely affect any option previously granted
under the plan.
The compensation committee, or in the absence of such a committee the
board of directors, administers the stock option plan and has full power and
authority to designate plan participants and determine the provisions and terms
of options granted under the plan, including the exercise price and vesting
provisions, in accordance with the terms of the plan. Under the plan, the
exercise price of each stock option shall be not less than 100% of the fair
market value of the common stock on the date of the grant. In addition, no
option shall have a term of more than ten years from the date of the grant.
DIRECTORS
Directors are reimbursed for all reasonable expenses incurred in
attending board meetings. Directors are not otherwise compensated for their
services.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
Our prior employment contracts with Larry Hunt, Richard Quinney and
Ronald Crowe have expired. We are currently negotiating new employment
agreements with our executive officers. However, we have not finalized or
executed any current employment agreements.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 8. DESCRIPTION OF SECURITIES
Our authorized capital consists of (a) 100,000,000 shares of common
stock, par value $.001 per share, and (b) 25,000,000 shares of preferred stock,
par value $.001 per share. At September 30, 2000, there were outstanding a total
of 23,582,754 shares of common stock, and we had commitments to issue an
additional 22,879,504 shares, as follows:
1. 7,500,000 shares upon the conversion of 2,500,000 shares of
preferred stock;
2. 2,598,750 shares upon the conversion of $1,039,500 of
convertible promissory notes at a conversion price of $0.40
per share;
3. 2,598,750 shares upon the exercise of 2,598,750 warrants to
purchase shares at an exercise price of $1.00 per share;
4. 520,000 shares upon the conversion of $416,000 of convertible
promissory notes at a conversion price of $0.80 per share;
29
<PAGE>
5. 520,000 shares upon the exercise of warrants to purchase
shares at an exercise price of $1.50 per share;
6. 1,000,004 shares upon the exercise of warrants to purchase
shares at an exercise price of $1.00;
7. 8,142,000 shares pursuant to various stock options. In
addition, we plan to issue another 1,000,000 options in the
near future.
There are 2,500,000 shares of preferred stock presently outstanding,
which are designated as Class A Voting Convertible Preferred Stock. Originally,
there were 5,000,000 shares of preferred stock outstanding. In January 2000,
Innofone's board of directors voted to convert 2,500,000 preferred shares into
7,500,000 common shares as they determined that the relevant conditions for
conversion had been met. The conditions for conversion were all satisfied by the
establishment by three internet gateways, as defined in "Description of
Securities - Series A Voting Convertible Preferred Stock". At such time, the
holders of the preferred shares were permitted to convert 50% of their holdings
of the preferred shares. In February 2000 the conversion was effected and we
issued 7,500,000 common shares to the holders of the preferred shares.
COMMON STOCK
Holders of common stock are entitled to receive dividends in cash,
property or common stock when and if dividends are declared by the board of
directors out of funds legally available therefor. However, our certificate
of incorporation prohibits us from declaring or paying dividends on the
common stock unless all dividend obligations owed on the preferred stock have
been satisfied, and unless we are not in default with respect to any
obligations with respect to a sinking fund for any class of preferred stock.
Except for this limitation, neither our certificate of incorporation nor our
by-laws impose any additional limitations on the payment of dividends. A
quorum for any meeting of shareholders is a majority of all common stock and
preferred stock then issued and outstanding and entitled to be voted at the
meeting. Holders of common stock are entitled to one vote per share of common
stock. There is no cumulative voting with respect to the election of
directors, with the result that the holders of more than 50% of the shares
voted can elect all of the directors then being elected. Upon any
liquidation, dissolution or winding up of our business, any assets will be
distributed to shareholders after payment or provision for payment of all of
our debts, obligations and liabilities, including the liquidation preference
to holders of the preferred stock.
There are no preemptive rights, subscription rights or conversion
rights relating to the common stock. Common shares may be redeemable at our
option or upon the occurrence of a designated event, but we have not yet issued
stock that contains redemption provisions. The common stock carries no liability
for further calls. The rights of holders of common stock may not be modified
other than by a majority vote of shares voting on such modification.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar is Interwest Transfer Company Inc.,
located at 1981 East 4800 South Street, Suite 100, Salt Lake City, Utah. Its
telephone number is (801) 272-9294.
30
<PAGE>
PREFERRED STOCK
The board of directors has the authority to issue the undesignated
preferred stock in one or more classes or series, to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated preferred stock and to fix the number of shares
constituting any series and the designation of such series. The issuance of
preferred stock could have the effect of delaying, deferring or preventing a
change in control of Innofone. We have no present plans to issue any shares of
our preferred stock.
SERIES A VOTING CONVERTIBLE PREFERRED STOCK
VOTING RIGHTS. Holders of shares of Series A Voting Convertible
Preferred Stock have the right to vote in elections of directors and on other
matters generally as to which shareholders of Innofone may vote. Holders of
Series A Preferred Stock are entitled to one vote for each share of preferred
stock. The shares of Series A Preferred Stock vote with the common stock and not
as a separate class. We cannot amend are certificate of incorporation or bylaws
without the prior approval of the holders of the Series A Preferred Stock if
such amendment would adversely affect any of the rights, preferences or
privileges of the holders of the Series A Preferred Stock. Any matter which
requires the approval of the holders of the Series A Preferred Stock shall
require only the affirmative vote of a majority of the votes cast by the holders
of such shares, voting as a separate class, at any lawful meeting of such
holders which commences with a quorum.
DIVIDEND RIGHTS. Holders of the Series A Preferred Stock are not
entitled to receive dividends. However, if a dividend is declared on the common
stock or any series of preferred stock ranking equal or junior to the Series A
Preferred Stock, the holders of the Series A stock are entitled to receive a
proportionate share of that dividend.
CONVERSION PROVISIONS. Upon our attainment of certain milestones,
outlined below, a share of Series A Preferred Stock is convertible, at the
option of the holder, into three shares of common stock.
1. Upon the establishment of three Gateways that are fully functional
and capable of immediately commencing commercial operations, as certified by an
engineer qualified to make such certificate, holders had the right to convert
2,500,000 shares of preferred stock into 7,500,000 shares of common stock. We
satisfied this condition in February 2000, and 2,500,000 shares of preferred
stock were converted into 7,500,000 shares of common stock.
The term "Gateway" means a telephony gateway server computer that
serves as a bridge between the Public Switched Telephone Network or Private
Branch Exchanges, and the Internet and converts analog voice or data
transmissions to digital data packets (or vice versa); provided, that three of
the Gateways must have the capacity to handle twenty-four phone lines and the
Internet access to provide capacity of not less than Two Hundred Fifty Thousand
(250,000) minutes of talk time per month.
2. When we have generated $2,000,000 Can. in cumulative revenues,
holders have the right to convert 1,250,000 shares of preferred stock into
3,750,000 shares of common stock.
3. When we have generated $7,000,0000 Can. in cumulative revenues,
including the $2,000,000 Can. in cumulative revenues above, holders have the
right to convert 1,250,000 shares of preferred stock
31
<PAGE>
into 3,750,000 shares of common stock.
Any shares of preferred stock that have not been converted into common
stock before June 26, 2003 will automatically convert into common stock. Holders
will receive one share of common stock for every two shares of preferred stock.
OTHER PROVISIONS. Upon any liquidation, dissolution or winding up of
our business, the holders of the Series A Preferred Stock are entitled to a
liquidation payment of $.001 per share and additionally, to share ratably with
the holders of the common stock any assets available for distribution to
shareholders after payment or provision for payment of all of our debts,
obligations and liabilities, including any liquidation preference to holders of
other series of preferred stock. There are no redemption provisions of the
Series A Preferred Stock.
