FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-26109
NETTAXI.COM
(Exact name of registrant as specified in its charter)
Nevada 82-0486102
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1696 Dell Avenue, Campbell, CA 95008
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (408) 879-9880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Applicable Only To Corporate Issuers:
As of April 30, 2000, the registrant had 40,753,658 shares of common stock,
$.001 par value per share, outstanding.
1
NETTAXI.COM
CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, March 31, 2000 (unaudited)
and December 31, 1999 3
Condensed Consolidated Statements of Operations, Three Months Ended
March 31, 2000 (unaudited) and March 31, 1999 (unaudited) 4
Condensed Consolidated Statements of Shareholders' Equity (Deficiency),
March 31, 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows, Three Months Ended
March 31, 2000 (unaudited) and March 31, 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 34
EXHIBIT INDEX 35
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NETTAXI.COM
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 March 31, 2000
- ----------------------------------------------------------------------------------- ------------------- ----------------
(unaudited)
- ----------------------------------------------------------------------------------- ------------------- ----------------
ASSETS
- ----------------------------------------------------------------------------------- ------------------- ----------------
Current assets:
- ----------------------------------------------------------------------------------- ------------------- ----------------
Cash and cash equivalents $ 987,700 $ 19,271,600
- ----------------------------------------------------------------------------------- ------------------- ----------------
Accounts receivable, net of allowance for doubtful accounts of $83,600 and
$168,600, respectively 1,181,600 2,070,500
- ----------------------------------------------------------------------------------- ------------------- ----------------
Prepaid expenses and other assets 609,200 863,000
- ----------------------------------------------------------------------------------- ------------------- ----------------
TOTAL CURRENT ASSETS 2,778,500 22,205,100
- ----------------------------------------------------------------------------------- ------------------- ----------------
Property and equipment, net 1,968,600 1,834,800
- ----------------------------------------------------------------------------------- ------------------- ----------------
Intangibles, net 628,900 559,800
- ----------------------------------------------------------------------------------- ------------------- ----------------
Deferred expenses 655,200 891,300
- ----------------------------------------------------------------------------------- ------------------- ----------------
TOTAL ASSETS $ 6,031,200 $ 25,491,000
- ----------------------------------------------------------------------------------- ------------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
- ----------------------------------------------------------------------------------- ------------------- ----------------
CURRENT LIABILITIES
- ----------------------------------------------------------------------------------- ------------------- ----------------
Accounts payable $ 4,041,400 $ 2,207,900
- ----------------------------------------------------------------------------------- ------------------- ----------------
Accrued expenses 664,500 1,286,800
- ----------------------------------------------------------------------------------- ------------------- ----------------
Income taxes payable 125,600 2,600
- ----------------------------------------------------------------------------------- ------------------- ----------------
TOTAL CURRENT LIABILITIES 4,831,500 3,497,300
- ----------------------------------------------------------------------------------- ------------------- ----------------
LONG-TERM LIABILITIES
- ----------------------------------------------------------------------------------- ------------------- ----------------
Convertible notes payable 3,200,000 2,400,000
- ----------------------------------------------------------------------------------- ------------------- ----------------
TOTAL LIABILITIES 8,031,500 5,897,300
- ----------------------------------------------------------------------------------- ------------------- ----------------
Commitments and contingencies
- ----------------------------------------------------------------------------------- ------------------- ----------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
- ----------------------------------------------------------------------------------- ------------------- ----------------
Preferred stock, $.001 par value; 1,000,000 shares authorized; no shares issued
and outstanding
Common stock, $.001 par value; 50,000,000 shares authorized; 23,214,446 and
40,438,557 shares issued and outstanding, respectively 20,000 37,000
- ----------------------------------------------------------------------------------- ------------------- ----------------
Additional paid-in capital 11,807,500 36,534,800
- ----------------------------------------------------------------------------------- ------------------- ----------------
Deferred Compensation (491,400) (872,700)
- ----------------------------------------------------------------------------------- ------------------- ----------------
Accumulated Deficit (13,336,400) (16,105,400)
