10-Q 1 form10q2.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2002. or [ ] Transition report under Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the transition period from to Commission File Number: 0-27387 VOICE MOBILITY INTERNATIONAL, INC. ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 33-0777819 ------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180-13777 Commerce Parkway, Richmond, British Columbia, Canada V6V 2X3 ---------------------------------------------------------------------- (Address of principal executive offices) (604) 482-0000 --------------------------- (Issuer's telephone number) (Not Applicable) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: 36,974,448 shares of Common stock and common stock equivalents as of August 14, 2002 VOICE MOBILITY INTERNATIONAL, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 INDEX PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) a) Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 b) Consolidated Statements of Operations - Three-Months Ended June 30, 2002 and 2001 and Six-Months Ended June 30, 2002 and 2001 c) Consolidated Statements of Cash Flows - Six-Months Ended June 30, 2002 and 2001 d) Notes to the Consolidated Financial Statements - June 30, 2002 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 99.1 Certification of Chief Executive Officer Exhibit 99.2 Certification of Chief Financial Officer PART I: FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS Voice Mobility International, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited - Expressed in U.S. Dollars) As at June 30, December 31, 2002 2001 $ $ ------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 414,757 1,732,200 Accounts receivable [net of allowance for doubtful debts: June 30, 2002 - $8,209; December 31, 2001 - $26,014] 847,290 222,268 Other receivables - 266,881 Notes receivable (Note 3) 222,500 232,500 Prepaid expenses 66,474 100,850 ------------------------------------------------------------------------------- Total current assets 1,551,021 2,554,699 Property and equipment [net of accumulated amortization: June 30, 2002 - $2,108,398; December 31, 2001 - $1,552,084] 1,282,333 1,780,935 ------------------------------------------------------------------------------- 2,833,354 4,335,634 =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current Accounts payable 307,578 445,936 Accrued liabilities 152,542 57,062 Employee related payables 84,880 182,154 Notes payable (Note 3) 30,000 205,000 Deferred revenue 819,487 158,584 Series A promissory notes payable (Note 4) 428,891 - ------------------------------------------------------------------------------- Total current liabilities 1,823,378 1,048,736 Promissory note payable (Note 5) 1,642,029 1,575,930 ------------------------------------------------------------------------------- Total liabilities 3,465,407 2,624,666 ------------------------------------------------------------------------------- Commitments and contingencies (Note 8) Stockholders' equity (deficiency) (Note 7) Common stock, $0.001 par value, authorized 100,000,000 28,811,282 outstanding [December 31, 2001 - 27,648,782] 28,812 27,649 Preferred stock, $0.001 par value, authorized 1,000,000 Series A Preferred stock issued and outstanding, 1 1 1 Series B Preferred stock issued and outstanding, 585,698 586 586 Additional paid-in capital 31,337,352 31,323,354 Accumulated deficit (31,901,767)(29,563,804) Other accumulated comprehensive income (97,037) (76,818) ------------------------------------------------------------------------------- Total stockholders' equity (deficiency) (623,053) 1,710,968 ------------------------------------------------------------------------------- 2,833,354 4,335,634 =============================================================================== See accompanying notes Voice Mobility International, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - Expressed in U.S. Dollars)
Three Months ended Six Months ended June 30 June 30 2002 2001 2002 2001 $ $ $ $ --------------------------------------------------------------------------------------------------------------------------- Sales 23,842 33,886 193,330 77,732 Cost of sales 130 4,823 14,440 8,258 --------------------------------------------------------------------------------------------------------------------------- Gross Profit 23,712 29,063 178,890 69,474 --------------------------------------------------------------------------------------------------------------------------- Operating expenses Sales and marketing 278,382 641,563 582,085 1,358,815 Research and development 263,007 1,441,404 594,923 2,674,135 General and administrative 667,473 1,053,672 1,213,016 1,915,191 --------------------------------------------------------------------------------------------------------------------------- 1,208,862 3,136,639 2,390,024 5,948,141 --------------------------------------------------------------------------------------------------------------------------- Loss from operations 1,185,150 3,107,576 2,211,134 5,878,667 Interest income (1,459) (5,415) (4,555) (17,569) Interest expense 21,092 163,545 41,198 164,705 (Gain) loss on embedded foreign currency derivative - (69,000) - 141,000 --------------------------------------------------------------------------------------------------------------------------- Net loss for the period 1,204,783 3,196,706 2,247,777 6,166,803 Foreign currency translation gains (losses) (19,742) 47,095 (20,219) (32,873) --------------------------------------------------------------------------------------------------------------------------- Comprehensive loss for the period 1,224,525 3,149,611 2,267,996 6,199,676 =========================================================================================================================== Loss per share (Note 7[d]) Basic and diluted loss per share (0.04) (0.12) (0.07) (0.22) ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes Voice Mobility International, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - Expressed in U.S. Dollars) For the six months ended, June 30, June 30, 2002 2001 $ $ ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss for the period (2,247,777) (6,166,803) Non-cash items included in net loss Amortization 533,959 406,977 Stock based compensation 15,160 414,822 Bad debt expense (20,049) 6,580 Loss on embedded foreign currency derivative - 141,000 Loss on disposal of property and equipment 14,356 - ------------------------------------------------------------------------------- (1,704,351) (5,197,424) Net change in operating assets and liabilities 53,915 1,316,415 ------------------------------------------------------------------------------- Cash used in operating activities (1,650,436) (3,881,009) ------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property and equipment (45,456) (702,070) Proceeds on sale of property and equipment 47,904 - ------------------------------------------------------------------------------- Cash provided (used) in investing activities 2,448 (702,070) ------------------------------------------------------------------------------- FINANCING ACTIVITIES Cash proceeds from Series A promissory notes payable 428,891 1,402,235 Net repayments of promissory note payable (13,192) - Cash proceeds on issuance of special warrants, net - 581,960 Cash proceeds on release of preferred stock from escrow - 1,757,093 Cash proceeds on exercise of options - 396,250 Dividends paid on preferred stock (90,186) - ------------------------------------------------------------------------------- Cash provided by financing activities 325,513 4,137,538 ------------------------------------------------------------------------------- Effect of foreign currency on cash 5,032 (2,732) ------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (1,317,443) (448,273) Cash and cash equivalents, beginning of period 1,732,200 602,527 ------------------------------------------------------------------------------- Cash and cash equivalents, end of period 414,757 154,254 =============================================================================== See accompanying notes VOICE MOBILITY INTERNATIONAL, INC. Notes to Consolidated Financial Statements June 30, 2002 Unaudited 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Voice Mobility International, Inc., (the 'Company') is a Nevada corporation engaged in the development and sales and marketing of unified voice messaging software through its wholly owned operating subsidiaries, Voice Mobility Inc. and Voice Mobility (US) Inc. The Company's Enhanced Messaging software suite will allow for legacy voice-mail replacement and incremental offerings such as real time call connect, voice-mail to e-mail, and fax to e-mail services. These unified communication services are facilitated by the creation of a single personal digital mailbox that can receive any type of communication regardless of its incoming format or medium. The Company's principal geographic markets include North America, Europe and Asia. The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. The interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The Company incurred an operating loss of $2,211,134 for the six-months ended June 30, 2002 [June 30, 2001 - $5,878,667] that raises substantial doubt about its ability to continue as a going concern. Management has been able, thus far, to finance the operations, as well as the growth of the business, through a series of equity and debt financing. Management plans to continue to seek other sources of financing on favorable terms in addition to the $506,155 raised through a series of equity private placements in July 2002 as described in Note 9 [c], [d] and [e]. However, there are no firm commitments for any other additional financing, and there can be no assurance that any such commitment can be obtained on favorable terms, if at all. Management believes it has implemented significant cost reductions and expects to keep its operating costs to a minimum until cash is available through financing or operating activities. Management expects revenues to increase in 2002 from the deployment of the unified communications software product which will afford the Company the ability to fund its daily operations and service its debt obligations. There are no assurances that the Company will be successful in achieving these goals. In view of these conditions, the ability of the Company to continue as a going concern is uncertain and dependent upon achieving a profitable level of operations and on the ability of the Company to obtain necessary financing to fund ongoing operations. Management believes that its current and future plans enable it to continue as a going concern. These financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying financial statements. 