Part II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our common stock traded on National Association of Securities Dealers
Over the Counter Bulletin Board ("OTC Bulletin Board") from October 1998 to
September 1, 1999. The price range of trading in our common stock, on a
quarterly basis, during that period was as follows:
OTC BULLETIN BOARD
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
High Low
--------------------------------------------------------------------------------------
<S> <C> <C>
1998
--------------------------------------------------------------------------------------
4th Quarter .85 .700
--------------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------------
1st Quarter .90 .312
--------------------------------------------------------------------------------------
2nd Quarter .75 .125
--------------------------------------------------------------------------------------
3rd Quarter (through 8/31/99) 1.50 .350
--------------------------------------------------------------------------------------
</TABLE>
Please note that quotations on the OTC Bulletin Board represent
inter-dealer prices, without mark-ups, commissions, etc., and they may not
necessarily be indicative of actual sales prices.
On September 1, 1999 our common stock was de-listed from the OTC
Bulletin Board for failure to become a reporting issuer with the SEC by such
date. Since that date, our common stock has traded on the over-the-counter
market in the United States. The price range of trading in our common stock,
since that time, is as follows:
32
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
High Low
--------------------------------------------------------------------------------------
<S> <C> <C>
1999
--------------------------------------------------------------------------------------
Through September 30 1.125 .375
--------------------------------------------------------------------------------------
4th Quarter 1.00 .125
--------------------------------------------------------------------------------------
2000
--------------------------------------------------------------------------------------
1st Quarter 3.00 .200
--------------------------------------------------------------------------------------
2nd Quarter 2.00 .350
--------------------------------------------------------------------------------------
3rd Quarter 1.45 .250
--------------------------------------------------------------------------------------
</TABLE>
The closing price of our common stock in on the over-the-counter market
on November 2, 2000 was $0.30 per share.
Upon the effectiveness of our registration statement, of which this
prospectus is a part, we will become a reporting issuer with the SEC. As a
reporting issuer we will be required to file periodic reports with the SEC and
our common stock will be eligible for listing on the OTC Bulletin Board. We
intend to take the necessary steps for our common stock to be listed on the OTC
Bulletin Board.
At November 1, 2000, we had 73 shareholders of record.
We have not paid any cash dividends to date. Payment of dividends is
solely at the discretion of our board of directors. We do not anticipate
declaring or paying any cash dividends during the next twelve months.
ITEM 2. LEGAL PROCEEDINGS
We are not involved in any lawsuits and are unaware of any legal
proceedings known to be contemplated by any governmental authorities.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On June 15, 1998, Innofone issued 1,000,000 common share purchase
warrants to a shareholder of Innofone as consideration for services provided,
related to the reverse take-over transaction with APC Telecom Inc. described
in the next paragraph. A value of $9,838 was assigned to the common share
purchase warrants. Each common share purchase warrant was exercisable until
June 30, 1999 to acquire one common share at $0.02 per share. On January 5,
1999, the common share purchase warrants were exercised. Upon exercise of the
1,000,000 common share purchase warrants, 1,000,000 common shares were issued
at $0.02 per share. The share purchase warrants and the shares issued upon
exercise of the warrants were issued pursuant to the exemptions from
registration set forth in Rule 504 of the Securities Act of 1933.
33
<PAGE>
On June 26, 1998, APC Telecom Inc., a federally chartered Canadian company
("APC"), was acquired by Innofone in a stock-for-stock exchange pursuant to an
Agreement and Plan of Reorganization dated June 12, 1998 among Innofone, APC and
the shareholders of APC. As a result of the exchange, APC became a wholly owned
subsidiary of Innofone. Innofone issued to the shareholders of APC (i) 5,000,000
shares of its common stock, par value $.001 per share ("Shares"), and (ii)
5,000,000 shares of Series A, Convertible Preferred Stock, pursuant to the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933, as a transaction not involving a public offering.
From July 28, 1998 through October 14, 1998 Innofone sold a total of 2,000,000
Units, at a price of $0.05 per Unit, to 13 investors located in the Bahamas,
Hong Kong, and Mexico, netting Innofone $100,000. Each Unit consisted of (i) one
Share; (ii) One Class A common stock purchase warrant exercisable April 30,
1999, to purchase one Share at a price of $0.10 per Share; (iii) One Class B
common stock purchase warrant exercisable until April 30, 1999, to purchase one
Share at a price of $.14 per Share; and (iv) One Class C common stock purchase
warrant exercisable until April 30, 1999, to purchase one Share at a price of
$0.20 per Share. A total of (i) 1,848,000 Class A Warrants were exercised,
between December 23, 1998 and April 30, 1999, netting Innofone $184,800, (ii)
1,820,000 Class B Warrants were exercised, between December 8, 1998 and April
30, 1999, netting Innofone $254,800, and (iii) 462,000 Class C Warrants were
exercised, between April 10, 1999 and April 30, 1999, netting Innofone $92,400.
The Units were sold pursuant to the exemption from registration set forth in
Rule 504, promulgated under the Securities Act; the shares issued pursuant to
the exercise of the Class A, B, and C Warrants were issued pursuant to the
exemption from registration set forth in Rule 504, promulgated under the
Securities Act.
During August 1999, Innofone raised a total of $501,100 U.S. in a private
placement of its convertible promissory notes to 23 subscribers in Canada. Each
holder of the notes is entitled to convert the note plus accrued interest with
shares at the rate of $0.40 U.S. per share. The notes are unsecured, bear
interest at the annual rate of 8% and are due on July 31, 2000. Each holder of
the notes is entitled to convert the notes plus accrued interest into common
stock at the rate of $0.40 per share. Each note also originally included
warrants allowing the holder to purchase one share of common stock of
HotCaller.com, Inc., one of our non-operating subsidiaries, for each $.80 of
notes purchased, at a price of $2.00 per share. The warrants were cancelled in
an amendment to each subscription agreement. The notes and warrants were sold
pursuant to the exemption from registration set forth in section 4(2) of the
Securities Act, as a transaction not involving a public offering, and pursuant
to the exemption from registration set forth in Regulation S.
During December 1999 and January and February 2000, Innofone raised a total of
$1,039,500 U.S. in a private placement of its convertible promissory notes to 50
subscribers in Canada. Each holder of the notes is entitled to convert the note
plus accrued interest to shares at the rate of $0.40 U.S. per share. The notes
are unsecured, bear interest at the annual rate of 8% and are due beginning in
January 2001. Each note also included a warrant allowing the holder to purchase
2.5 shares of common stock, for every $1.00 of notes purchased, at an exercise
price of $1.00 per share. The warrants expire December 31, 2000. The notes and
warrants were sold pursuant to the exemption from registration set forth in
section 4(2) of the Securities Act, as a transaction not involving a public
offering, and pursuant to the exemption from registration set forth in
Regulation S.
In June 2000, Innofone raised $416,000 in a private placement of our convertible
promissory notes to four investors in Canada and the Bahamas. Each holder of the
notes is entitled to convert the note plus accrued interest into common stock at
the rate of $0.80 per share. The notes are unsecured, bear interest at the
34
<PAGE>
annual rate of 8%, and are due on June 1, 2001. Each note also included a
warrant allowing the holder to purchase one share of common stock, for every
$.80 of notes purchased, at an exercise price of $1.50 per share; a total of
520,000 warrants were issued. The notes and warrants were sold pursuant to the
exemption from registration set forth in section 4(2) of the Securities Act, as
a transaction not involving a public offering, and pursuant to the exemption
from registration set forth in Regulation S.
