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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to _________________
Commission File Number 0-18299
i3 MOBILE, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0335259
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
181 Harbor Drive 06902
Stamford, Connecticut (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 428-3000
Indicate by check mark 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 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 [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class November 10, 2002
----- -----------------
Common Stock, Par Value $.01 20,471,360
1
i3 MOBILE, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheet as of September 30, 2002 and
December 31, 2001..................................................... 3
Consolidated Statement of Operations for the Three and Nine
Months Ended September 30, 2002 and 2001.............................. 4
Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 2002 and 2001.............................. 5
Notes to Consolidated Financial Statements.............................. 6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9
Item 3. - Quantitative and Qualitative Disclosures about Market Risk.... 22
Item 4. - Controls and Procedures....................................... 22
Part II - Other Information
Item 6. - Exhibits and Reports on Form 8-K.............................. 23
Signatures.............................................................. 24
Section 302 Certifications.............................................. 25
2
i3 MOBILE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
2002 2001
---------- -----------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 25,195 $ 52,612
Accounts receivable, net of allowances....................... 424 651
Deferred advertising......................................... - 2,245
Prepaid expenses and other current assets.................... 644 749
--------- ----------
Total current assets.................................. 26,263 56,257
Fixed assets, net ........................................... 1,908 11,423
Deposits and other non-current assets........................ 535 778
--------- ----------
Total assets.......................................... $ 28,706 $ 68,458
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................... $ 4,488 $ 5,190
Capital lease obligation, current portion ................... 103 568
--------- ----------
Total liabilities..................................... 4,591 5,758
Stockholders' equity:
Preferred stock; $.01 par value per share, 50,000 shares
authorized, none issued .................................... -- --
Common stock; $.01 par value per share, 75,000,000 shares
authorized, 24,805,640 and 24,788,740 shares issued ........ 248 248
Additional paid-in capital................................... 166,945 166,919
Notes receivable from stockholder ........................... (250) (500)
Deferred compensation........................................ (10) (133)
Accumulated deficit.......................................... (135,681) (98,871)
Treasury stock at cost, 4,334,280 and 2,230,800 shares ...... (7,137) (4,963)
--------- ----------
Stockholders' equity ................................. 24,115 62,700
--------- ----------
Total liabilities and stockholders' equity............ $ 28,706 $ 68,458
========= ==========
NOTE: The balance sheet at December 31, 2001 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
3
i3 MOBILE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Net revenue ............................... $ 899 $ 989 $ 2,597 $ 3,671
-------- -------- -------- --------
Expenses:
Operating ........................ 1,682 635 5,237 2,423
Sales and marketing .............. 2,078 1,809 11,539 4,523
Product development .............. 1,377 1,529 4,217 4,892
General and administrative ....... 3,971 5,240 12,200 13,125
Long-lived asset impairment ...... 6,731 -- 6,731 --
-------- -------- -------- --------
Total expenses ............................ 15,839 9,213 39,924 24,963
-------- -------- -------- --------
Operating loss ............................ (14,940) (8,224) (37,327) (21,292)
Interest income, net ...................... (112) (548) (517) (2,451)
-------- -------- -------- --------
Net loss .................................. $(14,828) $ (7,676) $(36,810) $(18,841)
======== ======== ======== ========
Net loss per share - basic and diluted .... $ (0.72) $ (0.34) $ (1.72) $ (0.83)
======== ======== ======== ========
Shares used in computing net loss per share 20,471 22,729 21,345 22,775
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
i3 MOBILE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
---------------------------
September 30, September 30,
2002 2001
----------- ----------
(UNAUDITED) (UNAUDITED)
Cash flow from operating activities:
Net loss ...................................................... $(36,810) $(18,841)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ............................................... 4,564 3,293
Long-lived asset impairment ................................ 6,731 --
Non-cash stock compensation charges ........................ 403 437
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ................ 227 (146)
Decrease in deferred advertising .......................... 2,245 --
Decrease (increase) in other assets ....................... 88 (723)
(Decrease) in accounts payable and accrued liabilities .... (1,414) (625)
-------- --------
Net cash (used) in operating activities ........................ (23,966) (16,605)
-------- --------
Investing activities:
Purchase of fixed assets .................................. (829) (6,327)
-------- --------
Net cash (used) in investing activities ........................ (829) (6,327)
-------- --------
Financing activities:
Payments on capital lease obligations ..................... (465) (613)
Proceeds from exercise of stock options ................... 17 58
Proceeds from notes receivable ............................ -- 4
Issuance of note to stockholder ........................... -- (500)
Repurchase of common stock ................................ (2,174) (372)
-------- --------
Net cash (used) in financing activities ........................ (2,622) (1,423)
-------- --------
Decrease in cash and cash equivalents .......................... (27,417) (24,355)
Cash and cash equivalents at beginning of period ............... 52,612 84,900
-------- --------
Cash and cash equivalents at end of period ..................... $ 25,195 $ 60,545
======== ========
See accompanying notes to consolidated financial statements.
5
i3 MOBILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 - COMPANY OVERVIEW:
i3 Mobile, Inc., "i3" or the "Company", was incorporated in Delaware on
June 28, 1991. During 2001, the Company evolved from a company that distributed
customized text-based information to mobile devices under the "Powered by i3
Mobile" product brand into a company that it believes is among the first to
create a premium mobile subscription information and communication service for
telephones. This service, Pronto, was marketed directly to consumers delivering
information on demand 24 hours a day, combining the service of a mobile
concierge with the power of voice recognition technology.
Pronto provides telephone users with information accessible through the
Company's live operators and proprietary, automated flat menu voice recognition
system. The Company's live operators provide its subscribers with services such
as making restaurant reservations and providing driving directions. The
Company's live operators are also available to answer questions outside the
scope of its automated voice recognition system, and can assist subscribers if
the automated voice recognition system cannot properly answer the request. The
Company's automated content currently features news, stock quotes, sports,
weather, movie reviews and leisure categories such as horoscopes and lottery
results. The Company's content is automatically accessible in an "ask a
question/get an answer" format.
The Company also continues to offer its legacy wireless alert products
in different categories for mobile device consumers. These "Powered by i3
Mobile" products are sold primarily through relationships with wireless network
operators on a subscription basis.
LIQUIDITY:
The Company has incurred substantial losses and negative cash flows
from operations in every fiscal period since inception. For the nine months
ended September 30, 2002, the Company incurred a loss from operations of
approximately $37.3 million and negative cash flows of approximately $27.4
million. As of September 30, 2002, the Company had an accumulated deficit of
approximately $135.7 million. Management expects operating losses and negative
cash flows to continue for the foreseeable future as the Company incurs ongoing
costs and expenses related to its Pronto-related initiatives. We anticipate our
overall cash expenditures in 2002 will exceed the total cash used in 2001. The
anticipated cash expenditures for the next twelve months include approximately
$3.3 million of non-cancelable commitments, which include, among other things,
rent, marketing and technology commitments. During July 2002, the Company began
the implementation of certain cost savings measures to manage working capital.
