UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______ to ______
Commission file number: 000-27185
GLOBAL NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0367123
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
575 Madison Avenue, 10th Floor, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices)
212-605-0431
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes [x] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 30,415,717
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [x]
Part I
Financial Information
Item 1. Financial Statements
See financial statements beginning on page F-1.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Except for historical information, the material contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operation is forward-looking. This discussion includes, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
discussed in these forward-looking statements. For the purposes of the safe
harbor protection for forward-looking statements provided by the Private
Securities Litigation Reform Act of 1995, readers are urged to review the list
of certain important factors set forth in Cautionary Statement for Purposes of
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995, which is set forth below after Liquidity and Capital Resources.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including those related to accounts
receivable, computer equipment, capitalized software development costs, stock
based compensation, income taxes and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The accounting policies and estimates used as of December 31, 2001,
which are included in the notes to the consolidated financial statements in the
Company's previously filed Form 10-KSB, have been applied consistently for the
quarter ended June 30, 2002.
Results of Operations:
Six months ended June 30, 2002 as compared to the six months ended
June 30, 2001:
1
Revenues:
Revenues for the six months ended June 30, 2002 were $120,956 as
compared with $110,363 for the six months ended June 30, 2001, representing an
increase of $10,593 or 9.6%. Revenues for the period from inception were
$606,758. The increased revenues were attributable to more intensive training
with the National Newspaper Network sales staff, participation in contracts
resulting from our onsite help desk at National Newspaper Network, and enhanced
relationships with major advertising agencies including, among others,
Interpublic Omnicom and WPP Group.
Cost of Revenues:
Cost of revenues for the six months ended June 30, 2002 was $34,590 as
compared with $59,655 for the six months ended June 30, 2001. Cost of revenues
for the period from inception were $278,366. As a result of the decrease in our
cost of revenues of $25,065 or 42%, our gross profit for the six months ended
June 30, 2002 was $86,366 as compared with $50,708 for the six months ended June
30, 2001. The decrease in costs was attributable to the implementation of
revenue sharing plans with newspapers instead of the outright purchase of
impressions.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses for the six months ended
June 30, 2002 were $1,162,085 as compared with $1,688,944 for the six months
ended June 30, 2001, representing a decrease of $526,859 or 31%. Selling,
general and administrative expenses for the period from inception were
$7,376,844. The decrease in these costs is primarily a result of management's
effort to better contain costs. In addition, during the six months ended June
30, 2002, we recognized a non-cash charge of $572,600 associated with the
issuance of 4,420,000 shares of our common stock, of which 2,000,000 shares with
a fair value of $260,000 were given to members of our Board of Directors for
services rendered and the remaining 2,420,000 shares with a fair value of
$312,600 were given to consultants for investment services, public relations and
marketing services and assistance with the maintenance and updating of our
proprietary software. During the six months ended June 30, 2001, we recognized a
non-cash charge of $866,250 associated with the issuance of 1,090,000 shares of
our common stock for similar services.
Loss From Operations:
Loss from operations for the six months ended June 30, 2002 was
$(1,075,719) as compared with $(1,638,236) for the six months ended June 30,
2001. Our loss from operations for the period from inception was $(7,048,452).
The decrease in loss from operations was primarily attributable to our improved
gross margins and our reductions in selling, general and administrative expenses
as described above.
Net Loss:
Net loss was $(1,083,587) for the six months ended June 30, 2002 as
compared with $(1,641,479) for the six months ended June 30, 2001. Net loss for
the period from inception was $(7,021,213).
2
Three months ended June 30, 2002 as compared to the three months ended
June 30, 2001:
Revenues:
Revenues for the three months ended June 30, 2002 were $69,956 as
compared with $45,000 for the three months ended June 30, 2001, representing a
increase of $24,956 or 55.5%. The increased revenues were attributable to more
intensive training with the National Newspaper Network sales staff,
participation in contracts resulting from our onsite help desk at National
Newspaper Network, and enhanced relationships with major advertising agencies
including, among others, Interpublic Omnicom and WPP Group.
