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 January 31, 2003
[ ] 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: 17,349,279 outstanding as of
January 31, 2003
Item 1. Financial Statements
OTHNET, INC.
Index to Financial Information
Period Ended January 31, 2003
Item Page
Item 1 - Financial Statements
Unaudited Consolidated Balance Sheet 3
Unaudited Consolidated Statements
of Operations
and Comprehensive Income (Loss) 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
Item 3 - Controls and Procedures 10
OTHNET, INC.
CONSOLIDATED BALANCE SHEET
As of January 31, 2003
ASSETS
Current Assets
Cash $ 733
Property and equipment
Office furniture and equipment, net of accumulated
depreciation of $18,934 12,170
------------
Total Assets $ 12,903
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 128,033
Accounts payable to related parties 113,651
Note payable 30,500
------------
Total Current Liabilities 272,184
------------
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, 13,264,279 issued and outstanding 13,264
Additional paid in capital 11,841,591
Accumulated other comprehensive income 63,248
Retained deficit (12,177,384)
------------
Total Stockholders' Deficit ( 259,281)
------------
Total Liabilities and Stockholders' Deficit $ 12,903
============
OTHNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For The Three Months and Nine Months Ended January 31, 2003 and 2002
Three Months Nine Months
Ended January 31, Ended January 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Sales $ 66 $ 5,750
Operating Expenses
Depreciation and
amortization $ 2,791 166,634 $ 8,373 774,921
General and
administrative 9 273,788 7,595 990,537
Impairment expense 783,755 783,755
Debt forgiveness (98,153) (98,153)
----------- ----------- ----------- -----------
Income (Loss) From
Operations 95,353 (1,224,111) 82,185 (2,543,463)
Other income 56 3,151
----------- ----------- ----------- -----------
Net Income (Loss) 95,353 (1,224,055) 82,185 (2,540,312)
Other Comprehensive Loss
Foreign currency
translation
adjustment (36) (36)
----------- ----------- ----------- -----------
Net Comprehensive
Income (Loss) $ 95,317 $(1,224,055) $ 82,149 $(2,540,312)
=========== =========== =========== ===========
Basic and diluted
net income
(loss) per
common share $.01 $(0.07) $.01 $(0.15)
Weighted average common
shares outstanding 13,064,279 16,949,279 13,064,279 16,915,946
OTHNET, INC.
STATEMENTS OF CASH FLOWS
For The Nine Months Ended January 31, 2003 and 2002
2003 2002
----------- -----------
Cash Flows From Operating Activities
Net income (loss) $ 82,185 $(2,540,312)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 8,373 774,921
Impairment expense 783,755
Debt forgiveness ( 98,153)
Changes in:
Prepaid expenses 875
Accounts payable ( 25,199) 232,591
Accrued expenses 140,633
----------- ----------
Net Cash Used By Operating Activities ( 32,794) (607,537)
----------- -----------
Cash Flows From Investing Activities
Purchase of office furniture and equipment ( 16,713)
-----------
Cash Flows From Financing Activities
Proceeds from bank loan 25,000
Repayment of note payable to related party ( 72,000)
Proceeds from loans from related parties 40,001
----------- -----------
Net Cash Provided By
(Used In) Financing Activities ( 72,000) 65,001
----------- -----------
Foreign Currency Adjustment ( 36)
-----------
NET CHANGE IN CASH (104,830) ( 559,249)
Cash balance, beginning 105,563 559,365
----------- -----------
Cash balance, ending $ 733 $ 116
=========== ===========
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.
NOTE 2 - FORGIVENESS OF DEBT
On January 31, 2003, Othnet agreed to settle $138,653 of accounts
payable owed to a creditor for 200,000 shares of Othnet common
stock and an unsecured $30,000 note payable, bearing 10 percent
interest, maturing on March 31, 2003. The total value of the
common stock and the note payable plus interest is $40,500,
resulting in a gain on forgiveness of debt of $98,153.
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 and nine months
ended January 31, 2003 compared to revenues of approximately $100
and $6,000, respectively, for the three and nine months ended
January 31, 2002.