These included a substantial reduction of television marketing and other
initiatives, a transition of the customer provisioning and service activities of
Pronto from an outside partner to an in-house solution, the renegotiation and/or
termination of certain of its content relationships, and a reduction of
approximately 30% of its workforce. The reduction of workforce has resulted in a
$0.8 million charge included in the Company's results of operations for the
third quarter of 2002. Certain of these costs could be further reduced if the
Company determines that its business model and prospects do not support or
require costs being maintained at current levels. Additionally, during the third
quarter of 2002, the Company recorded a $6.7 million non-cash charge for the
impairment of capitalized software, computer hardware and leasehold improvements
in accordance with SFAS 144 (see Note 4). If the Company fails to generate
sufficient revenues, enter into a Transaction, raise additional capital or
reduce certain discretionary spending, the resultant reduction of the Company's
available cash resources would have a material adverse effect on the Company's
ability to continue as an operating company and a going concern and therefore to
achieve its intended business objectives and could result in the Company ceasing
operations.
6
NOTE 2 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Certain information
and note disclosures normally included in financial statements have been omitted
pursuant to Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included in the accompanying unaudited financial
statements. Operating results for the three and nine month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2002.
For further information, refer to the consolidated financial statements
and footnotes thereto included in our annual report on Form 10-K for the year
ended December 31, 2001.
Certain reclassifications have been made for consistent presentation.
NOTE 3 - SIGNIFICANT CUSTOMERS:
During the nine months ended September 30, 2002 and September 30, 2001,
the Company had two wireless network operator customers for its legacy wireless
alert product, which combined, accounted for approximately 72% and 74% of its
total net revenues, respectively. During April 2002, the Company received notice
from its largest wireless network operator customer, who accounted for 50% of
net revenues for the nine-month period ending September 30, 2002, that it will
be terminating its legacy wireless alert product with the Company effective
December 31, 2002.
NOTE 4 - LONG-LIVED ASSET IMPAIRMENT:
In the third quarter of 2002, the Company recorded a $6.7 million
non-cash charge for the impairment of capitalized software, computer hardware
and leasehold improvements. Due to the Company's operating results being
substantially lower than originally anticipated, a decline in the Pronto
subscriber base realized during the third quarter of 2002, the reduction of the
Company's direct to consumer marketing initiatives, and the uncertainty
surrounding its Pronto offering, management determined that a review for
impairment of the fair value of the Company's long-lived assets in accordance
with SFAS 144 was required. During its impairment review, the Company assessed
its future cash flows and determined that it was necessary to record an
impairment charge to reduce the carrying value of its long-lived assets to their
estimated fair value.
NOTE 5 - ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company maintained an allowance for doubtful accounts of $0.1
million at September 30, 2002 and December 31, 2001, respectively.
NOTE 6 - STOCK REPURCHASES:
On April 16, 2001, the Company issued a press release announcing that
its Board of Directors had authorized a share repurchase program to acquire up
to 2.3 million shares of its common stock. Pursuant to this repurchase program,
such purchases will be made from time to time in the open market, subject to
general market and other conditions. The Company will finance the repurchase
program through existing cash resources. Shares acquired pursuant to this
repurchase program will become treasury shares and will be available for
reissuance for general corporate purposes. As of September 30, 2002, and
December 31, 2001, 0.4 million shares and 0.3 million shares have been
repurchased by the Company under this plan at a weighted average repurchase
price of $1.86 per share and $2.12 per share, respectively.
During April 2002, the Company announced that it had purchased, through
a privately negotiated transaction, 1.5 million shares of the Company's common
stock, at $1.10 per share, from Keystone Ventures IV, L.P. and Keystone Ventures
V, L.P., which represented a discount to the fair market value of the shares at
the time of such repurchase. The Keystone entities had purchased the shares in a
private placement prior to the Company's April 2000 initial public offering.
During the three months ended June 30, 2002, the Company also repurchased 0.5
million shares of its common stock from a former member of the Company's Board
of Directors. The
7
average price of these repurchases were $0.85 per share, which represented no
greater than the fair market value of the shares at the time of such
repurchases.
NOTE 7 - RELATED PARTY TRANSACTIONS:
On September 10, 2001, the Company entered into a note agreement with
RMU Management, LLC, ("RMU"), an entity controlled by a then member of the
Company's Board of Directors. Under the terms of the note agreement, as amended,
the Company agreed to lend RMU $0.5 million, until December 31, 2002, at an
interest rate equal to the prime rate plus two percent. The note is secured by
833,333 shares of the Company's common stock owned by RMU. During the three
months ended September 30, 2002, the Company recorded a non-cash stock
compensation charge of $0.3 million in its results of operations to reflect the
difference between carrying value of the note and the fair value of the
collateral as of September 30, 2002.
NOTE 8 - SUBSEQUENT EVENTS:
On October 31, 2002, the Company engaged the investment bank of Kaufman
Bros., L.P. ("KBRO") on an exclusive basis until February 28, 2003 (the "KBRO
engagement") to evaluate potential strategic alternatives for the Company, and
to assist the Company in locating suitable merger or acquisition candidates,
strategic alliance partners, potential funding sources, or a buyer for the
Company (collectively, a "Transaction"). KBRO is paid a fixed monthly fee for
its services, which will be credited against the sliding scale fees it would
receive if the Company consummates a Transaction with a party sourced by KBRO.
There can be no assurance the Company will be successful in sourcing or
consummating a Transaction and the failure to do so could have a material
adverse effect on the Company, including the possible cessation of business.
Effective October 31, 2002, the Company extended its agreement with
iNetNow, Inc., and the agreement is currently on automatic monthly renewals
until January 31, 2003, unless earlier terminated. iNetNow provides the live
operator aspect of the Company's Pronto service, and is materially dependent on
iNetNow for this aspect of its business. There can be no assurance that iNetNow
will be able or willing to continue this arrangement or that the Company will be
able to provide this aspect of the Pronto service internally; any interruption
in service could have a material adverse affect on our business. See "Risk
Factors." The Company is continuing to reassess its call center needs.
8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes included in this document and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and notes thereto for the years ended December
31, 2001, 2000 and 1999 included in our annual report on Form 10-K for the year
ended December 31, 2001, and presumes that readers have access to, and will have
read, "Management's Discussion and Analysis of Financial Conditions and Results
of Operations" contained in such Form 10-K.
OVERVIEW
From our inception in June 1991 until 2001, our business was comprised
of distributing customized text-based information to mobile devices under the
"Powered by i3 Mobile" product brand. During 2001, we evolved from a company
that distributed customized text-based information to mobile devices under the
"Powered by i3 Mobile" product brand into a company that we believe is among the
first to create a premium mobile subscription information and communication
service for telephones. This service, Pronto, was marketed directly to consumers
delivering information and service on demand 24 hours a day, combining the
service of a mobile concierge with the simplicity of flat-menu voice recognition
technology.
In fiscal 2001, we invested significant financial resources developing
Pronto and its supporting technology infrastructure. In addition, we spent
approximately $1 million on consumer research to identify specific consumer
needs and preferences in order to develop applications that are most compelling
to telephone users, especially mobile telephones. The Pronto experience, unlike
the experience afforded by the current "wireless internet," leverages the core
voice interface functionality of telephones, rather than the telephone keypad,
to create a seamless user experience.
Pronto was test marketed in the Hartford/New Haven region of
Connecticut in the fourth quarter of 2001, and a coordinated national marketing
campaign for Pronto was conducted during the second quarter of 2002. As of
September 30, 2002 we had approximately 2,800 paying subscribers on our Pronto
service, down from 3,400 subscribers as of June 30, 2002.
