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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2002
----------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
---------- ----------
Commission file number 0-31949
------------------------------
INNOFONE.COM, INC.
-------------------------------------------------------------
(Exact name of small business
issuer as specified in its charter)
Nevada 98-0202313
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4390 Paletta Court, Burlington, Ontario, Canada L7L 5R2
-------------------------------------------------------------
(Address of principal executive offices)
(905)637-9442
-------------------------------------------------------------
(Issuer's telephone number)
-------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes[ ] No [ ]
APPLICABLE ONLY TO CORPORATE
ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
99,209,837 common and 1,250,000 preferred at 03/31/02.
-----------------------------------------------------------
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Financial Statements
(Stated in United States dollars)
I N N O F O N E . C O M ,
I N C O R P O R A T E D
For the quarter ended March 31, 2002
(Unaudited)
F-1
I N N O F O N E . C O M , I N C O R P O R A T E D
Consolidated Balance Sheets
(Stated in United States dollars)
March 31, 2002 with comparative figures as at June 30, 2001.
================================================================================================
March 31, 2002 June 30,2001
------------------------------------------------------------------------------------------------
(unaudited) (audited)
A s s e t s
Current assets:
Cash and cash equivalents $ 1,592 $ -
Accounts receivable 131,963 -
Inventory 475,360
Prepaid expenses and deposits 3,145 225
------------------------------------------------------------------------------------------------
612,059 225
Fixed assets 87,526 441
Investment in associated company 308,176
Intangible assets 3,931 -
------------------------------------------------------------------------------------------------
$ 1,011,693 $ 666
================================================================================================
L i a b i l i t i e s a n d S h a r e h o l d e r s ' D e f i c i e n c y
Current liabilities:
Bank indebtedness $ 113,208 $ 546
Accounts payable and accrued liabilities 414,354 232,510
Due to former officers and directors - 284,470
Income taxes payable 187,089
Current portion of long-term debt 6,340 -
Convertible debt 700,000 1,116,000
Note payable 150,000 150,000
------------------------------------------------------------------------------------------------
1,570,990 1,783,526
Long-term debt 10,566 -
Due to majority shareholder 5,043 -
Non-interest bearing notes payable to related parties 156,918 -
Shareholders' deficiency:
Share capital (note 2):
Common shares 67,001 4,772,715
Preferred shares - 1,250
Additional paid-in capital (1,484,047) 7,098,052
------------------------------------------------------------------------------------------------
(1,414,046) 11,872,017
Foreign currency adjustment (25,726) -
Deficit 416,113 (13,654,877)
------------------------------------------------------------------------------------------------
(1,023,659) (1,782,860)
Other events and contingencies (notes 5 and 6)
------------------------------------------------------------------------------------------------
$ 1,011,693 $ 666
================================================================================================
See accompanying notes to consolidated financial statements.
F-2
I N N O F O N E . C O M , I N C O R P O R A T E D
Consolidated Statements of Operations
(Stated in United States dollars)
Unaudited
For the three months ended March 31, 2002 with comparative figures for the three
months ended March 31, 2001.
======================================================================================
2002 2001
--------------------------------------------------------------------------------------
(unaudited) (unaudited)
Sales $ 112,438 $ 291,351
Cost of sales 75,963 189,501
--------------------------------------------------------------------------------------
Gross profit 36,475 101,849
Selling, general and administrative expenses 72,494 110,665
Amortization 8,136 8,958
Interest on long term debt and bank charges 5,274 6,148
--------------------------------------------------------------------------------------
Total operating expenses 85,904 125,771
Other income (note 5) 295,599 68,713
--------------------------------------------------------------------------------------
Net income before taxes 246,170 44,791
Income tax provision (18,266) 17,916
--------------------------------------------------------------------------------------
Net income after tax 264,436 26,875
======================================================================================
Basic net profit per common share $ 0.0027 $ 0.0012
======================================================================================
Weighted average number of common
shares outstanding 99,209,837 26,181,504
======================================================================================
See accompanying notes to consolidated financial statements.
F-3
I N N O F O N E . C O M , I N C O R P O R A T E D
Consolidated Statements of Operations
(Stated in United States dollars)
(Unaudited)
For the nine months ended March 31, 2002 with comparative figures for the nine
ended March 31, 2001.