Cost of Revenues:
Cost of revenues for the three months ended June 30, 2002 was $20,987
as compared with $32,067 for the three months ended June 30, 2001. As a result
of the decrease in our cost of revenues of $11,080 or 34.6%, our gross profit
for the three months ended June 30, 2002 was $48,969 as compared with $12,933
for the three months ended June 30, 2001. The decrease in costs was attributable
to the implementation of revenue sharing plans with newspapers instead of the
outright purchase of impressions.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses for the three months
ended June 30, 2002 were $508,896 as compared with $904,776 for the three months
ended June 30, 2001, representing a decrease of $395,880 or 43.8%. The decrease
in these costs is primarily a result of management's efforts to better contain
costs. In addition, during the three months ended June 30, 2002, we issued
1,270,000 shares of common stock with a fair value of approximately $163,000 for
marketing and public relations services. During the three months ended June 30,
2001, we issued 750,000 shares of common stock with a fair value of
approximately $420,000 for similar type services.
Loss From Operations:
Loss from operations as of the three months ended June 30, 2002 was
$(459,927) as compared with $(891,843) for the three months ended June 30, 2001.
Our loss from operations for the period from inception was $(7,048,452). The
decrease in loss from operations was primarily attributable to our improved
gross margins and our reductions in selling, general and administrative expenses
as described above.
Net Loss:
Net loss was $(463,646) for the three months ended June 30, 2002 as
compared with $(895,910) for the three months ended June 30, 2001.
Liquidity and Capital Resources
Our financial statements have been prepared assuming that we will
continue as a going concern. We are in the development stage and only generated
revenues of approximately
3
$121,000 and $607,000 during the six months ended June 30, 2002 and the period
from inception, respectively. As a result, in part, of our limited revenues, we
incurred net losses of approximately $(1,084,000) and $(7,021,000) and negative
cash flows from operating activities of $394,000 and $3,241,000 during the six
months ended June 30, 2002 and the period from inception, respectively. As a
result, we had a cash balance of only $201,000, a working capital deficiency of
$26,000 and an accumulated deficit of approximately $7,021,000 as of June 30,
2002. In addition, we believe that we will continue to incur net losses and
negative cash flows from operating activities through at least June 30, 2003.
These matters raise substantial doubt about our ability to continue as a going
concern.
To enable us to continue as a going concern through at least the
twelve-month period ending June 30, 2003, we plan to continue to seek
opportunities to increase revenues through strategic alliances in the
advertising industry, in addition to those already formed, and the licensing or
sale of our proprietary software for which we were issued Patent #6,401,075 on
June 4, 2002. We have renewed our contract with the Newspaper National Network
and have entered into an non-disclosure agreement with the Associated Press to
develop an offline planning tool to complement our proprietary software system.
During the six months ended June 30, 2002, we raised $581,000 through the sale
of shares of common stock and we intend to continue to seek additional equity
and/or debt financing for the Company. Because we have limited fixed costs, we
believe we will have the ability to curtail our cash usage without causing a
material impact on our overall operations during the twelve-month period ending
June 30, 2003. As a result, we believe, but cannot assure, that we will have
sufficient resources and will be able to continue to operate through at least
June 30, 2003.
As of June 30, 2002 and 2001 and from inception, we used approximately
$(394,000), $(527,000) and $(3,241,000), respectively, in our operating
activities, primarily to fund our net losses.
As of June 30, 2002 and 2001 and from inception, we used approximately
$(4,700), $(4,400) and $(172,000), respectively, in our investing activities for
the purchases of equipment and our proprietary software.
Through our financing activities, primarily consisting of private
placements of shares of common stock, we have raised net proceeds of
approximately $ 565,000 and $85,000 and $3,613,000 during the six months ended
June 30, 2002 and 2001 and from inception, respectively.
During the six-month period ended June 30, 2002, we received proceeds
of $580,896 net of expenses of $34,500, from the sale and issuance of 7,112,136
shares of common stock through such private placements exempt from registration
under the Securities Act of 1933. A total of 5,203,960 shares of common stock
sold at $.10 per share, 2,141,176 shares sold at $.085 per share and 637,000
shares issued for financial services related to the private placement. A total
of 3,341,176 shares of common stock sold through private placement will be
converted into 3,341,176 shares of preferred stock upon the proper filing of the
certificate of designation with respect to the preferred stock. Holders of the
preferred shares will be entitled to receive dividends at the annual rate of 8%
and will have voting rights equivalent to those of a holder of common stock.
During the six-month period ended June 30, 2002, we issued a total of 4,420,000
shares of common stock as compensation for the services of executive officers
and consultants.
