UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001
[ ] 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 0-27145
1st NET TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Colorado | 33-0756798 | |
(State or jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
11415 West Bernardo Court, 2nd Floor | ||
(Address of principal executive offices) | ||
(858) 675-4449 | ||
(Issuer's telephone number) | ||
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 [ ]
As of August 9, 2001, there were 6,945,892 shares of the Registrant's common stock outstanding.
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PART I-FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements............................................................................ | |||
Condensed Consolidated Balance Sheets June 30, 2001(unaudited)................... | F-1 | |||
Condensed Consolidated Statements of Operations June 30, 2001 (unaudited) | F-2 | |||
Condensed Consolidated Statements of Cash Flows – Three Months Ended June 30, 2001 and June 30, 2001 (unaudited)............................................................ | F-3 | |||
Notes to Condensed Consolidated Financial Statements..................................... | F-4 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................................... | F-6 | ||
PART II—OTHER INFORMATION | ||||
Item 1. | Legal Proceedings............................................................................... | Part II-1 | ||
Item 2. | Changes in Securities........................................................................... | Part II-1 | ||
Item 3. | Defaults Upon Senior Securities........................................................... | Part II-1 | ||
Item 4. | Submission of Matters to a Vote of Security Holders............................ | Part II-1 | ||
Item 5. | Other Information................................................................................ | Part II-1 | ||
Item 6. | Exhibits and Reports on Form 8-K...................................................... | Part II-1 | ||
Signatures............................................................................................................... | Part II-2 | |||
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1st NET TECHNOLOGIES, INC. AND SUBSIDIARY | ||||
and Subsidiaries | ||||
CONDENSED CONSOLIDATED BALANCE SHEET | ||||
UNAUDITED | ||||
June 30, 2001 | ||||
ASSETS | ||||
Current assets: | ||||
Cash | $ 8,490 | |||
Accounts receivable, net | 8,325 | |||
Marketable securities | 1,419 | |||
Current portion of notes receivable | 93,364 | |||
Total current assets | 111,598 | |||
Notes receivable | 377,588 | |||
Property and equipment, net | 127,577 | |||
Other assets | 7,600 | |||
$ 624,363 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
Current liabilities: | ||||
Accounts payable and accrued liabilities | $ 454,744 | |||
Notes payable | 50,000 | |||
Notes payable and amounts due to related parties | 50,800 | |||
Current portion of capital lease obligations | 48,467 | |||
Accrued personnel costs | 156,352 | |||
Deferred revenues | 23,750 | |||
Income taxes payable | 3,200 | |||
Total current liabilities | 787,313 | |||
Long term portion of capital lease obligations | 113,210 | |||
Deferred credits from acquisition of CTG, | ||||
net of accumulated amortization of $ and $29,504 | - | |||
Total liabilities | 900,523 | |||
Commitments and contingencies | - | |||
Stockholders' equity (Note 3): | ||||
Preferred stock | - | |||
Common stock | 6,946 | |||
Common stock warrants | 175,797 | |||
Additional paid in capital | 5,406,168 | |||
Accumulated deficit | (5,681,101) | |||
Accumulated other comprehensive income | (183,970) | |||
Total stockholders' equity | (276,160) | |||
$ 624,363 | ||||
See accompanying notes. | ||||
F-2
1st NET TECHNOLOGIES, INC. AND SUBSIDIARY | ||||||||||
and Subsidiaries | ||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||
UNAUDITED | ||||||||||
| ||||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||
June 30, | June 30, | |||||||||
2001 | 2000 | 2001 | 2000 | |||||||
Restated * | Restated * | |||||||||
Revenues: | ||||||||||
Technology consulting, user fees and | ||||||||||
Total revenues | 247,099 | 1,760,113 | 247,099 | 1,760,113 | ||||||
marketing services | $ 33,920 | $ 25,444 | $ 37,036 | $ 73,103 | ||||||
Stock-based compensation | - | - | 6,775 | - | ||||||