======================================================================================
2002 2001
--------------------------------------------------------------------------------------
(unaudited) (unaudited)
Sales $ 601,506 $ 1,415,304
Cost of sales 342,982 936,492
--------------------------------------------------------------------------------------
Gross profit 258,524 478,812
Selling, general and administrative expenses 323,860 305,863
Amortization 26,577 27,745
Interest on long-term debt and bank charges 19,160 19,544
--------------------------------------------------------------------------------------
Total operating expenses 369,597 353,152
Other income (note 5) 32,749 208,333
--------------------------------------------------------------------------------------
Net income before taxes 213,511 333,993
Income tax provision (31,330) 133,597
--------------------------------------------------------------------------------------
Net income after taxes 244,841 200,396
======================================================================================
Basic net profit per common share $ 0.0034 $ 0.0086
======================================================================================
Weighted average number of common
shares outstanding 72,751,197 23,176,504
======================================================================================
See accompanying notes to consolidated financial statements.
F-4
I N N O F O N E . C O M , I N C O R P O R A T E D
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(Unaudited)
For the nine months ended March 31, 2002
================================================================================
Innofone.com, Incorporated (the "Company") is incorporated under the laws of the
State of Nevada. Effective October 15, 2001, the Company was acquired by Digital
Micro Distribution Canada Incorporated ("DMD Canada") as further described in
Note 1 to these financial statements. The Company, through its legal subsidiary
DMD Canada that operates in Canada, is engaged in the refurbishment and
distribution of computer and related equipment. The Company is not dependent on
a single customer.
1. Basis of presentation:
----------------------
(a) Business combination of the Company and DMD Canada:
On October 15, 2001, the directors of the Company approved a share
exchange takeover bid whereby, on October 15, 2001 the Company
acquired all of the outstanding shares of DMD Canada, a private
company. Under the terms of the transaction, the shareholders of DMD
Canada received 67,000,000 common shares of the Company. The result of
this transaction is that the former shareholders of DMD Canada
acquired 67% of the outstanding common shares of the Company on a
fully diluted basis.
Accounting for the business combination:
As former shareholders of DMD Canada hold 67% of the outstanding
shares of the Company subsequent to these transactions, the business
combination of the two companies has been accounted for as a reverse
takeover of the Company by DMD Canada.
Application of reverse takeover 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 (DMD Canada);
(ii) As DMD Canada is deemed to be the acquirer for accounting
purposes, its assets and liabilities are included in the
Consolidated financial statements at their historical
carrying values;
(iii) Control of the net assets and operations of the Company is
deemed to be acquired by DMD Canada. For purposes of this
transaction, the deemed consideration is considered to be
$1. Since the book value of the liabilities of the Company
exceeded the book value of the assets by $1,414,047, this
deficiency has been attributed to additional paid-in
capital.
F-5
I N N O F O N E . C O M , I N C O R P O R A T E D
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(Unaudited)
For the nine months ended March 31, 2002
================================================================================
(b) Interim financial statements:
These unaudited interim consolidated financial statements should be
read in conjunction with the Company's annual consolidated financial
statements which were completed as of June 30, 2001 and with the
audited financial statements of DMD Canada filed as at July 31, 2001.
The comparative balance sheet as at June 30, 2001 represents the
audited balance sheet prior to accounting for the effects of the
reverse takeover involving DMD Canada. The statement of operations for
the quarter ended and the six months ended March 31, 2002 together
with the comparative figures represent the consolidation of the
Company with its wholly owned subsidiary DMD Canada Inc. A
consolidated statement of changes in financial position has not been
prepared as management does not believe that it would add meaningful
information. The statement of operations do not include the results of
the company's previously wholly owned subsidiary Innofone Canada. In
the opinion of management, the unaudited interim consolidated
financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments) necessary for the
fair presentation of the results of such periods. The results of
operations for the interim periods are not necessarily indicative of
the results of operations for the full year.
2. Share Capital:
--------------
As described in note 1(a), DMD Canada is deemed for accounting purposes, to
have acquired the Company effective October 15, 2001.
As at October 15, 2001, the authorized share capital of DMD Canada
consisted of an unlimited number of common shares. The issued share capital
of DMD Canada as at October 15, 2001 was $1. These shares were issued for
cash. The share capital of DMD Canada as at October 15, 2001 is shown as
additional paid-in capital. The 67,000,000 common shares issued to effect
the business combination on October 15, 2001 were $67,000 based on their
par value.
