U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(D) OF THE
EXCHANGE ACT
For the transition period from _______________ to _______________
Commission file number 0-28879
E-TREND NETWORKS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0348508
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5919 - 3RD STREET, S.E., CALGARY, ALBERTA, CANADA T2H 1K3
(Address of principal executive offices)
(403) 252-7766
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the last practicable date:
5,212,702 SHARES OF COMMON STOCK, $0.0001 PAR VALUE, AS OF
JUNE 30, 2001
Transitional Small Business Disclosure Format (check one); Yes No X
Unaudited Interim Consolidated Financial Statements of
E-TREND NETWORKS, INC.
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
2
E-TREND NETWORKS, INC.
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
June 30, September 30,
2001 2000
(Unaudited)
Assets
Current assets:
Cash and cash equivalents (note 3) $ 213,279 $ 1,866,159
Accounts receivable 60,053 63,290
Due from related parties (note 4):
VHQ Entertainment Inc. 256,030 207,716
Diz Investments Ltd. 5,704 6,293
Summerhill Investment Corp., note receivable 5,686 -
Inventory 246,012 40,344
Prepaid expenses 49,200 773
------------ ------------
835,964 2,184,575
Advances to VHQ Entertainment Inc. (note 4) 376,731 231,709
Investment in VHQ Entertainment Inc. (note 5) 141,522 232,382
Property and equipment 380,098 266,641
Goodwill 166,214 175,169
------------ ------------
$ 1,900,529 $ 3,090,476
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 3) $ - $ 74,816
Accounts payable and accrued liabilities 566,854 201,585
------------ ------------
566,854 276,401
Stockholders' equity:
Common shares (note 6) 842,643 8,854
Deferred stock-based compensation (361,000) -
Advance due from stockholder (note 4) (23,720) -
Additional paid-in capital 3,601,406 3,601,406
Deficit (2,728,351) (866,495)
Accumulated other comprehensive income (losses):
Unrealized gain from investment (note 5) 1,382 89,102
Cumulative translation adjustment 1,315 (18,792)
------------ ------------
1,333,675 2,814,075
Subsequent event (note 7)
------------ ------------
$ 1,900,529 $ 3,090,476
============ ============
See accompanying notes to interim consolidated financial statements.
3
E-TREND NETWORKS, INC.
Consolidated Statements of Operations and Deficit
(Expressed in U.S. Dollars)
(Unaudited)
Three months ended Nine months ended
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 713,376 $ 260,076 $ 1,637,598 $ 448,211
Cost of sales 590,208 176,804 1,410,527 314,532
------------ ------------ ------------ ------------
123,168 83,272 227,071 133,679
Expenses 863,680 301,175 1,821,672 641,425
Depreciation 22,188 11,841 55,861 27,294
Amortization of goodwill 4,970 10,251 15,004 15,251
Interest and other income (19,423) - (103,810) (3,327)
------------ ------------ ------------ ------------
Net loss for the period (748,247) (239,995) (1,561,656) (546,964)
Other comprehensive income (loss):
Unrealized loss on investment (7,310) - (87,720) -
Foreign currency translation
adjustment (31,214) - 20,108 -
------------ ------------ ------------ ------------
(38,524) - (67,612) -
------------ ------------ ------------ ------------
Comprehensive loss $ (786,771) $ (239,995) $(1,629,268) $ (546,964)
============ ============ ============ ============
Deficit, beginning of period $(1,980,104) $ (362,308) $ (866,495) $ (55,339)
Charge for excess of
consideration given over net book
value of assets acquired (note 2) - - (300,200) -
Net loss for the period (748,247) (239,995) (1,561,656) (546,964)
------------ ------------ ------------ ------------
Deficit, end of period $(2,728,351) $ (602,303) $(2,728,351) $ (602,303)
============ ============ ============ ============
Net loss per common share,
basic and diluted $ (0.17) $ (0.05) $ (0.35) $ (0.12)
============ ============ ============ ============
Weighted average common
shares outstanding, basic 4,472,228 4,439,371 4,472,228 4,439,371
============ ============ ============ ============
See accompanying notes to interim consolidated financial statements.
4
E-TREND NETWORKS, INC.