2. MAJOR CUSTOMERS AND SEGMENTED INFORMATION The Company operates in one major line of business, the development, manufacture and marketing of unified voice messaging systems. The Company derived 92% [six months ended June 30, 2001 - 80%] of its revenues to external customers from sales by its Canadian operations and has substantially all its assets in Canada. The Company derived 8% [six months ended June 30, 2001 - 20%] of its revenues from sales by its US operations. Sales to Innovatia Inc., an existing shareholder of the Company, and NBTel, wholly owned subsidiaries of Aliant Inc. comprised 64% of revenues for the six months ended June 30, 2002. Sales to three customers comprised 86% of revenues for the six-months ended June 30, 2002. Sales to three customers comprised 94% of revenues for the six-months ended June 30, 2001. 3. NOTES RECEIVABLE AND PAYABLE On August 8, 2001, a plaintiff commenced an action in the Superior Court of California against the Company and the predecessor corporation, Equity Capital Group, Inc. ("ECG"), to recover damages as a result of an alleged breach of contract. On October 15, 2001, a settlement agreement and mutual release was signed between the Company and the above noted plaintiff. The settlement agreement sets forth payments owing to the plaintiff by the Company in the sum of $252,500 to be paid in set installments from October 10, 2001 to October 1, 2002 of which the Company has paid $222,500 as at June 30, 2002. Prior to signing the plaintiff settlement agreement, the Company signed an indemnification agreement on October 10, 2001 with the former majority shareholder of ECG to indemnify the Company against this claim and any other claims or liabilities that existed prior to the reverse acquisition of ECG. Subsequent to signing the indemnification agreement, the Company and the former majority shareholder of ECG signed a settlement agreement, a security agreement and a stock pledge agreement. In accordance with the settlement agreement, the former shareholder is to pay the Company $290,000 to cover the costs of the plaintiff settlement and additional related legal expenses. The settlement amount is to be paid in set installments from October 10, 2001 to October 25, 2002. The security and stock pledge agreements are in place to further collateralize the Company's position in addition to the indemnification agreement. As at June 30, 2002, the former shareholder was delinquent in scheduled payments to the Company totaling $120,000. On March 8, 2002, a shareholder and Director of the Company agreed to indemnify the Company against any losses that may be incurred on the collectibility of the note receivable. 4. SERIES A PROMISSORY NOTES PAYABLE On June 28, 2002, the Company issued an aggregate of $428,891 (Cdn.$650,000) of Series A promissory notes to four shareholders. The notes are repayable on the earlier of June 27, 2003, or if the Company's revenues plus the net proceeds of any debt or equity financing exceed Cdn.$2,500,000, or if the Company completes a consolidation, merger, amalgamation, arrangement or other reorganization as a result of which the successor corporation after completion of the transaction has working capital of more than Cdn.$2,500,000. The notes bear interest at a rate of 8% per annum, such interest being payable quarterly and the notes are subject to a repayment premium equal to 15% of the outstanding principal balance. 5. PROMISSORY NOTE PAYABLE A promissory note is due to Innovatia Inc. ("Innovatia"), an existing shareholder of the Company and a wholly owned subsidiary of Aliant Inc. ("Aliant") for development services provided from February 1, 2001 to December 31, 2001. The promissory note bears interest at prime plus 1% (prime rate at June 30, 2002 was 4.25%) and is repayable in quarterly installments until repaid in full. The amount payable each quarter ("Maximum Amount Payable") is the lesser of $142,314 (Cdn $226,678) and 40% of the net aggregate amount of invoices ("Invoiced Amount") issued by the Company to Aliant in the quarter. The Maximum Amount Payable, if any, for the first two quarters ended June 30, 2002 will be due on October 1, 2002. All subsequent amounts payable, if any, will be due on or before the first business day following the quarter end date. In the event the Invoiced Amount for a particular quarter exceeds $142,314 (Cdn$226,678), the Company will carry forward the difference between the Invoiced Amount and $142,314 (Cdn$226,678) and include the difference in the calculation of Maximum Amount Payable for subsequent quarters. The Company has the option, until December 31, 2004, to settle some or all of the promissory note, principal and interest, in cash, common shares or a combination thereof. If paid by common shares, then 500,000 of the shares will be valued at the lesser of the market price of our shares on the Toronto Stock Exchange and Cdn$0.75 per share, and the value of the balance of any other shares issuable is determined by the weighted average trading price of the Company's common share on the Toronto Stock Exchange over the ten trading days immediately prior to the date on which the common shares are to be issued. After December 31, 2004, any amount of the promissory note which remains unpaid will continue to be settled as the lesser of $142,314 (Cdn$226,678) and 40% of the net aggregate amount of invoices issued by the Company to Aliant in the quarter, however the Company is required to settle only with common shares and the number of common shares payable each quarter, if any, is determined by dividing the Maximum Amount Payable by Cdn$1.56. The Company is required to obtain shareholder and regulatory approval to issue common shares to settle the promissory note, other than for the 500,000 common shares issued on December 28, 2001 and for up to 2,000,000 shares of common stock that was approved by shareholders at the Company's Annual General Meeting held on June 13, 2002. If such approval is not obtained, the Company can only repay the promissory note in cash. 6. DEVELOPMENT AGREEMENT On March 4, 2002, the Company and Innovatia signed a new development agreement. The agreement to develop a carrier-classified unified communications product is for the period January 1, 2002 to December 31, 2003. Innovatia will license certain intellectual property to the Company on a non-exclusive non-transferable basis for use in the development and verification of current products and will provide specific professional, project management, administrative and support services. In consideration for these services, the Company agreed to pay Innovatia a cash royalty within 30 days after the end of each calendar quarter equal to 10% on the gross quarterly revenue received for the sale of the Company's products. If the development agreement is terminated the royalty payments will continue for six months after the termination date. 7. SHARE CAPITAL [a] Issued and Authorized The Company is authorized to issue up to 100,000,000 share of common stock, par value $.001 per share and up to 1,000,000 shares of preferred stock, par value $.001 per share. In connection with the 1999 recapitalization of VMI, Voice Mobility Canada Limited (VM Canada) issued 6,600,000 VM Canada Exchangeable Shares. VM Canada is a wholly owned subsidiary of VMII. Each VM Canada Exchangeable Share is exchangeable for one VMII common share at any time at the option of the shareholder, and will be exchanged no later than July 1, 2009, and has essentially the same voting, dividend and other rights as one VMII common share. A share of Series A preferred voting stock, which was issued to a trustee in trust for the holders of the VM Canada Exchangeable Shares, provides the mechanism for holders of the VM Canada Exchangeable Shares to have voting rights in VMII. The Company considers each Exchangeable Share as equivalent to a share of its common stock and therefore the Exchangeable Shares are included in the computation of basic earnings per share. On March 6, 2002, a holder of Exchangeable Shares exchanged 500,000 Exchangeable Shares into 500,000 common shares of the Company for no additional consideration. On June 11, 2002, a holder of Exchangeable Shares exchanged 662,500 Exchangeable Shares into 662,500 common shares of the Company for no additional consideration. As at June 30, 2002 the holders of the Exchangeable Shares are entitled to 5,437,500 individual votes in all matters of Voice Mobility International, Inc. As the Exchangeable Shares are converted into common stock of the Company, the voting rights attached to the share of Series A preferred voting stock are proportionately reduced. [b] Stock options The Second Amended and Restated 1999 Stock Option Plan ("Plan") authorizes an aggregate amount of 10,000,000 common shares to be issued pursuant to the exercise of stock options. Activity under the Plan is as follows:
Options Outstanding ------------------------------------------------- Weighted Shares Available Number Price Average for Grant of Shares per Share Exercise Price --------------------------------------------------------------------------------------------------- Balance, December 31, 2001 2,100,609 6,444,936 0.35 - 7.25 $2.16 Options granted (810,000) 810,000 0.18 $0.18 Options forfeited 1,840,721 (1,840,721) 0.18 - 6.88 $2.03 --------------------------------------------------------------------------------------------------- Balance, June 30, 2002 3,131,330 5,414,215 0.18 - 7.25 $1.92 ===================================================================================================
[c] Warrants As at June 30, 2002, the Company has the following common stock warrants outstanding: Number of Common Exercise Price Shares Issuable $ Date of Expiry -------------------------------------------------------------------------------- Series F warrants 1,250,000 2.25 November 30, 2003 Series K warrants 100,000 1.50 April 25, 2004 Share purchase warrants 3,250,000 Cdn. $2.25 April 3, 2003 Compensation options 650,000 Cdn. $2.00 April 3, 2003 Compensation warrants 325,000 Cdn. $2.25 April 3, 2003 -------------------------------------------------------------------------------- 5,575,000 ================================================================================ [d] Loss per share The following table sets forth the computation of basic and diluted loss per share for the periods ended:
Three Months ended Six Months ended June 30 June 30 2002 2001 2002 2001 $ $ $ $ ----------------------------------------------------------------------------------------------------------- Numerator: Net loss for the period (1,204,783) (3,196,706) (2,247,777) (6,166,803) Reduction of beneficial conversion feature on retraction of 80,969 Series B preferred stock - - - 109,550 Dividends paid on preferred stock (90,186) - (90,186) - ----------------------------------------------------------------------------------------------------------- Net loss attributable to holders of common stock and common stock equivalents (1,294,969) (3,196,706) (2,337,963) (6,057,253) ----------------------------------------------------------------------------------------------------------- Denominator: Weighted average number of common stock outstanding 28,294,386 20,631,348 28,045,191 20,499,057 Weighted average number of common stock issuable on exercise of exchangeable shares 5,954,396 6,600,000 6,203,591 6,600,000 ----------------------------------------------------------------------------------------------------------- Average number of common stock and common stock equivalents outstanding 34,248,782 27,231,348 34,248,782 27,099,057 ----------------------------------------------------------------------------------------------------------- Loss per share: Basic and diluted loss per share (0.04) (0.12) (0.07) (0.22) -----------------------------------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES [a] On August 24, 2001, Manschot Opportunity Fund, LP and Galladio Capital Management, BV filed suit in the Superior Court of the State of California, County of Orange (Case No. 01CC10988) against Voice Mobility International, Inc., Funkart Holdings, Inc., Pioneer Growth Corporation, Robert L. Cashman and Greg Harrington. The suit relates to an alleged December 1998 agreement between Motorsports Promotions, Inc. and Funkart Holdings, Inc., during the time period prior to Voice Mobility Inc.'s April 1999 reverse acquisition of Equity Capital Group, Inc., the predecessor company to Voice Mobility International, Inc. Plaintiffs allege to be creditors of Motorsports Promotions, acquiring Motorsports rights under the alleged agreement at a UCC public sale. Defendant Funkart Holdings is alleged to have been a subsidiary of Equity Capital Group during the period in question, but which was assigned to Pioneer Growth Corporation, a company unaffiliated with Voice Mobility International, Inc. pursuant to the reverse acquisition. The suit alleges that during the period in question, Voice Mobility International, Inc. also was the alter- ego of defendant Cashman. The suit alleges breach of contract and breach of fiduciary duty and seeks compensatory damages in excess of $1,325,000, prejudgment interest and punitive damages. The Company has tendered the defense and indemnity of such claims to Mr. Cashman. Management believes that there is no substantive merit to the claims and they intend to defend the lawsuit vigorously if Mr. Cashman fails to perform the defense and indemnification obligations he has accepted. The Company has accrued $25,000 as final settlement for this matter. See Note 9[a]. [b] On December 31, 2001, a former contract employee filed a Writ of Summons and Statement of Claim with the Supreme Court of British Columbia claiming breach of an implied employment contract and Stock Option Agreement by the Company. The relief sought is damages under several causes of action for an aggregate of approximately $1,825,892. The Company believes that there is no substantive merit to the claim and management intends to vigorously defend the action. The Company has made no provision in the financial statements on the belief that the probability of a loss is remote. Any amount the Company may be obligated to pay, if any, in connection with this claim will be recorded in the period the claim is resolved. [c] On June 29, 2001, Mr. O'Flaherty resigned his position as President and Director of the Company. As part of his final settlement, Mr. O'Flaherty will remain in salary continuance up to December 31, 2002. In the case of re-employment with another company, the Company will continue to pay the difference, if any, between his new monthly base salary and the monthly base salary which he was earning at the Company. Mr. O'Flaherty will also forego any rights he may have under his employment agreement to any additional monetary bonuses and associated options for 2001 and 2002. As at June 30, 2002, the Company has accrued $54,412 for this matter. 9. SUBSEQUENT EVENTS [a] On July 1, 2002, the Company settled the Manschot Opportunity Fund, LP suit for $25,000 and was fully released from all plaintiff's claims. See note 8[a]. [b] On July 4, 2002, the Company paid cash dividends of $28,475 to holders of Series B preferred stock. [c] On July 26, 2002, the Company issued 500,000 units, at $0.18 per unit for gross cash proceeds of $90,000. Each unit comprises one share of common stock and one non-transferable warrant, entitling the holder to one common share, exercisable at $0.25 at any time up to July 26, 2005. [d] On July 31, 2002, the Company issued 755,333 units, at Cdn$0.30 per unit for gross cash proceeds of $143,155 (Cdn$226,600). Each unit comprises one share of common stock and one half of one non-transferable warrant, entitling the holder to one common share, exercisable at Cdn$0.45 at any time up to July 31, 2003. [e] On July 31, 2002, the Company issued 1,400,000 units, at $0.195 per unit for gross cash proceeds of $273,000. Each unit comprises one share of common stock and one half of one non-transferable warrant, entitling the holder to one common share, exercisable at $0.30 at any time up to July 31, 2003, upon giving 61 days notice. [f] As at August 14, 2002, 24,333 employee stock options were forfeited according to their terms under the Second Amended and Restated 1999 Stock Option Plan. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Interim Consolidated Financial Statements and related notes. Certain statements contained in this section and elsewhere in this quarterly report regarding matters that are not historical facts are "forward-looking statements" (as defined in the Private Securities Litigation Reform Act of 1995). Because such forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. All statements that address operating performance, events or developments that our management expects or anticipates to incur in the future, including statements relating to sales and earnings growth or statements expressing general optimism about future operating results, are forward-looking statements. These forward-looking statements are based on our management's current views and assumptions regarding future events and operating performance. Many factors could cause actual results to differ materially from estimates contained in our management's forward-looking statements. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, competitive pressures, inadequate capital, unexpected costs, lower revenues, net income and forecasts, the possibility of fluctuation and volatility of our operating results and financial condition, inability to carry out marketing and sales plans and loss of key executives, among other things. Voice Mobility International, Inc. is a Nevada corporation engaged in the development and sales and marketing of unified voice messaging software through its wholly owned operating subsidiaries, Voice Mobility Inc. and Voice Mobility (US) Inc. Our Enhanced Messaging software suite allows for legacy voice-mail replacement and incremental offerings such as real time call connect, voice-mail to e-mail, and fax to e-mail services. These unified communication services are facilitated by the creation of a single personal digital mailbox that can receive any type of communication regardless of its incoming format or medium. The principal geographic markets include North America, Europe and Asia. All references to "$" or "dollars" refer to U.S. Dollars. Results of Operations for the three-month periods ended June 30, 2002 and June ------------------------------------------------------------------------------ 30, 2001: -------- Sales - Sales for the three-month period ended June 30, 2002 were $23,842, compared to $33,886 for the three-month period ended June 30, 2001 representing a 30% decrease. Sales for the three-month period ended June 30, 2002 were for recognition of deferred revenue from 2000, mailbox subscriptions, and support services. Sales for the three-month period ended June 30, 2001 were for recognition of deferred revenue from 2000, mailbox subscriptions, installation, marketing and training fee. In April 2000 we entered into a license agreement with Ikano Communications, Inc. and received $250,000 for the installation and set up of our unified communication software. The $250,000 was deferred and is being recognized ratably over the term of the agreement. For the three-month period ended June 30, 2002, we have recognized $20,833 of the deferred amount. The decrease in revenues, net of recognition of deferred revenue from 2000, was primarily attributable to the sales of mailbox subscriptions to three more customers for the three months ended June 30, 2001 compared to the three months ended June 30, 2002. Cost of sales - Cost of sales were $130 and $4,823 for the three-month periods ended June 30, 2002 and 2001 respectively, representing a 97% decrease. Cost of sales for the three-month period ended June 30, 2002 is comprised of royalty costs. Cost of sales for the three-month period ended June 30, 2001 is comprised of the amortization of the telephony hardware, software licenses, and installation costs of our unified communications product at existing customer sites. The decrease in cost of sales was primarily attributable to the decrease in amortization of the telephony hardware, software licenses, and installation costs of our unified communications product at existing customer sites for the three months ended June 30, 2002. Operating Expenses ------------------ Sales & Marketing - Our sales and marketing costs consist primarily of personnel, advertising, promotions, public relations, trade shows and business development. Total costs were $278,382 and $641,563 for the three-month periods ended June 30, 2002 and June 30, 2001 respectively representing a decrease of 57%. The decrease of $363,181 in sales and marketing expense between the three-month period ended June 30, 2002 and 2001, is a result of a decrease in sales and marketing personnel, advertising and promotions, consulting fees, and general sales and marketing expenses. The primary reason for the remaining decrease in costs is a result of a significant cost reduction plan. We decreased personnel in our sales and marketing department by 15 persons between April 1, 2001 and June 30, 2002. Research and Development - Our research and development costs consist primarily of personnel, data and voice transmission, and related facility costs. Research and development costs were $263,007 and $1,441,404 for the three-month periods ended June 30, 2002 and 2001 respectively representing a decrease of 82%. These costs reflect employee stock option compensation cost of $6,033 and $88,607 for the three-month periods ended June 30, 2002 and 2001 respectively. The decrease of $1,095,823 (net of stock based compensation) in research and development expense between the three-month period ended June 30, 2002 and 2001, is primarily a result of a decrease in research and development costs, personnel costs, leased office space and utility costs, data and voice transmission costs and general research and development costs. Of the $1,095,823 decrease, $475,000 is a result of an agreement dated February 27, 2001 with Innovatia Inc., a wholly owned subsidiary of Aliant Inc., to develop a carrier-classified unified communications product which was expensed for the three month period ended June 30, 2001. For the three month period ended June 30, 2002, no such expense was incurred. The primary reason for the remaining decrease in costs of $620,823 is a result of a significant cost reduction plan. We have decreased personnel in our research and development department by 32 developers between April 1, 2001 and June 30, 2002. General and Administrative - Our general and administrative costs consist primarily of personnel costs, professional and legal costs, consulting fees, travel, and the lease of office space. Total general and administrative costs were $667,473 and $1,053,672 for the three-month periods ended June 30, 2002 and 2001 respectively, representing a decrease of 37%. These costs reflect employee stock option compensation cost of $nil and $15,000 for the three-month periods ended June 30, 2002 and 2001 respectively. The decrease of $371,199 (net of stock based compensation) in general and administrative costs between the three-month periods ended June 30, 2002 and 2001, is primarily a result of a decrease in personnel costs, professional and legal costs, consulting fees, depreciation and amortization, lease of office space, and general administrative costs. Interest Income - Interest income was $1,459 and $5,415 for the three-month periods ended June 30, 2002 and 2001 respectively. For the three month period ended June 30, 2002, we earned interest income on cash through term deposits. Interest Expense - Our interest expense was $21,092 and $163,545 for the three-month period ended June 31, 2002 and 2001 respectively. Our interest expense is primarily related to short-term debt. Income Taxes - For financial statement purposes the Company has recognized a valuation allowance equal to deferred tax assets for which realization is uncertain. Results of Operations for the six-month periods ended June 30, 2002 and June 30, -------------------------------------------------------------------------------- 2001: ----- Sales - Sales for the six-month period ended June 30, 2002 were $193,330 compared to $77,732 for the six-month period ended June 30, 2001, representing a 149% increase. Sales for the six-month period ended June 30, 2002 were for software license sales, recognition of deferred revenue from 2000, mailbox subscriptions, and support services. Sales for the six-month period ended June 30, 2001 were from recognition of deferred revenue from 2000, mailbox subscriptions, installation, marketing and training fee. In April 2000 we entered into a license agreement with Ikano Communications, Inc. and received $250,000 for the installation and set up of our unified communications software. The $250,000 was deferred and is being recognized ratably over the term of the agreement. For the six-month period ended June 30, 2002, we have recognized $41,667 of the deferred amount. The increase in revenues, net of recognition of deferred revenue from 2000, was primarily attributable to the sales of our software license to one customer comprised 65% of revenues for the six months ended June 30, 2002. Cost of sales - Cost of sales for the six-month period ended June 30, 2002 is comprised of the localization costs, royalty cost and amortization of the telephony hardware, software licenses, and installation costs of our unified communications product at existing customer sites. Cost of sales for the six-month period ended June 30, 2001 is comprised of the amortization of the telephony hardware, software licenses, and installation costs of our unified communications product at existing customer sites. Cost of sales were $14,440 and $8,258 for the six-month periods ended June 30, 2002 and 2001 respectively, representing a 75% increase. The increase in cost of sales was primarily attributable to localization cost related to sales of our software license to one customer for the six months ended June 30, 2002. Operating Expenses ------------------ Sales & Marketing - Our sales and marketing costs consists primarily of personnel, advertising, promotions, public relations, trade shows and business development. Total costs were $582,085 and $1,358,815 for the six-month periods ended June 30, 2002 and June 30, 2001 respectively representing a decrease of 57%. The decrease of $776,730 in sales and marketing expense between the six-month period ended June 30, 2002 and 2001 is a result of a decrease in sales and marketing personnel, advertising and promotions, travel, consulting fees, and general sales and marketing expenses. The primary reason for the remaining decrease in costs is a result of a significant cost reduction plan. We decreased personnel in our sales and marketing department by 15 persons between April 1, 2001 and June 30, 2002. Research and Development - Our research and development costs were $594,923 and $2,674,135 for the six-month periods ended June 30, 2002 and 2001 respectively representing a decrease of 78%. These costs reflect employee stock option compensation cost of $14,171 and $253,772 for the six-month periods ended June 30, 2002 and 2001 respectively. The decrease of $1,839,611 (net of stock based compensation) between the six-month period ended June 30, 2002 and 2001 is primarily a result of a decrease in research and development costs, personnel costs, leased office space and utility costs, data and voice transmission costs and general research and development costs. Of the $1,839,611 decrease, $791,667 is a result of an agreement dated February 27, 2001 with Innovatia Inc., a wholly owned subsidiary of Aliant Inc., to develop a carrier-classified unified communications product which was expensed for the six month period ended June 30, 2001. For the six month period ended June 30, 2002, no such expense was incurred. The primary reason for the remaining decrease in costs of $1,047,944 is a result of a significant cost reduction plan. We have decreased personnel in our research and development department by 32 developers between April 1, 2001 and June 30, 2002. General and Administrative - Our general and administrative costs consist primarily of personnel costs, professional and legal costs, consulting fees, travel, and the lease of office space. General and administrative costs were $1,213,016 and $1,915,191 for the six-month periods ended June 30, 