SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-26454
OTHNET, INC.
(Exact name of Small Business Issuer
as Specified in its Charter)
Delaware 98-0142664
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
1187 Coast Village Road
Suite 319
Santa Barbara, California 93108
(Address of Principal Executive Offices)
(805) 969-7482
(Issuer's Telephone Number, including Area Code)
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: 17,149,279 outstanding as of
November 30, 2002
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OTHNET, INC.
Index to Financial Information
Period Ended July 31, 2002
Item Page
Item 1 - Financial Statements
Unaudited Consolidated Balance Sheet 3
Unaudited Statements of Operations 4
Unaudited Statements of Cash Flows 5
Unaudited Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis
or Plan of Operation 7
OTHNET, INC.
CONSOLIDATED BALANCE SHEET
As of July 31, 2002
ASSETS
Current Assets
Cash $ 11,934
Property and equipment
Office furniture and equipment, net of accumulated
depreciation of $13,351 17,753
------------
Total Assets $ 29,687
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 275,015
Accounts payable to related parties 113,651
------------
Total Current Liabilities 388,666
------------
Stockholders' Deficit
Preferred stock, $.001 par, 2,000,000 shares authorized,
None issued and outstanding
Common stock, $.001 par value, 40,000,000 shares
authorized, 13,064,279 issued and outstanding 13,064
Additional paid in capital 11,831,791
Accumulated other comprehensive income 71,029
Retained deficit (12,274,863)
------------
Total Stockholders' Deficit ( 358,979)
------------
Total Liabilities and Stockholders' Deficit $ 29,687
============
OTHNET, INC.
CONSOLIDATED STATEMENTS OF EXPENSES
For The Three Months Ended July 31, 2002 and 2001
2002 2001
--------- ---------
Net Sales $ 2,796
Operating Expenses
Depreciation & amortization $ ( 2,791) (249,958)
General and administrative ( 4,766) (440,173)
--------- ---------
Loss From Operations ( 7,557) (687,335)
Other Income (Expense)
Foreign exchange loss ( 7,737)
Other income 2,447
--------- ---------
Net Loss (15,294) (684,888)
Other Comprehensive Income (Loss)
Foreign currency translation adjustment 7,745
--------- ---------
Net Comprehensive Loss $ ( 7,549) $(684,888)
========= =========
Basic and diluted net loss per common share $(0.00) $ (0.04)
Weighted average common shares outstanding 13,064,279 16,899,279
OTHNET, INC.
STATEMENTS OF CASH FLOWS
For The Three Months Ended July 31, 2002 and 2001
2002 2001
--------- ---------
Cash Flows From Operating Activities
Net loss $ (15,294) $(684,888)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 2,791 289,902
Changes in:
Prepaid expenses ( 38,564)
Accounts payable (16,871) 2,398
Accrued expenses ( 16,250)
--------- ---------
Net Cash Used By Operating Activities (29,374) (447,402)
--------- ---------
Cash Flows From Investing Activities
Purchase of office furniture and equipment ( 15,680)
Cash Flows From Financing Activities
Repayment of note payable to related party (72,000)
--------
Effect of exchange rate changes on cash 7,745
--------- ---------
NET CHANGE IN CASH (93,629) (463,082)
Cash balance, beginning 105,563 559,365
--------- ---------
Cash balance, ending $ 11,934 $ 96,283
========= =========
OTHNET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of
Othnet, Inc. ("Othnet") have been prepared in accordance with
accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission
("SEC"), and should be read in conjunction with the audited
financial statements and notes thereto contained in Othnet's
latest Annual Report filed with the SEC on Form 10-KSB. In the
opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim
periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of
the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the
disclosure contained in the audited financial statements for the
most recent fiscal year 2001, as reported in the 10-KSB, have
been omitted.
Item 2. Management's 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
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
the caption "Other Factors Affecting Our Operating Results" in
Part II, Item 6, "Management's Discussion and Analysis or Plan
of Operation" of the Company's Annual Report on Form 10-KSB for
the year ended April 30, 2002. Except as required by the
Federal Securities law, the Company does not undertake any
obligation to release publicly any revisions to any
forward-looking statements to reflect events or circumstances
after the date of this Form 10-QSB or for any other reason.
Results of Operations
In December 2001 and as a result of the Company's then
impaired cash position and failure to generate significant
revenues from its new business strategy, the Board of Directors
of the Company approved a plan 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. In carrying out this plan,
the Company received $300,000 in equity financing in April 2002
from a private investor by selling 600,000 shares of its common
stock at a purchase price of $0.50 per share and the Company
entered into certain agreements and effected certain
transactions in May 2002 described below.