During July 2002, the Company began the implementation of certain cost
savings measures to manage working capital. These included a substantial
reduction of television marketing and other initiatives, a transition of the
customer provisioning and service activities of Pronto from an outside partner
to an in-house solution, the renegotiation and/or termination of certain of its
content relationships, and a reduction of approximately 30% of our workforce.
The reduction of workforce has resulted in a $0.8 million charge included in our
results of operations for the third quarter of 2002. Certain of these costs
could be further reduced if working capital continues to decrease significantly.
We would anticipate that subscription revenues from wireless network
operators will continue to decrease substantially in the future as we
de-emphasize our legacy SMS wireless alert product. During April 2002, we
received notice from our largest wireless network operator customer, who
accounted for 38% and 50%, respectively, of net revenues for the three-month and
nine-month periods ending September 30, 2002, that it will be terminating its
legacy wireless alert product with us effective December 31, 2002.
During the three months ended September 30, 2002, we recorded a $6.7
million non-cash charge for the impairment of capitalized software, computer
hardware and leasehold improvements. Due to our operating results being
substantially lower than originally anticipated, a decline in the Pronto
subscriber base realized during the third of quarter of 2002, the reduction of
our direct to consumer marketing initiatives, and the uncertainty surrounding
the Pronto offering, management determined that a review for impairment of the
fair value of the Company's long-lived assets in accordance with SFAS 144 was
required. During our impairment review, we assessed the Company's future cash
flows and determined that it was necessary to record an impairment charge to
reduce the carrying value of the Company's long-lived assets to their estimated
fair value. The charge has the effect of increasing the operating loss for the
three and nine months ended September 30, 2002 by $6.7 million.
9
On October 31, 2002, the Company engaged the investment bank of Kaufman
Bros., L.P. ("KBRO") on an exclusive basis until February 28, 2003 (the "KBRO
engagement") to evaluate potential strategic alternatives for the Company, and
to assist the Company in locating suitable merger or acquisition candidates,
strategic alliance partners, potential funding sources, or a buyer for the
Company (collectively, a "Transaction"). KBRO is paid a fixed monthly fee for
its services, which will be credited against the sliding scale fees it would
receive if the Company consummates a Transaction with a party sourced by KBRO.
Effective October 31, 2002, the Company extended its agreement with
iNetNow, Inc., and the agreement is currently on automatic monthly renewals
until January 31, 2003, unless earlier terminated. iNetNow provides the live
operator aspect of the Company's Pronto service, and is materially dependent on
iNetNow for this aspect of its business. There can be no assurance that iNetNow
will be able or willing to continue this arrangement or that the Company will be
able to provide this aspect of the Pronto service internally; any interruption
in service could have a material adverse affect on our business. See "Risk
Factors." The Company is continuing to reassess its call center needs.
The Company has determined that its direct to consumer marketing
approach for Pronto has not proven effective in quickly growing its subscriber
base; the Company has now focused its efforts on establishing sales channels for
Pronto through marketing and distribution relationships with third parties.
These could include wireless network operators, telecommunications carriers,
Internet portals, business enterprises, and selected vertical retail outlets.
The Company could adopt variable pricing models, different from those currently
in effect, and a variety of revenue sharing arrangements, if it consummates any
such marketing and distribution relationships. Even if such a relationship is
established, there can be no assurance any such relationships will be able to
successfully commercialize the Company's services, and the Company would
continue to incur substantial operating losses, and would require significant
additional financing, until such time as a substantial subscriber base,
recurring revenues and positive cash flow were achieved. In addition, the
Company could consummate a Transaction if the KBRO engagement is successful. The
Company has determined that seeking a Transaction at this time is necessary,
since we believe the public market price of our stock does not adequately
reflect the quality of our technology, personnel, products and services, and
growth prospects. Moreover, we believe that the Pronto service can be positioned
to capitalize on the increasing consumer demand for voice services. However,
while the Company seeks such marketing and distribution relationships and/or a
Transaction, we will continue to incur significant operating expenses and incur
significant losses in maintaining our existing Pronto subscriber base and
supporting our related call center capabilities and technology infrastructures,
including our relationship with iNetNow. The Company will also continue to incur
research and development and related technology expenses in refining and
creating new Pronto services, including in response to requests from potential
marketing and distribution partners.
We anticipate that our financial results for the remainder of 2002 and
through 2003 will be principally driven by our ability to properly allocate the
extent and timing of our cash resources to technology development and the
establishment and servicing of such marketing and distribution channel
relationships, if such relationships materialize. In the event we are unable to
consummate any such marketing and distribution relationships, or effect a
Transaction, at some point early in 2003 we would need to determine whether to
implement additional cost reductions, obtain additional financing, or determine
whether it would be appropriate to cease operations. See "Risk Factors".
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Net Revenue. Net revenue decreased 9% to $0.9 million for the three
months ended September 30, 2002 from $1.0 million for the three months ended
September 30, 2001. This decrease was primarily attributable to a $0.3 million
decrease in subscription revenues from wireless network operators recognized
during the 2002 period as compared to the 2001 period, partially offset by $0.2
million in revenues realized from the Pronto product offering in the 2002
period.
Operating Expenses. Operating expenses increased by 165% to $1.7
million for the three months ended September 30, 2002 from $0.6 million for the
three months ended September 30, 2001. The increase from the 2001 period was
primarily attributable to the cost of our live operator and customer service
costs in connection with the offering of Pronto in the 2002 period. During the
remainder of 2002, we will continue to incur substantial operating expenses
relating to our various Pronto-related requirements.
Sales and Marketing Expenses. Sales and marketing expenses increased by
15% to $2.1 million for the three months ended September 30, 2002 from $1.8
million for the three months ended September 30, 2001. The increase from the
2001 period is primarily attributed to direct marketing initiatives for Pronto
in the 2002 period which primarily included the fulfillment of television
commitments. As of September 30, 2002, we are contractually obligated to
purchase for cash approximately $0.7 million in the aggregate in advertising
from CNN Newsource Inc. and ESPN Inc. This commitment is scheduled to be
fulfilled as follows, $0.4 million by December 31, 2002, and $0.3 million by
June 30, 2003. We anticipate that sales and marketing expenses will continue to
decrease, as compared to the third quarter of 2002, as a result of cost
management initiatives.
Product Development Expenses. Product development expenses decreased by
10% to $1.4 million for the three months ended September 30, 2002 from $1.5
million for the three months ended September 30, 2001. The decrease from the
2001 period was primarily a result of reduced outside labor costs during the
2002 period that were associated with the creation of Pronto in the 2001 period.
General and Administrative Expenses. General and administrative
expenses decreased by 24% to $4.0 million for the three months ended September
30, 2002 from $5.2 million for the three months ended September 30, 2001. This
decrease from the September 30, 2001 period was primarily attributable to a
decrease in personnel and related costs of $1.3 million in the 2002 period,
reflecting our recent cost management initiatives.
Interest Income, Net. Net interest income was $0.1 million for the
three months ended September 30, 2002 as compared to $0.5 million for the three
months ended September 30, 2001. The decrease was attributable to a lower amount
of funds invested in the 2002 period as compared to 2001 as well as lower
average returns on investments due to a general decrease in interest rates. We
expect net interest income to decline in the near future as we continue to
reduce the amount of funds invested.