In September 2000, Innofone raised $500,002 in two separate private placements,
to the same purchasers, of 1,000,004 Units consisting of one share of common
stock and one warrant to purchase common stock at $1.00 per share. The common
stock and warrants were sold pursuant to the exemption from registration set
forth in section 4(2) of the Securities Act, as a transaction not involving a
public offering.
In October 2000, Innofone raised $150,000 in a private placement of our
convertible promissory notes to one investor in the Bahamas. The holder of the
note is entitled to convert the note plus accrued interest into common stock at
the rate of $0.50 per share. The notes are unsecured, bear interest at the
annual rate of 10%, and are due on October 4, 2001. The holder of the note also
received 300,000 warrants entitling him to purchase one share of common stock at
an exercise price of $1.00 per share. The notes and warrants were sold pursuant
to the exemption from registration set forth in section 4(2) of the Securities
Act, as a transaction not involving a public offering, and pursuant to the
exemption from registration set forth in Regulation S.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Nevada law, Innofone's Certificate of Incorporation
provides that Innofone will indemnify its officers and directors against
attorneys' fees and other expenses and liabilities they incur to defend, settle
or satisfy any civil or criminal action brought against them arising out of
their association with or activities on behalf of Innofone, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of Innofone.com and, with respect to a criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful. Innofone may also
bear the expenses of such litigation for any such persons upon their promise to
repay such sums if it is ultimately determined that they are not entitled to
indemnification. Such expenditures could be substantial and may not be recouped,
even if Innofone is so entitled. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
or persons controlling Innofone pursuant to the foregoing provisions, Innofone
believes that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in that Act and is,
therefore, unenforceable.
35
<PAGE>
PART F/S
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report...................................................................................F-2
Consolidated Balance Sheets....................................................................................F-3
Consolidated Statements of Operations..........................................................................F-5
Consolidated Statements Shareholders' Deficiency and Comprehensive Loss........................................F-7
Consolidated Statements of Cash Flows..........................................................................F-8
Notes to Consolidated Financial Statements....................................................................F-10
</TABLE>
36
<PAGE>
Consolidated Financial Statements
(Stated in United States dollars)
INNOFONE.COM,
INCORPORATED
Years ended June 30, 2000 and 1999
F-1
<PAGE>
AUDITORS' REPORT
To the Shareholders of Innofone.com, Incorporated
We have audited the consolidated balance sheets of Innofone.com, Incorporated as
at June 30, 2000 and 1999 and the consolidated statements of operations,
shareholders' deficiency and comprehensive loss and cash flows for the years
ended June 30, 2000 and 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 2000 and
1999 and the results of its operations and its cash flows for the years ended
June 30, 2000 and 1999 in accordance with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
September 30, 2000 except as to note 16(b) which is as of October 4, 2000.
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1(b) to the financial statements. Our report to the shareholders dated
September 30, 2000 is expressed in accordance with Canadian reporting standards
which does not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
September 30, 2000 except as to note 16(b) which is as of October 4, 2000.
F-2
<PAGE>
INNOFONE.COM, INCORPORATED
Consolidated Balance Sheets
(Stated in United States dollars)
June 30, 2000 and 1999
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,257 $ -
Term deposit - 102,477
Accounts receivable, net of allowance for doubtful accounts
of $54,000 (1999 - nil) 352,190 73,167
Prepaid expenses and deposits 86,895 18,792
-------------------------------------------------------------------------------------------------------------------
447,342 194,436
Fixed assets (note 3) 332,328 286,370
-------------------------------------------------------------------------------------------------------------------
$ 779,670 $ 480,806
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank indebtedness $ - $ 28,816
Accounts payable and accrued liabilities 794,480 254,130
Advances from ultimate shareholders (note 4) 114,528 67,000
Current portion of long-term debt (note 5) 40,524 41,012
Obligation under capital lease 2,236 3,695
-------------------------------------------------------------------------------------------------------------------
951,768 394,653
Advances from ultimate shareholders (note 4) 244,177 245,405
Long-term debt (note 5) 47,954 89,176
Convertible debt (notes 6, 8 and 16) 1,956,600 -
Shareholders' deficiency:
</TABLE>
F-3
<PAGE>
<TABLE>
<S> <C> <C>
Share capital (note 7):
Common shares 14,750 12,130
Preferred shares 2,500 5,000
Additional paid-in capital 3,373,671 748,178
-------------------------------------------------------------------------------------------------------------------
3,390,921 765,308
Deficit (5,805,515) (988,235)
Accumulated other comprehensive loss (6,235) (25,501)
-------------------------------------------------------------------------------------------------------------------
(2,420,829) (248,428)
Future operations (note 1(b))
Commitments (note 9)
Subsequent events (note 6)
-------------------------------------------------------------------------------------------------------------------
$ 779,670 $ 480,806
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INNOFONE.COM, INCORPORATED
Consolidated Statements of Operations
(Stated in United States dollars)
Years ended June 30, 2000, 1999 and the period from April 24, 1998 to June 30,
1998
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 736,127 $ 105,100 $ -
Cost of sales 528,603 71,273 -
-------------------------------------------------------------------------------------------------------------------
Gross profit 207,524 33,827 -
Selling, general and administrative expenses 2,309,523 688,789 51,841
Loss on sale of investment - 89,118 -
Amortization 94,585 56,075 -
Interest on long-term debt and bank charges 25,083 23,769 -
Beneficial conversion feature of convertible debt 1,312,750 - -
Compensation cost for stock options 1,282,863 112,470 -
-------------------------------------------------------------------------------------------------------------------
5,024,804 970,221 51,841
-------------------------------------------------------------------------------------------------------------------
Net loss $ (4,817,280) $ (936,394) $ (51,841)
-------------------------------------------------------------------------------------------------------------------
Basic net loss per share (note 11) $ (0.38) $ (0.16) $ (0.05)
-------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 12,542,976 5,767,819 1,093,750
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INNOFONE.COM, INCORPORATED
Consolidated Statements of Shareholders' Deficiency and Comprehensive Loss
(Stated in United States dollars)
Years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Common
Additional share
Common Preferred paid-in purchase
Total shares shares capital warrants
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $ 5,000 $ 5,000 $ 1,000 $ 9,838 $ (51,841)
----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Issuance of common shares for cash 2,000 -- 98,000 -- --
Exercise of warrants for common shares 4,130 -- 527,870 (9,838) --
Exercise of common share purchase
warrants for common shares 1,000 -- 8,838 -- --
----------------------------------------------------------------------------------------------------------------------
7,130 -- 634,708 (9,838) --
----------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- (936,394)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss -- -- -- -- (936,394)
Compensatory value of stock options -- -- 112,470 -- --
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 12,130 5,000 748,178 -- (988,235)
----------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- (4,817,280)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss -- -- -- -- (4,817,280)
Beneficial conversion feature of convertible
debt (note 6) -- -- 1,312,750 -- --
Compensatory value of stock options 1,282,863
Stock options 120 -- 29,880 -- --
Conversion of preferred shares 2,500 (2,500) -- -- --
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $ 14,750 $ 2,500 $ 3,373,671 $ -- $(5,805,515)
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Accumulated
other
comprehensive
Deficit loss
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, June 30, 1998 $ -- $ (31,003)