4
Such shares had a fair value of $572,600 at the time of issuance. In addition,
as of June 30, 2002, we have 870,000 shares of common stock subscribed for
through private placements at an aggregate purchase price of $87,000 or $.10 per
share.
We will require additional capital during the remainder of 2002 to
continue to implement our business strategy. Such additional capital may be
raised through public or private financings, as well as through borrowings and
other resources. To the extent that additional capital is raised through the
sale of equity or equity-related securities, the issuance of such securities
could result in dilution to our stockholders. No assurance can be given,
however, that we will have access to the capital markets in the future, or that
financing will be available on acceptable terms to satisfy our cash requirements
to implement its business strategy. If we are unable to access the capital
markets or obtain acceptable financing, the results of operations and financial
conditions could be materially and adversely affected. If adequate funds are not
available to us, we may be required to curtail operations significantly or to
obtain funds through entering into arrangements with collaborative partners or
others that may require us to relinquish rights to our technology. While we have
begun to receive commercial revenues, there can be no assurance that revenue
growth will continue or be able to provide adequate cash to sustain our
operations.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
Certain statements contained in our Form 10-QSB contain
"forward-looking statements" within the meaning of the private Securities
Litigation Reform Act of 1995. These are statements that do not relate strictly
to historical or current facts. Such forward-looking statements involve known
and unknown risks and uncertainties. Our actual results could differ materially
from the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences are discussed below. These risks and
uncertainties include, without limitation:
o the rate of market development and acceptance of our technology;
o the limited revenues and significant operating losses we have granted
to date;
o the possibility of significant ongoing capital requirements;
o the loss of any significant customer;
o our ability to compete successfully with current or future
competitors;
o our ability to secure additional financing as and when necessary;
o our ability to retain the services of our key management, and to
attract new members of the management team;
o our ability to effect and retain appropriate patent, copyright and
trademark protection of our products; and
5
o our ability to achieve adequate levels of revenue to recover our
investment in capitalized software development costs.
For the purpose of the safe harbor protection for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995,
readers are urged to review the list of certain important factors set forth in
Cautionary Statement for Purpose of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
We undertake no obligation to release publicly any revisions to the
forward-looking statements or to reflect events or circumstances occurring after
the date of this Form 10-QSB.
6
Part II
Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
We sold an aggregate of 7,982,136 shares of our common stock through a
private placement which provided us with total gross proceeds of $580,896, net
of expenses of $34,500. The issuance of these securities was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933. The total
included 5,203,960 shares sold at $.10 per share, 2,141,176 shares sold at $.085
per share and 637,000 shares issued for financial services related to the
private placement. A total of 3,341,176 shares of common stock sold through the
private placement will be converted into 3,341,176 shares of preferred stock
upon the proper filing of the certificate of designation with respect to the
preferred stock. Holders of the preferred shares will be entitled to receive
cumulative dividends at the annual rate of 8% and will have voting rights
equivalent to those of a holder of common stock.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter for which
this report is filed.
7
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
August 14, 2002
Global Network, Inc.
s/s James C. Mason
--------------------------------------------
James C. Mason, CEO, President,
Treasurer and Director (Principal Executive,
Financial and Accounting Officer)
8
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
I N D E X
PAGE
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2002 (Unaudited) F-2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 2002 AND 2001 AND
PERIOD FROM APRIL 26, 1999 (DATE OF INCEPTION) THROUGH
JUNE 30, 2002 (Unaudited) F-3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 AND PERIOD FROM
APRIL 26, 1999 (DATE OF INCEPTION) THROUGH JUNE 30, 2002
(Unaudited) F-4/5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 AND PERIOD FROM
APRIL 26, 1999 (DATE OF INCEPTION) THROUGH JUNE 30, 2002
(Unaudited) F-6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS F-7/10
* * *
F-1
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2002
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 200,754
Accounts receivable, net of allowance for doubtful accounts 147,449
Advances to officers 90,453
Other current assets 275
------------
Total current assets 438,931
Computer equipment, net of accumulated depreciation of $49,725 96,305
Capitalized software development costs, net of accumulated
amortization of $148,440 273,674
Other assets 12,523
------------
Total $ 821,433
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 418,578
Current portion of notes payable 26,028
Other current liabilities 20,564
------------
Total current liabilities 465,170
Notes payable, net of current portion 28,565
------------
Total liabilities 493,735
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none issued
Common stock, $.001 par value; 50,000,000 shares authorized;
30,415,717 shares issued 30,416
Additional paid-in capital 7,525,981
Stock subscription receivable for 870,000 shares (87,000)
Treasury stock - 156,000 shares, at cost (120,486)
Deficit accumulated in the development stage (7,021,213)
------------
Total stockholders' equity 327,698
------------
Total $ 821,433
============
See Notes to Condensed Consolidated Financial Statements.
