UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 0-24408
FONEFRIEND, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0611753
(State of Incorporation) (I.R.S. Employer ID Number)
14545 Friar Street, Suite 103
Van Nuys, CA 91411
(Address of Principal Executive Offices)
(818) 376-1616
(Registrant's Telephone Number, Including Area Code)
2722 Loker Avenue West, Suite G
Carlsbad, CA 92008
(Former Name or Former Address, if changed since last Report)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
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 /X/ No / /
As of February 12, 2004, there were 19,014,444 shares of Common Stock
outstanding and no shares of preferred stock outstanding.
FONEFRIEND, INC.
INDEX
PART I - FINANCIAL INFORMATION
I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at December 31, 2003 and September 30, 2003 3
Statements of Operations for the three month periods
ended December 31, 2003 and 2002, and nine months
ended December 31, 2003 and 2002 4
Statements of Cash Flows for the three month periods
ended December 31, 2003 and 2002, and nine months
ended December 31, 2003 and 2002 6
Statements of Stockholders' Equity for the three month period
ended December 31, 2003 and from November 21, 2002 to
December 31, 2003 7
Notes to Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 13
Item 3. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
FONEFRIEND, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(Amounts in Dollars)
ASSETS
December 31, September 30,
2003 2003
------------ ------------
Current Assets
Cash in banks and on hand $ 11,853 $ 10,699
Inventory-equipment $ 16,400 $ 16,400
Stock subscription receivable $ 2,500 $ 1,390
Current portion of prepaid expenses $ 45,775 $ 99,400
------------ ------------
Total current assets $ 76,528 $ 127,889
------------ ------------
Furniture & equipment, net of depreciation Note 3 $ 13,029 $ 13,892
------------ ------------
Other Assets
Non-current prepaid expenses and deposits $ 13,597 $ 13,597
Capitalized development costs $ 694,863 $ 694,863
Technology rights, FoneFriend license $ 300,000 $ 300,000
Stock in FoneFriend Systems, Inc. $ 150,000 $ 150,000
Organizational costs, net of amortization Note 3 $ 90 $ 100
------------ ------------
Total other assets $ 1,158,550 $ 1,158,560
------------ ------------
TOTAL ASSETS $ 1,248,107 $ 1,300,341
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 23,833 $ 31,919
Accrued expenses payable $ 176,500 $ 163,500
Litigation settlement payable $ 10,000 $ 20,000
Loans from officers and others $ 126,300 $ 57,188
Payroll taxes payable $ 5,416 $ 5,416
------------ ------------
Total current liabilities $ 342,049 $ 278,023
------------ ------------
Loans payable, non-current $ 25,000 $ 25,000
------------ ------------
TOTAL LIABILITIES $ 367,049 $ 303,023
------------ ------------
Stockholders' Equity Note 4
Preferred stock, $.001 par value, authorized
50,000,000 shares, issued and outstanding
820,361 shares $ 820 $ 820
Common stock, $.001 par value, authorized
200,000,000 shares, issued and outstanding,
9,556,000 at December 31, 2003 and 9,386,000
at September 30, 2003 $ 9,556 $ 9,386
Additional paid in capital $ 3,887,533 $ 3,868,203
Operating deficit $ (2,882,091) $ (2,882,091)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 997,318 $ 997,318
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,300,341 $ 1,300,341
------------ ------------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
STATEMENTS OF OPERATIONS
(Amounts in Dollars)
Nine Months Ended
-----------------
December 31, December 31,
2003 2002
------------ ------------
Revenue $ 0 $ 0
------------ ------------
Expenses
Advertising $ 200 $ 16,400
Automobile $ 0 $ 7,451
Commissions related to fund raising activities $ 0 $ 24,040
Consulting fees $ 412,711 $ 225,792
Depreciation and amortization $ 2,619 $ 3,839
Insurance $ 1,963 $ 5,573
Legal and accounting fees $ 24,398 $ 52,356
Office supplies $ 2,771 $ 8,130
Officer/stockholder payments $ 20,060 $ 39,995
Postage $ 1,792 $ 6,738
Rent $ 26,881 $ 19,560
Salaries & payroll $ 0 $ 127,283
Telephone $ 10,375 $ 15,292
Travel $ 9,764 $ 16,064
Other $ 12,566 $ 42,002
------------ ------------
Total expenses $ 526,100 $ 610,515
------------ ------------
Loss from development stage operations $ (526,100) $ (610,515)
------------ ------------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
STATEMENTS OF OPERATIONS
(Amounts in Dollars)
Three Months Ended
------------------
December 31, December 31,
2003 2002
------------ ------------
Revenue $ 0 $ 0
------------ ------------
Expenses
Advertising $ 0 $ 894
Automobile $ 624 $ 234
Consulting fees $ 115,607 $ 77,091
Depreciation and amortization $ 873 $ 3,182
Insurance $ 55 $ 1,632
Officer/stockholder payments $ 0 $ 16,533
Office supplies $ 620 $ 2,654
Postage $ 232 $ 215
Professional fees, legal & accounting $ 610 $ 34,243
Rent $ 8,737 $ 3,000
Salaries & payroll $ 0 $ 39,804
Telephone $ 2,301 $ 2,343
Travel $ 3,200 $ 1,501
Other $ 1,901 $ 6,148
------------ ------------
Total expenses $ 134,760 $ 189,474
------------ ------------
Loss from development stage operations $ (134,760) $ (189,474)
------------ ------------
See Accompanying Notes To Financial Statements
FONEFRIEND, INC.
