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, 2004
[ ] 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: 21,449,279 outstanding as of
February 29, 2004
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OTHNET, INC.
Index to Financial Information
Period Ended January 31, 2004
Item Page
Item 1 - Financial Statements
Unaudited Consolidated Balance Sheet 3
Unaudited Consolidated Statements
of Expenses 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 9
OTHNET, INC.
CONSOLIDATED BALANCE SHEET
January 31, 2004
ASSETS
Current Assets
Cash $ 64,791
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 257,258
Accounts payable to related parties 120,326
Accrued expenses 95,500
Notes payable, net of $29,117 of unamortized interest 100,883
------------
Total Current Liabilities 573,967
------------
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, 17,364,279 issued and outstanding 17,364
Additional paid in capital 12,630,248
Accumulated other comprehensive income 63,029
Retained deficit (13,219,817)
------------
Total Stockholders' Deficit ( 509,176)
------------
Total Liabilities and Stockholders' Deficit $ 64,791
============
OTHNET, INC.
CONSOLIDATED STATEMENTS OF EXPENSES
Three Months and Nine Months Ended January 31, 2004 and 2003
Three Months Nine Months
Ended January 31, Ended January 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Operating Expenses
Depreciation and
amortization $ - $ 2,791 $ - $ 8,373
General and
administrative 41,507 9 112,263 7,595
Debt Forgiveness - (98,153) - (98,153)
----------- ----------- ----------- ----------
Net Income (Loss) (41,507) 95,353 (112,263) 82,185
Other Comprehensive Loss
Foreign currency
translation adjustment 18 ( 36) ( 131) ( 36)
----------- ----------- ----------- -----------
Net Comprehensive Income
(Loss) $ (41,489) $ 95,317 $ (112,394) $ 82,149
=========== =========== =========== ===========
Basic and diluted net
loss per common share $(0.00) $0.01 $(0.01) $0.01
Weighted average common
shares outstanding 17,297,613 13,064,279 17,275,390 13,064,279
OTHNET, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended January 31, 2004 and 2003
2004 2003
----------- -----------
Cash Flows From Operating Activities
Net loss $ (112,263) $ 82,185
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and Amortization 8,373
Debt Forgiveness ( 98,153)
Changes in:
Accounts payable 16,387 ( 25,199)
Accrued expenses 49,750
Accretion of interest 3,640
----------- -----------
Net Cash Provided By Operating Activities ( 42,486) ( 32,794)
----------- -----------
Cash Flows From Financing Activities
Repayment of note payable to related party ( 72,000)
Advances from related parties 6,675
Proceeds from Note Payable 67,243
Stock issued with Note Payable 18,000
Warrants issued with Note Payable 14,757
----------- -----------
Net Cash Used in Financing Activities 106,675 ( 72,000)
----------- -----------
Effect of exchange rate on cash ( 131) (36)
----------- -----------
NET CHANGE IN CASH 64,058 ( 104,830)
Cash balance, beginning 733 105,563
----------- -----------
Cash balance, ending $ 64,791 $ 733
=========== ===========
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 2003, as reported in
the 10-KSB, have been omitted.
NOTE 2 NOTE PAYABLE
On December 30, 2003, Othnet issued a $100,000 convertible
note payable for $100,000 cash. The note is due September 30,
2004 or earlier in the event Othnet completes a
merger or similar transaction, bears 10 percent interest
until maturity and 18 percent thereafter. The note is not
collateralized. Attached to the note was
100,000 shares of common stock with a fair value of
$18,000 and an option to purchase 100,000 shares of
common stock at $.18 per share. The option
has a relative fair value of $17,995. The note can
be converted at any time at the
option of the holder at a conversion rate of $.25.
The closing price of the stock on the date the note
was issued was $.18, therefore no beneficial conversion
feature exists. After discounting the note payable
for value of the common stock and the
option, the net value assigned to the note
payable was $67,243. The discount of
$32,757 will be recognized over the term of
the note as interest expense. As of
January 31, 2004, $3,640 of interest expense
related to the discount was recognized.
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, 2003. 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
The Company reported no revenue from operations for the three
and nine months ended January 31, 2004 and January 31, 2003.