The Company had no revenues for the three months ended
July 31, 2002 compared to revenues of approximately $3,000 for
the three months ended July 31, 2001.
Operating expenses were approximately $8,000 for the
three months ended July 31, 2002 and were comprised of
depreciation and amortization, and general and administrative.
This compares to operating expenses of approximately $687,000
for the three months ended July 31, 2001 which 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 significant decrease was primarily
attributable to the plan approved by the Board of Directors in
December 2001 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.
For the three months ended July 31, 2002, the Company
recognized an expense of $3,000 for depreciation and
amortization compared to $250,000 for the three months ended
July 31, 2001. General and administrative expenses for the
three months ended July 31, 2002 decreased to $5,000 from
$440,000 for the three months ended July 31, 2001. Such
decrease was primarily a result of the aforesaid plan approved
by the Board in December 2001 which reduced expenses.
For the three months ended July 31, 2002, the Company
had a net comprehensive loss of approximately $8,000 compared
to a net comprehensive loss of approximately $685,000 for the
three months ended July 31, 2001. The decrease in net loss is
primarily due to the decrease in operating expenses discussed
above.
Liquidity and Capital Resources
During the quarter ended January 31, 2002, 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.
In carrying out this plan, the Company received $300,000
in equity financing in April 2002 from a private investor by
selling 600,000 shares of its common stock at a purchase price
of $0.50 per share and the Company entered into certain
agreements and effected the transactions described below in May
2002. See "Redemption of Shares and Assignment of the Othnet
Technology" below. Although the aforesaid transactions were
effected as of May 9, 2002, said transactions were recorded as
of the balance sheet date of April 30, 2002 as the type of
subsequent event that requires adjustment to the balance sheet
carrying values because they affect the estimates used in
preparing financial statements.
As a result of the foregoing, the Company has no current
business operations and its principal business purpose at this
time is to seek to extinguish much of its outstanding debt and
to locate and consummate a merger or acquisition with a private
entity. It should be noted that in June 2002 the Company
entered into a letter of intent with Kingdom Entertainment
Group, LLC ("Kingdom") whereby the members of Kingdom would
receive, either through the sale of all of the assets of
Kingdom to the Company or through a merger of Kingdom into the
Company, shares in the Company. No assurance can be given,
however, that a definitive agreement relating thereto will be
signed, or that this or any other transaction will in fact be
consummated.
On July 31, 2002, the Company had cash of approximately
$12,000 and a working capital deficit of approximately
$377,000.
Cash used in operating activities was approximately
$29,000 for the three months ended July 31, 2002 which was
primarily the result of a loss of approximately $15,000 and
accounts payable of $17,000, partially offset by non-cash
charges for depreciation and amortization of $3,000. For the
three months ended July 31, 2002, the Company used no cash in
investing activities.
Cash used in operating activities was approximately
$447,000 for the three months ended July 31,2001 which was
primarily the result of a loss of approximately $685,000
partially offset by non-cash charges totaling approximately
$290,000 for depreciation and amortization, and increased by
$39,000 for prepaid expenses and $16,000 for accrued expenses.
For the three months ended July 31, 2001, the Company also used
approximately $16,000 in investing activities for the purchase
of property and equipment.
For the three months ended July 31, 2002, the Company
also repaid $72,000 of a note payable to a related party, for
which there was comparable item in the three months ended July
31, 2001.
Our independent auditors have issued a "going concern"
opinion in their report to our financial statements for the
year ended April 30, 2002, citing the deficiency in working
capital at April 30, 2002 and the recurring operating losses.
Accordingly, those conditions raise substantial doubt about our
ability to continue as a going concern. With the assignment of
the Othnet Technology in May 2002, the Company's only operating
division, the Company has no current operations. As a result,
the Company's principal business purpose at this time is to
seek to extinguish much of its outstanding debt and to locate
and consummate a merger or acquisition with a private entity.
There can be no assurance, however, that the Company will be
able to acquire any business or business opportunity or that
any business or business opportunity the Company acquires will
prove successful or will be able to operate profitably.
Redemption of Shares and Assignment of the Othnet
Technology
As mentioned above, in December 2001, the Board of
Directors of the Company approved a plan 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. In
carrying out this plan, the Company entered into agreements and
effected the transactions described below.