F-2
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 2002 AND 2001 AND PERIOD FROM
APRIL 26, 1999 (DATE OF INCEPTION) THROUGH JUNE 30, 2002
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30, Cumulative
------------------------------------------------------------------- from
2002 2001 2002 2001 Inception
---------------- --------------- ------------- ------------- ---------------
Revenues $ 120,956 $ 110,363 $ 69,956 $ 45,000 $ 606,758
Cost of revenues 34,590 59,655 20,987 32,067 278,366
------------ ------------ ---------- ---------- -------------
Gross profit 86,366 50,708 48,969 12,933 328,392
Selling, general and admini-
strative expenses 1,162,085 1,688,944 508,896 904,776 7,376,844
------------ ------------ ---------- ---------- -------------
Loss from operations (1,075,719) (1,638,236) (459,927) (891,843) (7,048,452)
------------ ------------ ---------- ---------- -------------
Other income (expense):
Interest income 220 5,753 137 956 57,407
Interest expense (8,088) (8,996) (3,856) (5,023) (30,168)
------------ ------------ ---------- ---------- -------------
Totals (7,868) (3,243) (3,719) (4,067) 27,239
------------ ------------ ---------- ---------- -------------
Net loss $(1,083,587) $(1,641,479) $(463,646) $(895,910) $ (7,021,213)
============ ============ ========== ========== =============
Basic net loss per common
share $(.04) $(.13) $(.02) $(.07)
====== ====== ====== ======
Basic weighted average
common shares out-
standing 25,207,335 12,447,892 27,680,105 12,704,330
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-3
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 AND PERIOD FROM APRIL 26, 1999
(DATE OF INCEPTION) THROUGH JUNE 30, 2002
(Unaudited)
Deficit
Accumulated
Common Stock Additional Stock Treasury Stock in the
------------------- Paid-in Subscription -------------- Development
Shares Amount Capital Receivable Shares Amount Stage Total
------- ------- ---------- ------------ ------ ------ ------------- ----------
Initial issuance of shares
on April 26, 1999
(as retroactively adjusted to
reflect shares effectively issued
prior to reverse acquisition on
August 5, 1999 and the effects of
certain agreements on
September 9, 1999) 9,000,000 $ 100 $ (100)
Effects of reverse acquisition 1,576,000 10,476 $ (45,576) 100 $ (35,000)
Sale of units of shares of
common stock and warrants
through private placement 100,000 100 199,900 200,000
Exercise of warrants 100,000 100 199,900 200,000
Effects of issuance of common stock
in exchange for services 35,000 35 8,090 8,125
Effects of issuance of stock options
in exchange for services 76,050 76,050
Net loss $ (357,722) (357,722)
----------- -------- ----------- -------- ------------ -----------
Balance, December 31, 1999 10,811,000 10,811 438,364 - (357,722) 91,453
Sale of shares of common stock
through private placements,
net of expenses of $145,250 1,552,250 1,552 2,011,198 2,012,750
Cancellation of shares of common stock (1,175,000) (1,175) 1,175
Effects of issuance of common stock
in exchange for services 1,000,000 1,000 1,705,250 1,706,250
Effects of issuance of stock options
in exchange for services 396,000 396,000
Purchase of treasury stock 14,500 $(17,670) (17,670)
Net loss (3,097,910) (3,097,910)
----------- -------- ----------- -------- ------ --------- ------------ -----------
Balance, December 31, 2000 12,188,250 12,188 4,551,987 - 14,500 (17,670) (3,455,632) 1,090,873
F-4
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 AND PERIOD FROM APRIL 26, 1999
(DATE OF INCEPTION) THROUGH JUNE 30, 2002
(Unaudited)
Common Stock Additional Stock
--------------------- Paid-in Subscription
Shares Amount Capital Receivable
--------- -------- ---------- ------------
Sale of shares of common stock through private
placements, net of expenses of $139,451 7,677,553 $ 7,678 $ 970,569
Purchases of treasury stock for cash
Purchases of treasury stock through cancellation of
advances receivable from former officers
Effects of issuance of common stock in
exchange for services 1,367,778 1,368 1,045,438
Retirement of treasury stock (850,000) (850) (149,777)
Effects of issuance of common stock
in exchange for cancellation
of stock options 450,000 450 (450)
Net loss
----------- -------- ----------- ---------
Balance, December 31, 2001 20,833,581 20,834 6,417,767 $ -
Sale of shares of common stock through private
placements, net of expenses of $34,500 7,982,136 7,982 659,914 (87,000)
Purchases of treasury stock for cash
Retirement of treasury stock (2,820,000) (2,820) (119,880)
Effects of issuance of common stock in
exchange for services 4,420,000 4,420 568,180
Net loss
----------- -------- ----------- ---------
Balance, June 30, 2002 30,415,717 $30,416 $7,525,981 $(87,000)
