UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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 000-29929
COMMUNICATE.COM INC.
(Exact name of small business as specified in its charter)
Nevada 33-0786959
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
#600 - 1100 Melville Street, Vancouver, B.C. V6E 4A6
(Address of principal executive offices)
(604) 697-0136
(Issuer's telephone number)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
Common Stock 15,596,339 shares outstanding
$.001 Par Value as of May 13, 2005
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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COMMUNICATE.COM INC.
REPORT ON FORM 10-QSB
QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
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The response to Item 1 has been submitted as a separate section of this Report beginning on page F-1.
Registrant, through its majority-owned subsidiaries, Domain Holdings, Inc. (“DHI”, formerly Communicate.com Inc.) and FrequentTraveller.com Inc. (“FrequentTraveller”) (together the "Subsidiaries"), is involved in businesses that exploit commercial uses of the Internet. DHI markets and licenses a portfolio of domain names, a number of which generate high amounts of internet traffic because of, among other things, their generic description of a specific product or services category.
Registrant has focused since the beginning of 2001 on developing revenue streams from its domain names and reducing its debts. Registrant generates revenue from leasing domain names, from sales commissions from the sale of third-party products and services utilizing the Internet, from "pay-per-click" revenue and from the sale of domain name assets that Registrant believes are not essential to its business. Since May 2003, Registrant has begun selling fragrances and beauty and sports products online directly to consumers and in October 2003 begun selling travel services through its website FrequentTraveller.com.
Registrant presently has twenty-two full-time employees and three consultants and occupies approximately 5,000 square feet of office space in Vancouver, British Columbia and Bellingham, Washington.
(a) Selected Financial Data
The following selected financial data was derived from Registrant’s unaudited consolidated financial statements. The information set forth below should be read in conjunction with Registrant’s financial statements and related notes included elsewhere in this report.
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For the Quarters Ended | |||||||
March 31, 2005 | March 31, 2004 | ||||||
Statements of Operations Data | |||||||
Domain Name Leasing and Advertising | $ | 337,337 | $ | 66,548 | |||
Domain Name Sales | -- | 200,000 | |||||
eCommerce Sales | 640,989 | 229,561 | |||||
Total Revenues | 978,326 | 496,109 | |||||
Cost of Domain Name Sales and Commission | -- | 74,857 | |||||
eCommerce Direct Costs | 553,116 | 179,582 | |||||
Total Cost of Revenues | 553,116 | 254,439 | |||||
Gross Profit | 425,210 | 241,670 | |||||
Marketing | (32,696 | ) | (5,021 | ) | |||
General and Administrative | (65,446 | ) | (90,980 | ) | |||
Management Fees and Salaries | (186,905 | ) | (102,598 | ) | |||
Professional Fees | (10,601 | ) | (9,587 | ) | |||
Depreciation | (2,134 | ) | (608 | ) | |||
Operating Income | 127,428 | 32,876 | |||||
Gain on Debt Settlement | 6,044 | -- | |||||
Non-Controlling Interest Share of Loss | -- | 6,691 | |||||
Dilution Gain in Subsidiary | -- | 5,654 | |||||
Net Income for the Period | $ | 133,472 | $ | 45,221 | |||
Basic Earnings (Loss) per Share | $ | 0.01 | $ | 0.00 | |||
Weighted Average Shares Outstanding | 15,024,188 | 14,737,493 |
Balance Sheet Data | As at March 31, 2005 | As at December 31, 2004 | |||||
Current Assets | $ 1,243,260 | $ 1,064,928 | |||||
Fixed Assets | 32,102 | 26,394 | |||||
Intangible Assets | 1,503,725 | 1,503,725 | |||||
Total Assets | $ | 2,779,087 | $ | 2,606,711 | |||
Accounts Payable & Accrued Liabilities | $ | 489,899 | $ | 665,195 | |||
Total Liabilities | 489,899 | 665,195 | |||||
Common Stock | 6,331 | 6,331 | |||||
Additional Paid in Capital | 3,133,886 | 3,133,886 | |||||
Share Subscriptions | 100,000 | -- | |||||
FT obligation to issue shares | 50,200 | -- | |||||
Obligation to issue shares | 64,000 | -- | |||||
Accumulated Deficit | (1,065,229 | ) | (1,198,701 | ) | |||
Total Stockholders’ Equity | $ | 2,174,988 | $ | 1,941,516 |
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(b) Results of Operations
REVENUES AND COSTS OF REVENUES.