11
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Net Revenue. Net revenue decreased 29% to $2.6 million for the nine
months ended September 30, 2002 from $3.7 million for the nine months ended
September 30, 2001. This decrease was attributable to a $0.9 million decrease in
subscription revenues from wireless network operators for the 2002 period as
compared to 2001, as well as $0.4 million of non-recurring development revenues
recognized during the 2001 period as compared to the 2002 period, partially
offset by $0.3 million in revenues realized from the Pronto product offering in
the 2002 period.
Operating Expenses. Operating expenses increased by 116% to $5.2
million for the nine months ended September 30, 2002 from $2.4 million for the
nine months ended September 30, 2001. The increase was primarily attributable to
the cost of expanding our live operator and customer service as well as
increased customer acquisition costs incurred in connection with the marketing
and offering of Pronto in the 2002 period. During the remainder of 2002, we will
continue to incur substantial operating expenses relating to our various
Pronto-related requirements.
Sales and Marketing Expenses. Sales and marketing expenses increased by
155% to $11.5 million for the nine months ended September 30, 2002 from $4.5
million for the nine months ended September 30, 2001. The increase from the
September 30, 2001 period is primarily attributed to $7.3 million in direct
marketing initiatives in the 2002 period for the Pronto product which included
television, direct mail, on-line and print advertising, as well as our
utilization of non-cash media credits with the National Broadcasting Company,
Inc. which reduced our deferred advertising asset, amounting to $2.2 million of
expense. The increase in the sales and marketing expenses for the nine-month
period ended September 30, 2002 is attributable to the marketing of our Pronto
product. As of September 30, 2002, we are contractually obligated to purchase
for cash an aggregate of approximately $0.7 million in advertising from CNN
Newsource Inc. and ESPN Inc. This commitment is scheduled to be fulfilled as
follows, $0.4 million by December 31, 2002 and $0.3 million by June 30, 2003. We
anticipate that sales and marketing expenses will continue to decrease, as
compared to the nine months ended September 30, 2002, as a result of our recent
cost management initiatives.
Product Development Expenses. Product development expenses decreased by
14% to $4.2 million for the nine months ended September 30, 2002 from $4.9
million for the nine months ended September 30, 2001. The decrease from the 2001
period was primarily a result of reduced outside labor costs during the 2002
period that were associated with the creation of Pronto in the 2001 period.
General and Administrative Expenses. General and administrative
expenses decreased by 7% to $12.2 million for the nine months ended September
30, 2002 from $13.1 million for the nine months ended September 30, 2001. This
decrease from the September 30, 2001 period was primarily attributable to a
decrease in personnel and related costs of $3.1 million, which reflect our
recent cost management initiatives, partially offset by an increase in
depreciation of $1.2 million as compared to the prior year period due to our
capital investing activities undertaken in 2001.
Interest Income, Net. Net interest income was $0.5 million for the nine
months ended September 30, 2002 as compared to $2.5 million for the nine months
ended September 30, 2001. The decrease was attributable to a lower amount of
funds invested in the 2002 period as compared to 2001 as well as lower average
returns on investments due to a general decrease in interest rates. We expect
net interest income to decline in the near future as we continue to reduce the
amount of funds invested.
12
LIQUIDITY AND CAPITAL RESOURCES
Since our inception we have financed our operations primarily through
sales of our common and preferred securities and the issuance of long-term debt,
which has resulted in aggregate cash proceeds of $130.1 million through
September 30, 2002. We have incurred substantial losses and negative cash flows
from operations in every fiscal period since inception. For the nine months
ended September 30, 2002, we have incurred a loss from operations of
approximately $37.3 million and negative cash flows of $27.4 million. As of
September 30, 2002, we have an accumulated deficit of approximately $135.7
million.
Net cash used in operating activities was $24.0 million for the nine
months ended September 30, 2002 and $16.6 million for the nine months ended
September 30, 2001. The principal use of cash in each of these periods was to
fund our losses from operations.
We believe that our current cash and cash equivalents will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. In this regard, we have
determined that we will not continue to market Pronto through a direct to
consumer marketing approach, and will instead focus on promoting and positioning
Pronto through potential marketing distribution channels with third parties who
have significantly greater financial resources than we do. We anticipate
utilizing our cash and cash equivalents to invest in product development, secure
third party marketing distribution channels and to fund expected losses from
operations. Specifically, we anticipate such utilization to include operating
expenses associated with our Pronto product offering, such as call center, live
operator and associated expenses, and ongoing refinement of our speech
recognition technology. In addition, we may incur significant uses of cash in
connection with possible strategic acquisitions and exploration of other
potential business Transactions with strategic partners. We anticipate our
overall cash expenditures in 2002 will exceed the total cash used in 2001. The
anticipated cash expenditures for the next twelve months include approximately
$3.3 million of non-cancelable commitments, which include, among other things,
rent, marketing and technology commitments. Because we implemented a business
model in 2002 focusing on the Pronto suite of services, and we have
de-emphasized our legacy wireless alert product offering, we anticipate that our
historical source of revenues will diminish, and that we will incur negative
operating margins through 2002 and into 2003 and net losses throughout 2002 and
2003 as we incur significant expenses in connection with Pronto. While we strive
to attain revenues from Pronto that will eventually replace and exceed those
from our legacy wireless alert business, there can be no assurance of this
occurrence. In addition, we may not generate revenues at levels sufficient to
cover anticipated expenses, resulting in ongoing net losses and depletion of our
cash resources. Certain of these expenses could be further reduced if working
capital further decreases significantly. In such event, we would need to seek
and obtain additional financing; there can be no assurance we will be able to do
so on favorable terms, or at all. If the Company fails to generate sufficient
revenues, enter into a Transaction, raise additional capital or reduce certain
discretionary spending, the resultant reduction of the Company's available cash
resources would have a material adverse effect on our ability to continue as an
operating company and a going concern and therefore to achieve our intended
business objectives and could result in the Company ceasing operations.
During July 2002, we began the implementation of certain cost savings
measures to manage our working capital. These included a substantial reduction
of television marketing and other initiatives, a transition of the customer
provisioning and service activities of Pronto from an outside partner to an
in-house solution, the renegotiation and/or termination of certain of our
content relationships, and a reduction of approximately 30% of our workforce.
Net cash used in investing activities was $0.8 million for the nine
months ended September 30, 2002 compared to $6.3 million for the nine months
ended September 30, 2001. The decrease in the 2002 period was principally
attributed to a reduction of capitalized expenses related to Pronto as compared
to the 2001 period.
Net cash used in financing activities was $2.6 million for the nine
months ended September 30, 2002 and $1.4 million for the nine months ended
September 30, 2001. The principal uses of cash in the 2002 period were $2.2
million for the purchase of treasury stock and $0.4 million for the repayment of
certain capital lease obligations. The principal uses of cash in the 2001 period
were $0.6 million for the repayment of certain capital lease obligations, $0.5
million for the issuance of a note, and $0.3 million for the purchase of
treasury stock.
As of September 30, 2002, we had cash and cash equivalents of $25.2 million
and working capital of $21.7 million.