=========== ======== =========== ========
Deficit
Accumulated
Treasury Stock in the
------------------------- Development
Shares Amount Stage Total
------ ------ ------------- ----------
Sale of shares of common stock through private
placements, net of expenses of $139,451 $ 978,247
Purchases of treasury stock for cash 3,390,500 $(265,934) (265,934)
Purchases of treasury stock through cancellation of
advances receivable from former officers 400,000 (105,627) (105,627)
Effects of issuance of common stock in
exchange for services 1,046,806
Retirement of treasury stock (850,000) 150,627
Effects of issuance of common stock
in exchange for cancellation
of stock options
Net loss (2,481,994) (2,481,994)
---------- ------------- ------------ -----------
Balance, December 31, 2001 2,955,000 (238,604) (5,937,626) 262,371
Sale of shares of common stock through private
placements, net of expenses of $34,500 580,896
Purchases of treasury stock for cash 21,000 (4,582) (4,582)
Retirement of treasury stock (2,820,000) 122,700
Effects of issuance of common stock in
exchange for services 572,600
Net loss (1,083,587) (1,083,587)
---------- ------------- ------------ -----------
Balance, June 30, 2002 156,000 $(120,486) $(7,021,213) $ 327,698
========== ============= ============ ===========
See Notes to Condensed Consolidated Financial Statements.
F-5
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 AND PERIOD FROM
APRIL 26, 1999 (DATE OF INCEPTION) THROUGH JUNE 30, 2002
(Unaudited)
Six Months Ended
June 30 , Cumulative
------------------------------- from
2002 2001 Inception
-------------- ---------------- ---------------
Operating activities:
Net loss $(1,083,587) $(1,641,479) $(7,021,213)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts 58,230 50,000 282,076
Depreciation 14,604 14,138 49,725
Amortization of software development costs 42,411 42,412 148,440
Costs of services paid through issuance of
common stock and stock options 572,600 866,250 3,481,831
Changes in operating assets and liabilities:
Accounts receivable (117,455) (37,783) (429,525)
Advances to (repayments by) officers and
former officers, net (21,612) 23,767 (196,080)
Other current assets 4,475 20,700 (275)
Other assets (4,186) (12,523)
Accounts payable and accrued expenses 136,038 138,928 436,158
Other current liabilities 20,564
------------ ------------ ------------
Net cash used in operating activities (394,296) (527,253) (3,240,822)
------------ ------------ ------------
Investing activities:
Purchase of computer equipment (4,655) (4,461) (73,665)
Payments for capitalized software development
costs (98,114)
------------ ------------ ------------
Net cash used in investing activities (4,655) (4,461) (171,779)
------------ ------------ ------------
Financing activities:
Payment of notes payable (10,860) (7,955) (35,352)
Proceeds from sale of common stock and warrants 580,896 176,038 3,771,893
Proceeds from exercise of warrants 200,000
Purchases of treasury stock (4,582) (83,211) (288,186)
Payments of costs in connection with reverse
acquisition (35,000)
------------ ------------ ------------
Net cash provided by financing activities 565,454 84,872 3,613,355
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 166,503 (446,842) 200,754
Cash and cash equivalents, beginning of period 34,251 454,945
------------ ------------ ------------
Cash and cash equivalents, end of period $ 200,754 $ 8,103 $ 200,754
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
F-6
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and business:
In 1999, Global Network, Inc. and its subsidiary (the "Company")
began to develop business operations comprised of packaging and
selling online banner advertising on newspaper web sites to national
advertisers. The Company has developed a proprietary software system
that allows national advertisers and their ad agencies to place ads
on multiple newspaper web sites at one time and to target a specific
demographic by having the advertisement posted in the section of the
newspaper that they choose. During the period from its inception on
April 26, 1999 through June 30, 2002, the Company did not generate
any significant revenues and, accordingly, it was in the development
stage as of June 30, 2002.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present fairly
the financial position of the Company as of June 30, 2002, its
results of operations for the six and three months ended June 30,
2002 and 2001, its changes in stockholders' equity for the six
months ended June 30, 2002, its cash flows for the six months ended
June 30, 2002 and 2001 and the related cumulative amounts for the
period from April 26, 1999 (date of inception) to June 30, 2002.