Consolidated Statement of Stockholders' Equity
Nine months ended June 30, 2001
(Expressed in U.S. Dollars)
(Unaudited)
ISSUED COMMON SHARES Additional
-------------------------------- Paid-In
Number Amount Capital
------------ ------------- -----------
Balance, September 30, 2000 8,853,734 $ 8,854 $ 3,601,406
Issued in exchange for property and equipment 30,000 30,000 -
------------ ------------- -----------
8,883,734 38,854 3,601,406
- ----------------------------------------------------------------------
Common shares of Cool Entertainment, Inc.
at time of acquisition (note 2) 38,340,636 13,488,710 -
Effect of 1:100 reverse stock split (37,957,305) - -
- ----------------------------------------------------------------------
383,331
Issued in exchange for common shares of Cool
Entertainment, Inc. (note 2) 4,439,371 - -
Elimination of Cool Entertainment, Inc. share capital
under reverse-take-over accounting - (13,488,710) -
Issued for settlement of notes payable (note 2) 25,000 93,789 -
Issued for settlement of notes payable (note 2) 15,000 45,000 -
Issued in exchange for fees and services provided 160,000 304,000 -
Issued for deferred stock-based compensation 190,000 361,000 -
------------ ------------- -----------
Balance, June 30, 2001 5,212,702 $ 842,643 $ 3,601,406
============ ============= ===========
See accompanying notes to interim consolidated financial statements.
5
E-TREND NETWORKS, INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
(Unaudited)
Three months ended Nine months ended
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Cash provided by (used in):
Operating activities:
Net loss for the period $ (748,247) $ (239,995) $(1,561,656) $ (546,964)
Add items not involving cash:
Shares issued in exchange
for services 304,000 - 304,000 -
Unrealized foreign exchange
loss (46,512) (8,327) (67,037) (14,814)
Depreciation 22,188 11,841 55,861 27,294
Amortization of goodwill 4,970 10,251 15,004 15,251
------------ ------------ ------------ ------------
Funds used in operations (463,601) (226,230) (1,253,828) (519,233)
Net change in non-cash
working capital 240,714 (304,051) 61,000 (391,353)
------------ ------------ ------------ ------------
(222,887) (530,281) (1,192,828) (910,586)
Financing activities:
Decrease in bank indebtedness (316,977) - (74,816) -
Advances from (to) related party (24,235) 259 (145,022) (178,695)
Proceeds from capital
contributions - - - 2,542,351
------------ ------------ ------------ ------------
(341,212) 259 (219,838) 2,363,656
Investing activities:
Purchase of property and
equipment (14,170) (59,794) (72,214) (352,133)
Acquisition - - (168,000) -
------------ ------------ ------------ ------------
(14,170) (59,794) (240,214) (352,133)
------------ ------------ ------------ ------------
Increase (decrease) in cash
and cash equivalents (578,269) (589,816) (1,652,880) 1,100,937
Cash and cash equivalents,
beginning of period 791,548 2,329,465 1,866,159 638,712
------------ ------------ ------------ ------------
Cash and cash equivalents,
end of period $ 213,279 $ 1,739,649 $ 213,279 $ 1,739,649
============ ============ ============ ============
See accompanying notes to interim consolidated financial statements.
6
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
These unaudited interim consolidated financial statements of E-Trend
Networks, Inc. ("E-Trend" or the "Company") have been prepared in
accordance with United States generally accepted accounting principles for
interim financial information, including all normal recurring adjustments
that are, in the opinion of management, necessary for the fair presentation
of the consolidated balance sheet and the consolidated statements of
operations and deficit, stockholders' equity and cash flows for the interim
periods. There have been no changes to the accounting policies as detailed
in the Company's audited financial statements for the year ended September
30, 2000 during the interim periods presented. These interim financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended September 30, 2000. The financial
information included herein is unaudited.
2. ACQUISITION:
Effective February 21, 2001 an arrangement was completed between E-Trend
and Cool Entertainment, Inc. ("Cool") whereby the shareholders of E-Trend
exchanged all of their common shares for 4,439,371 common shares of Cool.
Following the acquisition, the former shareholders of E-Trend held a
majority of the total issued and outstanding common shares of Cool; E-Trend
was thereby deemed to be the acquiror. Accordingly, the transaction has
been accounted for as a reverse-take-over using the purchase method whereby
the assets and liabilities of Cool have been recorded at their fair market
values and the operating results of Cool have been included in the
Company's financial statements from the effective date of the purchase. The
fair values of the net assets acquired is equal to their book values.