2002 and 2001 respectively representing a 37% decrease. These costs reflect employee stock option compensation cost of $nil and $35,800 for the six-month periods ended June 30, 2002 and 2001 respectively. A further $nil and $125,250 of stock options compensation cost were recorded for the six-month periods ended June 30, 2002 and 2001 respectively for stock option grants awarded to non-employees in exchange for consulting services. The decrease of $541,125 (net of stock based compensation) in general and administrative costs between the six-month periods ended June 30, 2002 and 2001, is primarily a result of a decrease in personnel costs, professional and legal costs, consulting fees, depreciation and amortization, lease of office space, and general administrative costs. Interest Income - Interest income was $4,555 and $17,569 for the six- month periods ended June 30, 2002 and 2001 respectively. For the six month period ended June 30, 2002, we earned interest income on cash through term deposits. Interest Expense - Our interest expense was $41,198 and $164,705 for the six-month period ended June 31, 2002 and 2001 respectively. Our interest expense is primarily related to short-term debt. Income Taxes - For financial statement purposes the Company has recognized a valuation allowance equal to deferred tax assets for which realization is uncertain. Fluctuations in Annual and Quarterly Results -------------------------------------------- Our annual and quarterly operating results may fluctuate significantly in the future as a result of numerous factors, including: 1. The amount and timing of expenditures required developing strategic relationships to enhance sales and marketing. 2. Changes in the growth rate of Internet usage and acceptance by consumers of unified messaging systems. 3. Emergence of new services and technologies in the market in which we compete; and fluctuations of foreign currency exchange rates. 4. Unanticipated delays in product development that could adversely affect our revenues or results of operations. 5. The failure or unavailability of third-party technologies and services could limit our ability to generate revenue. In addition, a portion of our revenue relies on the number of mailboxes our customers sell and therefore our revenue may fluctuate depending on the marketing and sales campaigns of our customers. Liquidity and Capital Resources ------------------------------- As of June 30, 2002, we had $414,757 in cash and cash equivalents and a working capital deficiency of $272,357. Our operating activities resulted in net cash outflows of $1.7 million for the six-month period ended June 30, 2002. Operating activities resulted in net cash outflows for the years ended December 31, 2001, 2000 and 1999 of $7.6 million, $5.5 million and $2.1 million respectively. The operating cash outflows for these periods resulted from significant investments in research and development, sales, marketing and services, which led to operating losses in all periods. Investing activities resulted in net cash inflows of $2,448 for the six-month period ended June 30, 2002. Investing activities resulted in net cash outflows for the years ended December 31, 2001, 2000 and 1999 of $0.9 million, $1.9 million and $0.5 million respectively. The investing activities consisted primarily of purchases of property and equipment as a result of growth of our company and our development activities. These capital expenditures consisted of hardware, software, equipment, and furniture for our growing employee headcount, and our research and development needs including test equipment. At June 30, 2002, we did not have any material commitments for future capital expenditures. In February 2001, we entered into a three year development agreement with Innovatia Inc., a shareholder and a wholly owned subsidiary of Aliant Inc. The agreement is to develop a carrier-classified unified communications product that will become Aliant's primary hosted messaging solution for business and residential customers. In consideration of the services provided, we had originally agreed to pay quarterly fees based directly on the value of the work performed beginning February 2001. We had the option to elect to pay for some or all of the services in cash or common shares. On December 28, 2001, we agreed to settle the value of the services provided to date by Innovatia of $1.7 million in the form of a promissory note bearing interest at prime plus 1%. The promissory note is repayable in quarterly payments over the term commencing July 2002 and for the ten consecutive quarters thereafter. We have the option to elect to settle some or all of the amounts owing in cash or common shares. On December 28, 2001, we also issued 500,000 common shares to Innovatia at a market price of $0.26 per share as partial payment of the promissory note. At our Annual General Meeting held on June 13, 2002, shareholders approved the issuance of up to 2,000,000 share of common stock to be issued to Innovatia Inc. as payment against the promissory note. On March 4, 2002, we renegotiated the remaining term of the February 2001 development agreement with Innovatia. The term of the revised agreement is for the period January 1, 2002 to December 31, 2003. Innovatia will continue to provide the originally agreed services, however, in consideration of the services provided, we have agreed to pay Innovatia a cash royalty within 30 days after the end of each calendar quarter equal to 10% on the gross revenue received for the sale of our products globally within the quarter. In June 2002, we received $0.4 million from the issuance of promissory notes bearing interest at 8% per annum payable quarterly plus a repayment premium of 15%. The proceeds from the promissory notes were applied towards working capital purposes. In June 2002, we entered into a three year software license agreement with Aliant Telecom Inc. Aliant is the parent of Innovatia Inc., a shareholder of the company. The license agreement is a joint development agreement with Aliant involving voicemail replacement, product development and product deployment strategies to help us develop a first class carrier grade unified communication software product to be marketed to carriers worldwide. As part of the agreement, Aliant agreed to pay us $1.125 million as an initial payment. The initial payment is to be applied towards the projected deployment of mailboxes in Year 1 of the contract. In July 2002, we received $0.5 million in proceeds through a series of equity private placements. The private placements involved the issuance of both common shares and warrants. The proceeds were applied towards working capital purposes. We currently anticipate that revenues will increase in the long-term as we increase our sales and marketing activities and introduce new versions of our software that are technologically feasible and of carrier class quality. We have implemented significant cost reductions and expect to keep our operating costs to a minimum until cash is available through financing or operating activities. Based on current projections, we anticipate significant revenues from Tier I telecommunications providers in 2002 from revenues generated through the replacement of legacy voice mail systems. Our contract with Aliant will provide us with $1.125 million as an initial payment to be applied towards the projected deployment of mailboxes in Year 1 of the contract. Such payments will afford us the ability to fund a portion of our daily operations and service our debt obligations. However, if we do not secure additional revenue beyond the Aliant contract, we will need to raise additional funds through equity or debt financing to meet our current and future financial commitments. There are no assurances that we will be successful in achieving these objectives. In addition, as a result of the current slowdown in capital spending by telecommunications service providers, revenues from other service providers may be adversely affected more than we currently project. Based on current projections, if we are unable to increase revenues over historical levels, we will have negative cash flows in excess of $1.8 million for the balance of fiscal 2002 and we will need to raise additional funds through equity or debt financing to meet our current and future financial commitments. To date, we have incurred significant operating losses that raise substantial doubt about our ability to raise funds and to continue as a going concern. Inflation has not had a significant effect to date on our results of operations. Risk Factors OUR BUSINESS FACES SIGNIFICANT RISKS. THE RISKS DESCRIBED BELOW MAY NOT BE THE ONLY RISKS WE FACE. ADDITIONAL RISKS THAT WE DO NOT YET KNOW OF OR THAT WE CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. INVESTMENT IN OUR SECURITIES IS SPECULATIVE. ONE OR MORE OF THESE RISKS COULD CAUSE OUR BUSINESS AND THE TRADING PRICE OF OUR COMMON STOCK TO SUFFER AND YOU COULD LOSE ALL OR PART OF THE MONEY YOU INVESTED IN OUR SECURITIES. The following risks and uncertainties could affect our operating results and financial condition and could cause our actual results to differ materially from our historical results. Our Business Model is in Its Early Stages and May Not Be Successful. In early 1998, the focus of our predecessor's business by necessity shifted to research and development efforts needed to develop a Windows 2000 platform-based product line. Given this shift in our business focus, even though our predecessor and we have had limited revenues from operations since 1993, we are at an early stage of entering the commercial marketplace. Our future operating results are subject to a number of risks, including our ability to implement our strategic plan, to attract qualified personnel and to raise sufficient financing as required. Our