Other operating expenses | 91,244 | 341,840 | 235,251 | 1,373,105 | ||||||
Loss from operations | (57,324) | (316,396) | (204,990) | (1,300,002) | ||||||
Other income and expense: | ||||||||||
Realized gain/(loss) on investments sold | (20,812) | 441,264 | (5,980) | 1,154,822 | ||||||
Unrealized loss on investments held | - | - | (64,961) | (40,000) | ||||||
Loss on write-down of investments | (794,152) | - | (794,152) | - | ||||||
Interest expense | (10,587) | (3,892) | (18,782) | (51,607) | ||||||
Gain on sale of assets | - | - | - | 535,255 | ||||||
Loss on disposal of property and equipment | - | - | ||||||||
Loss on disposal of property and equipment | - | - | - | (9,390) | ||||||
Interest and dividend income | - | 21,272 | 130 | 29,737 | ||||||
Loss before provision for income taxes | (882,875) | 142,248 | (1,088,735) | 318,815 | ||||||
Provision for income taxes | - | (5,102) | - | (5,102) | ||||||
Net loss | $ (882,875) | $ 137,146 | $ (1,088,735) | $ 313,713 | ||||||
Basic and diluted loss per share | $ (0.13) | $ 0.02 | $ (0.16) | $ 0.05 | ||||||
Weighted average common shares outstanding: | ||||||||||
Basic and diluted | 6,873,631 | 6,003,700 | 6,738,779 | 5,943,260 | ||||||
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* See Note 1 | ||||||||||
See accompanying notes. | ||||||||||
F-2
1st NET TECHNOLOGIES, INC. AND SUBSIDIARY | ||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
UNAUDITED | ||||||
For the Six Months Ended | ||||||
June 30, | ||||||
2001 | 2000 | |||||
Restated * | ||||||
Net cash flows used in operating activities | $ (715,042) | $ 525,477 | ||||
Investing activities | ||||||
Additions to property and equipment | (24,250) | (25,517) | ||||
Proceeds from payment of notes receivable | 100,000 | - | ||||
Net cash flows provided by investing activities | 75,750 | (25,517) | ||||
Financing activities | ||||||
Repayments of capital lease obligations | (12,362) | (37,029) | ||||
Additions to notes payable | 35,000 | - | ||||
Repayments of notes payable | (22,750) | (268,516) | ||||
Net proceeds from issuance of common stock | 94,506 | - | ||||
Net proceeds from issuance of preferred stock and warrants | - | - | ||||
Net cash flows provided by financing activities | 94,394 | (305,545) | ||||
Change in cash | (544,898) | 194,415 | ||||
Cash at beginning of period | 553,388 | 12,873 | ||||
Cash at end of period | $ 8,490 | $ 207,288 | ||||
Supplemental disclosures of cash flow information: | ||||||
Cash paid during the period for: | ||||||
Interest | $ 2,100 | $ 51,082 | ||||
Income taxes | $ - | $ - | ||||
* See Note 1 | ||||||
F-4
1st NET TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Basis of presentation
The financial statements presented herein have been prepared by the Company in accordance with the accounting policies in its annual 10-KSB report dated December 31, 2000 and should be read in conjunction with the notes thereto.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, SSP Management Corp. (“SSP”). Intercompany transactions and balance were eliminated in consolidation.
Prior to the quarter to which this quarterly report relates, the Company accounted for its investment in Children’s Technology Group, Inc. (“CTG”) in accordance with Accounting Principle Board (“APB”) Opinion No. 16. Under this method, the Company consolidated CTG’s financial statements with its own. During the quarter ended June 30, 2001, CTG issued additional shares of its common stock to the public resulting in a change in the Company’s ownership. Because of the change in ownership, the Company no longer has a controlling interest in CTG. In addition, the Company no longer has any influence over the affairs of CTG. Accordingly, as of June 30, 2001, the Company accounts for its ownership of 3,992,614 shares of CTG’s common stock at cost. The investment in CTG common stock was written down to $-0-, resulting in a loss of $794,152 for the three and six months ended June 30, 2001.
In accordance with APB No. 20, the financial statements have been restated to show financial information for the new reporting entity for all periods presented.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim period presented have been made. The results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the year.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company has a net capital deficit at June 30, 2001 and a loss of $5,681,101 since inception.