Domain Name Leasing and Advertising.In the first quarter of 2005, Registrant generated domain name leasing and advertising revenue of $337,337 as compared to $66,548 in the first quarter of 2004, an increase of 407%. The increase is attributed to the new rate contract which has become effective in the first quarter of 2004 and to the surge in Internet advertising over the holiday season. While Management believes its advertising revenue will continue to grow, it does not believe this 2005 first quarter result is sustainable. Management believes monthly advertising revenue for 2005 realistically should be around $70,000 per month which represents a 40% increase over the 2004 monthly average of approximately $50,000.
Domain Name Sales.
In the first quarter of 2005, the Registrant did not sell any domain names. Management has concluded its strategy to recapitalize the Registrant through the selling of non-strategic domain names. Proceeds from the prior sales in 2003 and 2004 were used to repay a note payable and to enhance the Registrant’s financial ratios and liquidity. Management has begun acquiring new domain names both individually and as a portfolio to replenish its asset base and to increase its advertising revenue. While Registrant has no immediate plans to sell any domain names in the near future, it will evaluate opportunities as they arise.
eCommerce Sales. Registrant began converting Internet traffic into customers by directly marketing and selling consumable goods. Beginning in May 2003, Registrant launched its cologne.com and perfume.com Internet retail sites and karate.com Internet retail site in 2004. In the first quarter of 2005, the combined retail sites generated sales of $524,049 (2004 Q1 - $219,037), or approximately $5,823 per day (2004 Q1 - $2,407 per day), with cost of purchases and shipping totaling $446,621 (2004 Q1 - $168,333) resulting in gross profit margin of approximately 14.8% (2004 Q1 - 23.1%). While comparable quarterly sales have increased by 139%, gross profit margin as a percentage has declined by 36%. Management during the quarter lowered the retail selling prices for its fragrance products to acquire new customers and since the start of the second quarter has returned selling prices to normal. Management expects overall gross profit margin to return to between 18% and 20% in the second and subsequent quarters. Management continues to maintain or improve margins by negotiating with multiple suppliers for better pricing and by automating the fulfillment process.
In the first quarter of 2005, Registrant through its travel business subsidiary generated product sales of $116,940 at a cost of $106,495 as compared to sales of $10,524 at a cost of $11,252 in the first quarter of 2004. The travel operation incurred a net loss of $22,723 in the first quarter of 2005 and an accumulated deficit of $248,247 since inception in October 2002. While Management has reduced the monthly loss by consolidating its base of operation it has not reached its revenue target of $150,000 per quarter and will continue to work to meet this goal. Management continues to build its travel business by forming affiliations with partners in Southeast Asia and in Brazil and estimates that the travel business will break-even when sales approach $150,000 per quarter and believes the goal is achievable within six months.
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MARKETING. Registrant has begun to advertise online by paying-for-clicks and search-engine-placements and other media in 2004 and has continued its effort into 2005. In the first quarter of 2005, Registrant recorded marketing expenses of $32,696 or 5.1% of eCommerce sales as compared to $5,021 or 2.2% of sales in 2004. Management expects marketing expenses to increase as sales increase and has planned to use up to 10% of gross product sales for marketing in 2005.
GENERAL AND ADMINISTRATIVE. Registrant’s general and administrative expenses consist of costs for general and corporate functions, including facility fees, travel, telecommunications and investor relations. In the first quarter of 2005, Registrant recorded general and administrative expense of $65,446 as compared to $90,980 in the first quarter of 2004 - a decrease of 28.1%. The decline is primarily attributable to a decline in travel and financing expenses which were not incurred in the current quarter. Management expects general and administrative expenses to remain at their current level for the second quarter of 2004.
MANAGEMENT FEES AND SALARIES. In the first quarter of 2005, Registrant incurred management fees and staff salaries of $186,905, an increase of 82.2% over the first quarter of 2004 of $102,598 as the number of employees has more than doubled over the year from 10 staff to 22 staff. Management expects staff salaries to increase as hiring continues in the coming quarters.
PROFESSIONAL FEES. Professional fees include legal and auditing fees. During the first quarter of 2005, professional fees totaled $10,601 as compared to $9,621 in 2004, an increase of 10.2%. No significant legal expenses have been incurred in the first quarter of 2005. The Registrant’s subsidiary is pursuing equity financing and plans to file its prospectus in the second quarter of 2005 thus professional fees are expected to increase subsequent to the first quarter in 2005. Other than professional fees related to raising capital, Management is unaware of factors which are likely to increase professional fees in the second quarter of 2005.