Pursuant to the rules and regulations of the United States
Securities and Exchange Commission (the "SEC"), certain information
and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the
United States of America have been condensed in or omitted from
these consolidated financial statements unless significant changes
have taken place since the end of the most recent fiscal year.
Accordingly, these unaudited condensed consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements as of December 31, 2001 and for
the period from April 26, 1999 (date of inception) to December 31,
2001 and the notes thereto (the "Audited Financial Statements") and
the other information included in the Company's Annual Report on
Form 10-KSB (the "Form 10-KSB") for the year ended December 31, 2001
that was previously filed with the SEC.
The results of the Company's operations for the six and three months
ended June 30, 2002 are not necessarily indicative of the results of
operations for the full year ending December 31, 2002.
Note 2 - Net earnings (loss) per common share:
The Company presents "basic" earnings (loss) per common share and,
if applicable, it will present "diluted" earnings per common share
pursuant to the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share". Generally, basic earnings
(loss) per common share is calculated by dividing net income or loss
by the weighted average number of common shares outstanding during
each period. The calculation of diluted earnings per common share is
similar to that of basic earnings per common share, except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if all potentially dilutive
common shares, such as those issuable upon the exercise of options
and warrants, were issued during the period.
F-7
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Net earnings (loss) per common share (concluded):
Since the Company had a loss for the six and three months ended June
30, 2002 and 2001, the assumed effects of the exercise of
outstanding stock options and warrants and the application of the
treasury stock method would have been anti-dilutive and, therefore,
diluted per share amounts have not been presented in the
accompanying condensed consolidated statements of operations for
those periods.
Note 3 - Basis of presentation:
The condensed accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going
concern. The Company is in the development stage and it only
generated revenues of approximately $121,000 and $607,000 during the
six months ended June 30, 2002 and the period from inception,
respectively. As a result, in part, of its limited revenues, the
Company incurred net losses of $1,084,000 and $7,021,000 and
negative cash flows from operating activities of $394,000 and
$3,241,000 during the six months ended June 30, 2002 and the period
from inception, respectively. As a result, the Company had a cash
balance of only $201,000, a working capital deficiency of $26,000
and an accumulated deficit of approximately $7,021,000 as of June
30, 2002. In addition, management believes that the Company will
continue to incur net losses and negative cash flows from operating
activities through at least June 30, 2003. These matters raise
substantial doubt about the Company's ability to continue as a going
concern.
To enable the Company to continue as a going concern through at
least the twelve-month period ending June 30, 2003, management plans
to continue to seek opportunities to increase revenues through
strategic alliances in the advertising industry, in addition to
those already formed, and the licensing or sale of the Company's
proprietary software. During the six months ended June 30, 2002, the
Company raised $581,000 through the sale of shares of common stock
(see Note 6 herein), and management intends to continue to seek
additional equity and/or debt financing for the Company. Since the
Company has limited fixed costs, management believes it will have
the ability to curtail the Company's cash usage without causing a
material impact on its overall operations during the twelve-month
period ending June 30, 2003. As a result, management believes, but
cannot assure, that the Company will have sufficient resources and
will be able to continue to operate through at least June 30, 2003.
The accompanying condensed consolidated financial statements do not
include any adjustments related to the recoverability and
classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue its operations as a going concern.