F-6
I N N O F O N E . C O M , I N C O R P O R A T E D
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(Unaudited)
For the nine months ended March 31, 2002
================================================================================
2. Share capital (continued):
--------------------------
The ascribed share capital of the Company, the continuing consolidated
entity, as at March 31, 2002 for accounting purposes, is computed as
follows:
---------------------------------------------------------------------------
Existing share capital of DMD Canada, as at
October 15, 2001 $ 1
Ascribed value of the shares of the Company
as a result of the business combination 67,000
Additional paid-in-capital (1,481,047)
---------------------------------------------------------------------------
Share capital of the Company, March 31, 2002 $ (1,414,046)
---------------------------------------------------------------------------
The number of outstanding common shares of the Company as at March 31, 2002
is computed as follows:
===========================================================================
Common Preferred
Shares Shares
---------------------------------------------------------------------------
Existing outstanding shares
as at June 30, 2001 31,214,837 1,250,000
Options exercised 475,000 -
Debt converted to stock 520,000 -
Shares issued to effect reverse takeover
(note 1(c)) 67,000,000 -
---------------------------------------------------------------------------
Outstanding shares
as at March 31, 2002 99,209,837 1,250,000
===========================================================================
During the nine months ended March 31, 2002, 475,000 options were exercised
generating proceeds of $48 for the Company and $416,000 in convertible
notes were converted into 520,000 common shares.
F-7
I N N O F O N E . C O M , I N C O R P O R A T E D
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(unaudited)
For the nine months ended March 31, 2002
================================================================================
3. Stock options:
--------------
The following table summarizes the stock option activity:
===================================================================================
Number of Weighted-
average
options exercise price
-----------------------------------------------------------------------------------
Outstanding at June 30, 1999 1,380,000 $ 0.64
Granted - non employees vested 2,750,000 0.50
Granted - employees vested 255,000 0.29
Granted - employees not vested 1,150,000 0.11
Granted - non employees not vested 3,207,000 0.46
Exercised (120,000) 0.25
Forfeited - n/a
Expired - n/a
-----------------------------------------------------------------------------------
Outstanding (held by 13 optionees) at June 30, 2000 8,622,000 $ 0.45
Granted 160,000 0.41
Exercised (460,000) 0.15
Expired or forfeited (4,605,000) n/a
-----------------------------------------------------------------------------------
Outstanding (held by 9 optionees) at June 30, 2001 3,717,000 0.47
Exercised (475,000) .0001
Expired or forfeited (10,000) n/a
-----------------------------------------------------------------------------------
Outstanding (held by 7 optionees) at March 31, 2002 3,232,000 0.49
-----------------------------------------------------------------------------------
The weighted average remaining contractual life for all outstanding options is
approximately one year.
4. Segmented information:
----------------------
Since the reverse takeover, the Company has one reportable segment;
refurbishment and distribution of used computer and related equipment. The
Companies sales are made to small to medium sized businesses, commonly
referred to as value added resellers. This segment represents the results
of operations for the Company.
F-8
I N N O F O N E . C O M , I N C O R P O R A T E D
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(unaudited)
For the nine months ended March 31, 2002
================================================================================
5. Other events:
-------------
Conversion to common stock:
EPhone Telecom Inc. made an agreement effective October 12, 2001 with the
previous officers of the Company to convert its set-up fee loan to the
Company in the amount of $500,000 into 2,000,000 shares of common stock of
the Company held by those officers at a conversion price of $0.25 per
share. This agreement is now being disputed by ePhone Telecom Inc. The
company is negotiating with ePhone Telecom Inc. to reach a mutually
satisfactory settlement to the matter.
The holder of the note payable in the amount of $150,000 made an agreement
effective October 12, 2001 with the previous officers of the company to
convert the note payable into 300,000 shares of common stock of the Company
held by those officers based on the agreed upon conversion price of $0.50
per share. This agreement is now being disputed by the note holder. The
company is attempting to negotiate a satisfactory settlement with the note
holder.