As Cool was a non-operating public shell prior to the combination, no
goodwill has been recognized and the excess of the consideration paid over
the fair value of the identifiable assets acquired has been charged to
stockholders' equity.
7
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements, Page 2
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
2. ACQUISITION (CONTINUED):
Net book value of assets acquired:
Property and equipment of Cool, at book value $ 10,940
Assets acquired in associated transactions 68,000
Less working capital deficiency (72,351)
----------
$ 6,589
==========
Assigned value of 4,441,867 shares issued in exchange for shares of Cool $ -
Settlement of liability assumed by the issue of 25,000 common shares 93,789
Issue of 15,000 on acquisition of assets in associated transaction 45,000
Cash paid on acquisition of assets in associated transaction 23,000
Cash paid for transaction costs 145,000
---------
306,789
Less excess of consideration given over net book value of assets acquired (300,200)
----------
$ 6,589
==========
Other transactions relating to the arrangement were as follows:
(a) Change of the Company's name from Cool Entertainment, Inc. to E-Trend
Networks, Inc.;
(b) Re-domestication of the Company to the State of Delaware from the State
of Nevada;
(c) Reverse stock split of 1-for-100 common shares;
(d) Continuance, on an equivalent basis, of all of the unexpired and
unexercised outstanding stock options and warrants of the former
E-Trend under the same terms and conditions;
(e) Cancellation of all of the outstanding warrants of Cool;
(f) Settlement of a note payable of $93,789 to Fictional Media Inc., a
company controlled by stockholders of Cool, by way of the issuance of
25,000 common shares; and
(g) Cash payment of $23,000 and the issuance of a promissory note of
$45,000 by E-Trend to Fictional Media Inc. in exchange for property and
equipment, subsequently settled by way of the issuance of 15,000 common
shares.
3. BANK INDEBTEDNESS:
The Company has a line of credit of $150,000 Canadian. Drawings bear
interest at prime plus 1/2% and are secured by a $150,000 U.S. deposit
included in cash and cash equivalents.
8
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements, Page 3
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS:
(a) VHQ Entertainment Inc.:
VHQ Entertainment Inc. ("VHQ") represents the Company's major
stockholder. The advances to VHQ, totaling $571,757 Canadian, bear
interest at 8%, are unsecured and have no fixed terms of repayment. For
the three and nine months ended June 30, 2001, the Company accrued
interest income of $6,925 and $20,985, respectively (2000 - $4,832 and
$12,596, respectively).
During the three and nine months ended June 30, 2001 the Company sold
$315,068 and $779,794, respectively, (2000 - $217,781 and $357,258,
respectively) of its products to VHQ, representing 44% and 48% of total
sales (2000 - 84% and 80%). These transactions are considered to be in
the normal course of business and are measured at the exchange amount,
which is the amount of consideration established and agreed to by the
related parties. The current amount due from VHQ relates to such sales.
(b) Diz Investments Ltd.:
During the three and nine months ended June 30, 2001 the Company sold
$3,764 and $57,744, respectively, (2000 - $488 and $1,282,
respectively) of its products to Diz Investments Ltd., a company owned
by two of the Company's stockholders. These transactions are considered
to be in the normal course of business and are measured at the exchange
amount, which is the amount of consideration established and agreed to
by the related parties.
(c) Summerhill Investment Corp.:
Summerhill Investment Corp. is a shareholder of the Company. The
receivable of $5,686 is for unpaid interest on a fully-paid loan.
(d) Stockholder:
The advance due from a stockholder relates to the purchase of common
shares of the Company. The subject shares serve as security for the
advance.
5. INVESTMENT:
On January 21, 2000 the Company purchased 99,900 common shares of VHQ,
a publicly-traded Canadian company, in exchange for 100,000 shares of
the Company at an assigned value of $150,000.
- --------------------------------------------------------------------------------------------------------------
JUNE 30, 2001
---------------------------------------------------
Translated Unrealized Recorded
cost basis gain basis
Video Headquarters Inc. common shares $140,140 $1,382 $141,522
- --------------------------------------------------------------------------------------------------------------
9
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements, Page 4
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
- --------------------------------------------------------------------------------
6. SHARE CAPITAL:
There were 1,067,160 stock options outstanding at June 30, 2001 having a
weighted average exercise price of $4.59 and expiring on various dates to
December 2004.