STATEMENTS OF CASH FLOWS
(Amounts in Dollars)
Nine Months Ended Three Months Ended
----------------------- -----------------------
December December
31, 2003 31, 2002 31, 2003 31, 2002
--------- --------- --------- ---------
Operating Activities
Loss from development stage
operations $(526,100) $(610,515) $(134,760) $(189,474)
Adjustments to loss from
development stage operations:
Prepaid expenses $ 156,375 $(195,000) $ 53,625 $(192,000)
Accounts payable $ 19,531 $ 4,303 $ (8,086) $ 3,500
Accrued expenses $ 176,500 $ 0 $ 13,000 $ 0
Litigation settlement payable $ 10,000 $ 0 $( 10,000) $ 0
Deposits $ 0 $ 41,264 $ 0 $ (316)
Depreciation and amortization $ 2,619 $ 5,868 $ 873 $ 3,182
Other $ (16,205) $ (30,415) $ (1,110) $ 7
--------- --------- --------- ---------
Net cash provided (used) by
development stage operations $(177,280) $(867,035) $( 86,458) $(375,101)
--------- --------- --------- ---------
Increase in capitalized development
Costs $ 0 $(188,000) $ 0 $ (15,000)
--------- --------- --------- ---------
Financing Activities
Issuance of common stock $ 98,500 $ 262,689 $ 18,500 $ 247,699
Issuance of preferred stock $ 0 $ 820 $ 0 $ 820
Loans from officers and others $ 70,412 $ 102,133 $ 69,112 $ 102,133
--------- --------- --------- ---------
Net cash provided by financing
activities $ 168,912 $ 365,642 $ 88,612 $ 350,652
--------- --------- --------- ---------
Net cash increase (decrease)
for the period $ (8,368) $(689,393) $ 1,154 $ (39,449)
Cash at beginning of period $ 20,221 $ 685,359 $ 10,699 $ 35,415
--------- --------- --------- ---------
Cash at end of period $ 11,853 $ (4,034) $ 11,853 $ (4,034)
--------- --------- --------- ---------
See Accompanying Notes To Financial Statements
FONEFRIEND, INC.
STATEMENTS OF STOCKHOLDERS'EQUITY
(AMOUNTS IN DOLLARS)
Additional Accumu- Total
No. Shares Par Paid-In lated Stockholders'
Outstanding Value Capital Deficit Equity
----------- ------ ---------- ----------- -------------
Common shares
-------------
Beginning
balance, July
1, 2002 8,956,361 $8,956 $3,069,182 $(1,036,686) $ 2,041,452
Loss from
operations $ (211,316) $ (211,316)
Common shares
issued September
30, 2002 85,500 $ 86 $ 427,415 $ 427,501
----------- ------ ---------- ----------- -------------
Balance,
September
30, 2002 9,041,861 $9,042 $3,496,597 $(1,248,002) $ 2,257,637
Loss from
Operations to
November
21, 2002 $ (118,281) $ (118,281)
Common shares
cancelled (300,000) $ (300) $ (300)
Common shares
issued November
21, 2002 58,139 $ 58 $ 29,942 $ $ 30,000
----------- ------ ---------- ----------- -------------
Total common
shareholders'
equity pre-
merger, November
21, 2002 8,800,000 $8,800 $3,526,539 $(1,366,283) $ 2,169,056
----------- ------ ---------- ----------- -------------
MERGER OF FONEFRIEND, INC. (NEVADA CORPORATION) ON NOVEMBER
21, 2002 WITH AND INTO FONEFRIEND, INC. (DELAWARE CORPORATION)
--------------------------------------------------------------
Exchange of
Nevada shares
for Delaware
shares 2,200,000 $2,200
Issue new
Delaware
Shares:
To: management 4,600,000 $4,600
FONEFRIEND, INC.
STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Additional Accumu- Total
No. Shares Par Paid-In lated Stockholders'
Outstanding Value Capital Deficit Equity
----------- ------ ---------- ----------- -------------
To: UBN Trust 423,000 $ 423
To: D. Johnston 423,000 $ 423
Transfer par value
to paid-in capital $(1,154) $ 1,154
Issue common
shares to
consultants,
December 2002 825,000 $ 825 $ 213,675 $ 214,500
Loss from
operations
from November
21, 2002 to
March 31, 2003 $(1,124,468) $ (1,124,468)
Total common
shareholders'
equity, March
31, 2003
Delaware
Corporation 8,471,000 $8,471 $3,741,368 $(2,490,751) $ 1,259,088
Issue common
shares to
consultants,
June 2003 455,000 $ 455 $ 58,695 $ 59,150
Loss from
operations
from April 1,
2003 to June
30, 2003 $ (75,457) $ (75,457)
----------- -------------
Total common
shareholders'
equity, June
30, 2003
Delaware
Corporation 8,926,000 $8,926 $3,800,063 $(2,566,208) $ 1,242,781
----------- ------ ---------- ----------- -------------
Issue common
Shares 460,000 $ 460 $ 69,140 $ (315,883) $ 246,283
FONEFRIEND, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
Additional Accumu- Total
No. Shares Par Paid-In lated Stockholders'
Outstanding Value Capital Deficit Equity
----------- ------ ---------- ----------- -------------
Total common
shareholders'
equity, September
30, 2003
Delaware
Corporation 9,386,000 $9,386 $3,869,203 $(2,882,091) $ 996,498
----------- ------ ---------- ----------- -------------
Loss from
Operations $ (134,760) $ (134,760)
Issuance of
Common
Shares 170,000 $ 170 $ 18,330 $ 0 $ 18,500
----------- ------ ---------- ----------- -------------
Total common
Shareholder's
Equity, December
31, 2003 Delaware
Corporation 9,556,000 $9,556 $3,887,533 $(3,016,851) $ 880,238
----------- ------ ---------- ----------- -------------
Preferred shares
----------------
Preferred shares
issued November
21, 2002, Nevada 820,361 $ 820 $ 820
Cancel Nevada
preferred shares,
November 21,
2002 (820,361) $ (820) $ (820)
----------- ------ -------------
Issue Delaware
preferred shares
for Nevada
preferred shares,
November 21,
2002 (820,361) $ (820) $ (820)
----------- ------ -------------
Total stockholders'
equity, December
31, 2003 $ 997,318
-------------
See Accompanying Notes to Financial Statements
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2003
NOTE 1 - DESCRIPTION OF BUSINESS
A. Background
FoneFriend, Inc. ("FoneFriend" or the "Company") was incorporated on April 24,
2001, under the laws of the State of Nevada, and on November 21, 2002, was
merged with and into FoneFriend, Inc., a Delaware corporation. The Company
maintains a corporate office at 14545 Friar Street, Suite 103, Van Nuys,
California 91411. The Company's telephone number is: (818) 376-1616.
The Company is a development stage enterprise and has not generated any revenue
during its brief history. The primary business of the Company is to market an
Internet telephony device and related services to customers worldwide, called
the "FoneFriend". The underlying technology of FoneFriend has been licensed by
the Company from FoneFriend Systems, Inc. and will enable the Company's
subscribers to make and receive unlimited long distance telephone calls over the
Internet, using only their standard residential telephone set (without the need
for a computer), for a low monthly fee of about $10.00. Due to the small cost of
transmitting calls over the Internet, the Company anticipates that it will
realize significant profit margins, well in excess of the traditional
telecommunications industry.
