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 October 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number: 0-26454
OTHNET, INC.
(Exact name of Small Business Issuer
as specified in its Charter)
Delaware 98-0142664
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
The First National Bank Building
332 Minnesota Street, Suite 100 North
St. Paul, Minnesota 55101
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (651) 291-2993
Check whether the Issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No ______
State the number of shares outstanding of each of the Issuer's
classes of common equity, as of the latest practicable date:
Common, $.001 par value per share: 16,949,279 outstanding as of
December 31, 2001
OTHNET, INC.
Quarter Ended October 31, 2001
INDEX
Part I - Financial Information
Item 1. Financial Statements
Page
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Operations 4
Unaudited Consolidated Statements of Cash Flows 5
Unaudited Notes
to Consolidated Financial Statements 6
Item 2. Management's Discussion and
Analysis or Plan of Operation 8
Part II Other Information 12
OTHNET, INC.
(formerly known as PL Brands, Inc.)
(a development stage company)
UNAUDITED CONSOLIDATED BALANCE SHEET
October 31, April 30,
2001 2001
ASSETS
CURRENT ASSETS:
Cash $ 6,567 $ 559,365
Prepaid expenses 27,009 875
Total current assets 33,576 560,240
PROPERTY AND EQUIPMENT:
Office furniture and equipment 72,312 55,599
Less accumulated depreciation 16,287 8,132
Property and equipment, net 56,025 47,467
OTHER ASSETS:
Investment in Savage Beast 250,000 -
License agreement, net of amortization of
$72,000 and $ 0 108,000 180,000
Proprietary information database and
search engine, net of
amortization of $1,333,106
and $833,190 1,666,394 2,166,310
Total other assets 2,024,394 2,346,310
$ 2,113,995 $ 2,954,017
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 400,438 $ 246,086
Note payable to bank 25,000 -
Accrued salaries and benefits 82,345 35,462
Total current liabilities 507,783 281,548
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value,
40,000,000 shares authorized,
16,949,279 issued and outstanding 16,949 16,899
Preferred stock, $.001 par value,
2,000,000 shares authorized - -
Additional paid-in capital 12,219,230 11,969,280
Accumulated deficit (10,629,967) (9,313,710)
Total shareholders' equity 1,606,212 2,672,469
$ 2,113,995 $ 2,954,017
See Unaudited notes to the Consolidated Financial Statements
OTHNET, INC.
(formerly known as PL Brands, Inc.)
(a development stage company)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
Period From
May 1, 2000
to October 31, Three Months Ended October 31,
2001 2001 2000
Net sales $ 31,139 $ 2,888 $ 18,430
Operating Expenses:
Amortization of intellectual property 1,333,106 249,958 249,958
General and administrative expenses 2,781,623 384,947 308,835
Stock based compensation for nonemployees 4,404,307 - -
Total operating expenses 8,519,036 634,905 558,793
Loss from operations (8,487,897) (632,017) (540,363)
Other Income 77,420 648 23,874
Net loss $ (8,410,477) $ (631,369) $ (516,489)
Basic and diluted net loss per share $ (0.52) $ (0.04) $ (0.03)
Weighted average shares outstanding 16,037,500 16,899,279 16,899,279
Six Months Ended October 31,
2001 2000
Net sales $ 5,684 $ 18,430
Operating Expenses:
Amortization of intellectual property 499,916 333,278
General and administrative expenses 825,120 814,784
Stock based compensation for nonemployees - -
Total operating expenses 1,325,036 1,148,062
Loss from operations (1,319,352) (1,129,632)
Other Income 3,095 29,314
Net loss $ (1,316,257) $(1,100,318)
Basic and diluted net loss per share $ (0.08) $ (0.08)
Weighted average shares outstanding 16,899,279 14,313,948
See Unaudited notes to the Consolidated Financial Statements
OTHNET, INC.
(formerly known as PL Brands, Inc.)