F-8
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Advances to officers and former officers:
Advances to officers of $90,453 as of June 30, 2002 were due on
demand. All advances to officers and former officers during the
period from April 26, 1999 through June 30, 2002 were noninterest
bearing.
Note 5 - Income taxes:
As of June 30, 2002, the Company had net operating loss
carryforwards of approximately $6,811,000 available to reduce future
Federal and state taxable income which, if not used, will expire at
various dates through 2022. The Company had no other material
temporary differences as of that date. Due to the uncertainties
related to, among other things, the changes in the ownership of the
Company, which could subject those loss carryforwards to substantial
annual limitations, and the extent and timing of its future taxable
income, the Company offset the deferred tax assets attributable to
the potential benefits of approximately $2,724,000 from the
utilization of those net operating loss carryforwards by an
equivalent valuation allowance as of June 30, 2002.
The Company had also offset the potential benefits from net
operating loss carryforwards by an equivalent valuation allowance
during each period from April 26, 1999 through December 31, 2001. As
a result of the increases in the valuation allowance of $725,000 and
$197,000 during the six and three months ended June 30, 2002,
respectively, $810,000 and $334,000 during the six and three months
ended June 30, 2001, respectively, and $2,724,000 for the period
from April 26, 1999 through June 30, 2002, the Company did not
recognize any credits for income taxes in the accompanying condensed
consolidated statements of operations to offset its pre-tax losses
in any of those periods.
Note 6 - Stockholders' equity:
Preferred stock authorized:
The Company's Articles of Incorporation authorize the issuance of up
to 5,000,000 shares of preferred stock with a par value of $.001 per
share. The preferred stock may be issued in one or more series, with
terms and preferences to be determined by the Company's Board of
Directors. No shares of preferred stock had been issued as of June
30, 2002 although certain shares of common stock issued during the
six months ended June 30, 2002 will be converted into shares of
preferred stock as explained below.
F-9
GLOBAL NETWORK, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Stockholders' equity (concluded):
Issuances of common stock:
During the six months ended June 30, 2002, the Company received
proceeds of $580,896, net of payments for related costs and expenses
of $34,500, from the sale and issuance of 7,112,136 shares of common
stock that were made through a private placement intended to be
exempt from registration under the Securities Act of 1933 (the
"Act"). The total included 5,203,960 shares sold at $.10 per share,
2,141,176 shares sold at $.085 per share and 637,000 shares issued
for financial services related to the private placement. A total of
3,341,176 shares of common stock sold through the private placement
will be converted into 3,341,176 shares of preferred stock upon the
proper filing of the certificate of designation with respect to the
preferred stock. Holders of the preferred shares will be entitled to
receive dividends at the annual rate of 8% and will have voting
rights equivalent to those of a holder of common stock. In addition
to selling shares through the private placements during six months
ended June 30, 2002, the Company had received subscriptions for the
purchase of 870,000 shares of common stock at $.10 per share or a
total of $87,000 as of June 30, 2002.
During the six months ended June 30, 2002, the Company issued a
total of 4,420,000 shares of common stock as compensation for the
services of executive officers and consultants. The shares had an
approximate fair value of $572,600 or $.13 per share as of the date
the Company agreed to issue the shares which was charged to selling,
general and administrative expenses during that period. The
issuances of those shares for services were noncash transactions
that are not reflected in the accompanying 2002 condensed
consolidated statement of cash flows.
Treasury stock:
During 2001 and 2000, the Board of Directors authorized the
repurchase by the Company of up to 300,000 additional shares of its
outstanding common stock. During the six months ended June 30, 2002,
the Company repurchased 21,000 shares at a cost of $4,582 or an
average of $.22 per share. As of June 30, 2002, the Company had
repurchased a total of 156,000 shares pursuant to the authorization
by the Board of Directors.
In addition, during the six months ended June 30, 2002, the Company
retired 2,820,000 shares of treasury stock which had been acquired
from former officers of the Company at a cost of $122,700.
Note 7 - Other related party transactions:
Selling, general and administrative expenses include charges by
related parties for client entertainment, office and secretarial
services and other office expenses totaling approximately $66,000
and $19,000 for the six and three months ended June 30, 2002,
respectively, $122,000 and $55,000 for the six and three months
ended June 30, 2001, respectively, and $657,000 for the period from
April 26, 1999 through June 30, 2002.
* * *
F-10