- ----------------------------------------------------------------------------------- ------------------- ----------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (2,000,300) 19,593,700
- ----------------------------------------------------------------------------------- ------------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) $ 6,031,200 $ 25,491,000
- ----------------------------------------------------------------------------------- ------------------- ----------------
**The accompanying notes are an integral part of these financial statements
3
NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
ended 3/31/99 ended 3/31/00
--------------- ---------------
(unaudited) (unaudited)
- -------------------------------------------------------------------------
Net Revenues $ 689,300 $ 2,764,900
- --------------------------------------- --------------- ---------------
Operating Expenses:
- --------------------------------------- --------------- ---------------
Cost of operations 323,400 1,773,500
- --------------------------------------- --------------- ---------------
Sales and marketing 135,700 1,763,300
- --------------------------------------- --------------- ---------------
Research and development 217,800 457,100
- --------------------------------------- --------------- ---------------
General and administrative 422,800 1,467,500
- --------------------------------------- --------------- ---------------
Total Operating Expenses 1,099,700 5,461,400
- --------------------------------------- --------------- ---------------
Loss From Operations (410,400) (2,696,500)
- --------------------------------------- --------------- ---------------
Interest Income 2,600 26,000
- --------------------------------------- --------------- ---------------
Interest Expense (500) (97,700)
- --------------------------------------- --------------- ---------------
Loss before income taxes (408,300) (2,768,200)
- --------------------------------------- --------------- ---------------
Income Tax Expense (100,800) (800)
- --------------------------------------- --------------- ---------------
Net Loss $ (509,100) $ (2,769,000)
- --------------------------------------- --------------- ---------------
- --------------------------------------- --------------- ---------------
Basic and diluted loss per common share $ (0.02) $ (0.09)
- --------------------------------------- --------------- ---------------
Weighted average common shares
outstanding 21,110,000 29,391,784
- --------------------------------------- --------------- ---------------
**The accompanying notes are an integral part of these financial statements
4
NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
Common Stock
------------------- Additional Paid Deferred Accumulated
Shares Amount -in Capital Compensation Deficit Total
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Balances, December 31,
1999, (Audited) 23,214,446 $20,000 $ 11,807,500 $ (491,400) $(13,336,400) $(2,000,300)
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Exchange of convertible notes
payable and accrued interest 632,472 600 834,300 834,900
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Proceeds from the issuance
of common stock 632,472 600 834,300 834,900
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Deferred Compensation 1,175,400 (1,175,400) -
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Amortization of deferred compensation 794,100 794,100
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Conversion of trade payables
to common stock 417,034 400 833,700 834,100
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Issuance of common stock for services 175,000 200 574,000 574,200
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Proceeds from sale of common
stock, net of costs of $2,409,100 15,367,133 15,200 20,475,600 20,490,800
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Net loss (2,769,000) (2,769,000)
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
Balances, March 31, 2000
(unaudited) 40,438,557 $37,000 $ 36,534,800 $ (872,700) $(16,105,400) $19,593,700
- -------------------------------------- ---------- ------- ---------------- -------------- ------------- ------------
**The accompanying notes are
an integral part of these financial
statements
5
NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended THREE MONTHS ENDED
March 31, MARCH 31,
1999 2000
==============================================================================================
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (509,100) $ (2,769,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 75,800 216,900
Allowance for doubtful accounts (3,200) 85,000
Issuance of common stock for interest
on convertible notes - 34,900
Issuance of common stock for services - 183,800
Compensation expense
related to options granted - 216,600
Interest expense related to warrants granted - 30,700
Changes in operating assets and liabilities:
Accounts receivable (148,700) (973,900)
Prepaid expenses and other assets (51,400) (130,200)
Accounts payable 1,562,300 (999,500)
Accrued expenses 15,800 624,100
Deferred revenue (5,000) -
Income taxes payable 100,000 (123,000)
- --------------------------------------------------- -------------------- --------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,036,500 (3,603,600)
- --------------------------------------------------- -------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (23,600) 18,100
Capital expenditures (168,600) (32,100)
- --------------------------------------------------- -------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (192,200) (14,000)