(a development stage company)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
Period From
May 1,
to October 31, Six Months Ended October 31,
2001 2001 2000
Operating Activities
Net loss $ (8,410,477) $(1,316,257) $(1,100,318)
Adjustment to reconcile net loss to net cash used
used in operating activities:
Fair value of options granted to nonemployees 4,404,307 - -
Stock compensation expense 499,000 - 499,000
Depreciation and amortization 1,421,393 580,071 335,427
Changes in assets and liabilities affecting cash flow:
flow (net of assets acquired):
Prepaid expenses (27,009) (26,134) (873)
Accounts Receivable - - (24,070)
Acounts payable 235,958 154,352 (26,396)
Accrued salaries and benefits 82,345 46,883 81,262
Net cash (used in operating activities (1,794,483) (561,085) (235,968)
Investing Activities
Purchase of intellectual property - Othnet (500,000) - (500,000)
Purchase of license agreement (100,000) - -
Purchase of office furniture and equipment (72,312) (16,713) (44,934)
Net cash used in investing activities (672,312) (16,713) (544,934)
Financing Activities
Net proceeds from sale of common stock
in private placement 2,443,823 - 2,443,823
Proceeds from bank loan 25,000 25,000
Other proceeds from issuance of common stock 1,500 - 1,000
Net cash from financing activities 2,470,323 25,000 2,444,823
Net increase in cash 3,528 (552,798) 1,664,421
Cash beginning of period 3,039 559,365 3,039
Cash end of period $ 6,567 $ 6,567 $ 1,667,460
NONCASH TRANSACTIONS
Issuance of 50,000 shares for investment in
Savage Beast $ 250,000 $ 250,000 $ -
Issuances of 500,000 common shares for
services provided $ 249,500 $ - 249,500
Issuances of 4,500,000 common shares for purchase
of intellectual database and search engine $ 2,250,000 $ - $ 2,250,000
Amount due for purchase of license agreement
(included in accounts payable) $ 80,000 $ - $ -
See Unaudited notes to the Consolidated Financial Statements
OTHNET, INC.
(formerly known as PL Brands, Inc.)
(a development stage company)
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Unaudited Interim Financial Information
The accompanying interim consolidated financial
statements are unaudited, but in the opinion of the management
of the Company, contain all adjustments, consisting of only
normal recurring accruals, necessary to present fairly the
financial position at October 31, 2001 and April 30, 2001, the
results of operations for the three and six month periods ended
October 31, 2001 and 2000, and the cash flows for the six month
periods ended October 31, 2001 and 2000. The results of
operations for the three and six month periods ended October
31, 2001 are not necessarily indicative of the results of
operations to be expected for the full fiscal year ending April
30, 2002. These interim consolidated financial statements
should be read in conjunction with the audited financial
statements and notes thereto appearing in the Company's Form
10-KSB for the year ended April 30, 2001.
Note 2. Note Payable to Bank
On October 19, 2001, the Company borrowed $25,000 from a
bank. The loan was due on December 18, 2001, and bears
interest at 1% over the bank prime rate (6.5%). The loan is
secured by the assets of the Company and a Personal Guaranty by
the President of the Company. The due date of the loan has
been extended to February 18, 2002.
Note 3. Savage Beast
The Company completed a stock exchange with Savage Beast
Technologies Incorporated ("Savage Beast") during the three
months ended October 31, 2001, by issuing Savage Beast 50,000
shares of common stock, at an agreed valuation of $5.00 per
share, or $250,000 in the aggregate, in exchange for 100,000
shares of Savage Beast's common stock, at an agreed valuation
of $2.50 per share, or $250,000 in the aggregate. Should the
Company sell shares of its common stock at a price below $5.00
per share (reduced price) in its next round of financing, the
number of shares of Company common stock issued to Savage Beast
shall be increased such that the total number of shares issued
multiplied by the reduced price equals $250,000.
Note 4. Subsequent Event
At October 31, 2001, the Company had unamortized costs
of $1,666,394 related to its proprietary information database
and search engine and $108,000 related to an agreement that
licensed the use of certain technology to the Company. During
the current fiscal year, the Company has continued to enhance
the functionality of the proprietary information database and
search engine and in August 2001, the Company entered into Beta
testing on the enhanced version. Also during the second
quarter of fiscal 2002, the Company was actively seeking
funding to further technology and web site development, for the
acquisition of legal content, expansion of the management team
and establishment of sales and marketing office on the West
Coast. Meetings with investors were scheduled for September
12, 2001 in the World Trade Center in New York, but were
postponed after the terrorist attacks that occurred on
September 11, 2001. These meetings were rescheduled, and as of
October 31, 2001, management was still confident that the
additional funding would be received, and there was no decision
by management or the Board of Directors to change the original
focus.