13
CRITICAL ACCOUNTING POLICIES
Please refer to the discussion of our critical accounting policies
contained in the Management's Discussion and Analysis section of our 2001 Annual
Report to Stockholders (which discussion is incorporated herein by reference).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Exit or Disposal Activities" ("FAS No. 146") was issued. FAS No.
146 addresses the accounting for costs to terminate a contract that is not a
capital lease, costs to consolidate facilities and relocate employees, and
involuntary termination benefits under one-time benefit arrangements that are
not an ongoing benefit program or an individual deferred compensation contract.
A liability for contract termination costs should be recognized and measured at
fair value either when the contract is terminated or when the entity ceases to
use the right conveyed by the contract. A liability for one-time termination
benefits should be recognized and measured at fair value at the communication
date if the employee would not be retained beyond a minimum retention period
(i.e., either a legal notification period or 60 days, if no legal requirement
exists). For employees which will be retained beyond the minimum retention
period, a liability should be accrued ratably over the future service period.
The provisions of the statement will be effective for disposal activities
initiated after December 31, 2002. The Company is currently evaluating the
financial impact of adoption of FAS No. 146.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains certain 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. When used in this report,
the words "believe," "anticipate," "think," "intend," "plan," "expect,"
"project," "will be" and similar expressions identify such forward-looking
statements. The forward looking statements included herein are based on current
expectations and assumptions that involve a number of risks and uncertainties,
including the statements in Liquidity and Capital Resources regarding the
adequacy of funds to meet funding requirements. Our actual results may differ
significantly from the results discussed in the forward-looking statements. A
number of uncertainties exist that could affect our future operating results,
including, without limitation, our ability to locate a suitable strategic
investment partner, acquisition candidate or other investment opportunity, the
growth rate of the market for wireless products, the ability to secure marketing
channel distribution, consumer awareness of our products, the progress and cost
of development of our products and services, the timing and market acceptance of
those products and services, our ability to manage our cash resources until we
are able to generate revenues and profitable operations from our Pronto product,
our history of losses, competitive economic conditions, and general economic
factors. We have incurred significant operating losses since our inception.
There can be no assurance that we will be able to achieve or maintain
profitability in the future. In light of the significant risks and uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such statements should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
Before deciding to invest in i3 Mobile or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information contained in this report and in our other filings with
the SEC. Additional risks and uncertainties not presently known to us may also
affect our business operations. If any of these risks actually occur, our
business, financial condition or results of operations could be seriously
harmed. In that event, the market price of our common stock could decline and
you may lose all or part of your investment.
We have a new product and are considering alternative business models,
which makes predictions of our future results of operations difficult.
During 2001 we initiated our current business model involving offering
subscription-based voice-activated premium wireless content and services, and in
the fall of 2001 we launched local consumer testing of our current "Pronto"
service offering. During the second quarter of 2002, we conducted a national
direct-to-consumer marketing and sales campaign for Pronto. The Company has
determined that its direct to consumer marketing approach for Pronto
14
has not proven effective in quickly growing its subscriber base; the Company has
now focused its efforts on establishing sales channels for Pronto through
marketing and distribution relationships with third parties. These could include
wireless network operators, telecommunications carriers, Internet portals,
business enterprises, and selected vertical retail outlets. The Company could
adopt variable pricing models, different from those currently in effect, and a
variety of revenue sharing arrangements, if it consummates any such marketing
and distribution relationships. Even if such a relationship is established,
there can be no assurance any such relationships will be able to successfully
commercialize the Company's services, and the Company would continue to incur
substantial operating losses, and would require significant additional
financing, until such time as a substantial subscriber base, recurring revenues
and positive cash flow were achieved. There can be no assurance that we will be
able to enter into such a relationship. In addition, the Company could
consummate a Transaction if the KBRO engagement is successful. While the Company
seeks such marketing and distribution relationships and/or a Transaction, we
will continue to incur significant operating expenses and incur significant
losses in maintaining our existing Pronto subscriber base and supporting our
related call center technology infrastructure including our relationship with
iNetNow. Due to our new product offering and alternative business models, the
substantial reduction in direct to consumer marketing initiatives, the
uncertainty in securing marketing channel distribution partnerships with third
parties, evolving consumer preferences in our industry, and the uncertainty of
consummating a Transaction (or the nature thereof if consummated), it is
difficult to predict our future results of operations. Investors must consider
our business, industry and prospects in light of the risks and difficulties
typically encountered by companies in rapidly evolving and intensely competitive
markets requiring significant capital expenditures such as those in which we are
engaged. In the event we are unable to consummate any such marketing and
distribution relationships, or effect a Transaction, at some point early in 2003
we would need to determine whether to implement additional cost reductions,
obtain additional financing, or determine whether it would be appropriate to
cease operations.
We have a history of losses and may not be able to generate sufficient
net revenue from our new business in the future to achieve or sustain
profitability.
We have incurred losses since inception and expect that our net losses
and negative cash flow will continue for the foreseeable future as we seek to
implement our business plan, maintain our service infrastructure, secure
marketing channel distribution partnerships, attract subscription customers and
grow our business. To date, our revenues have largely come from our legacy
"Powered by i3 Mobile" SMS alerts distribution arrangements, and it is
anticipated that this revenue stream will decrease as we develop and expand our
new business. We cannot assure you that we will ever generate sufficient net
revenue to achieve or sustain profitability.
A high percentage of our expenses are, and will continue to be, fixed.
We may also incur significant new costs related to possible acquisitions,
investments, and the integration of new technologies. Whether or not we
consummate a Transaction, we expect to continue to incur significant expenses
for product development, sales and marketing, call center operation, customer
support, and general and administrative expenses as we seek to increase our
product and service offerings, and expand into new markets through establishing
new marketing and distribution relationships with third parties. In particular,
given our early stage of development, our significant operating expenses, the
rate at which consumers subscribe to Pronto, and the rate at which competition
in our industry is intensifying, we may not be able to achieve nor maintain
adequate operating margins. Our ability to achieve and sustain profitability
will depend on the accuracy of our expense projections and revenue growth
projections and on our ability to generate and sustain substantially higher
revenue, while maintaining reasonable cost and expense levels, as we seek to
increase our product offerings, customer base, geographic reach and
technological advantages. As a result, if we fail to increase our revenue, or if
we experience delays in generating revenue, we would incur continuing
substantial operating losses which could lead us to cease providing the Pronto
service. We do not anticipate achieving profitability for the remainder of 2002
and into 2003.
The accuracy of our subscriber base and expense projections are
critical to our profitability.
We anticipate that our financial results for the remainder of 2002 and
through 2003 will be principally driven by our ability to properly allocate the
extent and timing of our limited cash resources to technology development and
the establishment and servicing of third party marketing and distribution
channel relationships, if any are to materialize. The application of these
resources must be
15
coordinated with and take into account the projected rate of growth of our
Pronto service subscriber base and the pricing assumptions in our business
model. In the event we are unable to consummate any such marketing and
distribution relationships, or effect a Transaction, we would need to determine
whether to implement additional cost reductions, obtain additional financing, or
determine whether it would be appropriate to cease operations. Based on our
experiences to date, management has made significant estimates regarding the
anticipated size of our subscriber base, taking into account many variables,
certain of which are outside our control. These variables include growth in the
market for wireless services, customer demand for our products and services, the
efficacy of our marketing channel distribution efforts, and the reliability and
speed of our technology infrastructure and live operator service. If our
subscriber base does not grow at projected rates or if our pricing assumptions
are incorrect, our up front expenses, will continue to exceed our revenues by
amounts greater than currently anticipated, which will accelerate our projected
losses and place additional pressure on our cash resources and could lead us to
cease providing the Pronto offering. As of September 30, 2002, the number of
subscribers for the Pronto service was significantly below the number originally
projected by management for such date and less than the number of subscribers at
June 30, 2002.