Pursuant to a Redemption Agreement dated May 9, 2002
(the "PPP Redemption Agreement") by and between the Company and
People to People Publishing, Inc., a Delaware corporation
("PPP") and an Assignment and Assumption Agreement dated May
9, 2002 between the Company and PPP, the Company has agreed to
redeem 4,085,000 shares of its common stock held of record by
PPP in consideration (i) for the assignment (the "Othnet
Technology Assignment") by the Company to PPP of the Company's
current principal technology consisting primarily of the
Company's peer to peer file sharing software, including without
limitation, the technology with respect to digital rights
management technology which is subject of the Company's patent
application (the "Othnet Technology"), and (ii) a payment of
$32,500. Such amount was paid on May 9, 2002 (the "Initial
Closing"). In connection with the Othnet Technology
Assignment, PPP has agreed to assume all liabilities or
obligations in connection with the Othnet Technology whether
such liabilities were incurred prior to or after the date of
the assignment, except with respect to legal fees or other
trade creditor debt associated with the development of the
Othnet Technology.
PPP is a corporation formed in January 2002 by
Christopher J. Pearson and certain other former stockholders of
the Company (the "PPP Founders") to effect the transactions
contemplated by the PPP Redemption Agreement and the Othnet
Technology Assignment. Subsequent to the formation of PPP and
prior to May 9, 2002, each of the PPP Founders transferred the
shares each of them then owned in the Company to PPP. As a
result, PPP became the owner of 4,085,000 shares of common
stock of the Company. Prior to May 9, 2002, Christopher J.
Pearson was the Vice President and a director of the Company.
The Othnet Technology Assignment is subject to the
Company obtaining shareholder approval (the "Shareholder
Approval") on or before September 30, 2002, which date has been
extended by the parties until January 31, 2003. In the event
Shareholder Approval is not obtained, the Othnet Technology
Agreement and the obligations thereunder shall terminate. In
addition, pending such approval, all of the foregoing 4,085,000
shares being redeemed are to be held in escrow and will
maintain voting rights although PPP has agreed to vote all of
the shares in favor of the Othnet Technology Assignment.
In addition to the foregoing, the Company has
transferred ownership of its web sites www.oth.net and
www.othnet.com to Joel Pearson, one of the PPP Founders and the
father of Christopher J. Pearson, in consideration for the
assumption of all liabilities associated with such sites.
Change in Management
In conjunction with the Initial Closing, the Company
obtained the resignation of each of the then current officers
(Richard A. Barbari, Christopher J. Pearson, Robert Brown and
David M. Kaye) and each of its then current directors (Messrs.
Barbari, Pearson and Brown), and Jeffrey Wattenberg was elected
sole director of the Company. Mr. Wattenberg has also been
elected President and Secretary of the Company. The Company
currently has no other officers.
In December 2001, Richard A. Barbari (the Company's then
Chief Executive Officer and Chairman of the Board) had entered
into an Agreement for Separation and Release (the "Barbari
Separation Agreement") with the Company whereby Mr. Barbari
agreed that upon the occurrence of certain events he would
resign as an officer and director of the Company and have
400,000 shares of common stock of the Company owned by him
redeemed by the Company in consideration for the payment by the
Company of certain funds Mr. Barbari had advanced on behalf of
the Company or debt Mr. Barbari had guaranteed, as well as the
transfer to Mr. Barbari of an automobile registered in the
Company's name. Contemporaneously with the Initial Closing,
Mr. Barbari resigned as an officer and director, Mr. Barbari
and the Company executed a Redemption Agreement with respect to
such 400,000 shares and the other transactions described above
as contemplated by Barbari Separation Agreement were completed.
In connection with the Initial Closing, Christopher J.
Pearson and the Company also entered into an Agreement for
Separation and Release whereby among other things the parties
agreed to terminate the employment agreement between them and
Mr. Pearson agreed to resign as an officer and director.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
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.
99.1 Certification pursuant to U.S.C. Section
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
Listed below are reports on Form 8-K filed
during the quarter for which this report is
filed:
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: December 9, 2002 By: /s/ Jeffrey Wattenberg
Jeffrey Wattenberg,
President, Chief Executive
Officer and Secretary
(Principal Executive
Officer and Principal
Accounting and Financial
Officer)
CERTIFICATIONS
I, Jeffrey Wattenberg, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Othnet, 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;
and
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.
Date: December 9, 2002 By: /s/ Jeffrey Wattenberg
Jeffrey Wattenberg,
President and Chief
Executive Officer
I, Jeffrey Wattenberg, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Othnet, 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;
and
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.
Date: December 9, 2002 By: /s/ Jeffrey Wattenberg
Jeffrey Wattenberg,
Principal Financial
Officer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5
and 6 of the Certifications as set forth in this Form 10-QSB
have been omitted, consistent with the Transition Provisions
of SEC Exchange Act Release No. 34-46427, because this
Quarterly Report on Form 10-QSB covers a period ending before
the Effective Date of Rules 13a-14 and 15d-14.