----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with:
Issuance of common shares for cash -- 100,000
Exercise of warrants for common shares -- 522,162
Exercise of common share purchase
warrants for common shares -- 9,838
----------------------------------------------------------------------------------------------------------------------
-- 632,000
----------------------------------------------------------------------------------------------------------------------
Net loss -- (936,394)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (25,501) (25,501)
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss (25,501) (961,895)
Compensatory value of stock options -- 112,470
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (25,501) (248,428)
----------------------------------------------------------------------------------------------------------------------
Net loss -- (4,817,280)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment 19,266 19,266
----------------------------------------------------------------------------------------------------------------------
Comprehensive loss 19,266 (4,798,014)
Beneficial conversion feature of convertible
debt (note 6) -- 1,312,750
Compensatory value of stock options 1,282,863
Stock options -- 30,000
Conversion of preferred shares -- --
----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $ (6,235) $(2,420,829)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INNOFONE.COM, INCORPORATED
Consolidated Statements of Cash Flows
(Stated in United States dollars)
Years ended June 30, 2000, 1999 and the period from April 24, 1998 to June 30,
1998
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in):
Operations:
Net loss $(4,817,280) $ (936,394) $ (51,841)
Items not involving cash:
Amortization 94,585 56,075 -
Write-off of franchise fee - 23,729 -
Loss on disposal of fixed asset - 17,071 -
Loss on sale of investment - 89,118 -
Compensation cost on stock options (note 8) 1,282,863 112,470 -
Beneficial conversion feature of convertible debt (note 6) 1,312,750 - -
Change in non-cash operating working capital:
Accounts receivable (279,893) (56,900) (16,232)
Prepaid expenses and deposits (68,323) 32,049 (30,463)
Accounts payable and accrued liabilities 543,822 39,800 213,812
-------------------------------------------------------------------------------------------------------------------
1,931,476 (622,982) (115,276)
Financing:
Advances from ultimate shareholders 49,519 83,017 229,388
Increase (decrease) in bank indebtedness (28,816) 28,816 -
Principal payments on long-term debt (40,524) (40,321) -
Proceeds on long-term debt - - 170,509
Principal payments on obligation under capital lease (1,416) (1,105) -
Increase in convertible debt 1,956,600 - -
Proceeds from options exercised 30,000 - -
Issuance of share capital - 632,000 563
-------------------------------------------------------------------------------------------------------------------
400,460 1,965,363 702,407
Investments:
Additions to fixed assets (141,942) (285,963) (181,722)
Proceeds from disposal of fixed asset - 106,330 -
Purchase of term deposit - (102,477) -
Payment of franchise fee - - (23,729)
Investment in CTRA - (89,118) -
Proceeds on sale of investment in CTRA - 40,000 -
Payment of note payable to CTRA - (40,000) -
Proceeds from term deposit 102,477 - -
-------------------------------------------------------------------------------------------------------------------
(205,451) (39,465) (371,228)
Effect of exchange rate changes on cash 13,835 (18,482) -
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 8,257 (310,285) 310,285
Cash and cash equivalents, beginning of period - 310,285 -
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 8,257 $ - $ 310,285
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash interest paid for the periods ended June 30, 2000, 1999 and 1998 was
$25,083, $73,679 and nil, respectively.
See accompanying notes to consolidated financial statements
F-7
<PAGE>
INNOFONE.COM, INCORPORATED
Notes to Consolidated Financial Statements
(Stated in United States dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
Innofone.com, Incorporated (the "Company") is incorporated under the laws of
the State of Nevada. The Company commenced commercial operations in fiscal
1999 and, accordingly, they are no longer considered to be in the development
stage and certain cumulative information from inception presented in prior
years is no longer disclosed. The Company, through its legal subsidiary
Innofone Canada, Inc. ("Innofone Canada") that operates in Canada, is engaged
in the business of long distance telephone and internet telephony. All of the
Company's sales are to Canadian customers in the residential and business
sectors. The Company is not dependent on a single customer. However, the
Company uses only a few carriers of long distance services that they are
dependent on for the usage of their telephone networks. On June 29, 1999,
Hotcaller.com Inc. ("Hotcaller") was incorporated and is a wholly owned
subsidiary of the Company. The Hotcaller business is an advertiser sponsored
program that allows customers to make free long distance calls from their
personal computer to a regular phone utilizing internet telephony. However,
Hotcaller has not commenced commercial operations. In addition, the Company
has another wholly owned subsidiary, Access South ("Access"), which is dormant.
1. BASIS OF PRESENTATION:
(a) Business combination of the Company and Innofone Canada Inc.:
On June 26, 1998, the shareholders of the Company approved a share
exchange takeover bid whereby, on June 26, 1998, the Company
acquired all of the outstanding shares of Innofone Canada, a private
company. Under the terms of the transaction, the shareholders of
Innofone Canada received 5,000,000 common shares and 5,000,000
Series A, voting convertible preferred shares of the Company. The
result of this transaction is that the former shareholders of
Innofone Canada acquired 83% of the outstanding common shares of the
Company on a fully diluted basis.
As former shareholders of Innofone Canada hold 83% of the
outstanding common shares of the Company immediately subsequent to
these transactions, the transaction between the two companies has
been accounted for as a recapitalization of the Company by Innofone
Canada effectively as if Innofone Canada had issued common shares
for consideration equal to the net monetary assets of the Company.
Application of recapitalization accounting results in the following:
(i) The consolidated financial statements of the combined entity are
issued under the name of the legal parent (the "Company") but
are considered a continuation of the financial statements of the
legal subsidiary, Innofone Canada;
(ii) As Innofone Canada is deemed to be the issuer for accounting
purposes, its assets and liabilities are included in the
consolidated financial statements at their historical carrying
values;
F-8
<PAGE>
BASIS OF PRESENTATION (CONTINUED):
(iii) Control of the net assets and operations of the Company is
deemed to be acquired by Innofone Canada. For purposes of this
transaction, the deemed consideration is considered to be
equivalent to the net book value of the Company's net assets as
at June 26, 1998.
<TABLE>
--------------------------------------------------------------------------------
<S> <C>
Deemed consideration $ 20,275
Assigned value of net assets:
Prepaid expenses and deposits $ 20,275
--------------------------------------------------------------------------------
</TABLE>
(b) Future operations:
These financial statements have been prepared on the going concern
basis, which assumes the realizations of assets and settlement of
liabilities in the normal course of operations, notwithstanding the
significant operating losses since incorporation, negative working
capital and shareholders' deficiency at June 30, 2000. Effective
September 1, 1999, the Company's shares were delisted from the
National Association of Securities Dealers ("NASD") over-the-counter
Bulletin Board. The Company is in the process of preparing a
Registration Statement to be filed with the United States Securities
and Exchange Commission in order for the Company's shares to be
eligible for trading in the United States on the NASD
over-the-counter Bulletin Board. Continued operations depend upon the
Company's ability to attain profitable operations and obtain
sufficient cash from external financing to meet the Company's
liabilities as they become payable. These conditions and events cast
substantial doubt on the Company's ability to continue as a going
concern. Management is of the opinion that sufficient working capital
will be obtained from operations and external financing to meet the
Company's liabilities and commitments as they become payable.
F-9
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in the United
States, the more significant of which are outlined below.
(a) Basis of presentation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Innofone Canada, Hotcaller
and Access. All significant intercompany transactions and balances
have been eliminated on consolidation.
(b) Cash equivalents:
Cash equivalents are nil as at June 30, 2000 and 1999. For purposes
of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or
less when acquired to be cash equivalents.