There were 100,000 common share purchase warrants outstanding at June 30,
2001. Each warrant entitles the holder to purchase one common share of the
Company for $4.00 and expires on April 20, 2002. These warrants were issued
in connection with the acquisition of Langara Distribution Inc.
Effective April 20, 2001 the shareholders approved a change to the
Company's authorized share capital from 20,000,000 preferred shares with a
par value of $0.0001 per share and 80,000,000 common shares with a par
value of $0.0001 per share to 1,000,000 preferred shares with a par value
of $0.0001 per share and 20,000,000 common shares with a par value of
$0.0001 per share.
7. SUBSEQUENT EVENT:
On July 3, 2001 the Company executed an equity financing agreement with a
U.S.-based corporation. The agreement is subject to the completion and
filing of the required regulatory documentation. Under the agreement the
Company can, under certain conditions, put common shares to the investor to
a maximum of $10 million over a three-year period.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management's Discussion and Analysis (MD&A) focuses on key statistics from
the consolidated financial statements of E-Trend for the fiscal quarter ended
June 30, 2001, and pertains to known risks and uncertainties relating to its
businesses. This MD&A should not be considered all-inclusive, as it excludes
changes that may occur in general economic, political and environmental
conditions. This MD&A of the financial condition and results of operations for
the quarter ended June 30, 2001 should be read in conjunction with the
consolidated financial statements and related notes of E-Trend.
RESULTS OF OPERATIONS
The company is considered to be in the early stages of implementing its business
plan, since it has not generated significant revenues and is continuing to
develop its business, particularly the Web-based site that is currently in its
initial customer acquisition phase. The site (EntertainMe.com) and traditional
distribution via Langara Distribution Inc., a wholly owned subsidiary of
E-Trend, will be the engine that drives future growth.
Sales for the three months ended June 30, 2001 increased $226,671 over the
previous quarter and $453,300 over the comparable quarter of the previous fiscal
year. Similarly, sales of the nine months ended June 30, 2001 increased 265%
from the previous fiscal year, since commercial launch of the company's retail
web sites did not take place until March 2000. The company notes increased
traffic on the website, as E-Trend increases its marketing initiatives
affiliations with other sites.
Gross margins decreased to 17% for the three months ended June 30, 2001 and 14%
for the nine-month period, from 32% and 30% for fiscal 2000 periods because of a
price increase from the company's suppliers in the previous quarter that was not
passed on to customers until close to the end of the previous quarter and
unrecovered shipping costs from promotional efforts.
Operating and development costs continued to rise because of the need to retain
the services of an external contractor to complete the website design and
testing. These costs, of approximately $32,000 per month, ceased at the end of
June 2001.
Net loss for the quarter was $748,247, compared to $397,967 for the previous
quarter and $239,995 for the same quarter of the previous fiscal year. The net
loss for the nine-month period increased to $1,561,656 from $546,964 from fiscal
2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, the company had a working capital surplus of $269,110 compared to a
surplus of $1,908,174 at September 30, 2000.
To date, virtually all of the company's resources have been provided from the
sale of common stock. At the current rate of expenditure, additional funds from
the sale of common stock or debt will have to be secured to enable the company
to continue to operate.
BUSINESS RISKS AND MANAGEMENT
The e-commerce sales and distribution of filmed entertainment, video games and
music is very competitive. E-Trend faces a number of competitors, with
competition existing on a global basis. The main competitive factors are
availability, price and service.
11
Management continues to review and assess its competitors, and is continually
vigilant for industry trends.
To be successful, E-Trend must increase sales. To do this, it must rely on
working capital and outside sources of capital to finance current operations and
new marketing initiatives designed to drive additional traffic.
THE FUTURE
The E-Trend Board of Directors and management are confident that the company is
on the right track for significant gains in the future. The news media has been
rife with reports of e-commerce failures, among them many of E-Trend's
competitors. However, overall Internet sales continue to increase as consumers
become more comfortable with the security of the systems. E-Trend continues to
believe that its strategy of being a `second tier' online company will allow it
to take advantage of the tremendous number of online purchases in its product
categories - especially as its first-mover competition continues to experience
financial trouble.