Operating expenses were approximately $3,000 and $16,000,
respectively, for the three and nine months ended January 31, 2003
and were comprised of depreciation and amortization, and general
and administrative. This compares to operating expenses of
approximately $1,224,000 and $2,538,000, respectively, for the
three and nine months ended January 31, 2002 which were comprised
primarily of depreciation and amortization, general and
administrative and an impairment expense. 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 January 31, 2003, the
Company recognized an expense of $3,000 for depreciation and
amortization compared to $167,000 for the three months ended
January 31, 2002. General and administrative expenses for the
three months ended January 31, 2003 decreased to under $10 from
$274,000 for the three months ended January 31, 2002. For
the nine months ended January 31, 2003, the Company recognized an
expense of $8,000 for depreciation and amortization compared to
$775,000 for the nine months ended January 31, 2002. General and
administrative expenses for the nine months ended January 31, 2003
decreased to $8,000 from $991,000 for the nine months ended
January 31, 2002. Such decreases were primarily a result of the
aforesaid plan approved by the Board in December 2001 which
reduced expenses. An impairment expense of $784,000 was also
recognized in the three and nine months ended January 31, 2002 for
which there was not a comparable expense in the three and nine
months ended January 31, 2003.
The Company had a net comprehensive income of
approximately $95,000 and $82,000 for the three and nine months
ended January 31, 2003 compared to a net comprehensive loss of
approximately $1,224,000 and $2,540,000 for the three and nine
months ended January 31, 2002. The net income achieved in the
three and nine months ended January 31, 2003 is primarily due to
the recognition in the quarter ended January 31, 2003 of a debt
forgiveness of approximately $98,000 along with the substantial
decrease in operating expenses discussed above. On January 31,
2003, the Company agreed to settle $138,653 of accounts payable
owed to a creditor for 200,000 shares of common stock and an
unsecured $30,000 promissory note payable, bearing 10% interest,
maturing on March 31, 2003. The total value of the common stock
and the note payable plus interest is $40,500, resulting in a gain
on forgiveness of debt of $98,153.
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 January 31, 2003, the Company had cash of approximately
$1,000 and a working capital deficit of approximately $271,000.
Cash used in operating activities was $33,000 for the nine
months ended January 31, 2003 which was primarily the result of
net income of approximately $82,000 and increased by $8,000 for
depreciation and
amortization offset by debt forgiveness of
$98,000 and accounts payable of $25,000. For the nine months
ended January 31, 2003, the Company used no cash in investing
activities.
Cash used in operating activities was $608,000 for the
nine months ended January 31, 2002 which was primarily the result
of a loss of approximately $2,540,000 partially offset by non-cash
charges totaling approximately $775,000 for depreciation and
amortization, an impairment charge of $784,000, accounts payable
of $233,000 and accrued expenses of $141,000. For the nine
months ended January 31, 2002, the Company also used
approximately $17,000 in investing activities for the purchase of
property and equipment.
For the nine months ended January 31, 2003, the Company
also repaid $72,000 of a note payable to a related party, for
which there was no comparable item in the nine months ended
January 31, 2002.
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"). 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.
Item 3. Controls and Procedures.
The Company's Chief Executive Officer and Principal
Financial Officer has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) as of a date within 90
days prior to the filing date of this quarterly report. Based on
such evaluation, such officer has concluded that the Company's
disclosure controls and procedures are effective in alerting him
on a timely basis to material information relating to the Company
(including its consolidated subsidiaries) required to be included
in the Company's periodic filings under the Exchange Act. There
have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect such
controls subsequent to the date of this evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
On January 31, 2003, the Company agreed to settle
$138,653 of accounts payable owed to a creditor
for 200,000 shares of common stock and an
unsecured $30,000 promissory note payable, bearing
10% interest, maturing on March 31, 2003. All of
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.
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: March 14, 2003 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.
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
indicted 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: March 14, 2003 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.
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
indicted 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: March 14, 2003 By: /s/ Jeffrey Wattenberg
Jeffrey Wattenberg,
Principal Financial Officer