B. Basis of Presentation
The accompanying financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") which contemplates
continuation of the Company as a going concern. Management is attempting to
raise additional capital.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Fiscal Year
The Company's fiscal year is March 31 (after the above-described merger of
FoneFriend, Inc. of Nevada with and into FoneFriend, Inc. of Delaware). The
accompanying unaudited financial statements are for December 31, 2002 and 2003,
and the corresponding three month and nine month periods then ended.
B. Significant Estimates
In the process of preparing its financial statements in accordance with GAAP,
the Company estimates the carrying value of certain assets and liabilities that
are subjective in nature. The primary estimates included in the Company's
financial statements include capitalized development costs and the ongoing value
of its purchased technology license.
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
C. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
maturity dates of three months or less at the date of purchase. These items are
carried at cost, which approximates fair value due to their short-term maturity
dates.
D. Prepaid Expenses and other Current Assets
The Company has cash outlays in advance of expense recognition for items such as
rent, interest, financing fees, and service contracts. All amounts identified as
prepaid expenses that will be utilized during the next twelve months are
identified as current assets, while any portion that will not be utilized during
the next twelve months are classified as non-current assets.
E. Furniture and Equipment
Furniture and equipment are carried at cost and depreciated over the estimated
useful lives of the individual assets.
F. Capitalized Development Costs
Capitalized development costs consist of expenditures made by the Company to
improve the product and develop marketing channels for the product, and which
are deemed by management to have future value to the Company. Such capitalized
development costs will be amortized over the estimated useful life once product
sales begin.
G. Technology Rights, FoneFriend License
The Company purchased a license to use the FoneFriend technology for a period of
ten years from FoneFriend Systems, Inc. under a license agreement dated April
30, 2001. This license agreement allows the Company to manufacture, market and
utilize a proprietary technology referred to as FoneFriend. During the
development stage operations, the company is carrying the asset at cost and will
begin amortization over the remaining life of the license when product sales
begin. The remaining value to the company will be reviewed quarterly and if
management determines that impairment of the asset has occurred, the carrying
value will be adjusted accordingly.
H. Stock in FoneFriend Systems, Inc.
The Company purchased stock in FoneFriend Systems, Inc. as a long-term
investment. Such investment is carried at cost and will be evaluated
periodically by management to determine whether impairment has occurred. Should
management determine that the value has been impaired, the carrying value will
be adjusted accordingly.
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 3 - DEPRECIATION AND AMORTIZATION
The Company's management has estimated the useful lives of furniture, equipment
and certain organization costs. The following tables show the gross asset
amounts and the accumulated depreciation and amortization:
A. Furniture and Equipment
Nine months ended December
--------------------------
31, 2003 31, 2002
-------- --------
Cost $ 18,745 $ 15,840
Less accumulated depreciation $ (5,716) $ (4,933)
-------- --------
Net value $ 13,029 $ 10,907
-------- --------
B. Organizational Costs
Cost $ 195 $ 195
Less accumulated depreciation $ (105) $ (65)
-------- --------
Net value $ 100 $ 130
-------- --------
NOTE 4 - MERGER AND CAPITAL STOCK
The merger of FoneFriend, Inc. of Nevada with and into FoneFriend, Inc. of
Delaware was consummated on November 21, 2002 wherein the assets of FoneFriend,
Inc. of Nevada were acquired by Universal Broadband Networks, Inc. ("UBN") in a
tax-free reorganization pursuant to IRC 368 (the "Merger"). The Merger was
effectuated as a "C" type reorganization whereby UBN issued stock in exchange
for all of the assets FoneFriend, Inc. of Nevada, after which that corporation
was dissolved. UBN was the surviving corporation and changed its name to
FoneFriend, Inc. (a Delaware corporation) immediately subsequent to the Merger.
Pursuant to the express terms of the Fourth Amended Plan of Reorganization, as
approved by the U.S. Bankruptcy court (the "Plan"), the Merger was accomplished
as follows:
1. All of UBN's issued and outstanding shares of capital stock were cancelled
and extinguished and the stockholders of UBN prior to the Merger have no
further interest or rights in UBN.