(c) Liquidity and Capital Resources
Registrant seeks to generate revenue from (i) leasing domain names to third parties to conduct on-line businesses; (ii) selling products and services of owned inventory and of third parties; (iii) fees resulting from Internet traffic click-throughs generated by the domain name assets; and (iv) trading of non-core domain name assets.
Management’s previously stated goal of eliminating the working capital deficiency has been achieved in the third quarter of 2004 and maintained into the first quarter of 2005. At March 31, 2005 Registrant had current assets in excess of current liabilities resulting in a positive working capital of $753,361 as compared to a working capital of $411,397 at the fiscal year ending December 31, 2004. During the three-months ended March 31, 2005 Registrant had net income of $133,472 and an increase in cash of $164,751, compared to net income of $45,221 and a decrease in cash of $10,064 for the same three-month period of last year. Operating activities generated cashflows of $72,593 from net income after primarily reducing accounts payable during the three-month period ended March 31, 2005. To date, Registrant has reduced its accumulated deficit to $1,065,229 and has stockholders’ equity of $2,289,188 as at March 31, 2005.
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In October 2003, Registrant became a majority shareholder of FrequentTraveller which has developed and is operating travel sale websites utilizing non-exclusive access to Registrant’s domain names Vietnam.com, Malaysia.com, Indonesia.com, Brazil.com and Canadian.com. Registrant will continue to own the aforementioned domain names and to develop businesses other than travel sales for them. FrequentTraveller has two managers and is not expected to generate sufficient revenue to cover expenses for at least twelve months. Any fund shortfall, currently requiring $10,000 per month, will be covered by Registrant or by raising outside capital. As of March 31, 2005, FT has raised $191,826 in private placement equity, including $70,000 invested by the Registrant, and accumulated a deficit of $248,247. FT’s working capital is expected to increase in the second quarter of 2005 as FT completes its private placement. Currently, $50,200 is classified as an obligation to issue shares by FT.
As Registrant is working to achieve a positive working capital position and is currently profitable, opportunities may arise which would require Registrant to seek additional capital other than for operations from external sources. Registrant expects to raise any additional funds by way of equity and/or debt financing, and through the sale of non-strategic domain name assets. However, Registrant may not be able to raise the required funds from such financings, depending on volatile market conditions and the perception by investors of those companies that, like Registrant, engage in e-commerce and related businesses.
Registrant has no current plans to purchase any plant or significant equipment.
(d) Uncertainties Relating to Forward-Looking Statements
Management’s discussion and analysis of Registrant’s financial condition and the results of its operations and other sections of this report, contain forward looking statements that are based upon the current beliefs and expectations of Registrant’s management, as well as assumptions made by, and information currently available to, Registrant’s management. Because these statements involve risks and uncertainties, actual actions and strategies and the timing and expected results may differ materially from those expressed or implied by the forward-looking statements. As well, Registrant’s future results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements.
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Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-QSB, Registrant’s Chief Executive Officer and Chief Financial Officer believe Registrant’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by Registrant in this report is accumulated and communicated to Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in Registrant’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.
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OTHER INFORMATION
In December 1999, DHI commenced a lawsuit in the Supreme Court of British Columbia (No. C996417) against Paul Green, the former chief executive officer of DHI, for breach of fiduciary duty for wrongfully attempting to appropriate the Subsidiary’s business opportunities. DHI is seeking an undetermined amount of damages and a declaration that it had just cause to terminate Paul Green as the CEO in or about June 1999. No decision has been rendered in this case and Registrant cannot predict whether DHI will prevail, and if it does, what the terms of any judgment may be.
The former Chief Executive Officer of DHI, Paul Green, commenced a legal action against DHI on March 9, 2000 in the Supreme Court of British Columbia (No. S001317) for wrongful dismissal and breach of contract. He is seeking, at a minimum, 18.39% of the outstanding shares of DHI, specific performance of his contract, special damages in an approximate amount of $30,000, aggravated and punitive damages, interest and costs. On June 1, 2000, DHI filed a Defence and Counterclaim against this individual claiming damages and special damages for breach of fiduciary duty and breach of his employment contract. The outcome of these legal actions is currently not determinable and as such the amount of loss, if any, resulting from this litigation is presently not determinable.
Registrant is not aware of any other pending or threatened material legal proceedings.