About November 20, 2001, it became apparent that the
anticipated investors were not going to invest additional
funds, and management turned elsewhere to try and raise the
funds. In December 2001, the Board of Directors determined
that the financing would not be received, and decided to pursue
other alternatives.
After considerable discussion, the Board of Directors
determined that the best course of action would be to sell the
Company-owned technology. Management and the Board of
Directors is currently evaluating the possible alternatives,
and based on the initial responses believes that a significant
writedown of certain of its assets, principally the proprietary
information database and search engine and the license
agreement, will occur in the third quarter. There has been no
adjustments to the October 31, 2001 financial statements
related to the potential writedowns.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The following discussion of the Company's financial
condition and results of operations is based on the Company's
Consolidated Financial Statements and the related notes
thereto.
Forward-Looking Statements
This Form 10-QSB contains certain forward-looking
statements and information that reflect the Company's
expectations about its future operating results, performance
and opportunities that involve substantial risks and
uncertainties. When used in this Form 10-QSB, the words
"anticipate", "believe", "estimate", "plan," "intend" and
"expect" and similar expressions, as they relate to Othnet,
Inc. for its management, are intended to identify such forward-
looking statements. These forward looking statements are based
on information currently available to the Company and are
subject to a number of risks, uncertainties, and other factors
that could cause the Company's actual results, performance,
prospects, and opportunities to differ materially from those
expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences
include, but are not limited to, the factors discussed under
"Other Factors Affecting Our Operating Results". In addition,
although the Company intends the sell or license its
technology, the uncertainties and risks specifically related to
internet commerce discussed in the Company's Quarterly Report
on From 10-QSB for the quarter ended July 31, 2001 under the
caption "Other Factors Affecting Our Operating Results" in Part
I, Item 2. "Management's Discussion and Analysis or Plan of
Operation" should also be considered insofar that in connection
with any such transaction the Company intends to maintain some
type of economic interest in the technology (see "Liquidity and
Capital Resources" below).
Results of Operations
The Company reported revenues of approximately $3,000
and $6,000 from operations for the three and six months ended
October 31, 2001 compared to revenues of approximately $18,000
for the three and six months ended October 31, 2000.
Operating expenses were approximately $635,000 and
$1,325,000 for the three and six months ended October 31, 2001
and were comprised primarily of compensation expense,
amortization (relating to the Company's proprietary information
database, search engine and license agreement), contract labor,
consulting, and professional fees. This compared to operating
expenses of approximately $559,000 and $1,148,000 for the three
and six months ended October 31, 2000. The increase for the six
months ended October 31, 2001 compared to the six months ended
October 31, 2000 was primarily attributable to amortization of
intellectual property of approximately $500,000 for the six
month period ended October 31, 2001 compared to amortization
expense of approximately $333,000 for the six month period
ended October 31, 2000 and an increase in general and
administrative expenses from approximately $815,000 for the six
month period ended October 31, 2000 to approximately $825,000
for the six month period ended October 31, 2001.
The Company had interest income of approximately $600
and $3,000 for the three and six months ended October 31, 2001
compared to approximately $24,000 and $29,000 for the three and
six months ended October 31, 2000.
For the three and six months ended October 31, 2001, the
Company had a net loss of approximately $631,000 and
$1,316,000, respectively, compared to a net loss of
approximately $516,000 and $1,100,000 for the three and six
months ended October 31, 2000. The increase in net loss for the
six months ended October 31, 2001 is primarily due to an
increase in amortization of the intellectual property.
Liquidity and Capital Resources
On October 31, 2001, the Company had cash of
approximately $7,000 and a working capital deficit of
approximately $474,000. The Company's primary source of
liquidity has been cash provided through equity offerings and
interest income.
Cash used in operating activities was approximately
$561,000 for the six months ended October 31, 2001 which was
primarily the result of a loss of approximately $1,316,000
partially offset by non-cash charges totaling approximately
$580,000 for depreciation and amortization and an increase in
accounts payable and accrued salaries and benefits of
approximately $201,000.
Cash used in operating activities was approximately
$236,000 for the six month period ended October 31, 2000 which
was primarily the result of a loss of approximately $1,100,000
partially offset by non-cash charges totaling $499,000 for
stock compensation expense and approximately $335,000 for
depreciation and amortization.