The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Realization of a portion of the Company’s assets in the accompanying condensed consolidated financial statements is dependent upon the continued operation of the Company. In order to continue operations, the Company must raise additional funds by incurring new debt, raising new equity, or liquidating investment securities held. These factors, among others, may indicate that the Company will be unable to continue as a going concern. Management believes the actions presently being taken and current revenues being generated will provide the opportunity for the Company to continue as a going concern.
Interim financial data presented herein are unaudited.
Note 2: Related party transactions
On February 16, 2001, APJW, Inc., an affiliate company, loaned the Company $25,000 in exchange for a promissory note. The promissory note carries an interest rate of one percent per month and matures on demand. The Company repaid $15,000 of the note on June 6, 2001. The sole shareholder of APJW, Inc. is the Company’s Chief Executive Officer.
On April 20, 2001, the affiliate loaned the Company $10,000 in exchange for a promissory note. The promissory note carries an interest rate of one percent per month and matures on demand.
The Company paid $1,500 of interest expense on the two notes on June 6, 2001.
Note 3: Common stock
Warrants
On January 10, 2001, the Company granted warrants to purchase 525,000 shares of common stock at $3.00 per share to four related parties as follows:
Related Party | Warrants | |
Entrepreneur Investments, LLC | 300,000 | |
Jeffery M. Chatfield | 25,000 | |
Gregory D. Writer, Jr. | 100,000 | |
Clifford J. Smith | 100,000 | |
525,000 |
These warrants were issued in satisfaction of a stock option agreement with each of the respective parties, which was agreed to in January 1999; however, executed copies of the stock option agreement were not subsequently delivered to the parties. The stock option agreement with each of the parties was rescinded in exchange for the warrants. The warrants vested as of the grant date and expire on January 10, 2004.
On June 30, 2001, the Company issued 25,000 shares of its common stock in exchange for the rescission of warrants granted to purchase 100,000 shares of the Company’s common stock.
Following is a schedule of changes in the Company’s outstanding warrants for the six months ended June 30, 2001:
Warrants | ||
Balance, January 1, 2001................................................. | 275,572 | |
Granted............................................................................ | 525,000 | |
Exercised........................................................................…. | - | |
Cancelled............................................................................ | (100,000) | |
Balance, June 30, 2001................................................. | 700,572 | |
Stock-based compensation
The Company recorded stock-based compensation totaling $525 for the 525,000 warrants granted on January 10, 2001. The Company has accounted for the warrants under the fair value method in accordance with Statement of Financial Accounting Standard No. 123. The fair value for these warrants was estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate........................... | 5.80% |
Dividend yield...................................... | 0.00% |
Volatility factor..................................... | 50.00% |
Weighted average expected life............ | 3 years |
The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. However, the Company has presented the pro forma net loss and pro forma basic and diluted loss per common share using the assumptions noted above.
Common stock
On February 21, 2001, the Company sold 100,000 shares of its common stock to an unrelated third party for $25,000 ($.25/share).
On March 12, 2001, the Company sold 20,000 shares of its common stock to an unrelated third party for $5,000 ($.25/share).
On March 19, 2001, the Company sold 40,000 shares of its common stock to an unrelated third party for $10,000 ($.25/share).
On March 31, 2001, the Company issued 25,000 shares of its common stock to an employee in accordance with the terms of an employment agreement. The fair value of the common stock on the transaction date was determined as $.25 per share based on contemporaneous stock sales. Stock-based compensation of $6,250 was recognized in the accompanying condensed consolidated financial statements for the six months ended June 30, 2001.
On April 5, 2001, the Company sold 60,000 shares of its common stock to an unrelated third party for $15,000 ($.25/share).
On April 10, 2001, the Company sold 20,000 shares of its common stock to an unrelated third party for $5,000 ($.25/share).
On April 16, 2001, the Company sold 20,000 shares of its common stock to an unrelated third party for $5,000 ($.25/share).
On April 26, 2001, the Company sold 40,000 shares of its common stock to an unrelated third party for $10,000 ($.25/share).
On May 8, 2001, the Company sold 20,000 shares of its common stock to an unrelated third party for $5,000 ($.25/share).