The success of our current business model will be dependent on securing
marketing and distribution channels with third parties.
We have incurred significant expenditures in order to increase
awareness of our Pronto services and brand name through direct to consumer sales
and marketing and other promotional activities. We have determined that we do
not currently have the financial resources with which to continue a direct to
consumer marketing approach, and therefore the success of the Pronto product
will depend largely on the success of our ability to secure marketing and
distribution channels with third parties who have significantly more financial
resources than we do. These could include wireless network operators, Internet
portals, business enterprises, national retail chains and selected vertical
retail outlets. If we fail to secure these relationships or they are
unsuccessful, our business, financial condition and operating results would be
materially adversely affected. As a result, we could continue to incur
continuing substantial operating losses which could lead us to cease providing
the Pronto service.
Our reliance on certain suppliers and vendors could adversely affect
our ability to provide our Pronto brand services to our subscribers on a timely
and cost-efficient basis.
We currently rely on iNetNow, Inc. to provide the live operator aspect
of the Pronto service and we internally provide the customer service and
provisioning aspects of the Pronto service. The initial term of our agreement
with iNetNow expired on April 30, 2002 and is currently on automatic monthly
renewals until January 31, 2003, unless earlier terminated. Our reliance on
iNetNow, Inc. involves a number of risks, including their willingness to
continue to support our product, the long-term financial viability of this
vendor, and the inability to control iNetNow's quality and timing of delivery of
services. If iNetNow, Inc. is unable or unwilling to continue supporting our
products in required volumes and at high quality levels, or if this agreement is
not formally renewed or replaced, we will have to identify, qualify and select
acceptable alternative service providers or attempt to provide the services
internally. Significant interruptions may result as it is possible that an
alternate source may not be available to us when needed or be in a position to
satisfy our requirements at acceptable prices and quality nor may we be able to
provide the same quality of services internally. Although iNetNow has not
indicated to us that they will terminate our arrangement, nor do we have reason
to believe that they will, they have the right to do so at any time after
January 31, 2003. There can be no assurance we will be able avoid termination of
this arrangement. Any significant interruption in call center operations would
result in us having to reduce our support of our customers, which in turn could
have a material adverse effect on our business. We may not be able to
effectively manage our relationship with iNetNow, Inc.
The market for wireless content services is new, and our business will
suffer if the market does not develop as we expect or if the usage of wireless
content products does not continue to grow.
The wireless content services market is new and may not grow or be
sustainable. It is possible that our services may never achieve market
acceptance or be well received by consumers. We have a limited number of
customers and we have not yet provided our services on the scale that is
anticipated in the future. We incur operating expenses based largely on
anticipated revenue trends that are difficult to predict given the recent
emergence of the premium wireless content and concierge services market. If
general wireless product usage does not continue to increase, or the market for
premium wireless content service does not develop,
16
or develops more slowly than we expect, demand for our Pronto services may be
limited and our business, financial condition and operating results could be
harmed.
We will invest a significant amount of our resources to develop and
support our products and services and may not realize any return on this
investment.
We plan to continue to invest a significant amount of our resources to
develop and support our Pronto products and services. Accordingly, our success
will depend on our ability to generate sufficient revenue from sales of these
products and services to offset the expenses associated with developing and
supporting them.
There are many risks that we face in doing so. In particular, we will
need to reduce the costs and improve the reliability of our voice recognition
system to optimize the calls that fail over to the live operator for basic
requests of news, sports and weather. Additionally, the rapidly changing
technological environment in which we operate can require the frequent
introduction of new products, resulting in short product lifecycles.
Accordingly, if our products and services do not quickly achieve market
acceptance, they may become obsolete before we have generated enough revenue
from their sales to realize a sufficient return on our investment.
As a result, we expect to incur significant expenses and losses for the
remainder of 2002 and into 2003. If we incur substantial development, sales and
marketing expenses that we are not able to recover, and we are not able to
compensate for such expenses, our business, financial condition and results of
operations would be materially adversely affected.
If we do not have sufficient capital to fund our operations, we may be
forced to discontinue product development, reduce our distribution channel
partner efforts, forego attractive business opportunities and cease the Pronto
product offering.
We may not have sufficient capital to fund our operations and
additional capital may not be available on acceptable terms, if at all. Any of
these outcomes could adversely impact our ability to respond to competitive
pressures or could prevent us from conducting all or a portion of our planned
operations. The speed at which we have utilized our available capital increased
substantially during the three months ended June 30, 2002 as we launched Pronto
nationally on a direct-to-consumer basis. We expect that our currently available
cash resources will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months as we have determined that we
will not continue to market Pronto through a direct to consumer approach and
will instead promote and position Pronto through potential marketing and
distribution channels with third parties who have significantly greater
financial resources than we do. After that, we may need to raise additional
funds, and additional financing may not be available on acceptable terms, if at
all. We also may require additional capital to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. If we issue additional equity securities to raise funds, the
ownership percentage of existing shareholders will be reduced. If we incur debt,
the debt will rank senior to our common shares, we will incur debt service costs
and we will likely have to enter into agreements that will restrict our
operations in some respects and our ability to declare dividends to the holders
of our common shares.
If we fail to enhance Pronto to meet changing customer requirements and
technological advances, our operations would be materially adversely affected.
The timely development of new or enhanced products and services is a
complex and uncertain process and although we believe we currently have the
funding to add anticipated new features and functionalities to Pronto, we may
not have sufficient resources to successfully and accurately anticipate
technological and market trends, or to successfully manage long development
cycles. We may also experience design, marketing and other difficulties that
could delay or prevent our development, introduction or marketing of our Pronto
services, as well as new products and enhancements. We may also be required to
collaborate with third parties to develop our products and may not be able to do
so on a timely and cost-effective basis, if at all. If we are not able to
develop new products or enhancements to existing products on a timely and
cost-effective basis, or if our new products or enhancements fail to achieve
market acceptance, our business, financial condition and results of operations
would be materially adversely affected.
17
We rely on third-party software and technology, the loss of which could
force us to use inferior substitute technology or to cease offering our
products.
We rely on third party intellectual property licenses. For example, we
have entered into a license agreement with Nuance Communications, Inc. for use
of their speech recognition technology. In addition, we use, and will use in the
future, some third-party software that may not be available in the future on
commercially reasonable terms, or at all. We could lose our ability to use this
software if the agreements are terminated or if the rights of our suppliers to
license it were challenged by individuals or companies which asserted ownership
of these rights. The loss of, or inability to maintain or obtain, any required
intellectual property could require us to use substitute technology, which could
be more expensive or of lower quality or performance, or force us to develop the
technology ourselves or cease offering our products. Moreover, some of our
license agreements from third parties are non-exclusive and, as a result, our
competitors may have access to some of the technologies used by us. Any
significant interruption in the supply of any licensed software could cause a
decline in product sales, unless and until we are able to replace the
functionality provided by this licensed software. We also depend on these third
parties to deliver and support reliable products, enhance their current
products, develop new products on a timely and cost-effective basis, and respond
to emerging industry standards and other technological changes. The failure of
these third parties to meet these criteria could materially harm our business.