On March 22, 2005, the Board of Directors issued 275,000 shares of common stock to Carl H Jackson pursuant to a domain purchase agreement. Registrant relied on an exemption from registration under Section 4(2) of the Securities Act of 1933 in issuing the shares. These shares are restricted securities and are subject to resale restrictions under Rule 144.
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None.
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the three months of the fiscal year covered by this report.
None.
(A) Index to and Description of Exhibits.
EXHIBIT | DESCRIPTION |
F-1 | Financial Statements. |
31 | Section 302 Certification of Chief Executive Officer and Chief Financial Officer |
32 | Section 906 Certificate of Chief Executive Office and Chief Financial Officer |
(B) Reports on Form 8-K.
There were no report on Form 8-K filed by Registrant during the first quarter ending March 31, 2005.
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In accordance with the requirements of the Exchange Act, Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMUNICATE.COM INC.
By:/s/ David M. Jeffs
Name: David M. Jeffs
Title: Director and CEO
Dated: May 16, 2005
By:/s/ J. Cameron Pan
Name: J. Cameron Pan
Title: CFO
Dated: May 16, 2005
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Exhibit 31
Page - - 12
I, David M Jeffs, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Communicate.com 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 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 functions):
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: May 16, 2005
/s/ David M Jeffs
David M Jeffs, Director and CEO
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CERTIFICATIONS
I, J Cameron Pan, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Communicate.com 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 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 functions):
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: May 16, 2005
/s/ J Cameron Pan
J Cameron Pan - CFO
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Exhibit 32
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Communicate.com Inc. (“Communicate”) on Form 10-QSB for the period ending March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David M. Jeffs, President, Chief Executive Officer of Communicate and the sole member of the Board of Directors, certify, pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly represents, the financial condition and result of operations of Communicate.
/s/ David M. Jeffs
David M. Jeffs
Chief Executive Officer
May 16, 2005
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Communicate.com Inc. (“Communicate”) on Form 10-QSB for the period ending May 16, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Cameron Pan, Secretary, Treasurer, and Chief Financial Officer of Communicate, certify, pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly represents, the financial condition and result of operations of Communicate.
/s/ J. Cameron Pan
J. Cameron Pan
Chief Financial Officer
May 16, 2005
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EXHIBIT F-1
COMMUNICATE.COM INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
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COMMUNICATE.COM INC.
March 31,2005 | December 31,2004 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 1,229,679 | $ | 1,064,928 | |||
Accounts receivable | 13,581 | 9,373 | |||||
Advances receivable | - | 2,291 | |||||
1,243,260 | 1,076,592 | ||||||
FIXED ASSETS | 32,102 | 26,394 | |||||
INTANGIBLE ASSETS(Note 2) | 1,503,725 | 1,503,725 | |||||
$ | 2,779,087 | $ | 2,606,711 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable and accrued liabilities | $ | 489,899 | $ | 665,195 | |||
STOCKHOLDERS’ EQUITY | |||||||
Capital stock(note 4) | |||||||
Authorized | |||||||
50,000,000 Common shares, $0.001 par value | |||||||
Issued and outstanding | |||||||
15,321,339 Common shares | 6,331 | 6,331 | |||||
Additional paid in capital | 3,133,886 | 3,133,886 | |||||
Share subscriptions (Note 11) | 100,000 | - | |||||
FT obligation to issue shares (Note 3) | 50,200 | - | |||||
Obligation to issue shares (Note 4) | 64,000 | - | |||||
Accumulated deficit | (1,065,229 | ) | (1,198,701 | ) | |||
2,289,188 | 1,941,516 | ||||||
$ | 2,779,087 | $ | 2,606,711 | ||||
The accompanying notes are an integral part of these interim consolidated financial statements.
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COMMUNICATE.COM INC.