There were operating expenses for the three and nine months
ended January 31, 2004 of approximately $42,000 and $112,000,
respectively, compared to operating expenses of approximately $3,000
and $16,000, respectively, for the three and nine months ended January
31, 2003. Operating expenses for the three and nine months ended
January 31, 2004 were comprised of general and administrative expenses
primarily due to the salary amount paid as well as accrued for the
Company's President and professional fees. Operating expenses for the
three and nine months ended January 31, 2003 were comprised of the
recognition of depreciation and amortization expense of approximately
$3,000 and $8,000, respectively, and general and administrative
expenses of approximately $100 and $8,000, respectively. The Company
had a net comprehensive loss of approximately $41,000 and $112,000 for
the three and nine months ended January 31, 2004 compared to net
comprehensive income of approximately $95,000 and $82,000 for the three
and nine months ended January 31, 2003. The net income achieved in the
three and nine months ended January 31, 2003 was primarily due to the
recognition in the quarter ended January 31, 2003 of a debt forgiveness
of approximately $98,000. 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.
On December 5, 2003, the Company entered into a letter of
intent with Pro Sports & Entertainment, Inc., a California corporation
("Pro Sports"), to acquire all of the outstanding capital stock of Pro
Sports in exchange for which the shareholders of Pro Sports will
receive shares of capital stock of the Company. Although such letter
of intent has expired, the Company and Pro Sports are currently in the
process of negotiating a definitive agreement which will include
various conditions for closing including but not limited to the raising
of certain financing. In connection with such negotiations, on March
5, 2004, the parties entered into a letter agreement whereby Pro Sports
agreed that for a 45 day period it will not solicit (with certain
exceptions relating to financing) any other proposal with regard to any
merger, sale of substantial assets, equity or debt financing, or
similar transaction involving Pro Sports, except for the transaction
contemplated to be undertaken with the Company. No assurance can be
given, however, that a definitive agreement relating to a merger or
acquisition transaction with Pro Sports will be signed, that financing
can be obtained or that such a transaction will in fact be consummated.
On January 31, 2004, the Company had cash of approximately
$65,000 and a working capital deficit of approximately $509,000. As of
December 30, 2003, the Company obtained a $100,000 loan from an
unrelated party and issued a $100,000 convertible promissory note due
September 30, 2004 or earlier in the event the Company completes a
merger or similar transaction. The note bears interest at 10% per
annum until maturity and 18% thereafter. Principal and interest are
convertible into shares of Common Stock of the Company at a rate of
$0.25 per share. In connection with the loan, the Company issued to
the unrelated party 100,000 shares of common stock of the Company, and
an option expiring in two years to purchase an additional 100,000
shares of Common Stock of the Company at the exercise price of $0.18
per share.
Our independent auditors have issued a "going concern" opinion
in their report to our financial statements for the year ended April
30, 2003, citing the deficiency in working capital at April 30, 2003
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, during the quarter ended January 31, 2002,
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 (the
"PPP 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"). Pursuant
to a Supplemental Agreement dated June 2, 2003, the parties have agreed
to extend the date for obtaining Shareholder Approval to March 31,
2004. In the event Shareholder Approval is not obtained on or before
March 31, 2004, then PPP shall be granted a non-exclusive worldwide
license in perpetuity (the "License") to use any part of the Othnet
Technology or patent application related thereto upon payment to Othnet
of a fee of $5,000 and all of the PPP Shares shall be redeemed and
immediately canceled. Pending Shareholder Approval or the License,
all of the PPP Shares being redeemed are being 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.
Item 3. Controls and Procedures.
The Company's Chief Executive Officer and Principal Financial
Officer has reviewed the Company's disclosure controls and procedures
as of the end of the period covered by this report. Based upon this
review, such officer believes that the Company's disclosure controls
and procedures are effective in timely alerting him to material
information required to be included in this report. There have been no
significant changes in internal control over financial reporting that
occurred during the fiscal quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
As of December 30, 2003, the Company obtained a $100,000 loan
from an unrelated party and issued a $100,000 convertible promissory
note, convertible into shares of Common Stock of the Company at a rate
of $0.25 per share. In connection with the loan, the Company issued to
the unrelated party 100,000 shares of common stock of the Company, and
an option expiring in two years to purchase an additional 100,000
shares of Common Stock of the Company at the exercise price of $0.18
per share. The shares issued to the unrelated party 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.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14
of the Exchange Act)
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14
of the Exchange Act)
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
(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 15, 2004 By: /s/ Jeffrey Wattenberg
Jeffrey Wattenberg,
President, Chief Executive Officer and
Secretary (Principal Executive Officer
and Principal Accounting and
Financial Officer)