management's inability to guide growth effectively, including implementing appropriate systems, procedures and controls, could have an adverse effect on our financial condition and operating results. We May Not Be Able to Obtain Adequate Financing to Implement Our Growth Strategy Successful implementation of our growth strategy may require continued access to capital. If we do not generate sufficient cash from operations, our growth could be limited unless we are able to obtain capital through additional debt or equity financings. We cannot assure you that debt or equity financings will be available as required. We have incurred significant operating losses that raises substantial doubt about our ability to raise additional financing and to continue as a going concern. Even if financing is available, it may not be on terms that are favorable to us or sufficient for our needs. If we are unable to obtain sufficient financing, we may be unable to fully implement our growth strategy. Should we be able to obtain additional capital, we can make no assurance that it will not result in the dilution in the ownership and control of our existing shareholders. If we raise additional funds through the issuance of debt securities or preferred stock, these new securities would have rights, preferences and privileges senior to those of the holders of common stock. We Are Located in Canada but a Majority of our Revenues are denominated in U.S. Dollars, Which Subjects Us to Risks in Exchange Rate Fluctuations. We face foreign currency exchange risk because a majority of our revenue is denominated in U.S. dollars and a majority of our operating costs are incurred in Canadian dollars. We have derived substantially all of our revenues to external customers from sales by our Canadian operations and substantially all of our assets are located in Canada. Significant fluctuations in the foreign exchange rate between U.S. and Canadian currency will result in fluctuations in our annual and quarterly results. If the Canadian dollar were to strengthen in relation to the U.S. dollar, our effective costs would rise in relation to our revenues, adversely affecting our profitability and competitive position. We Hold No Patents on Our Technology. We do not have and do not intend to apply for patents on our products. We rely on trade secrets to protect our intellectual property. Management believes that the patent application process in many countries in which we intend to sell products would be time-consuming and expensive and any patent protection might be out of date by the time the patent were to be granted. The departure of any of our management or significant technical personnel, the breach of their confidentiality and non-disclosure obligations, or the failure to achieve our intellectual property objectives may have a material adverse effect on our business, financial condition and results of operations. We believe our success depends upon the knowledge and experience of our management and technical personnel and our ability to market our existing products and to develop new products. Employees may and have left us to go to work for a competitor. While we believe that we have adequately protected our proprietary technology, and we will take all appropriate and reasonable legal measures to protect it, the use of our processes by a competitor could have a material adverse effect on our business, financial condition and results of operations. Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We may not be able to successfully protect our proprietary technology, and our proprietary technology may otherwise become known or be independently developed by competitors. Competitors' products may add features, increase performance or sell at lower prices. We cannot predict whether our products will continue to compete successfully with such existing rival architectures or whether new architectures will establish or gain market acceptance or provide increased competition with our products. Because Our Officers and Directors Are Canadian, It May be Difficult to Enforce Civil Liabilities Under the US Federal Securities Laws Against Them All of our directors and officers reside outside the United States. Therefore, it may be difficult to serve process upon them in the United States or to collect upon a judgment obtained in the United States against them. Our Canadian counsel has advised us that there is doubt as to the enforceability of liabilities predicated on U.S. federal securities laws determined in original actions in the Province of British Columbia; and judgments of U.S. courts obtained in actions based upon the civil liability provisions of U.S. federal securities laws in the courts of the Province of British Columbia. Moreover, no treaty exists between the United States and Canada for the reciprocal enforcement of foreign court judgments. Consequently, claimants may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. We Are Currently Dependent on a Limited Number of Customers Sales to one customer, Aliant, Inc., comprised 64% of our revenues for the six months ended June 30, 2002. Sales to three customers comprised 86% of revenues for the six months ended June 30, 2002. Sales to three customers comprised 94% of revenues for the six months ended June 30, 2001. If our business strategy is successful, we expect that we will become less dependent on such significant customers in the future as sales increase. However, if we are unable to successfully diversify our customer base, our business, financial condition and results of operations would be materially and adversely affected. We Operate in a Highly Competitive Industry. The market for unified messaging software is highly competitive and subject to frequent product introductions with improved price and/or performance characteristics. Even if we are able to introduce products which meet evolving customer requirements in a timely manner, there can be no assurance that our new products will gain market acceptance. Many companies, including CommWorks, Comverse, Glenayre, and Sema Oryx and others, may have greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than ours. In addition, many of our large competitors may offer customers a broader product line which may provide a more comprehensive solution than ours. Increased competition in the unified messaging industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on our business and profitability. Our Business Is Subject to Risks Related to Rapid Technological Change, Which Could Increase Cost and Uncertainty. The telecommunications industry is characterized by rapidly changing technology and evolving industry standards. Our success will depend heavily on our continuing ability to develop and introduce enhancements to our existing systems and new products that meet changing markets. We can make no assurance that our technology or systems will not become obsolete due to the introduction of alternative technologies. If we are unable to continue to innovate successfully, our business and operating results could be adversely affected. We are Exposed to General Economic Conditions. As a result of recent unfavorable economic conditions, revenues and spending within the North American telecommunications industry have been adversely affected. If the economic conditions in North America continue or worsen or if a wider or global economic slowdown occurs, we may experience a material adverse impact on our business, operating results, and financial condition. Economic Conditions in the United States, Canada, and Globally, Affecting the Telecommunications Industry, as well as other Trends and Factors Affecting the Telecommunications Industry, Are Beyond our Control and May Result in Reduced Demand and Pricing Pressure on our Products. There are trends and factors affecting the telecommunications industry, which are beyond our control and may affect our operations. Such trends and factors include: o adverse changes in the public and private equity and debt markets and our ability, as well as the ability of our customers and suppliers, to obtain financing or to fund working capital and capital expenditures; o adverse changes in the credit ratings of our customers, potential customers and suppliers; o adverse changes in the market conditions in our industry and the specific markets for our products; o visibility to, and the actual size and timing of, capital expenditures by our customers and potential customers; o inventory practices, including the timing of product and service deployment, of our customers and potential customers; o policies of our customers and potential customers regarding utilization of single or multiple vendors for the products they purchase; o the overall trend toward industry consolidation and rationalization among our customers, potential customers, competitors, and suppliers; o conditions in the broader market for communications products, including data networking products and computerized information access equipment and services; o the effects of war and acts of terrorism. Economic conditions affecting the telecommunications industry, which affect market conditions in the telecommunications and networking industry, in the United States, Canada and globally, affect our business. Reduced capital spending and/or continued negative economic conditions in the United States, Canada, Europe, Asia, Latin America and/or other areas of the world could result in reduced demand for or pricing pressure on our products. We May be Materially and Adversely Affected by Continued Reductions in Spending on Telecommunications Infrastructure by Our Customers. A continued slowdown in capital spending by service providers may affect our revenues more than we currently expect. Moreover, the significant slowdown in capital spending by service providers has created