(unaudited)
Three months ended March 31, 2005 | Three months ended March 31, 2004 | ||||||
REVENUES | |||||||
Domain name leasing and advertising | $ | 337,337 | $ | 66,548 | |||
Domain name sales | - | 200,000 | |||||
eCommerce sales | 640,989 | 229,561 | |||||
Total revenues | 978,326 | 496,109 | |||||
COST OF REVENUES | |||||||
Cost of domain name sales and commissions | - | 74,857 | |||||
eCommerce direct costs | 553,116 | 179,582 | |||||
Total cost of revenues | 553,116 | 254,439 | |||||
GROSS PROFIT | 425,210 | 241,670 | |||||
EXPENSES | |||||||
Marketing | 32,696 | 5,021 | |||||
General and administrative | 65,446 | 90,980 | |||||
Management fees and salaries | 186,905 | 102,598 | |||||
Professional fees | 10,601 | 9,587 | |||||
Depreciation | 2,134 | 608 | |||||
297,782 | 208,794 | ||||||
INCOME BEFORE OTHER ITEMS | 127,428 | 32,876 | |||||
GAIN ON DEBT SETTLEMENT | 6,044 | - | |||||
NON-CONTROLLING INTEREST SHARE OF LOSS IN SUBSIDIARY | - | 6,691 | |||||
DILUTION GAIN INFREQUENT TRAVELLER.COM (Note 3) | - | 5,654 | |||||
INCOME BEFORE INCOME TAXES | 133,472 | 45,221 | |||||
INCOME TAXES(Note 7) | |||||||
Current | 53,389 | 10,000 | |||||
Recovery of deferred tax assets | (53,389 | ) | (10,000 | ) | |||
NET INCOME FOR THE PERIOD | $ | 133,472 | $ | 45,221 | |||
EARNINGS PER SHARE: | |||||||
Basic | $ | 0.01 | $ | 0.01 | |||
Diluted | $ | 0.01 | $ | 0.01 | |||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | |||||||
Basic | 15,024,188 | 14,737,493 | |||||
Diluted | 17,024,188 | 18,098,743 |
The accompanying notes are an integral part of these interim consolidated financial statements.
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COMMUNICATE.COM INC.
(unaudited)
Three months ended March 31, 2005 | Three months ended March 31, 2004 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income for the period | $ | 133,472 | $ | 45,221 | |||
Adjustments to reconcile net income to net cash from operating activities | |||||||
- non-controlling interest share of losses | - | (6,691 | ) | ||||
- dilution gain in Frequent Traveller.com | - | (5,654 | ) | ||||
- non-cash cost of domain name sales | - | 54,857 | |||||
- depreciation | 2,134 | 608 | |||||
- accrued interest | - | (488 | ) | ||||
- accounts and advances receivable | (1,917 | ) | (3,384 | ) | |||
- prepaid expenses | - | 2,067 | |||||
- accounts payable and accrued liabilities | (175,296 | ) | (60,468 | ) | |||
CASH FROM OPERATING ACTIVITIES | (41,607 | ) | 26,068 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
- purchase of computer equipment | (7,842 | ) | - | ||||
CASH FLOWS USED IN INVESTING ACTIVITIES | (7,842 | ) | - | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
- issuance of common stock | - | 10,000 | |||||
- share subscriptions (Note 11) | 100,000 | - | |||||
- FT obligation to issue shares (Note 3) | 50,200 | - | |||||
- obligation to issue shares (Note 4) | 64,000 | - | |||||
- loan proceeds (repayments) | - | (50,000 | ) | ||||
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES | 214,200 | (40,000 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES | - | 3,868 | |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 164,751 | (10,064 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 1,064,928 | 393,039 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 1,229,679 | $ | 382,975 | |||
SUPPLEMENTAL CASH FLOW INFORMATION (Refer to Note 8) |
The accompanying notes are an integral part of these interim consolidated financial statements.
Page - - 21
COMMUNICATE.COM INC.
March 31, 2005
(unaudited)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Company’s subsidiary Domain Holdings Inc. (“DHI”) owns a portfolio of generic domain names. DHI’s current business strategy is to develop or to seek partners to develop its domain names to include content, commerce and community applications. DHI has developed websites that sell fragrance and beauty care products to North American consumers. DHI is developing other sites with the goal of facilitating business transactions both at the wholesale level and at the consumer level. DHI sells advertising services on its domains held for development and seeks to acquire other domains to complement its retail strategy or its advertising strategy. DHI has an in-house development team that develops its corporate websites.
On October 1, 2003 the Company acquired a 71% controlling interest in FrequentTraveller.com Inc. (“FT”), a Nevada private company incorporated on October 29, 2002. FT is a full service travel agency that caters to Internet-based customers seeking tours and other travel services. As at March 31, 2005, the Company owns 54% of the outstanding shares of FT. (Refer to Note 3.)
Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited consolidated financial statements should be read in conjunction with those financial statements included in the Form 10-KSB. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
Comparative figures
Certain comparative figures have been reclassified in order to conform to the current period’s financial statement presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements are presented in United States dollars and are prepared in accordance with accounting principles generally accepted in the United States.