2. UBN issued 2,200,000 shares of newly created common stock in favor of
FoneFriend, Inc. (Nevada corporation) in exchange for all of the Nevada
corporation's assets and 115,750 of newly created common stock in favor of
a Liquidating Trust for the benefit of UBN's creditors. As a result, the
merged entity had a total of 2,315,750 shares of
FONEFRIEND, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
newly created common stock issued and outstanding, of which former
shareholders of the dissolved Nevada corporation owned 95%, and J. Michael
Issa, Esq., as Trustee of the Liquidating Trust (which was created under
the Plan), owned 5%. Additionally, the Liquidating Trust was granted a
conditional put option under the Plan whereby it could sell its shares back
to the Company for up to $3 Million dollars, contingent upon the Company
having sufficient available capital surplus at the time of such
transaction. This option was valid for a period of one year after trading
commenced in the Company's securities.
3. The issuance of stock pursuant to the Plan, as filed within the U.S.
Bankruptcy Court, was ordered by the Court to be exempt from all applicable
Federal, State and local securities law, pursuant to 11 U.S.C. ss.1145 (a).
4. The dissolved Nevada corporation's management distributed the newly issued
2,200,000 shares of FoneFriend, Inc. (Delaware corporation) to its former
shareholders, on a pro-rata basis. Each of such former shareholders
received one share of stock in FoneFriend, Inc. (Delaware corporation) for
every four shares held in the dissolved Nevada corporation.
5. Immediately subsequent to the Merger, the Company authorized the issuance
of 820,361 shares of a newly created Series A Preferred Stock (each share
of which is convertible into one share of common stock) to be issued to
shareholders of preferred stock in the dissolved Nevada corporation prior
to the Merger.
6. The Company then issued 4,600,000 shares of common stock to various
management personnel and consultants in order to hire and/or retain their
services. The Company also issued 423,000 shares of common stock to Dennis
H. Johnston, Esq. as compensation for his services in connection with the
Merger. Additionally, the Company issued 307,250 shares of common stock to
the Liquidating Trust so as to be in compliance with the Anti-Dilution
Protection provisions of the Plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements and related footnotes included elsewhere
herein.
Statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Examples of
such forward looking statements include the Company's expectations regarding its
intended plan of operation, the potential sale of its product, the Company's
planned financing of this venture and the sufficiency of the Company's available
liquidity for working capital, the Company's belief that its technology-based
business will grow and result in profitability, that it is positioned to take
advantage of new opportunities, and that it will focus on strengthening and
growing its business and commercializing innovative technologies and services.
Actual results may differ materially from those stated or implied in the forward
looking statements. Further, certain forward looking statements are based upon
assumptions of future events which may not prove to be accurate and are subject
to risks and uncertainties that could cause actual results to differ materially
from those set forth or implied by forward looking statements. These risks and
uncertainties include, but are not limited to, those referred to in the
Company's annual report on Form 10-KSB, for the fiscal year ended March 31,
2003, including the Company's entry into a new commercial business, its ability
to access the capital markets and obtain working capital, risks associated with
technological changes in the market for telecommunications and voice
transmission over the Internet, risks of competition in the emerging internet
telephony industry, and other risks described in the Company's Securities and
Exchange Commission filings.
OVERVIEW
The Company is a development stage enterprise and has not generated any
revenue during its history. The primary business of the Company is to market an
Internet telephony device and related services to customers worldwide, called
the "FoneFriend". The underlying technology of FoneFriend has been licensed by
the Company from FoneFriend Systems, Inc. and will enable the Company's
subscribers to make and receive unlimited long distance telephone calls over the
Internet, using only their standard residential telephone set (without the need
for a computer), for a low monthly fee of about $10.00 or less. Due to the small
cost of transmitting calls over the Internet, the Company anticipates that it
will realize significant profit margins, in excess of the traditional
telecommunications industry.
The Company has experienced significant losses during development stage
operations and has yet to realize any revenues from its operations.
During the forth quarter of fiscal year 2003, management of the Company
evaluated the future benefit of the Company's capitalized development costs and
determined that it was prudent to write down the value of that asset to its
estimated fair value.
During the first three quarters of the current fiscal year, the Company's
management focused its efforts primarily on reducing its overhead, to conserve
financial resources, and the hiring of consultants that would help further its
quest for financing, as well as assist in implementing the Company's intended
plan of business and preparing the technical infrastructure and marketing
support necessary for its operational stage.
To date, the Company has established the foundation necessary upon which it
can build a next generation telecommunications company, utilizing the Internet
and VoIP technology, that will carry customer calls at rates which are
dramatically lower than traditional international long distance carriers with
excellent quality.