For the six months ended October 31, 2001, the Company
also used approximately $17,000 in investing activities for the
purchase of property and equipment, compared to approximately
$45,000 in the six months ended October 31, 2000. The Company
also paid $500,000 of cash as part of the consideration for the
intellectual property in the six months ended October 31, 2000.
Cash provided by financing activities totaled $25,000
from a bank loan in the six months ended October 31, 2001
compared to $2,445,000 from the sale of common stock in the six
months ended October 31, 2000.
The Company's cash position is minimal at October 31,
2001 and the Company's funds, together with any operating
revenues that are recognized, are inadequate to meet its
current cash requirements. Thus, substantial additional capital
is needed in order to fund operations beyond this time.
During the quarter ended October 31, 2001, Management
was involved in discussions with certain parties and investment
banking firms concerning capital-raising possibilities
including possible private placements of equity and/or debt
securities. However, the Company was not able to complete any
such arrangements during the quarter ended October 31, 2001.
Subsequent to the end of the October 31, 2001 fiscal
quarter, the Company decided to shut down all nonessential
functions of the Company and to reduce all expenses that were
not absolutely essential to maintaining the Company as a
reporting entity until the Company is able to obtain some type
of cash infusion. Additionally, the Company began pursuing the
sale or license of its technology.
Prior to the filing of this report, the Company entered
into a letter of intent whereby the Company will attempt to
complete a private offering of its stock in order to raise
approximately $250,000 to $500,000 for the purpose of
extinguishing certain liabilities of the Company and financing
the Company's participation in a transaction whereby shares of
stock owned by certain shareholders (the "Sellers") will be
redeemed by the Company in consideration of a license, sale or
other transfer by the Company to a corporation to be created by
the Sellers of the Company's technology. Upon receipt and
approval of a business plan and pro forma financial statements
from the new entity, the Company shall further provide an
investment in the new entity of $125,000 in consideration of
the receipt of shares comprising not less than 33 1/3% of the
issued shares of the new entity. No adjustment has been made
to the carrying value of any of the assets at October 31, 2001
related to this possible transaction. It is probable that a
writedown will occur in third quarter. In connection with the
signing of the letter of intent, the Company also obtained an
agreement for a short term loan in the amount of approximately
$35,000 in order to fund the payment of certain specific
obligations of
_
the Company.
No assurance can be given that the Company will be able
to raise the funds and complete the transactions contemplated
by the letter of intent. In the event the Company completes
such transactions, it is expected that such will result in a
change in management of the Company. Following any such
transaction, the Company also expects that it will then seek
another business opportunity. As of the date of this report,
the Company has no agreement, understanding or arrangement to
acquire or participate in any specific business opportunity.
No assurance can be given that the Company will be able to
consummate any such arrangements or, if consummated, that such
business opportunity will be successful.
Other Factors Affecting our Operating Results
The following risk factors and other information
included in this Form 10-QSB should be carefully considered.
The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also
impair our business operations. See "Forward-Looking
Statements" above.
WE NEED TO OBTAIN ADDITIONAL FUNDS. At October 31,
2001, the Company had principally exhausted all of its
remaining cash and the Company's funds, together with any
operating revenues that are recognized, are inadequate to meet
its current cash requirements. Thus, substantial additional
capital is needed in order to fund operations beyond this time.
See "Liquidity and Capital Resources" above for additional
information.
COMPETITION FOR BUSINESS OPPORTUNITIES. In the event
the Company seeks another business opportunity, the Company is
aware that there are many other public companies with only
nominal assets that are also searching for operating businesses
and other business opportunities as potential acquisition or
merger candidates. The Company will be in direct competition
with these other public companies in its search for business
opportunities. In addition, the Company expects to encounter
substantial competition in its efforts to attract business
opportunities from business development companies, venture
capital partnerships and corporations, venture capital
affiliates of large industrial and financial institutions,
small business investment companies and wealthy individuals.
Competition in the search for business opportunities is
principally based upon experience in connection with
identifying and effecting business acquisitions, financial and
personnel resources and technical expertise. Many of these
entities have significantly greater experience, financial and
personnel resources, and managerial and technical capabilities
than the Company and in all likelihood will be in a better
position than the Company to obtain access to attractive
business opportunities. In view of the Company's limited
financial resources and personnel, the Company will continue to
be at a significant competitive disadvantage in identifying
possible business opportunities and successfully completing a
business combination.