Principles of consolidation
The financial statements include the accounts of the Company, the 94% interest in its subsidiary, DHI, and the 54% interest in FT. All significant intercompany balances and transactions are eliminated on consolidation.
Revenue recognition
Revenue from the sale and lease of domain names, whose carrying values are recorded as intangible assets, consists primarily of funds earned for the transfer of rights to domain names that are currently in the Company’s control. Collectibility of revenues generated is subject to a high level of uncertainty; accordingly revenues are recognized only as received.
Web advertising revenue consists primarily of commissions earned from the referral of visitors to the Company’s sites to other parties. The amount and collectibility of these referral commissions is subject to uncertainty; accordingly revenues are recognized when the amount can be determined and collectibility can be reasonably assured. In accordance with EITF 99-19 the Company records web advertising revenue net of service costs.
Revenues, and associated costs of goods sold, from the on-line sales of products, currently consisting primarily of fragrances and other beauty products, are recorded upon shipment of products and determination that collection is reasonably assured. The Company does not record inventory as an asset because all products sold are delivered to the customer on a “just-in-time” basis.
Revenues from the sales of travel products, including tours, airfares and hotel reservations, are non-refundable upon receipt of payment and are accordingly recognized as received. All costs relating to travel related sales are accrued at that time.
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COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Stock-based compensation
In December 2002, the Financial Accounting Standards Board issued Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS No. 148”), an amendment of Financial Accounting Standard No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”). The purpose of SFAS No. 148 is to: (1) provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, (2) amend the disclosure provisions to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation, and (3) to require disclosure of those effects in interim financial information. The disclosure provisions of SFAS No. 148 were effective for the Company commencing December 31, 2002 and the required disclosures have been made below.
The Company has elected to continue to account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB No. 25”) and comply with the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148 as described above.In addition, in accordance with SFAS No. 123 the Company applies the fair value method using the Black-Scholes option-pricing model in accounting for options granted to consultants.Under APB No. 25, compensation expense is recognized based on the difference, if any, on the date of grant between the estimated fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Compensation expense is recognized immediately for past services and pro-rata for future services over the option-vesting period.
The following table illustrates the pro forma effect on net income and net earnings per share as if the Company had accounted for its stock-based employee compensation using the fair value provisions of SFAS No. 123 using the assumptions as described in Note 4:
Three months ended March 31, 2005 | Three months ended March 31, 2004 | |||||||||
Net income for the period | As reported | $ | 133,472 | $ | 45,221 | |||||
SFAS 123 compensation expense | Pro-forma | - | (3,924 | ) | ||||||
Net income for the period | Pro-forma | $ | 133,472 | $ | 41,297 | |||||
Pro-forma basic net income per share | Pro-forma | $ | 0.03 | $ | 0.01 | |||||
Pro-forma diluted net income per share | Pro-forma | $ | 0.03 | $ | 0.01 |
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services” (“EITF 96-18”). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.
The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No.44, Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25 (“FIN 44”), which provides guidance as to certain applications of APB 25. FIN 44 is generally effective July 1, 2000 with the exception of certain events occurring after December 15, 1998.
Income taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances .deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. A valuation allowance is provided for deferred tax assets if it is more likely than not that the Company will not realize the future benefit, or if the future deductibility is uncertain.
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COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of intangible assets, stock based compensation, disclosure of contingent assets and liabilities at the date of the financial statements and for the periods that the financial statements are prepared. Actual amounts could differ from these estimates.
Foreign currency transactions
The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation”, the foreign currency financial statements of the Company’s subsidiaries are re-measured into U.S. dollars. Monetary assets and liabilities are re-measured using the foreign exchange rate that prevailed at the balance sheet date. Revenue and expenses are translated at weighted average rates of exchange during the year and stockholders’ equity accounts and certain other historical cost balances are translated by using historical exchange rates. Resulting re-measurement gains or losses are reported on the consolidated statement of operations.
Earnings per share
Basic earnings per share is computed by dividing earnings for the period by the weighted average number of common shares outstanding for the period. Fully diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including convertible preferred shares, in the weighted average number of common shares outstanding for a period and is not presented where the effect is anti-dilutive.
Cash and cash equivalents
The company considers all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents.
Intangible assets
The Company has adopted the provision of the Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Intangible Assets”, which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized and are tested for impairment annually. The determination of any impairment would include a comparison of estimated future operating cash flows anticipated during the remaining life with the net carrying value of the asset as well as a comparison of the fair value to book value of the Company.