RESULTS OF OPERATIONS
The Company had no revenue during the three months ended December 31, 2003,
or during its entire history.
Expenses of the Company for the third quarter of the current fiscal year,
ending December 31, 2003, decreased to $134,760 from $315,883 for the three
month period ending September 30, 2003. The decrease was due primarily to a
reduction in consulting fees as the Company has dramatically curtailed
operations until financing can be obtained. Current expenses consist primarily
of consultant fees, officer salaries, overhead and other general expenses
related to continuing operations, seeking financing and preparing to bring the
Company's product to market.
In November of 2003, the Company entered into a strategic relationship with
Winsonic Holdings, Ltd., whereby Winsonic agreed to co-locate and house the
Company's global network servers and gateway equipment at the Level 3 facilities
rented by Winsonic. This provides the Company with access to a state-of-the-art,
fiber optic network that is expected to greatly improve the voice quality and
reliability of service of the FoneFriend product. In a related agreement, the
Company hired the services of Winston Johnson, president of Winsonic, to serve
as the Company's Chief Technology Officer. This agreement provides for the
issuance of up to 350,000 shares of common stock in exchange for services to be
provided by Mr. Johnson over a 12 month period.
During the third quarter of fiscal 2004, the Company issued 170,000 shares
of stock to two consultants for services provided to the Company during the
quarter. The consulting contract for one of the consultants was cancelled due to
lack of performance or results.
Also, on November 22, 2003, the Company's board of directors authorized the
issuance of 2,443,083 shares of common stock as a dividend to its preferred
stockholders and 4,000,000 shares of common stock to current management, in
settlement of its breach of contract with these individuals. In addition,
814,361 shares of the Company's Series A Convertible, Preferred Stock was
automatically converted into a like number of shares of common stock as of
November 22, 2003. However, the Company's transfer agent was not instructed to
issue any of the foregoing shares until January 12, 2004.
In December, 2003, the Company entered into a preliminary agreement for up
to $5 Million in equity financing with an unaffiliated investor. In connection
with this agreement, the investor advanced the Company $100,000 and received a
one year, convertible note with interest at 15% per annum. The note is
convertible at a 25% discount to the market price of the Company's common stock
at the time of conversion. Also, in connection with this transaction, the
Company issued 200,000 warrants to purchase the Company's common stock at $0.20
per share. As of December 31, 2003, the Company had not entered into any final
agreement for the equity financing.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company anticipates that it will market its product through direct
marketing to segments of the population that use significant long distance
service to foreign countries.
The initial target markets will be areas in which the population includes
significant European, Hispanic and Asian segments. These segments of the
population typically spend substantial time on international long distance calls
to their native countries.
Other products may be developed that compete with the Company's product,
thereby reducing future potential revenue.
Further, since the Company's product requires significant lead time in the
manufacturing process, any delay in filling orders could affect customer
satisfaction.
THE LOSS OF OUR KEY PERSONNEL COULD HARM OUR BUSINESS.
The loss of the services of the Company's CEO and other key consultants or
employees could have a material adverse effect on our operations, as hiring
replacements would most likely involve the payment of salaries, for which we do
not currently have the financial resources. Our inability to hire suitable
replacements could have a material adverse effect on our ability to continue
operating.
THE COMPANY IS IN BREACH OF KEY EMPLOYMENT AND CONSULTING AGREEMENTS.
For the last calendar year, the Company has failed to make the required
payments of $7,500 per month to Jackelyn Giroux, the President and Director,
under her employment agreement. There is no guarantee that she will continue to
work without being paid. However, on November 22, 2003, the Company's board of
directors agreed to amend her Employment Agreement and issued her 1,000,000
shares of common stock and promised to pay back salary upon receipt of
financing. Additionally, the Company agreed to an anti-dilution clause to
maintain her current equity ownership in the Company. The Company believes that
the loss of Ms. Giroux as President would have a material adverse effect on the
Company's ability to continue operating.
For the last calendar year, the Company has failed to make the required
payments of $10,000 a month to Gary A. Rasmussen, a Consultant and founder,
under the terms of his Consulting Agreement. There is no guarantee that he will
continue to work without being paid. However, on November 22, 2003, the
Company's board of directors agreed to amend his Consulting agreement and issued
him 3,000,000 shares of common stock and promised to pay past due amounts under
his agreement upon receipt of financing. Additionally, the Company agreed to an
anti-dilution clause to maintain his equity ownership in the Company at 25%. The
Company believes that the loss of Mr. Rasmussen would have a material adverse
effect on the Company's ability to continue operating.