We depend on third parties for content, and the loss of access to this
content could harm our business.
We do not create all of our own content. Rather, we acquire rights to
information from numerous third-party content providers, and our future success
is dependent upon our ability to maintain relationships with these content
providers and enter into new relationships with other content providers. We
typically license content through one or a combination of the following formats:
a revenue-sharing arrangement, a one-time fee, a periodic fee or a fee for each
query from subscribers. If we fail to enter into and maintain satisfactory
arrangements with content providers, our business will suffer.
We may be subject to liability for our use or distribution of
information that we receive from third parties.
We obtain content and commerce information from third parties. When we
integrate and distribute this information through Pronto, we may be liable for
the data that is contained in that content. This could subject us to legal
liability for such things as defamation, negligence, intellectual property
infringement and product or service liability. Many of our content agreements do
not provide us with indemnity protection. Even if a given contract does contain
indemnity provisions, these provisions may not cover a particular claim. Our
insurance coverage may be inadequate to cover fully the amounts or types of
claims that might be made against us. Any liability that we incur as a result of
content we receive from third parties could adversely affect our financial
results. We also gather personal information from users in order to provide
personalized services. Gathering and processing this personal information may
subject us to legal liability for negligence, defamation, invasion of privacy,
product or service liability. We may also be subject to laws and regulations,
both in the United States and abroad, regarding user privacy.
We rely heavily on our proprietary technology, but we may be unable to
adequately protect or enforce our intellectual property rights.
Our success depends significantly upon our proprietary technology. To
protect our proprietary rights, we rely on a combination of copyright and
trademark laws, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products or services or obtain and use information that we regard as
proprietary. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively protect
our intellectual property our business could suffer. If we cannot adequately
protect our intellectual property, our competitive position may suffer.
Companies in the software industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. Similarly, we cannot
ensure that our employees will comply with the confidentiality agreements that
they have entered into with us, or that they will not misappropriate our
technology for the benefit of a third party. If a third party or any
18
employee breaches the confidentiality provisions in our contracts or
misappropriates or infringes on our intellectual property, we may not have
adequate remedies. In addition, third parties may independently discover or
invent competing technologies or reverse engineer our trade secrets, software or
other technology.
Our products may infringe the intellectual property rights of others,
and resulting claims against us could be costly and require us to enter into
disadvantageous license or royalty arrangements.
The software industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement and the violation of intellectual property rights. Although we
attempt to avoid infringing known proprietary rights of third parties, we may be
subject to legal proceedings and claims for alleged infringement by us or as
licensees of third-party proprietary rights, such as patents, trade secrets,
trademarks or copyrights, from time to time in the ordinary course of business.
From time to time, we have received, and we may receive in the future, notice of
claims of infringement of other parties' proprietary rights. Any such claims
could be time-consuming, result in costly litigation, divert management's
attention, cause product or service release delays, require us to redesign our
products or services or require us to enter into royalty or licensing
agreements. If a successful claim of infringement were made against us and we
could not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could suffer.
Furthermore, former employers of our employees may assert that these employees
have improperly disclosed confidential or proprietary information to us. Any of
these results could harm our business. We may be increasingly subject to
infringement claims as the number of, and number of features of, our products
grow.
Our failure to respond to rapid change in the market for voice
interface services could cause us to lose revenue and harm our business.
The voice interface services industry is relatively new and rapidly
evolving. Our success will depend substantially upon our ability to enhance our
existing Pronto product release and to develop and introduce, on a timely and
cost-effective basis, new versions with features that meet changing end-user
requirements and incorporate technological advancements. If we are unable to
develop new enhanced functionalities or technologies to adapt to these changes,
or if we cannot offset a decline in revenue from existing products with revenues
from new products, our business would suffer. Commercial acceptance of our
products and technologies will depend on, among other things, the ability of our
products and technologies to meet and adapt to the needs of our target markets,
and the performance and price of our products and our competitors' products.
If our products contain defects, we could be exposed to significant
product liability claims and damage to our reputation.
Because our products are partially designed to provide critical
communications services, we may be subject to significant liability claims. Our
agreements with customers typically contain provisions intended to limit our
exposure to certain liability claims, but may not preclude all potential claims
resulting from a defect in one or more of our products. Although we believe that
we maintain adequate product liability insurance covering certain damages
arising from implementation and use of our products, our insurance may not be
sufficient to cover us against all possible liability. Liability claims could
also require us to spend significant time and money in litigation or to pay
significant damages. As a result, any such claims, whether or not successful,
could seriously damage our reputation and have a material adverse effect on our
business, financial condition and results of operations.
If we fail to comply with regulations and evolving industry standards,
sales of our existing and future products could be adversely affected.
We are not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than laws and
regulations applicable to businesses in general. However, in the future, we may
be subject to regulation by the FCC or another regulatory agency. In addition,
the wireless carriers who supply us airtime are subject to regulation by the FCC
and regulations that affect them could increase our costs or reduce our ability
to continue selling and supporting our services. While we believe that our
products comply with all current governmental laws, regulations and standards,
we cannot assure you that we will be able to continue to design our products to
comply with all necessary requirements in the future. In addition, we may be
required to customize our products to
19
comply with various industry or proprietary standards promoted by our
competitors. Our key competitors may establish proprietary standards, which they
do not make available to us. As a result, we may not be able to achieve
interoperability with their products.
We may otherwise deem it necessary or advisable to modify our products
to address actual or anticipated changes in the regulatory environment. Failure
of our products to comply, or delays in compliance, with the various existing,
anticipated, and evolving industry regulations and standards could adversely
affect sales of our existing and future products. Moreover, the enactment of new
laws or regulations, changes in the interpretation of existing laws or
regulations or a reversal of the trend toward deregulation in the
telecommunications industry, could have a material adverse effect on our
customers, and thereby materially adversely affect our business, financial
condition and operating results.
Our business will suffer if we are unable to hire, retain and motivate
highly qualified employees.
Our future success depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial, sales and
marketing and business development personnel. Our services and the industries to
which we provide our services are relatively new. As a result, qualified
technical personnel with experience relevant to our business are scarce and
competition to recruit them is intense. If we fail to successfully attract and
retain a sufficient number of highly qualified technical, managerial, sales and
marketing, business development and administrative personnel, our business could
suffer.
Stock options are an important means by which we compensate employees.
We face a significant challenge in retaining our employees if the value of these
stock options is either not substantial enough or so substantial that the
employees leave after their stock options have vested. To retain our employees,
we expect to continue to grant new options, subject to vesting, which could be
dilutive to our current stockholders. Currently, our stock price is well below
the exercise price of our outstanding options, causing the options to have
minimal current value. If our stock price does not increase significantly above
the prices of our options, we may also need to issue new options or grant
additional shares of stock in the future to motivate and retain our employees.
We do not plan to pay any dividends.