The Company’s intangible assets, which consist of its portfolio of generic domain names, has been determined to have an indefinite life and management has determined, based upon projected cash flows and market capitalization, that there is no impairment of the carrying value of its intangible assets at March 31, 2005.
Website development costs
The Company has adopted the provisions of EITF 00-2 "Accounting for Web Site Development Costs" and AICPA SOP 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” whereby costs incurred in the preliminary project phase are expensed as incurred; costs incurred in the application development phase are capitalized; and costs incurred in the post-implementation operating phase are expensed as incurred. The Company has not currently incurred any significant development costs relating to its operational websites.
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COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(unaudited)
NOTE 3 - FREQUENT TRAVELLER.COM (“FT”) OBLIGATION TO ISSUE SHARES
By agreement dated October 1, 2003 the Company acquired 350,000 common shares of FT, representing 71% of the outstanding shares of FT, in consideration for settlement of a $35,000 debt owing to the Company by FT for previous consulting work provided. Subsequent to October 1, 2003, FT issued 113,637 shares of its common stock to non-controlling interests for total proceeds of $50,000 resulting in a gain on dilution of $30,555 in fiscal 2003. In 2004, FT issued 350,000 shares to the Company in settlement of advances of $35,000 and issued 334,578 shares to non-controlling interests for total proceeds of $51,726 resulting in a net gain on dilution of $12,353 in fiscal 2004. On November 16, 2004, FT declared a nine share for every one share stock dividend. As of March 31, 2005, FT has 12,936,690 common shares issued and outstanding and the Company owns 7,000,000 common shares representing 54% of FT’s issued and outstanding common shares.
During the quarter ended March 31, 2005 FT had planned to raise $100,000 at $0.05 per common share in an equity private placement by June 2005 and had received $50,200 from investors. Upon completion of the private placement FT is expected to issue up to 2,000,000 common shares and the Company will subscribe for an amount sufficient to maintain its majority stake in FT, The monies raised will be used as working capital for FT.
NOTE 4 - CAPITAL STOCK
The authorized capital of the Company consists of 50,000,000 Common Shares with a par value of $.001.
During the quarter ended March 31, 2005, the Company authorized but has not yet issued 160,000 shares of restricted common stock of the Company to employees to satisfy bonuses of $64,000 awarded and recorded by DHI in 2004.
During the year ended December 31, 2004, the Company issued 50,000 shares of restricted common stock of the Company to two employees in satisfaction of bonuses of $10,000 granted and recorded by DHI in 2003 and issued 580,000 shares of restricted common stock to an officer under an option agreement (see Stock Options below).
Stock options
The Company does not have a formal Stock Option Plan, however, options may be granted with terms and conditions at the discretion of the Company’s board of directors.
On July 24, 2002 the Company granted an officer 580,000 stock options at an exercise price of $0.10 per share. The options vest evenly over two years commencing July 24, 2002. No compensation expense will be recorded upon vesting of these options in accordance with the provisions of APB No. 25 as the exercise price of the options awarded approximated the market price of the Company’s common shares as at the date of the award. In July 2004 the officer exercised his option for $58,000, and accordingly, the Company issued 580,000 shares of restricted common stock.
In accordance with the provisions of SFAS No. 123, for stock options granted to officers, directors and employees, the Company has provided pro forma information regarding net income (loss) and net income (loss) per share as if the Company had accounted for these stock options using the fair value method. The fair value of the options vested in the period was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 4%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 205% and a weighted average expected life of the option of 2 years.
For purposes of the pro-forma disclosures, the estimated fair value of the options of $49,823 was amortized to expense over the vesting period which ended July 24, 2004. In accordance with the provisions of SFAS 148, the Company’s pro-forma information relating to the granting and vesting of stock options has been shown in Note 2.
NOTE 5 - RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 2005 consulting fees totalling $51,000 (2004 - $48,000) were incurred and paid to three executives of the Company.
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COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(unaudited)
NOTE 6 - FINANCIAL INSTRUMENTS
Interest rate risk exposure
The Company has limited exposure to any fluctuation in interest rates.
Foreign exchange risk
The Company is subject to foreign exchange risk for sales and purchases denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the United States dollar. The Company does not actively manage this risk.
Concentration of credit risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and trade accounts receivable. The Company limits its exposure to credit loss by placing its cash and cash equivalents on deposit with high credit quality financial institutions. Receivables arising from sales to customers are generally not significant individually and are not collateralized. Management continually monitors the financial condition of its customers to reduce the risk of loss.