ADDITIONAL RISK FACTORS ARE SET FORTH IN THE COMPANY'S FORM 10KSB, AS FILED ON
JULY 16, 2003, FOR THE FISCAL YEAR ENDED MARCH 31, 2003, WHICH ARE HEREBY
ADOPTED AND INCORPORATED BY REFERENCE.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, the Company had limited working capital and the
Company had no material unused sources of liquid assets. Also at December 31,
2003, the Company had no existing credit facility. As a result, the Company is
delinquent in certain general and administrative expenses and has a shortage of
cash to pay its pending accounts payable.
A part of the Company's strategy is to seek external financing to grow its
commercial business. Management is presently negotiating with several qualified
investment sources in order to obtain the necessary financing required to
implement its intended plan of business. The Company's operating capital for the
current quarter was provided primarily through a loan from an unaffiliated third
party and accrual of officers' salaries and consulting fees.
While the Company intends to generate working capital from its product and
related services in the future, we expect our minimum capital needs during the
current calendar year to be approximately $3 Million. This amount will primarily
be used for manufacturing, implementing a large scale network system, marketing
programs and for general working capital. However, the Company may not be able
to obtain this required financing, or such financing may not be available on
acceptable terms. Due to the Company's historical operating losses, there can be
no assurance that projected capital requirements will not substantially exceed
current and future capital resources. This could result in a significant and
material adverse effect on our ability to continue operating.
Additional working capital needs of the Company may require issuance of
equity securities, either on a public or private basis. Such issuances would, if
consummated, affect the ongoing capital structure of the Company and may result
in substantial dilution to shareholders. If additional funds are raised through
the issuance of equity, convertible debt, or similar securities of the Company,
the percentage of ownership of the Company's current shareholders will be
reduced, and such new securities may have rights or preferences senior to those
of the common stock held be current shareholders. To this extent, the Company
has recently entered into a preliminary agreement with an unaffiliated third
party to provide up to $3 Million in an equity line of credit. This agreement
provides the Company with a series of put options whereby the third party will
purchase shares of the Company's common stock at a discount to the current bid
price. In connection with this preliminary agreement, the Company was obligated
to cover legal expenses necessary to prepare final documents and has issued
12,500 shares in consideration of said legal expenses This financing arrangement
is expected to result in substantial dilution. In the event that alternative
funding sources are not available as and when needed by the Company, and this
current equity financing is not fully realized, it could have a severe adverse
impact on the combined business and results of operations of the Company and
could result in the Company being unable to continue as a going concern.
Management is continually monitoring and evaluating the financing sources
available to achieve the Company's goals.
Due to the losses sustained by the Company and its lack of working capital,
the Company's ability to remain a going concern depends upon its ability to
generate sufficient cash flow to meet its obligations and to obtain additional
financing as may be required.
As of December 31, 2003, management estimated that the Company's cash
resources were not enough to meet the Company's estimated funding requirements
for the remainder of the current fiscal year ending March 31, 2004.
FORWARD LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS: "SAFE HARBOR"
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
The foregoing discussion should be read in conjunction with our financial
statements and the notes thereto included elsewhere in this Form 10-QSB. This
Form 10-QSB contains forward-looking statements regarding the plans and
objectives of management for future operations. This information may involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
we cannot assure you that these projections included in these forward-looking
statements will come to pass. Our actual results could differ materially from
those expressed or implied by the forward-looking statements as a result of
various factors.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), within the 90 days prior to the filing date of this report, the
Company carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. This evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Company's President, who serves as the
principal operating officer, and its Chief Financial Officer, who has served as
the principal financial and accounting officer. Based upon that evaluation, the
Company's President and CFO have concluded that the Company's disclosure
controls and procedures are effective in alerting them to material information
regarding the Company's financial statement and disclosure obligation in order
to allow the Company to meet its reporting requirements under the Exchange Act
in a timely manner.
(b) Changes in internal control.
There have been no changes in internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Company's quarterly report for the period
ending September 30, 2003, the Company received notice of a lawsuit commenced
against its predecessor company, FoneFriend, Inc., a Nevada corporation, seeking
past due legal fees of approximately $21,000. The assets of this predecessor
company were acquired by the Company in a stock for assets purchase transaction
and FoneFriend of Nevada was dissolved. Should the Company become a party to
this litigation, it believes it has affirmative defenses to the amount of such
charges and intends to defend against any such action should it be commenced.