(c) Fixed assets:
Fixed assets are recorded at cost and are amortized over the
estimated useful life of the asset using the following methods and
annual rates:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Asset Basis Rate
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment Declining balance 30%
Computer software and website
development costs Straight line 2 years
Furniture and fixtures Declining balance 20%
Leasehold improvements Straight line Over the lease term
Telephone Declining balance 30%
Technical equipment Declining balance 30%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Computer software and website development costs are expensed as
incurred unless they meet generally accepted criteria for deferral
and amortization. The development costs incurred in the conceptual
formulations of alternatives and prior to the establishment of
technological feasibility do not meet the accepted criteria for
development and are expensed as incurred. Capitalized computer
software and website development is evaluated in each reporting
period prior to determine whether it continues to meet criteria for
continued deferral and amortization.
F-10
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Use of estimates:
The preparation of financial statements in conformity with United
States 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 revenues and expenses during the period. Actual results
could differ from those estimates.
(e) Income taxes:
Income taxes are accounted for under the asset and liability method.
Under the asset and liability method, deferred 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
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
To the extent that the recoverability of deferred tax assets is not
considered to be more likely than not, a valuation allowance is
provided.
(f) Foreign currency translation:
To June 30, 1998, the Company's functional currency was the United
States dollar. To that date, substantially all of the Company's
operations had been undertaken in United States dollars. For the
years ended June 30, 2000 and 1999, the Company's functional
currency changed to the Canadian dollar. The effect of the change
has been applied prospectively from July 1, 1998. This change in
functional currency has been made to reflect the primary economic
environment for the Company being the Canadian dollar the primary
currency in which its business is conducted.
The Company's reporting currency is the United States dollar. The
consolidated statements of operations are translated into United
States dollars using the average exchange rate for the year. The
consolidated balance sheets are translated into United States
dollars using the year-end exchange rate. The translation gains or
losses are included in the consolidated statement of shareholders'
deficiency as accumulated other comprehensive income or loss.
F-11
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Comprehensive income:
On July 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net
loss and foreign currency translation adjustments and is presented
in the consolidated statements of shareholders' deficiency and
comprehensive loss. The statement requires only additional
disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations.
Prior year financial statements conform to the requirements of SFAS
No. 130.
(h) Stock option plans:
The Company applies the fair value based method of accounting
prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
in accounting for its stock option plans. As such, compensation
expense is recorded on the date of grant based on the fair value of
the award and is recognized over the service period.
(i) Impairment of long-lived assets and long-lived assets to be disposed
of:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
(j) Revenue recognition:
The Company generates revenue primarily from the resale of long
distance services. Long distance services revenue is recorded as
revenue when the services are rendered.
F-12
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(k) Development costs of bundled services:
The costs of developing bundled services programs include software
development costs, marketing costs, and call center development
costs. The software development costs are paid to the Company's
external billing partner in order to modify the billing engine and
customer support services program to meet the needs of each bundled
services customer. Marketing costs consist of the creative design
costs for artwork as well as the costs of all printed materials.
Call center development costs are paid to external suppliers of call
center services and include the costs of training their staff and
preparing for the launch of a bundled services program. All such
development costs are expensed as incurred.
3. FIXED ASSETS:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Accumulated Net book
2000 Cost amortization value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer equipment $ 296,860 $ 53,422 $ 243,438
Computer software and website development costs 106,666 35,908 70,758
Furniture and fixtures 16,955 4,179 12,776
Leasehold improvements 6,214 2,263 3,951
Telephone 1,688 1,006 682
Technical equipment 1,215 492 723
-------------------------------------------------------------------------------------------------------------------
$ 429,598 $ 97,270 $ 332,328
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Accumulated Net book
1999 Cost amortization value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer servers and software $ 267,378 $ 263 $ 267,115
Furniture and fixtures 13,526 1,087 12,439
Leasehold improvements 5,456 1,059 4,397
Telephone 1,654 248 1,406
Technical equipment 1,192 179 1,013
-------------------------------------------------------------------------------------------------------------------
$ 289,206 $ 2,836 $ 286,370
-------------------------------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
4. ADVANCES FROM ULTIMATE SHAREHOLDERS:
The ultimate shareholders are those registered shareholders who existed
on June 26, 1998, the date the Company approved the share exchange
takeover as described in note 1(a). Advances from ultimate shareholders,
classified as long term, are unsecured, non-interest bearing providing
the Company is not in default of any payments required to be made
starting July 1, 2003, and are repayable in equal monthly installments
beginning July 1, 2003 to 2018. The current advances from ultimate
shareholders are unsecured, non-interest bearing and due on demand.
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bank loan bearing interest at the bank's prime rate plus 3%, repayable in
monthly principal payments of $4,774 from October 1998 to April 1999
and $3,418 commencing in May 1999, interest repayable monthly effective
upon inception of
the loan $ 88,478 $ 130,188
Less current portion 40,524 41,012
--------------------------------------------------------------------------------------------------------------------------------
$ 47,954 $ 89,176
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The loan is secured by a first charge against the assets of the Company.
Certain shareholders have signed personal guarantees totalling $42,500 to
secure the loan.
Principal repayments are as follows:
<TABLE>
-------------------------------------------------------------------------------------------------------------------
<S> <C>
2001 $ 40,524
2002 40,524
2003 7,430
-------------------------------------------------------------------------------------------------------------------
$ 88,478
-------------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
6. CONVERTIBLE DEBT:
During the year ended June 30, 2000, the Company completed three private
convertible debt offerings, raising an aggregate total of $1,956,600.
These three offerings are described below:
(a) On August 5 and 6, 1999, the Company raised $501,100 through a
subscription of 8% unsecured convertible promissory notes (amended on
October 5, 1999) which are due July 31, 2000. The notes are
convertible into common shares of the Company with a par value of
$0.001 per share at a price of $0.40 per share. The total market
value of the Company's common shares on August 5 and 6, 1999 was
$438,000 higher than the total conversion price. Therefore, these
convertible promissory notes have an embedded beneficial conversion
feature that has been charged to interest expense and additional
paid-in capital on the dates the notes were issued. Effective
September 12, 2000, all of the promissory notes have been converted
into 1,252,750 common shares.
(b) During the period from December 1999 to February 2000, the
Company raised $1,039,500 through the subscription of 8% unsecured
convertible promissory notes which are due December 31, 2000. The
notes are convertible into common shares of the Company with a par
value of $0.001 per share at a price of $0.40 per share. The notes
also include a warrant to purchase one common share of the Company
with a par value of $0.001 at a price of $1.00 per share for each
$0.40 of notes purchased on or before December 31, 2000. The total
market value of the Company's common shares at the dates when the
notes were signed was $874,750 higher than the total conversion
price.The embedded beneficial conversion feature has been charged to
interest expense and added to additional paid in capital.
As of September 30, 2000, no notes have been converted into common
shares and no warrants have been exercised.
(c) On June 1, 2000, the Company raised $416,000 through the subscription
of 8% unsecured convertible promissory notes which are due June 1,
2001. The notes are convertible into common shares of the Company
with a par value of $0.001 per share at a price of $0.80 per share.
The total market value of the Company's common shares at the dates
when the notes were signed was less than the total conversion price.
Therefore, there is no embedded beneficial conversion feature. The
notes also include a warrant to purchase one common share of the
Company with a par value of $0.001 at a price of $1.50 per share for
each $0.80 of notes purchased on or before June 30, 2001.
As of September 30, 2000, no notes have been converted into common
shares and no warrants have been exercised.
F-15
<PAGE>
7. SHARE CAPITAL:
As described in note 1(a), Innofone Canada is deemed, for accounting
purposes, to have acquired the Company effective June 26, 1998.