Fair values of financial instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities. The fair values of these financial instruments approximate their carrying values.
NOTE 7 - INCOME TAXES
The Company’s subsidiary, DHI is subject to Canadian federal and British Columbia provincial taxes in Canada and the Company is subject to United States federal and state taxes.
As at March 31, 2005 the Company and its subsidiaries have net operating loss carryforwards of approximately $3,500,000that result in deferred tax assets. The majority of the loss carryforwards will expire, if not utilized, through 2025 with the majority expiring by 2006. The Company’s subsidiary DHI also has approximately $1,500,000 in undepreciated capital costs relating to fixed assets that have not been amortized for tax purposes. These costs may be amortized in future as necessary to reduce taxable income. Management believes that the realization of the benefits from these deferred tax assets appears uncertain due to the Company’s limited profitable operating history and current business plans. Accordingly, a full deferred tax asset valuation allowance has been provided and no deferred tax asset benefit has been recorded.
NOTE 8 - SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
Three month period ended March 31, 2005 | Three month period ended March 31, 2004 | ||||||
Cash paid during the period for: | |||||||
Interest | $ | - | $ | 7,656 | |||
Income taxes | $ | - | $ | - |
On January 7, 2004, 50,000 shares were issued in settlement of $10,000 of DHI’s bonus payable. (Refer to Note 4.)
On January 7, 2005, 160,000 shares were authorized to be issued in settlement of $64,000 of DHI’s bonus payable. (Refer to Note 4.)
NOTE 9 - CONTINGENCIES
The former Chief Executive Officer of DHI commenced a legal action against DHI on March 9, 2000 for wrongful dismissal and breach of contract. He is seeking, at a minimum, 18.39% of the outstanding shares of DHI, specific performance of his contract, special damages in an approximate amount of $30,000, aggravated and punitive damages, interest and costs. On June 1, 2000, Communicate.com filed a Defence and Counterclaim against this individual claiming damages and special damages for breach of fiduciary duty and breach of his employment contract. The outcome of these legal actions is currently not determinable and as such the amount of loss, if any, resulting from this litigation is presently not determinable.
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COMMUNICATE.COM INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(unaudited)
NOTE 10 - DOMAIN NAME SALES
On July 3, 2003, DHI entered into agreements to sell automobile.com, body.com, exercise.com and makeup.com to Manhattan Assets Corp. for a total sales price of $1,000,000. Upon entering into the agreements, DHI received a non-refundable $50,000 payment for each of the four domain names totalling $200,000 and granted Manhatten Assets the option to purchase the four domain names for $200,000 each, with payments due beginning on November 3, 2003 and every three-months thereafter until August 3, 2004. If any of the payments are not made on the specified date, Manhattan Assets forfeits its rights to purchase under the agreement. In September 2004, pursuant to an amendment between the parties to the July 3, 2003 agreement of sale, DHI agreed to substitute call.com in place of body.com. As of March 31, 2005, Manhatten Assets has paid $1,000,000 to DHI under the terms of the contract and the Company has paid $100,000 in commissions on the $1,000,000.
DHI retains a perpetual royalty right to each of the domain names sold commencing on the fourth month after each sale. The royalty is calculated and payable monthly as the greater of 5% of net revenues arising from the sale of products and services marketed on webpages hosted on the domain names, or $2,500, commencing January 2005. No value is ascribed to the perpetual royalty upon sale or transfer of a domain name right as future royalty amounts are not readily determinable and collectability is not reasonably assured. DHI has waived the royalty receivable from Manhatten Assets until July 2005 while awaiting the development of the websites.
NOTE 11 - SUBSEQUENT EVENTS
On March 22, 2005, the Company entered into an agreement to purchase from an unrelated third party a portfolio of domain names and $100,000 cash in exchange for 275,000 restricted common shares issued from treasury. The undertakings were completed and the common shares were released to the seller on April 5, 2005.
On May 5, 2005, DHI entered into an agreement with FT whereby FT would have to rights to sell travel products on Brazil.com, Indonesia.com, Malaysia.com, Canadian.com and GreatBritain.com by agreeing to pay at least a minimum royalty commencing 2006 of $150,000 per annum. The royalty, averaging 3% up to $100 million, is based on sales of travel products by FT. DHI retains the rights to sell other services, including advertising, on the websites. The agreement expires on December 31, 2010 and may be extended in increments of 5 years thereafter with the minimum annual royalty recalculated based on the average from the previous 5-year period.
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