Certain financial targets relating to the conversion of half of the
remaining preference shares into common shares have been met. These
preferred shares are convertible into 1,875,000 common shares but the
conversion has yet to be completed.
The Company is in the process of converting $200,000 in convertible notes
dated in November and December 2000 into 666,666 common shares.
Change of year end:
The Company has filed an application with the state of Nevada to change its
year end to July 31st in order to coincide with the year end of its wholly
owned subsidiary, DMD Canada.
Conversion of amounts due from associated company:
The Company agreed to convert amounts due from an associated company into
80,000 shares of the associated company. The associated company, which is
indirectly controlled by the majority shareholder of the Company, is in the
process of filing an initial public offering in the United States.
F-9
I N N O F O N E . C O M , I N C O R P O R A T E D
Notes to Consolidated Financial Statements
(Stated in United States dollars)
(unaudited)
For the nine months ended March 31, 2002
================================================================================
5. Other events (continued):
-------------------------
Amounts due to former officers and directors:
Effective February 15, 2002, the former officers and directors of the
Company agreed to forgive amounts owed to them. This forgiveness of debt
has been recorded as other income during the quarter.
6. Contingent liabilities:
-----------------------
DMD Canada has been named as a defendant in an action brought in the
Ontario Provincial Court by Business Development Bank of Canada for
Canadian $50,000. The company denies liability for the claim and has filed
a statement of defense.
DMD Canada has been named as a co-defendant in a law suit filed in the
Ontario Provincial Court by Unique Restorations Ltd. The company denies
liability for the claim and has filed a statement of defense.
The Company has defaulted on a $10,000 settlement of a $22,000 debt. The
Company is in the process of renegotiating this settlement with
representatives of the creditor.
F-10
Item 2. Management's Discussion and Analysis or Plan of Operation.
Management's Discussion and Analysis
For the Quarter ended March 31, 2002
Forward-Looking Statements
--------------------------
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and Notes thereto for the year ended June 30,
2001 filed with the SEC on October 15, 2001 as well as with the audited
financial statements for the year ended July 31, 2001 filed with the SEC on
December 14, 2001 by the Company's wholly-owned subsidiary, Digital Micro
Distribution Canada Inc. ("DMD"). This quarterly report includes forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Words such as "may," "plans," "expects," "anticipates," "approximates,"
"believes," "estimates," "intends," "hopes," "potential," or "continue", and
variations of such words and similar expressions, are intended to identify such
forward-looking statements. The Company intends such forward-looking statements,
all of which are qualified by this statement, to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Litigation
Securities Reform Act of 1995, and is including this statement for purposes of
complying with these safe harbor provisions. The Company has based these
statements on its current expectations and projections about future events.
These forward-looking statements are not guarantees of future performance, and
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected in these statements. Forward-looking statements
include, but are not limited to:
o our expectations regarding the amount of our receivable from Innofone
Canada that we expect to recover; and
o our expectation that all or most of Innofone.com's liabilities will be
converted or written down as part of the plan for reorganization involving
DMD (the "RTO").
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's views only as of the date hereof. The
Company is not obligated to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Quarterly Report on Form 10-QSB might not occur.
Readers should carefully review the risk factors described in the
previously-filed Form 10-KSB and in any other documents the Company files from
time to time with the Securities and Exchange Commission, including any future
Annual Reports on Form 10-KSB and Quarterly Reports on Form 10-QSB.
-2-
Overview
--------
Innofone.com Inc. currently operates out of the offices of its subsidiary,
DMD, at 4390 Paletta Court, Burlington, Ontario, Canada.
Revenues
--------
Revenues for the quarter ended March 31, 2002 decreased to $112,438 from
$291,351 for the quarter ended March 31, 2001. The revenue decrease is due
mostly to the reduction in current cash flow due to the costs related to the RTO
and the events of September 11, 2001. The Company's working capital was greatly
reduced due to the unexpectedly high costs related to the RTO. Because of the
reduction in working capital, DMD's operating results have suffered. Management
believes that revenues will increase if working capital can be adequately
replenished.
Cost of Sales and Gross Margin
------------------------------
As a result of our decreased revenues, our cost of sales decreased to
$75,963 for the quarter end March 31t, 2002, as compared to $189,501 for the
quarter ended March 31, 2001.