As at June 26, 1998, the authorized share capital of Innofone Canada
consisted of an unlimited number of common shares. The change in share
capital of Innofone Canada for the period from April 24, 1998 (date of
incorporation) to June 26, 1998, the effective date of the business
combination with the Company was as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Total
-------------------------------------------------------------------------------------------------------------------
<S> <C>
Existing share capital of Innofone Canada, June 26, 1998 $ 563
Ascribed value of the shares of the Company as a result
of the recapitalization of the Company by Innofone Canada
(see note 1(a)) 20,275
-------------------------------------------------------------------------------------------------------------------
Share capital of the Company, June 26, 1998 $ 20,838
-------------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
7. SHARE CAPITAL (CONTINUED):
The number of outstanding common shares of the Company as at June 30,
2000 is computed as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Common
share
Common Preferred purchase
shares shares warrants
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Existing outstanding shares and
warrants as at June 30, 1998 6,000,000 5,000,000 1,000,000
Common share purchase warrants exercised 1,000,000 - (1,000,000)
Sale of units 2,000,000 - 6,000,000
Warrants exercised 4,130,000 - (4,130,000)
Warrants expired - - (1,870,000)
-------------------------------------------------------------------------------------------------------------------
Outstanding shares and warrants
as at June 30, 1999 13,130,000 5,000,000 -
Preferred shares converted to common shares 7,500,000 (2,500,000) -
Options exercised 120,000 - -
-------------------------------------------------------------------------------------------------------------------
Outstanding shares and warrants
as at June 30, 2000 20,750,000 2,500,000 -
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's authorized share capital consists of 100,000,000 common
shares and 25,000,000 preferred shares each with a par value of $0.001
per share. The preferred shares are voting, convertible to common shares
on a 3 for 1 basis at the option of the holder based on certain revenue
targets being met and participate equally as to dividends with each
common share. When the Company generates $2,000,000 Canadian in
cumulative revenue, 1,250,000 shares of preferred stock can be converted
into 3,750,000 shares of common stock. The remaining 1,250,000 shares of
preferred stock can be converted to 3,750,000 shares of common stock when
the Company has generated $7,000,000 Canadian in cumulative revenue.
Until these targets are met, the preferred shares remain outstanding
with all rights and restrictions continuing. Any dividends declared
and paid by the Company would be declared and paid in United States
dollars.
F-17
<PAGE>
7. SHARE CAPITAL (CONTINUED):
The Company had the right, until June 26, 2000, to redeem, at a price of
$0.01 per common share, 3,429,688 common shares issued to the founders
("Founder Shares") of Innofone Canada who are now officers, directors and
significant shareholders of the Company (the "Executives") and shares
issued to an affiliate of the founders of Innofone Canada, to effect the
business combination with Innofone Canada, in the event that any
Executives employment with the Company or its affiliates is terminated.
The Founder Shares are excluded from the weighted average number of
common shares used in the basic net loss per share calculation until June
26, 2000 (note 11). As of June 26, 2000, no Founder Shares were redeemed.
On June 15, 1998, the Company issued 1,000,000 common share purchase
warrants to a shareholder of the Company as consideration for services
provided, related to the recapitalization transaction (note 1). A value
of $9,838 was assigned to the common share purchase warrants. Each common
share purchase warrant was exercisable until June 30, 1999 to acquire one
common share at $0.02 per share. On January 5, 1999, the common share
purchase warrants were exercised. Upon exercise of the 1,000,000 common
share purchase warrants, 1,000,000 common shares were issued at $0.02 per
share. The payment for these shares was offset by a $20,000 payable for
services provided to the Company and the $9,838 value assigned to common
share purchase warrants was reallocated $1,000 to common shares based on
their par value and $8,838 as additional paid-in capital.
On July 7, 1998, the Company made an offering of 2,000,000 units, under
rule 504 of Regulation D of the Securities Act of 1933, at a price of
$0.05 per unit. Each unit consisted of one common share, $0.001 par value
per share and three common share purchase warrants exercisable at $0.10,
$0.14 and $0.20 respectively, each of which was exercisable until April
30, 1999. Cash in the amount of $100,000 was received on the sale of the
units and $2,000 was allocated to common shares based on their par value
and $98,000 to additional paid-in capital. As at April 30, 1999,
4,130,000 share purchase warrants were exercised for $532,000. This cash
was allocated $4,130 to common shares based on their par value and
$527,870 to additional paid-in capital. The remaining share purchase
warrants expired.
On February 14, 2000 and February 15, 2000, 2,500,000 preferred shares
were converted into 7,500,000 common shares in accordance with the terms
of the share exchange take-over agreement as described in note 1(a).
F-18
<PAGE>
8. STOCK OPTIONS:
At June 30, 2000, the Company has two stock-based compensation plans
which are described below. The Company accounts for the fair value of its
grants under these plans in accordance with FASB Statement 173. The
compensation cost that has been charged against income for those plans
was $1,282,863, $112,470 and nil for 2000, 1999 and 1998, respectively.
The full amount was assigned as additional paid up capital.
In 1997, the Company adopted a Compensatory Stock Option Plan (the "CSO
Plan") and an Employee Stock Compensation Plan (the "ESC Plan") pursuant
to which the Company's Board of Directors may grant stock options to
employees, consultants, advisors or directors of the Company. The CSO
Plan authorizes grants of options to purchase up to 1,500,000 shares of
authorized but unissued common stock and the ECS plan authorizes grants
of options to purchase up to 1,000,000 shares of authorized but unissued
common stock. Stock options are granted under the CSO Plan with an
exercise price equal to or greater than 100% of the stock's fair market
value at the date of grant and the vesting period is limited to no more
than 10 years.
Pursuant to the Company's CSO Plan, the Company has granted 1,175,000
stock options to directors and employees for the purchase of common
shares ranging from $0.10 to $1.00 per share, expiring from August 10,
2000 to June 30, 2002 and vesting either on the date of grant or periods
up to 12 months after the date of grant. The Company has granted a
further 250,000 options to an employee which vest upon meeting certain
business targets. Once vested, the employee is entitled to exercise the
options to purchase common shares of the Company for $0.50 per share.
At June 30, 2000, these targets had not been met.
Pursuant to the Company's ESC Plan, 100,000 stock options have been
granted to an employee for the purchase of common shares at $0.0001 per
share. The Company has granted a further 900,000 options to that employee
but the options do not vest until certain business targets are met. Once
vested, these options can be exercised at $0.0001 per share subject to a
release provision over 24 months after vesting. At June 30, 2000,
these targets had not been met.
The Company has also granted stock options, which are not part of the ESC
Plan and the CSO Plan. These options were approved by the Company's Board
of Directors and were granted to key consultants and advisors of the
Company. The Company has granted a total 3,110,000 stock options to
purchase common shares ranging from $0.20 to $0.50 per share, expiring
from August 10, 2000 to September 15, 2002, and vesting at the time of
grant. Some of these options have release provisions of up to 18 months
from the date of vesting. The Company has also granted a further
3,207,000 stock options to consultants and advisors of the Company at
prices ranging from $0.001 to $0.50. These options vest upon achieving
certain business targets, and once vested some are subject to release
provisions over 18 months.
F-19
<PAGE>
8. STOCK OPTIONS (CONTINUED):
The following table summarizes the activity for the Plan:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Number of Weighted-average
options exercise price
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at June 30, 1998 - n/a
Granted 1,380,000 $ 0.64
Exercised - n/a
Forfeited - n/a
Expired - n/a
-------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1999 1,380,000 $ 0.64
Granted - vested 3,005,000 $ 0.48
Granted - not vested 4,357,000 $ 0.37
Exercised (120,000) $ 0.25
Forfeited - n/a
Expired - n/a
-------------------------------------------------------------------------------------------------------------------
Outstanding (held by 13 optionees) at June 30, 2000 8,622,000 $ 0.54
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Subsequent to the year end, 50,000 options expired and 430,000 options
were exercised for total proceeds of $66,000.