Investors who need income from their holdings should not purchase our
shares. We intend to retain any future earnings to fund the operation and
expansion of our business. We do not anticipate paying cash dividends on our
shares in the future. As a result, our common stock is not a good investment
from people who need income from their holdings.
Insiders own a large percentage of our stock, which could delay or
prevent a change in control and may negatively affect your investment.
As of September 30, 2002, our officers, directors and affiliated
persons beneficially owned approximately 34% of our voting securities. J.
William Grimes, our Chairman, beneficially owned approximately 24% of our voting
securities as of that date. These stockholders will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
which could have the effect of delaying or preventing a third party from
acquiring control over us and could affect the market price of our common stock.
In addition, some of our executive officers have stock option grants which
provide for accelerated vesting upon a change in control if their employment is
actually or constructively terminated as a result. The interests of those
holding this concentrated ownership may not always coincide with our interests
or the interests of other stockholders, and, accordingly, they could cause us to
enter into transactions or agreements that we would not otherwise consider.
We have implemented anti-takeover provisions that could make it more
difficult to acquire us.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us
without the consent of our board of directors, even if doing so would be
beneficial to our stockholders. For example, a takeover bid otherwise favored by
a majority of our stockholders might be rejected by our board of directors. Last
year, we changed our charter to include provisions classifying our board of
directors into three groups so that the directors in each group will serve
staggered three-year
20
terms, which would make it difficult for a potential acquirer to gain control of
our board of directors. We are also afforded the protections of Section 203 of
the Delaware General Corporation Law, which provides certain restrictions
against business combinations with interested stockholders.
Our stock price may be volatile due to factors outside of our control.
Since our initial public offering on April 6, 2000, our stock price has
been extremely volatile. During that time, the stock market in general, and The
Nasdaq National and SmallCap Markets and the securities of technology companies
in particular, has experienced extreme price and trading volume fluctuations.
These fluctuations have often been unrelated or disproportionate to the
operating performance of individual companies. The following factors, among
others, could cause our stock price to fluctuate: actual or anticipated
variations in operating results; announcements of operating results and business
conditions by our customers and suppliers; announcements by our competitors
relating to new customers, technological innovation or new services; economic
developments in our industry as a whole; and general market conditions. These
broad market fluctuations may materially adversely affect our stock price,
regardless of our operating results. Our stock price may fluctuate due to
variations in our operating results.
Certain provisions of our charter documents provide for limited
personal liability of members of our board of directors.
Our certificate of incorporation and by-laws contain certain provisions
which reduce the potential liability of members of our board of directors for
certain monetary damages and provide for indemnity of other persons. We are
unaware of any pending or threatened litigation against us or our directors that
would result in any liability for which any of our directors would seek
indemnification or other protection.
Our common stock may be subject to delisting from the Nasdaq Small Cap
market.
Our common stock is currently trading on the Nasdaq SmallCap Market
("Nasdaq SmallCap"). By letter dated September 17, 2002 from Nasdaq, we have
been made aware that we do not currently meet the listing criteria for continued
listing on Nasdaq SmallCap. In order to maintain listing on Nasdaq SmallCap, it
is required, among other things, that our common stock have a minimum bid price
of $1. We will have until December 9, 2002 to regain compliance with Nasdaq
Marketplace Rule 4450(a)(5), which requires that a Nasdaq SmallCap listed
company maintain a minimum bid price of $1.00 per share. At that time, we may
also be eligible for an additional 180-day grace period, until June 9, 2003, to
achieve the $1 minimum bid price for Nasdaq SmallCap, provided that we meet the
initial listing criteria for the Nasdaq SmallCap Market under Marketplace Rule
4310(c)(2)(A). At this point in time, we meet each of these additional criteria
and would be eligible for the additional grace period to June 9, 2003 to
demonstrate compliance and maintain listing on the Nasdaq SmallCap. Furthermore,
if we are able to regain compliance with the listing standards for the Nasdaq
National Market in accordance with Nasdaq Marketplace Rule 4450(a)(2), we would
again be eligible for listing on the Nasdaq National Market. Although we have a
period of time to regain compliance and avoid a delisting of our securities, no
assurance can be given as to our ability to meet the standards of the Nasdaq
Small Cap maintenance requirements. If we are unable to demonstrate compliance
with the Nasdaq Small Cap criteria for maintaining our listing, our common stock
could be subject to delisting. If our common stock were to be delisted from
trading on the Nasdaq Small Cap and were neither re-listed thereon nor listed
for trading on another recognized securities exchange, trading, if any, in the
common stock may continue to be conducted on the OTC Bulletin Board or in the
non-Nasdaq over-the-counter market. Delisting would result in limited release of
the market price of the common stock and limited news coverage of our company
and services and could restrict investors' interest in our common stock and
materially adversely affect the trading market and prices for our common stock
and our ability to issue additional securities or to secure additional
financing.
Information that we may provide to investors from time to time is
accurate only as of the date we disseminate it, and we undertake no obligation
to update the information.
From time to time, we may publicly disseminate forward-looking
information or guidance in compliance with Regulation FD promulgated by the
Securities and Exchange Commission. This information or guidance represents our
outlook only as of the date that we disseminated it, and we undertake no
obligation to provide updates to this information or guidance in our filings
with the Securities and Exchange Commission or otherwise.
21
If our revenue and operating results fall below analysts' and
investors' expectations, our stock price could significantly decline.
Our quarterly operating results have fluctuated in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. If our quarterly or annual operating
results do not meet the expectations of investors and securities analysts, the
trading price of our common stock could significantly decline. As a result of
any of these factors, our quarterly or annual operating results could fall below
the expectations of public market analysts and investors. In this event, the
price of our common stock could significantly decline.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes
in interest rates. We do not currently transact significant business in foreign
currencies and, accordingly, are not subject to exposure from adverse movements
in foreign currency exchange rates. Our exposure to market risks for changes in
interest rates relates primarily to corporate debt securities. We place our
investments with high credit quality issuers and, by policy, limit the amount of
the credit exposure to any one issuer. Our general policy is to limit the risk
of principal loss and ensure the safety of invested funds by limiting market and
credit risk. All highly liquid investments with a maturity of less than three
months at the date of purchase are considered to be cash equivalents.
As of September 30, 2002 we had no debt outstanding. We currently have
no plans to incur debt during the next twelve months. As such, changes in
interest rates will only impact interest income. The impact of potential changes
in hypothetical interest rates on budgeted interest income in 2002 has been
estimated at approximately $0.4 million or approximately 1% of budgeted net loss
for each 1% change in interest rates.
Item 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Senior Vice President, Finance (its principal executive officer and principal
financial officer), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Senior Vice
President, Finance concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic Securities and Exchange Commission
filings. There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
22
Part II
Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 12, 2002
i3 MOBILE, INC.
By: /s/ Edward J. Fletcher
----------------------------------
Senior Vice President of Finance
24
CERTIFICATION
I, John A. Lack, Chief Executive Officer of i3 Mobile, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of i3 Mobile, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ John A. Lack
John A. Lack
Chief Executive Officer
25
CERTIFICATION
I, Edward J. Fletcher, Senior Vice-President, Finance of i3 Mobile, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of i3 Mobile, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Edward J. Fletcher
Edward J. Fletcher
Senior Vice President, Finance
26