On May 22, 2001, the Company sold 20,000 shares of its common stock to an unrelated third party for $5,000 ($.25/share).
On June 28, 2001, entered into an agreement with CTG whereby the Company agreed to sell 250,000 shares of CTG common stock back to CTG for $25,000.
Following is a schedule of changes in shareholders’ deficit for the six months ended June 30, 2001:
Accumulated Other Comprehensive Income/(Loss) | ||||||||
Additional Paid-in Capital | Accumulated Deficit | Total | ||||||
Common Stock | Common Stock Warrants | |||||||
Shares | Par Value | |||||||
Balance, January 1, 2001 | 6,555,892 | $6,556 | $275,272 | $8,422,179 | ($8,705,764) | $11,285 | $9,528 | |
Warrants issued in satisfaction | ||||||||
of stock option agreement… | - | - | 525 | - | - | - | 525 | |
Shares sold to unrelated third | ||||||||
parties at $.25 per share… | 340,000 | 340 | - | 84,660 | - | - | 85,000 | |
Shares issued in exchange for | ||||||||
services in accordance with | ||||||||
employment agreement | 25,000 | 25 | - | 6,225 | 6,250 | |||
Shares issued in exchange for | ||||||||
rescission of warrants… | 25,000 | 25 | (100,000) | 99,975 | - | - | - | |
Removal of CTG balances | ||||||||
from previously consolidated | ||||||||
figures……. | - | - | - | (3,206,871) | 4,113,398 | - | 906,527 | |
Comprehensive loss: | ||||||||
Net loss…….. | (1,088,735) | - | (1,088,735) | |||||
Unrealized loss on investments | ||||||||
held for sale, net of realized | ||||||||
gains and losses……. | - | - | - | - | - | (195,255) | (195,255) | |
Balance, June 30, 2001 | 6,945,892 | $6,946 | $175,797 | $5,406,168 | ($5,681,101) | (183,970) | (276,160) | |
Note 6: Income taxes
The Company records its income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. The Company incurred net operating losses during the six months ended June 30, 2001, resulting in a deferred tax asset, which was fully allowed for; therefore, the net benefit and expense result in $-0- income taxes.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. In addition to historical information, this Quarterly Report on Form 10-QSB contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risks and Uncertainties." You should carefully review the risks described in other documents we file rom time to time with the Securities and Exchange Commission, including future Quarterly Reports on Form 10-QSB to be filed in 2001. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-QSB. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
OVERVIEW
1st Net Technologies, Inc. (the "Company" or "1st Net") derives its revenue from services provided to the Internet and multi-media industries. Many of 1st Net's services are billed on an hourly rate based upon a project specification document developed in association with the client. Fees for other services vary, based on the type of service and client.
The Company maintains two subsidiary corporations:
1. SSP Management Corp.: In January 1999, we acquired a 100% interest in SSP Management Corp., a Colorado corporation, from a private company that is considered a related party.
2. Children's Technology Group, Inc.: In May 1999, we acquired a controlling interest in Children's Technology Group, Inc. ("CTG") (formerly Tummy Busters, Inc.), a Nevada corporation. The business model of CTG is to build a safe and enjoyable Internet community for children on-line.
Our historical financial information contained in this Quarterly Report on Form 10-QSB is that of 1st Net Technologies, Inc. and its subsidiary corporations on a consolidated basis.
RESULTS OF OPERATIONS - SECOND QUARTER OF 2001 COMPARED TO SECOND QUARTER OF 2000
Revenues
The Company's revenues from technology consulting, user fees and marketing services during the second quarter of 2001 increased $8,476 to $33,920, or 25% from the same quarter during the prior year. The increase in revenues was a result of increased sales of the Company's EnvoyMail product and eMarketing services.
Operating Gain/Loss
Loss from operations was reduced Qtr. over Qtr. from ($316,396) in 2000 to ($57,324) in 2001. Our Net Loss for the quarter rose to ($882,875) from a gain of $137,146, or 644% from the same quarter during the prior year. This was a direct result of our write down to $0 of the CTG asset.
Other income and expense
The Company expects to recognize additional gains from the sale of certain assets conducted in 2000 as the proceeds are received on the notes receivable from the respective buyers. The Company has chosen to recognize the gain on sale of the newsletter(s) in accordance with the installment method due to the uncertainties involved with the receipt of future payments from the buyer(s).