- --------------------------------------------------- -------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligation under capital lease (1,800) (1,800)
Proceeds from issuance of note payable 200,000 -
Net proceeds from issuance of common stock 6,800 21,903,300
- --------------------------------------------------- -------------------- --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 205,000 21,901,500
- --------------------------------------------------- -------------------- --------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,049,300 18,283,900
- --------------------------------------------------- -------------------- --------------------
CASH AND CASH EQUIVALENTS, beginning of period 465,800 987,700
- --------------------------------------------------- -------------------- --------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,515,100 $ 19,271,600
==============================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ---------------------------------------------------
Cash Paid:
Income taxes $ - $ 97,400
Interest $ 500 $ -
Noncash Operating and Financing Activities:
Issuance of common stock for accounts payable $ - $ 834,700
Issuance of common stock for
convertible notes plus accrued interest $ - $ 834,900
Issuance of common stock for consulting services $ - $ 574,200
Options granted for finders fee $ - $ 577,500
6
NETTAXI.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
THE COMPANY
Nettaxi.com (formerly Nettaxi, Inc and formerly Swan Valley Snowmobiles,
Inc.), the Company, is a Nevada Corporation, which was incorporated on
October 26, 1995. On September 29, 1998 the Company completed the
acquisition of 100% of the outstanding common stock of Nettaxi OnLine
Communities, Inc., a Delaware corporation, and changed its name to Nettaxi,
Inc. (now Nettaxi.com). For accounting purposes, the acquisition has been
treated as the acquisition of the Company by Nettaxi OnLine Communities,
Inc. with Nettaxi OnLine Communities, Inc. as the acquiror. All shares and
per share data prior to the acquisition have been restated to reflect the
stock issuance and related stock split.
As the former shareholders of Nettaxi OnLine Communities, Inc. received 85%
of the shares in the Company immediately after the acquisition, the
financial statements for periods prior to the reorganization are those of
Nettaxi OnLine Communities, Inc.
Effective May 7, 1999, the Company completed a merger in a single
transaction with Plus Net, Inc. by exchanging 7 million shares of its
common stock for all of the common stock of Plus Net, Inc. Each share of
Plus Net was exchanged for 1,000 shares of Nettaxi common stock.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interest under Accounting Principles Board Opinion No. 16.
For periods proceeding the merger, there were no intercompany transactions
that require elimination from the combined consolidated results of
operations and there were no adjustments necessary to conform the
accounting practices of the two companies.
The merger with Plus Net, Inc. allowed the Company to provide its customers
with a web based e-mail program and a robust meta search engine. Plus Net,
Inc. also had an e-commerce processing engine that enabled the acceptance
and processing of online credit card transactions.
Plus Net, Inc. reported no revenues and a net loss of $200 for the period
ended December 31, 1998. For the period from January 1 to May 7, 1999 Plus
Net, Inc. had revenues of approximately $700,000 and net income of
approximately $413,600. Subsequent to the merger the Company ceased its
evaluation and processing of online credit card transactions business. In
1999, this line of business accounted for approximately $1,285,000 of the
Company's revenues.
7
Nettaxi OnLine Communities, Inc., was incorporated on October 23, 1997 to
capitalize on a significant opportunity that exists today through the
convergence of the media and entertainment industries with the vast
communications power of the Internet. The Company's Web site,
http://www.nettaxi.com, is an online community designed to seamlessly
integrate content with e-commerce services for the Company's subscribers,
providing comprehensive information about news, sports, entertainment,
health, politics, finances, lifestyle, and areas of interest to the growing
number of Internet users. The Company's mission is to establish nettaxi.com
as an entry point, or portal, to the Internet by continuing to develop
premium online communities, which are both content-rich to its subscribers
and provide easy-to-use e-commerce services to businesses which reside in
these online communities.
The Company's principal executive offices are located in Campbell,
California.
CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Nettaxi.com (formerly Nettaxi, Inc. and formerly Swan Valley
Snowmobile, Inc.) and its wholly-owned subsidiary, Nettaxi OnLine
Communities, Inc. All intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
BASIS OF PRESENTATION
The unaudited historical consolidated financial statements of Nettaxi.com
included herein have been prepared in accordance with instructions for Form
10-Q and, therefore, do not include all information and footnotes necessary
for a complete presentation of Nettaxi.com results of operations, financial
position and cash flows.
The unaudited consolidated financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) which are,
in the opinion of management, necessary to state fairly the results for the
periods presented. The results for the three months ended March 31, 2000
are not necessarily indicative of the results expected for the full fiscal
year.