The weighted average grant date fair value of options granted during the
year is summarized in the following table:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Weighted-average
Weighted-average grant date
exercise price fair value of options
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options whose exercise price is at fair market value $ 0.46 $ 0.25
Options whose exercise price is less
than fair market value 0.41 1.03
Options whose exercise price is greater
than fair market value 0.50 0.10
-------------------------------------------------------------------------------------------------------------------
Total weighted-average grant date fair value of options $ 0.42 $ 0.98
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average remaining contractual life for all outstanding
options is approximately one year.
F-20
<PAGE>
8. STOCK OPTIONS (CONTINUED):
The fair value of each option was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions
used for 2000: dividend yield of 0%, expected volatility of 100%,
risk-free interest rate of approximately 6% and expected life of two
years.
9. COMMITMENTS:
(a) Lease commitments:
The Company has entered into operating leases for its premises and
equipment for terms expiring in June 2003. The annual lease payments
for the next three years are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
<S> <C>
2001 $ 36,000
2002 25,000
2003 21,000
-------------------------------------------------------------------------------------------------------------------
$ 82,000
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) CTRA Agreement:
The Company has entered into an agreement with CTRA ("CTRA
Agreement") on April 11, 2000 to resell the Company's long distance
services. The agreement expires on April 10, 2002, and automatically
renews every two years unless either party notifies the other at
least 30 days prior to the expiration of the term that it does not
wish to renew. Should the Company wish to terminate the agreement at
a date other than the renewal date, then it is subject to a
termination charge of $50,000 Canadian dollars. The Company is
subject to a $0.005 Canadian premium per minute on its rates from
CTRA if it does not reach a minimum monthly billing of six million
minutes by March 31, 2001 and every month thereafter.
F-21
<PAGE>
9. COMMITMENTS (CONTINUED):
(c) ACS Communications Industry Services, Inc. Agreement:
Effective March 2, 2000, the Company entered into a three-year agreement
with ACS Communications Industry Services, Inc. ("ACS"), whereby, ACS
will provide to the Company all billing related functions including
invoice preparation and mailing, dial-in-access over the internet to the
ACS iCars software, and all other routine functions including order
entry, customer service functions, accounting, sales tracking and
receipts processing functions. The Company is committed to a minimum
monthly service bureau fee of $10,000 per month. In the event that the
Company terminates the contract prior to March 3, 2003, it is subject to
a financial penalty of the greater of the three previous months average
billing or $10,000, times 50% of the number of months remaining in the
contract. The contract will automatically be renewed for a further two
years under the same terms and conditions unless either party wishes to
terminate the agreement after the three-year anniversary date.
(d) Rogers Wireless Inc. Agreement:
Effective April 20, 2000, the Company entered into a three-year agreement
with Rogers Wireless Inc ("Rogers") to resell their cellular based
telecommunications services to customers of financial institutions in
Canada for which the Company is offering bundled services. Under the
terms of the agreement, the Company is obligated to arrange for 5,000 new
customers by April 20, 2001, 15,000 new customers by April 20, 2002 and
25,000 new customers by April 20, 2003. If these minimums are not
reached, the Company is obligated to pay to Rogers $20 Canadian, times
the number of customers that the Company is short of the minimum. Rogers
would also have the option to terminate the contract upon 10 days notice
if the anniversary dates minimum are not met. The Company is also
required to post a security deposit with Rogers in the amount of $100,000
Canadian which has been accrued in the year ended June 30, 2000. After
three years, this agreement shall deem to continue on a month-to-month
basis, unless either party terminates after giving thirty days written
notice.
F-22
<PAGE>
9. COMMITMENTS (CONTINUED):
(e) Visa Desjardins:
On November 22, 1999, the Company entered into a memorandum of
understanding with Visa Desjardins, a Quebec financial institution
in order to launch a cellular, calling card, internet, home security
and long distance bundled services program to Visa Desjardins credit
cardholders. The Company is responsible for all of its costs
relating to the program. The Company is obligated to pay a 1.75%
merchant fee on all charges made on client credit cards and a
commission of 4% will be payable on gross sales commencing August 1,
2000. In addition, the Company is obligated to pay Visa Desjardins a
performance fee for each customer enrolled in a certain number of
services. If either party cancels the launch of this program prior
to completing a detailed contract, each party will be responsible
for their own costs incurred to that point.
(f) Mr. Burdon:
On November 30, 1999, the Company engaged the services of Mr. Burdon
to manage its marketing efforts focused on developing relationships
with businesses which can market the Company's long distance
services and other products to their customer base. This agreement
expired on March 31, 2000. On April 5, 2000, a new agreement,
superseding the November 30, 1999 agreement was signed with Mr.
Burdon. Under the terms of the agreement, Mr. Burdon is entitled to
receive options of up to 5,500,000 shares of common stock at an
exercise price of $0.50 per share subject to the satisfactions of
certain conditions. During the year, 2,750,000 shares were granted
to Mr. Burdon effective April 5, 2000 in connection with his efforts
in facilitating the Company's business arrangement with Visa
Desjardins. Options for 1,000,000 shares were deemed vested on
signing the agreement with Mr. Burdon, with the remaining 1,750,000
shares vesting over an eighteen-month period. The remaining options
of 2,750,000 shares will be earned upon the signing of a second
agreement with a financial institution for the marketing of the
Company's products and services. As part of the agreement, Mr.
Burdon also receives an advisory fee of $8,250 per month, for as
long as the Company considers his services worthwhile.
The fair value of the options for 5,500,000 shares are estimated on
the grant date using the Black-Scholes option pricing model assuming
a dividend yield of 0%, expected volatility of 100%, a risk free
interest rate of approximately 6% and an expected life of two years.
The compensation costs relating to these options in the amount of
$1,243,933 (included in total compensation expense of $1,282,863)
have been assigned as additional paid-in capital in the financial
statements as at June 30, 2000. These costs will be expensed over
the 24 month vesting period.
F-23
<PAGE>
9. COMMITMENTS (CONTINUED):
Compensation expense for the remaining 2,750,000 stock options will
be recognized whenever Mr. Burdon successfully negotiates and signs
the second agreement.
10. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
(a) Financial instruments:
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at June 30, 2000 and
1999. The estimated fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than a forced or
liquidation sale. These estimates, although based on the relevant
market information about the financial instrument, are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
2000 2000
-------------------------------------------------------------------------------------------------------------------
Carrying Fair
amount value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,257 $ 8,257
Accounts receivable 352,190 352,190
Deposits 86,895 86,895
Financial liabilities:
Accounts payable and accrued liabilities 794,480 794,480
Obligation under capital lease 2,236 2,236
Long-term debt 88,478 88,478
Advances from ultimate shareholders 358,705 358,705
Convertible debt 1,956,600 1,956,600
-------------------------------------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
10. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1999 1999
-------------------------------------------------------------------------------------------------------------------
Carrying Fair
amount value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Term deposit $ 102,477 $ 102,477
Accounts receivable 73,167 73,167
Deposits 5,105 5,105
Financial liabilities:
Bank indebtedness 28,816 28,816
Accounts payable and accrued liabilities 254,130 254,130
Long-term debt 130,188 130,188
Obligation under capital lease 3,695 3,695
Advances from ultimate shareholders 312,405 312,405
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
(i) Cash and cash equivalents, accounts receivable, deposits,
accounts payable and accrued liabilities and obligation under
capital lease:
The carrying amounts approximate fair value because of the
short maturity of these instruments.