uncertainty as to market demand. As a result, revenues and operating results for a particular period can be difficult to predict. In addition, there can be no certainty as to the severity or duration of the current industry adjustment. As a result of the recent changes in industry and market conditions, many of our customers have reduced their capital spending on telecommunications infrastructure. Our revenues and operating results are expected to continue to be affected by the continued reductions in capital spending on telecommunications infrastructure by our customers. Future Sales of Our Common Stock May Cause Our Stock Price to Decline. As of August 14, 2002, we had outstanding approximately 36,974,448 common share equivalents, consisting of 31,536,948 shares of common stock, 5,437,500 shares of common stock issuable on conversion of all outstanding exchangeable shares, represented by one Series A preferred stock. Generally all of the 8,418,000 shares issued in April 1999 under Rule 504 of the Securities Act of 1933, as amended, are freely tradable, as are 453,756 shares issued under Rule 504 prior to April 1999 and 954,455 shares issued upon the exercise of options granted under our Second Amended and Restated 1999 Stock Option Plan. The remaining 21,710,737 outstanding shares have not been registered under the Securities Act and therefore are treated as "restricted securities" and may be publicly sold in the United States only if registered or if the sale is made in accordance with an exemption from registration, such as Rule 144 under the Securities Act. Under these exemptions, however, substantially all of the 21,710,737 shares generally will be eligible for resale in the United States without registration one year from the date of purchase. This may adversely affect the market price of our shares and could affect the level of trading of such shares. As of August 14, 2002, warrants to purchase an aggregate of 7,152,667 shares were outstanding. We intend to register under the Securities Act the shares of common stock issuable upon exercise of such warrants. On April 11, 2000, we registered under the Securities Act 5,000,000 shares reserved for issuance under our 1999 Stock Option Plan, of which 954,455 shares have been issued pursuant to exercise. On September 13, 2000, we registered an additional 5,000,000 shares reserved for issuance under this plan. When issued, all of these shares generally will be freely tradable. The sale of a significant number of shares, or the perception that such sales could occur, could adversely affect prevailing market prices for the shares and could impair our future ability to raise capital through an offering of equity securities. Our Common Stock Is Illiquid and Subject to Price Volatility Unrelated to Our Operations. Our common stock currently trades on a limited basis on the OTC Bulletin Board, The Toronto Stock Exchange and the Frankfurt Stock Exchange. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other telephony companies, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock. A Decline in the Price of Our Common Stock Could Adversely Impact Our Operations. A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue operations. If our stock price declines, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations. Our Articles of Incorporation and Bylaws and Nevada Law Contain Provisions that Could Delay or Prevent a Change of Control and Could Limit the Market Price of Our Common Stock. Our authorized capital stock consists of 100,000,000 shares of common stock and 1,000,000 shares of preferred stock. To date, 1 share of Series A preferred stock has been designated and is issued and outstanding and, 666,667 shares of Series B preferred stock have been designated, of which 585,698 are issued and outstanding. Our board of directors, without any action by shareholders, is authorized to designate and issue shares of preferred stock in any class or series as it deems appropriate and to establish the rights, preferences and privileges of these shares, including dividends, liquidation and voting rights. The rights of holders of shares of preferred stock that may be issued may be superior to the rights granted to the holders of existing shares of our common stock. Further, the ability of our board of directors to designate and issue such undesignated shares could impede or deter an unsolicited tender offer or takeover proposal and the issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of our common stock. The Market for Our Common Stock is Adversely Affected by the "Penny Stock" Rules Our common stock is currently defined as a "penny stock" under the Securities Exchange Act of 1934, as amended, and rules of the SEC. The penny stock rules affect the ability of broker-dealers to make a market in or trade our shares and may also affect the ability of purchasers of shares to resell those shares in the public market. Penny stocks generally are equity securities with a price of less than $5.00 that are not registered on certain national securities exchanges or quoted on the Nasdaq system. Quotation on the OTC Bulletin Board and the Toronto Stock Exchange is not sufficient to avoid being treated as a "penny stock." The Exchange Act and such penny stock rules generally impose additional sales practices and disclosure requirements on broker-dealers who sell our securities to persons other than "accredited investors" or in transactions not recommended by the broker-dealer. The penny stock rules require a broker-dealer, prior to transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that, prior to a transaction in a penny stock, the broker-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. NASD Sales Practice Requirements Adversely Affect the Market for Our Common Stock In addition to the "Penny Stock" rules described above, the NASD has adopted rules that require that in recommending an investment to a customer,a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, and this has an adverse effect on the market for our shares. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. We are Subject to Further Dilution if We Elect to Pay Fees to Innovatia in Common Stock On February 27, 2001, the Company entered into a three-year development agreement with Innovatia Inc. ("Innovatia"), an existing shareholder of the Company and a wholly owned subsidiary of Aliant Inc. ('Aliant"). The purpose of the agreement is to develop a carrier-classified unified communications product to which the Company will have exclusive title. Under the agreement, Innovatia will license certain intellectual property to the Company on a non-exclusive non-transferable basis for use in the development and verification of current products and will provide specific professional, project management, administrative and support services. In consideration of the services provided, the Company agreed to pay $5.7 million over three years in quarterly installments of $475,000 commencing the quarter ended April 30, 2001. The Company had the option to pay for some or all of the services in cash or common shares. It is the Company's intention to negotiate a non-exclusive licensing agreement with Aliant for use of the product. On December 28, 2001, the Company and Innovatia agreed to terminate the three-year development agreement. In settlement of the services provided under this agreement, the Company issued to Innovatia a Canadian dollar denominated promissory note in the amount of $1,707,989 (Cdn $2,720,142). Immediately thereafter, the Company repaid $132,059 (Cdn $210,000) of the promissory note by issuing 500,000 common shares at a market price of $0.26 (Cdn $0.42) per share. In accordance with the requirements of the Toronto Stock Exchange, the issuance of these common shares resulted in an equivalent reduction in the number of common shares reserved for issuance under the Company's current stock option plan. The promissory note bears interest at prime plus 1% (prime rate at June 30, 2002 was 4.25%) and is repayable in quarterly installments until repaid in full. The amount payable each quarter ("Maximum Amount Payable") is the lesser of $142,314 (Cdn $226,678) and 40% of the net aggregate amount of invoices ("Invoiced Amount") issued by the Company to Aliant in the quarter. The Maximum Amount Payable, if any, for the first two quarters ended June 30, 2002 will be due on October 1, 2002. All subsequent amounts payable, if any, will be due on or before the first business day following the quarter end date. In the event the Invoiced Amount for a particular quarter exceeds $142,314 (Cdn$226,678), the Company will carry forward the difference between the Invoiced Amount and $142,314 (Cdn$226,678) and include the difference in the calculation of Maximum Amount Payable for subsequent quarters. The Company has the option, until December 31, 2004, to settle some or all of the promissory note, principal and interest, in cash, common shares or a combination thereof. If paid by common shares, then 500,000 of the shares will be valued at the lesser of the market price of our shares on the Toronto Stock Exchange and Cdn$0.75 per share, and the value of the balance of any other shares issuable is determined by the weighted average trading price of the Company's common share on the Toronto Stock Exchange over the ten trading days immediately prior to the date on which the common shares are to be issued. After December 31, 2004, any amount of the promissory note which remains unpaid will continue to be settled as the lesser of $142,314 (Cdn$226,678) and 40% of the net aggregate amount of invoices issued by the Company to Aliant in the quarter, however the Company is required to settle only with common shares and the number of common shares payable each quarter, if any, is determined by dividing the Maximum Amount Payable by Cdn$1.56. The Company is required to obtain shareholder and regulatory approval to issue common shares to settle the promissory note, other than for the 500,000 common shares issued on December 28, 2001 and for up to 2,000,000 shares of common stock that was approved by shareholders at the Company's Annual General Meeting held on June 13, 2002. If such approval is not obtained, the Company can only repay the promissory note in cash. If all or a significant portion of these payments were made in shares, this would result in substantial additional dilution in the future. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in foreign currency exchange rates and interest rates which could impact our results of operations and financial condition. We manage our exposure to these market risks through our regular operating and financing activities. We face foreign currency exchange risk because the majority of our revenues are denominated in U.S. dollars and a majority of our operating costs are incurred in Canadian dollars. The fluctuations in the foreign exchange rate between the U.S. and Canadian currency will result in fluctuations in our annual and quarterly results. Management has not employed the use of foreign currency derivative financial instruments that would allow the reduction in our exposure to exchange rate movements. Management does not expect any significant change in the strategies it employs to manage exposure in the near future. We maintain a short-term investment portfolio consisting of term deposits with an average maturity of less than 90 days. These short-term investments are subject to interest rate risk and we manage this risk by maintaining sufficient cash balance such that we are typically able to hold our investments to maturity. PART II OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On August 8, 2001, Sharon Ho commenced an action in the Superior Court of California against Voice Mobility International, Inc. and the predecessor corporation, Equity Capital Group, to recover damages as a result of an alleged breach of contract. On October 10, 2001, we entered into an indemnification agreement with the former majority shareholder of Equity Capital Group to indemnify us against any claims or liabilities that existed prior to the April 1, 1999 and June 1, 1999 share purchase agreements. Also on October 10, 2001, we entered into a settlement agreement with the former majority shareholder of Equity Capital Group. Under the agreement, the former shareholder is to pay us $290,000 to cover the costs of the Sharon Ho settlement and additional related legal expenses. The settlement amount is to be paid in set installments from October 10, 2001 to October 25, 2002. In addition to the indemnification and settlement agreements, Voice Mobility International, Inc. has also obtained a security agreement, a guaranty agreement and a stock pledge agreement to further protect and collateralize its position. On October 15, 2001, a settlement agreement and mutual release was signed between the Voice Mobility International, Inc. and Ms. Ho. The settlement agreement sets forth payments owing to Ms. Ho by Voice Mobility in the sum of $252,500 to be paid in set installments from October 10, 2001 to October 1, 2002. On March 8, 2002, a shareholder and Director of the Company agreed to indemnify the Company against any losses that may be incurred on the collectibility of the settlement amount related to Voice Mobility and the former majority shareholder of Equity Capital Group. On August 24, 2001, Manschot Opportunity Fund, LP and Galladio Capital Management, BV filed suit in the Superior Court of the State of California, County of Orange (Case No. 01CC10988) against Voice Mobility International, Inc., Funkart Holdings, Inc., Pioneer Growth Corporation, Robert L. Cashman and Greg Harrington. The suit related to an alleged December 1998 agreement between Motorsports Promotions, Inc. and Funkart Holdings, Inc., during the time period prior to Voice Mobility Inc.'s April 1999 reverse acquisition of Equity Capital Group, Inc., the predecessor company to Voice Mobility International. Plaintiffs alleged to be creditors of Motorsports Promotions, acquiring Motorsports' rights under the alleged agreement at a UCC public sale. Defendant Funkart Holdings was alleged to have been a subsidiary of Equity Capital Group during the period in question, but which was assigned to Pioneer Growth Corporation, a company unaffiliated with Voice Mobility International, pursuant to the reverse acquisition. The suit alleged that during the period in question, Voice Mobility International also was the alter-ego of defendant Cashman. The suit alleges breach of contract and breach of fiduciary duty and sought compensatory damages in excess of $1,325,000, prejudgment interest and punitive damages. Voice Mobility tendered the defense and indemnity of such claims to Mr. Cashman. On July 1, 2002, Voice Mobility settled all claims against Voice Mobility for $25,000 and was fully released from all plaintiff's claims. On December 31, 2001, Budd Stewart, a former employee of Voice Mobility, filed a Writ of Summons and Statement of Claim with the Supreme Court of British Columbia, claiming breach of an implied employment contract and stock option agreement by Voice Mobility Inc. The relief sought by Mr. Stewart is damages under several causes of action for an aggregate of approximately $1,825,892. We believe that there is no substantive merit to the claims and we intend to vigorously defend the action. We are party to other claims from time to time, not required to be disclosed in accordance with Item 103 of Regulation S-K. While management currently believes that the ultimate outcome of these proceedings, including those describe above, individually and in the aggregate, will not have a material adverse effect on our financial position or results of operations, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs. The estimate of the potential impact on our financial position or overall results of operations for the above legal proceedings could change in the future. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS On June 11, 2002, in connection with the exercise of 662,500 VM Canada Exchangeable Shares, we issued 662,500 common shares for no additional consideration. There was no cash or other consideration involved in this transaction as it was an exchange only. ITEM 3 - DEFUALTS UPON SENIOR SECURITIES None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS The Company held its annual general meeting of shareholders on June 13, 2002 in Vancouver, Canada. Three proposals were adopted at the annual general meeting by the margins indicated. 1) Mr. James J. Hutton, Randy G. Buchamer, William E. Krebs, Robert E. Neal, F. David D. Scott, Morgan Sturdy, and Donald A. Calder were elected as the Directors of the Company for a one-year term expiring at the 2003 Annual Meeting of Stockholders. Each nominee received votes of 23,432,107 For and 1,000 Abstaining. 2) The selection of Ernst & Young LLP., Chartered Accountants, as independent auditors for the year ending December 31, 2002 was ratified and the Board of Directors were authorized to fix the remuneration of the auditors. Votes were 23,499,334 For. 3) To issue up to 2,000,000 shares of common stock to Innovatia Inc. pursuant to the terms of an agreement between Innovatia Inc. and us dated February 27, 2001, as amended. Votes were 20,573,313 For, 9,100 Against, 1,733,171 Abstaining and 1,189,250 Not Voted. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer (b) Reports on Form 8-K: 1) On June 14, 2002, we filed a report on Form 8-K relating to a press release issued on June 13, 2002 announcing an agreement with Aliant Inc. to migrate its 450,000 voicemail customer base to Voice Mobility UCN 200 enhanced messaging platform. 2) On June 20, 2002, we filed a report on Form 8-K relating to a press release issued on June 18, 2002 announcing that, subject to regulatory approval, we have arranged a private placement of up to Cdn$650,000 and US$90,000. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VOICE MOBILITY INTERNATIONAL, INC. (Registrant) By: /s/Randy G. Buchamer ---------------------------------------------- Randy G. Buchamer Chief Executive Officer and Chairman of the Board Principal Executive Officer By: /s/James Hewett ---------------------------------------------- James Hewett, Chief Financial Officer and Principal Accounting Officer Dated: August 14, 2002 Exhibit 99.1 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. Paragraph 1350, AS ADOPTED PURSUANT TO Paragraph 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Voice Mobility International, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Randy G. Buchamer, Chief Executive Officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, hereby certify that to the best of my knowledge: (1) The Report fully complies with the requirements of 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Randy G. Buchamer ---------------------------------------------- Randy G. Buchamer Chairman and Chief Executive Officer August 14, 2002 This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Exhibit 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. Paragraph 1350, AS ADOPTED PURSUANT TO Paragraph 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Voice Mobility International, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James Hewett, Chief Financial Officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, hereby certify that to the best of my knowledge: (1) The Report fully complies with the requirements of 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ James Hewett ---------------------------------------------- James Hewett Chief Financial Officer August 14, 2002 This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.