Our gross profit decreased to $36,475 for the quarter ended March 31, 2002,
from a gross profit of $101,849 for the quarter ended March 31, 2002. Our gross
profit as a percentage of sales for the quarter ended March 31 decreased
slightly from 35.0% in 2001 to 32.4% in 2002.
Selling, General and Administrative Expenses
--------------------------------------------
Our selling, general and administrative expenses for the quarter ended
March 31, 2002 decreased to $72,494, as compared to $101,849 for the quarter
ended March 31, 2001. Costs have been reduced due to the reduction in sales.
Amortization
------------
Amortization expense consists of the depreciation of our capital assets.
Amortization for the quarter ended March 31 remained relatively unchanged at
$8,136 for 2002, versus $8,958 for 2001.
Interest on Long-Term Debt and Bank Charges
-------------------------------------------
Interest on long-term debt and bank charges includes interest on long-term
debt, interest charged on overdue accounts payable, and bank charges. Interest
on Long Term Debt and Bank Charges dropped for the quarter ended March 31, 2002
to $5,274, versus $6,148 for the quarter ended March 31, 2001. This was due to
the reduction in bank borrowing.
-3-
Net Profit
----------
Due to a write-back of debt payable to former Company officers and
directors, our net profit increased to $264,436 for the quarter ended March 31,
2002, as compared to $26,875 for the quarter ended March 31, 2001. This report
of profit is not through regular operations, and has been noted as "other
income" as disclosed in Note 5 to the Company's financial statements for the
March 31, 2002 quarter, attached.
Liquidity and Capital Resources
-------------------------------
Since our inception, we have financed our operations primarily through
retained earnings. All expenses relating to the RTO in Q1, Q2, and Q3 of the
current fiscal year (ending June 30, 2002) were paid out through current
operations and cash flow. During the quarter ended March 31, 2002, the Company
spent $6,005, and a total of $120,326 for the nine months ended March 31, 2002,
in professional and legal fees relating to the RTO.
Management has been actively seeking to refinance the Company, but has not
been able to do so. Management believes that the Company will not be able to
refinance itself until the holders of convertible notes payable for $150,000 and
$500,000 convert their debt into shares of the Company's capital stock pursuant
to the terms of those notes. Both parties are being represented by a former
director of the Company. An agreement exists to execute the conversion on or
about October 12, 2002. Management believes that the liquidity of the Company
has been adversely impacted due to this issue.
Litigation
----------
The Business Development Bank of Canada named DMD as a defendant in an
action brought in the Ontario Provincial Court for approximately $50,000
(Canadian dollars). The claim is over disputed consulting fees, and management
has filed a statement of defense for DMD in this action. Innofone.com, Inc. was
not named in this action.
DMD was named as co-defendant in an action brought in the Ontario
Provincial Court by Unique Restorations Ltd. for approximately $300,000
(Canadian dollars). The claim relates to a financing arrangement with an Alberta
company that did not mature. DMD has denied liability, and has filed a statement
of defense. Management is considering filing a counter-suit on behalf of DMD
against the plaintiff and a co-defendant. Innofone.com, Inc. was not named in
this action.
-4-
Innofone.com, Inc. defaulted on a negotiated settlement for $10,000 of a
$22,000 debt, incurred in 1999, with Global Financial PressLtd.'s bankruptcy
trustees. The Company is negotiating a new settlement for $12,500, and as of the
date of this report, has placed $10,000 in escrow in order to clear this
account.
Balance Sheet Liabilities
-------------------------
Management is actively seeking to have all outstanding convertible debt
converted into Company common stock. E-Phone and the holder of a $150,000 note
payable agreed to convert their outstanding debt upon completion of the RTO. To
date, neither party has converted its debt, and Management is actively
negotiating with the parties to have them converted as agreed.
Subsequent events
-----------------
The Company received a purchase order, dated April 28, 2002, from a
Belgian-based company for the purchase of approximately $200,000 in computer
equipment. The Company is having difficulty finding trade financing with which
to complete this transaction.
-5-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
INNOFONE.COM, INC.
--------------------------------
(Registrant)
Date May 13, 2002 /s/ Sumit Majumdar
------------------- --------------------------------
(Signature)*
Sumit Majumdar, President
Date
------------------- --------------------------------
(Signature)*
*Print the name and title of each signing officer under his signature.
- 6 -