E-Trend will continue to seek strategic alliances and acquisitions that will
complement its existing business and overall corporate strategy as expressed in
its business plan.
E-Trend is poised to implement key strategic initiatives that will include:
o increasing the number of music titles carried in Langara's
inventory,
o adding DVD and key VHS titles to the Langara product mix,
o amending movie purchasing agreements to reduce product cost,
o improving the data model and overall scalability of the e-commerce
engine,
o improving site capacity to seamlessly manage the planned increase
in site traffic and sales volumes,
o merging the company's three internet sites (MovieSource.com,
VHQMusic.com and EntertainMe.com) into one brandable
entertainment-focused supersite, ENTERTAINME.COM, and
o initiating new online marketing campaigns.
On July 1, 2001 E-Trend launched its new supersite, ENTERTAINME.COM. The focus
of the sales and marketing department for the next quarter will be to increase
consumer awareness of the new site.
At the end of the last quarter, E-Trend signed an agreement with a private
equity financier that will give E-Trend access to up to $10,000,000 over the
next 3 years by the sale of E-Trend. This agreement is still in the process of
receiving SEC approval, but is expected to be finalized by the end of September
2001.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB, as well as
statements made by the company in periodic press releases, oral statements made
by the company's officials to analysts and shareholders in the course of
presentations about the company, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance or achievements of
the company to be materially different from any future results, performance or
achievements expressed or implied by the forward looking statements. Such
factors include, among other things, (1) general economic and business
conditions; (2) interest rate changes; (3) the relative stability of the debt
and equity
12
markets; (4) competition; (5) demographic changes; (6) government regulations
particularly those related to Internet commerce; (7) required accounting
changes; (8) equipment failures, power outages, or other events that may
interrupt Internet communications; (9) disputes or claims regarding the
company's proprietary rights to its software and intellectual property; and (10)
other factors over which the company has little or no control.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
In May 2001, the registrant issued 150,000 common shares to
its directors in lieu of cash compensation for management fees
and directors' fees. The registrant also issued 200,000 common
shares to Garrett Krause for services. These shares issued for
services were valued at $665,000. Members of former management
of Cool Entertainment were issued 40,000 common shares in
settlement of notes payable totaling $138,789. The registrant
relied upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933. No underwriters
were used and no underwriting commissions were paid.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
2.1 Share Exchange Agreement, dated as of December 22, 2000, by and among N/A
E-Trend Networks, Inc., Cool Entertainment, Inc., and E-Trend Networks, Inc.
(a Delaware corporation) (1)<F1>
2.2 Agreement and Plan of Reincorporation and Merger between Cool Entertainment, N/A
Inc. and E-Trend Networks, Inc., a Delaware corporation (1)<F1>
2.3 Certificate of Ownership Merging Cool Entertainment, Inc. into E-Trend N/A
Networks, Inc. Pursuant to Section 253 of the Delaware General Corporation
Law and Articles of Merger Pursuant to Section 7-111-105 of the Colorado
Business Corporation Act(2)<F2>
- ----------------------------
<FN>
(1)<F1> Incorporated by reference to the exhibits filed with the registrant's
definitive information statement filed January 2, 2001 for the meeting
held January 26, 2001.
(2)(F2> Incorporated by reference to the exhibits filed with the registrant's
quarterly report on Form 10-QSB for the quarter ended December 31,
2000.
</FN>
14
B) REPORTS ON FORM 8-K:
On May 7, 2001, the registrant amended its current report on
Form 8-K dated February 21, 2001, reporting under Items 1, 2,
and 5, the consummation of the acquisition of E-Trend
Networks, Inc. E-Trend's historical audited financial
statements and pro forma combined financial statements were
filed. The registrant also reported a change in its certifying
accountant under Item 4.
On May 10, 2001, the registrant further amended the current
report on Form 8-K dated February 21, 2001 to file the letter
from its former auditors as an exhibit.
On May 23, 2001, the registrant further amended the current
report on Form 8-K dated February 21, 2001 to revise the
disclosure contained in Item 4.
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.
E-TREND NETWORKS, INC.
(Registrant)
Date: August 29, 2001 By: /s/ Caroline Armstrong
------------------------------------------
Caroline Armstrong
President and Chief Executive Officer
By:/s/ Lorne Cogswell
------------------------------------------
Lorne Cogswell
Interim Chief Financial Officer
15