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001 the Company had $111,598 in total current assets and total shareholders equity of ($276,160) with which to pay its obligations. During this reporting period, the Company had been involved in a best efforts financing in order to increase the Company's liquidity and capital resources, however, management has make a decision to suspend the offering at this time. The Company may elect to resume this offering at some point in the future.
In the past, our greatest need for cash is payment of salaries and benefits to our employees and fees to our outside consultants. Through June 30, 2001, we expended significant effort and committed substantial resources toward our continued development of the EnvoyMail product. Management is uncertain, at this time, whether that these investments, and the resulting EnvoyMail product, will ever provide revenue sufficient to maintain/sustain its operations.
At June 30, 2001, the Company had cash on hand in the amount of $8,490.00
On a going forward basis, 1st Net and its wholly owned subsidiary SSP continue to maintain several holdings of restricted and marketable securities. However, it is impossible to ascertain the actual value that will be eventually realized by the Company when these securities are sold.
Management is uncertain whether the current private offering of restricted stock, plus proceeds from the sale of investments held, in addition to cash payments to be received from the transactions described above, will be sufficient to make up projected shortfalls from the results of its operations through the next three months.
RISKS AND UNCERTAINTIES
The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company and our industry. If any of these or other risks actually occurs, the trading price of our common stock could decline further, and you may lose all or part of your investment. We have a history of losses and, absent the realized gains on securities held and sold and the sale of assets during the year 2000 and the first two quarters of 2001, we would have suffered a significantly greater operating loss than the ($204,990) we have incurred year to date. And, even though we expect our operating expenses to decrease in the future, we may never be profitable. We had an accumulated deficit of ($5,865,071) at June 30, 2001. Unless we are able to see a significant increase in revenues from our EnvoyMail product during the next quarter, we may well be forced to suspend current operations and the future development of the EnvoyMail product.
You should consider an investment in our stock in light of the risks, uncertainties and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets such as ours. We may not be able to successfully address any or all of these risks. Failure to adequately do so could cause our business, results of operations and financial condition to suffer. Our future financial performance also will depend, in part, on our ability to diversify our offerings by successfully developing, introducing and gaining customer acceptance of new products and enhanced versions of existing products. However, we cannot assure you that we will be successful in achieving market acceptance of any new products that we develop or of enhanced versions of existing products. Any failure or delay in diversifying our existing offerings could harm our business, results of operations and financial condition.
We currently sell our products both indirectly and directly. At present we primarily market 1st Net's EnvoyMail product through an internal sales force. Due to the new nature of the product, its market potential is uncertain. Also, if we are not able to attract and retain effective sales personnel, our prospects for realizing profits from the licensing of EnvoyMail will be diminished.
In the future, we may seek to license additional technology or content in order to enhance our current features or to introduce new services, such as certain of the community features we may introduce. There can be no assurance that any such licenses will be available on commercially reasonable terms, if at all. The loss of or inability to obtain or maintain any of these technology licenses could result in delays in introduction of new services until equivalent technology, if available, is identified, licensed and integrated, which could have a material adverse effect on our business, results of operations and financial condition.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have initiated litigation against Millennium Financial Publishing, LLC ("MFP") in Littleton, Colorado based on the failure MFP to make payments on certain promissory notes held by of SSP Management Corp in connection with the sale of various assets of SSP to MFP. Although management believes that we have a valid and enforceable claim, we cannot be certain about the ultimate resolution of the case.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) During the quarter ended June 30, 2001, the Company sold a total of 180,000 shares of its common stock at $0.25 per share in five separate private transactions. All of the shares issued were restricted securities.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No events occurred during the quarter covered by this Quarterly Report that would require response to this item.
ITEM 4. OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three months ended June 30, 2001
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunder duly authorized.
1st NET TECHNOLOGIES, INC. | ||
| Dated: August 27, 2001 | By: /s/ James H. Watson, Jr. | |
| James H. Watson, Jr. | ||
| Its: Principal Executive Officer and Principal Accounting Officer of the Registrant |