(ii) Long-term debt:
The fair value is estimated by discounting the future cash
flows at rates currently offered to the Company for similar
debt instruments of comparable maturity by the Company's
bankers.
(iii) Advances from ultimate shareholders:
Imputed interest computed at comparable market rates on the
interest free advances from ultimate shareholders is not
considered to be material to the financial statements.
Consequently, the financial statements do not include a charge
for imputed interest on the interest free advances and the
fair value is considered to be comparable to the carrying
value.
F-25
<PAGE>
10. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED):
(b) Currency rate risk:
The Company's current operations are headquartered in Canada and all
sales are generated in Canada. Since the financial results are
reported in United States dollars, fluctuations in the value of the
United States dollar relative to the Canadian dollar could materially
affect the Company's results.
11. BASIC NET LOSS PER SHARE:
Basic net loss per share figures are calculated using the weighted
average number of common shares outstanding computed on a daily basis.
The Founder Shares are excluded from the weighted average number of
common shares until June 26, 2000 (note 7) and are included for the
period effective June 27 and June 30, 2000. The effect of the conversion
of the preferred shares on an if-converted basis and stock options has an
anti-dilutive effect.
12. INCOME TAXES:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at June 30, 2000 and 1999 are
presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,226,000 $ 318,000
Net capital loss carryforwards 30,000 30,000
Capital assets, principally due to differences
in amortization 75,000 32,000
-------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,331,000 380,000
Less valuation allowance (1,331,000) (380,000)
-------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
-------------------------------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
12. INCOME TAXES (CONTINUED):
The valuation allowance for deferred tax assets as of June 30, 2000 and
1999 was $1,331,000 and $380,000, respectively. The net change in the
total valuation allowance for the years ended June 30, 2000 and 1999 was
an increase of $951,000 and $357,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset,
the Company will need to generate future taxable income of approximately
$27,000, $638,000 and $1,955,000 prior to the expiration of the net
operating loss carryforwards in 2005, 2006 and 2007, respectively and
future taxable capital gains of approximately $67,000 to utilize the net
capital loss carryforward available indefinitely. Based upon the level of
historical taxable income it cannot be reasonably estimated at this time
if its more likely than not the Company will realize the benefits of the
deferred tax assets. Consequently, the deferred tax assets have been
reduced by an equivalent valuation allowance. The valuation allowance
will be adjusted in the period that is determined with reasonable
certainty that it is more likely than not that some portion or all of the
deferred tax assets will be realized.
At June 30, 2000, the Company has net operating loss carryforwards for
income tax purposes of approximately $2,722,000 which are available to
offset future taxable income, if any, through 2005 to 2007, respectively.
In addition, the Company has net capital loss carryforwards for income
tax purposes of approximately $67,000 which are available to offset
future taxable capital gains.
13. NON-CASH FINANCING AND INVESTING ACTIVITIES:
(a) In 1999, a capital lease obligation of $4,800 was incurred
when the Company entered into a lease for
furniture and fixtures.
(b) In 1999, 1,000,000 shares of common stock were issued upon the
conversion of 1,000,000 common share purchase warrants to settle an
outstanding liability.
(c) In 1999, a note payable of $40,000 was issued when the Company
purchased an investment in CTRA.
F-27
<PAGE>
14. SEGMENTED INFORMATION:
(a) Reportable segment:
The Company has one reportable segment; resale of long distance
services. The resale of long distance services is provided to
residential and small to medium sized businesses. This segment
represents the result of operations for the Company.
(b) Geographic information:
The Company derives all of its revenue from Canada and all of its
fixed assets are physically located in Canada.
15. NEW US ACCOUNTING STANDARDS:
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 (SAB 101), REVENUE RECOGNITION IN FINANCIAL STATEMENTS, on
December 3, 1999. SAB 101 provides additional guidance on the application
of existing generally accepted accounting principles to revenue
recognition. The Company does not expect the initial application of SAB
101 will materially impact reported results on existing contractual
arrangements.
16. SUBSEQUENT EVENTS:
(a) In September 2000, the Company raised a total of $500,002 in two
separate private placements totaling 1,000,004 units consisting of
one share of common stock and one warrant to purchase common stock
at $1.00 per share expiring in March 2002.
(b) On October 4, 2000, the Company raised $150,000 through a
subscription of 10% unsecured promissory notes which are due October
4, 2001. The capital amount of the notes shall be payable on demand
in whole or in part in the event that the Company makes a
distribution of its securities worth at least $500,000 by private
placements or otherwise. The notes are convertible into common
shares of the Company with a par value of $0.001 at a price of $0.50
per share. The notes also include a warrant to purchase one common
share of the Company with a par value of $0.001 at a price of $1.00
per share.
F-28
<PAGE>
PART III
Item 1. Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- ------------------------------------------------------------------------------------------------
<S> <C>
2.1 Certificate of Incorporation of the Registrant and all amendments thereto.
2.2* Bylaws of the Registrant, as currently in effect (originally filed as 3.01(i)).
3.1 Specimen Common Stock Certificate
6.1t++ Agreement dated April 11, 2000 between Axxent Corp. (formerly Optel Communications) and Registrant.
6.2** Agreement dated March 2, 2000 between ACS Communications Industry Services, Inc. and Registrant
(originally filed as Exhibit 10.08).
6.3** Reseller Agreement dated April 20, 2000 between Rogers Wireless, Inc. and Registrant (originally filed as
Exhibit 10.10).
6.4 Memorandum of Understanding dated November 22, 1999 between Visa Desjardins and Registrant.
6.5t++ Memorandum of Understanding dated July 7, 2000 between Innofone and CIBC.
BizSmart Participation Agreement dated September 21, 2000 between Canadian Imperial Bank and Innofone
6.6t++ Canada, Inc.
6.7t++ Agreement dated September 7, 2000 between Bell Actimedia, Inc. and Innofone Canada, Inc.
6.8* 1997 Compensatory Stock Option Plan (originally filed as Exhibit 10.04).
6.9* 1997 Employee Stock Option Plan (originally filed as Exhibit 10.05).
6.10* 1997 Compensatory Stock Option Plan (originally filed as Exhibit 10.04).
6.11++ 2000 Stock Incentive Plan
6.12++ Employment Agreement between the Registrant and Larry Hunt.
6.13++ Employment Agreement between the Registrant and Ronald Crowe.
6.14++ Employment Agreement between the Registrant and Rick Quinney.
6.15* Memorandum of Understanding dated November 30, 2000 between the Registrant and Douglas Burdon (originally
filed as Exhibit 10.03)
6.16** Amended Memorandum of Understanding dated April 5, 2000 between the Registrant and Douglas Burdon
(originally filed as Exhibit 10.09).
12.1* Agreement and Plan of Reorganization among the Registrant, APC Telecommunications Inc. and the
Shareholders of APC Telecommunications, dated June 12, 1998 (originally filed as Exhibit 2.02).
</TABLE>
++ To be filed by amendment.
* Incorporated by reference from the Registrant's registration statement on
Form SB-2, file no. 333-94497, filed January 12, 2000.
** Incorporated by reference from amendment number 1 to the Registrant's
registration statement on Form SB-2, file no. 333-94497, filed May 26, 2000.
t Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been filed with the Commission
pursuant to our application for confidential treatment.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
INNOFONE.COM, INC.
Date: November __, 2000 By: /s/ LARRY HUNT
-----------------------
Larry Hunt
President