EXTREMELY LIMITED CAPITALIZATION. The Company has
insufficient capital with which to make any significant asset
acquisitions. Accordingly, it is likely that the consideration
utilized to make any acquisitions will consist of equity
securities. In addition, inasmuch as the Company's
capitalization is limited and the issuance of additional Common
Stock will result in a dilution of interest for present
shareholders, it is unlikely the Company will be capable of
negotiating more than one merger or acquisition.
Consequently, the Company's lack of diversification may
subject the Company to economic fluctuation within a
particular industry in which a target company conducts
business.
LACK OF MARKET RESEARCH OR IDENTIFICATION OF ACQUISITION
OR MERGER CANDIDATE. The Company has neither conducted nor
have others made available to it results of market research
concerning the availability of potential business
opportunities. Therefore, management has no assurance that
market demand exists for a merger or acquisition in the event
the Company seeks another
business opportunity.
TAXATION. In the course of any acquisition or merger
the Company may undertake, a substantial amount of attention
will be focused upon federal and state tax consequences to both
the Company and the "target" company. Presently, under Section
368 of the Internal Revenue Code of 1986, as amended, a
statutory merger or consolidation is an exempt transaction and
may be tax-free if effected in accordance with State law.
While the Company expects to undertake any merger or
acquisition so as to minimize federal and state tax
consequences to both the Company and the "target" company,
there is no assurance that such business combination will meet
the statutory requirements of a reorganization or that the
parties will obtain the intended tax-free treatment upon a
transfer of stock or assets. A nonqualifying reorganization
could result in the imposition of both federal and state taxes
which may have substantial adverse effect on the Company.
POSSIBLE USE OF DEBT FINANCING; DEBT OF AN ACQUIRED
BUSINESS. There are currently no limitations relating to the
Company's ability to borrow funds to increase the amount of
capital available to the Company to effect a business
combination or otherwise finance the operations of an acquired
business. The amount and nature of any borrowings by the
Company will depend on numerous considerations, including the
Company's capital requirements, the Company's perceived ability
to meet debt service on such borrowings, and then-prevailing
conditions in the financial markets, as well as general
economic conditions. There can be no assurance that debt
financing, if required or otherwise sought, will be available
on terms deemed to be commercially acceptable and in the best
interest of the Company. The inability of the Company to
borrow funds required to effect or facilitate a business
combination, or to provide funds for an additional infusion of
capital into an acquired business, may have a material adverse
effect on the Company's financial condition and future
prospects. Additionally, to the extent that debt financing
ultimately proves to be available, any borrowings may subject
the Company to various risks traditionally associated with
incurring of indebtedness, including the risks of interest
rate fluctuations and insufficiency of cash flow to pay
principal and interest. Furthermore, an acquired business may
already have previously-incurred debt financing and, therefore,
the risks inherent thereto, as discussed above.
ISSUANCE OF SHARES IN MERGER OR ACQUISITION. Any
acquisition effected by the Company may result in the issuance
of additional Common Stock without shareholder approval and may
result in substantial dilution in the percentage of the
Company's securities held by the Company's then-shareholders.
Moreover, the Common Stock issued in any such merger or
acquisition transaction may be valued on an arbitrary or non
arm's-length basis by management of the Company, resulting in
an additional reduction in the percentage of securities held by
the Company's then-shareholders.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
During the quarter ended October 31, 2001, the
Company completed a stock exchange with Savage
Beast Technologies Incorporated ("Savage Beast")
by issuing Savage Beast 50,000 shares of common
stock, at an agreed valuation of $5.00 per
share, or $250,000 in the aggregate, in exchange
for 100,000 shares of Savage Beast's common
stock, at an agreed valuation of $2.50 per
share, or $250,000 in the aggregate. See
"Unaudited Notes to Consolidated Financial
Statements" included with this report. Such
shares issued by the Company were issued in
reliance upon the exemption from registration
pursuant to Section 4(2) of the Securities Act
of 1933, as amended, for "transactions by the
issuer not involving any public offering".
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
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.
There are no exhibits applicable to this Form
10-QSB.
(b) Reports on Form 8-K.
Listed below are reports on Form 8-K filed
during fiscal quarter ended October 31, 2001.
None.
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.
OTHNET, INC.
(Registrant)
Dated: January 21, 2002 By:/s/ Richard A. Barbari
Richard A Barbari,
President, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer
and Principal Accounting
and Financial Officer)