Also previously reported, the Company has received a threat of litigation
from the bankrupt estate of Allegiance Telecom, seeking approximately $5,000.
Should the Company become a party to this litigation, it believes it has
affirmative defenses to such charges and intends to defend against any such
action should it be commenced.
In January, 2003, the Company entered into a settlement agreement with a
former officer and director of FoneFriend, Inc., a Nevada corporation. As
partial consideration under the settlement agreement, the Company was required
to pay plaintiff the sum of $20,000 on December 1, 2003. The plaintiff accepted
a payment of $10,000 from the Company in December of 2003 and agreed to accept a
final payment of $12,500 on January 4, 2004. The Company has not yet made the
final payment to plaintiff. In accordance with the terms of the settlement, the
plaintiff may, upon the Court's order, file with the Court a "Stipulation for
Entry of Judgment." The plaintiff has not yet moved to file or enforce the
judgment.
ITEM 2. CHANGES IN SECURITIES
During the three months ended December 31, 2003, the Company issued a total
of 170,000 shares of common stock to consultants for services provided to the
Company. Additionally, the Company issued 200,000 warrants to purchase the
Company's common stock at $0.20 per share in connection with a $100,000 loan
from an unaffiliated third party. The loan is evidenced by a promissory note
which is convertible into the Company's stock at a discount to the market price
at the time of conversion.
Subsequent to December 31, 2003, in accordance with resolutions adopted by
the Board of Directors during the current reporting period, the Company
instructed its transfer agent to: (i) cancel 76,500 shares of common stock and
6,000 shares of Series A convertible preferred stock ("Preferred Stock") that
were issued either in error or without proper consideration; (ii) issue
4,015,000 shares of common stock to officers and a consultant in order to retain
their continued services and to cure any default under their agreements; (iii)
issue 2,443,083 shares of common stock as a special, one-time dividend on the
Preferred Stock; (iv) issue 814,361 shares of common stock in exchange for a
like amount of Preferred Stock.
Also, subsequent to December 31, 2003, the Company signed a term sheet for
financing with an unaffiliated third party entity, which is subject to the
execution of definitive agreements, pursuant to which it will receive up to $3
Million in an equity line of credit to be made available over a period that
could extend for the next thirty-six months. In connection with the signing of
the terms sheet, the Company issued 12,500 shares for legal fees relating to the
preparation of the definitive agreements. Further, in anticipation of this
financing, the Company entered into several consulting agreements whereby it
issued an additional 2,250,000 shares of common stock in exchange for financial,
legal, marketing, technical support and other services in furtherance of its
intended plan of operation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------- ------------------
10.1 2002 Non-Employee Director And Consultant Retainer Stock
Plan And Employee Stock Incentive Plan. Incorporated by
Reference from Form S-8, filed on December 27, 2002.
10.2 Employment Agreement executed by the Registrant and
Jackelyn Giroux.
10.3 Consulting Agreement executed by the Registrant and Gary A.
Rasmussen.
10.4 Indemnification Agreement executed by the Registrant and
Jackelyn Giroux.
10.5 Indemnification Agreement executed by the Registrant and
Edward N. Jones.
10.6 Indemnification Agreement executed by the Registrant and
Dennis H. Johnston.
10.7 Indemnification Agreement executed by the Registrant and
Gary A. Rasmussen.
10.8 Indemnification Agreement executed by the Registrant and
Francois Van Der Hoeven.
10.9 Technology License Agreement executed by the Registrant and
FoneFriend Systems, Inc.
17.1 Resignation of Director (Francois Van Der Hoeven)
31.1* Chief Executive Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2* Chief Financial Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
99.1* Chief Executive Officer certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2* Chief Financial Officer certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
_______________
* Filed herewith
(b) No reports on Form 8-K were filed during the three months ended December
31, 2003.
***SIGNATURE PAGE FOLLOWS***
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized by FoneFriend, Inc. (the "Registrant")
By: /S/ Jackelyn Giroux
---------------------
Jackelyn Giroux, President, Director
By: /S/ Edward N. Jones
----------------------
Edward N. Jones, Chief Financial Officer
Dated: March 26, 2004