8
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of 90 days or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company grants credit to its customers after undertaking an
investigation of credit risk for all significant amounts. An allowance for
doubtful accounts is provided for estimated credit losses at a level deemed
appropriate to adequately provide for known and inherent risks related to
such amounts. The allowance is based on reviews of losses, adjustment
history, current economic conditions and other factors that deserve
recognition in estimating potential losses. While management uses the best
information available in making its determination, the ultimate recovery of
recorded accounts receivable is also dependent upon future economic and
other conditions that may be beyond management's control.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated economic useful lives of the
assets, as follows:
Estimated useful lives
------------------------
Furniture and fixtures. 5 years
Office equipment 5 years
Computers and equipment 3 years
Assets held under capital leases are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful lives
of the related assets.
PURCHASED TECHNOLOGY AND OTHER INTANGIBLES
The Company amortizes, on a straight-line basis, the cost of purchased
technology and other intangibles over the shorter of five (5) years or
the useful life of the related technology or underlying asset.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or
otherwise Marketed, software development costs are expensed as
incurred until technological feasibility has been established, at
which time such costs are capitalized until the product is available
for general release to customers. To date, the establishments of
technological feasibility of the Company's products and general
release of such software have substantially coincided. As a result,
software development costs qualifying for capitalization have been
insignificant, and therefore, the Company has not capitalized any
software development costs.
9
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's revenues are derived principally from the sale of banner
advertisements, web hosting services and from products from its online
malls. Advertising revenues are recognized in the period in which the
advertisement is delivered, provided that collection of the resulting
receivable is probable. Advertisers are charged on a per impression or
delivery basis up to a maximum as specified in the contract. To date,
the duration of the Company's advertising commitments has not exceeded
one year. When the Company guarantees a minimum number of impressions
or deliveries, revenue is recognized ratably in proportion to the
number of impressions or deliveries recorded to the minimum number of
impressions and deliveries guaranteed. Web hosting revenues are
recognized in the period in which the Services are provided. Product
revenue is recognized upon shipment, provided no significant
obligations remain and collectability is probable.
Advertising revenue include barter revenues, which are the exchange by
Nettaxi.com of advertising space on Nettaxi.com's web sites for
reciprocal advertising space on other web sites. Revenues from these
barter transactions are recorded as advertising revenues at the lower
of the estimated fair value of the advertisements received or
delivered and are recognized when the advertisements are run on
Nettaxi.com's web sites. Barter expenses are recorded when
Nettaxi.com's advertisements are run on the reciprocal web sites,
which is typically in the same period as when advertisements are run
on Nettaxi.com's web sites. As of March 31, 2000, barter revenues
represented 23% of net revenues as compared to 0% for the same time
period in 1999.
In November 1999, the Financial Accounting Standards Board (FASB)
issued Emerging Issues Task Force (EITF) Issue 99-17 "Accounting for
Advertising Barter Transactions". Under EITF 99-17, revenues and
expenses should be recognized from advertising barter transactions at
the fair value of the advertising surrendered or received only when
the company has a historical practice of receiving or paying cash for
such transactions. As of March 31, 2000, the Company was in compliance
with EITF 99-17.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, which requires an asset and liability approach. This approach
results in the recognition of deferred tax assets (future tax
benefits) and liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and the tax
basis of assets and liabilities. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be deductible or taxable when the
assets and liabilities are recovered or settled. Future tax benefits
are subject to a valuation allowance when management believes it is
more likely than not that the deferred tax assets will not be
realized.
10
ADVERTISING COSTS
The cost of advertising is expensed as incurred. Advertising costs for
the quarter ended March 31, 2000, and 1999, were approximately $1.3
million and $10,000, respectively.
LONG-LIVED ASSETS
The Company periodically reviews its long-lived assets for impairment.
When events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company writes the
asset down to its net realizable value.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS:
The carrying amount reported in the consolidated balance sheets for
cash and cash equivalents approximates fair value.
SHORT-TERM DEBT:
The fair value of short-term debt approximates cost because of the
short period of time to maturity.
LONG-TERM DEBT:
The fair value of long-term debt is estimated based on current
interest rates available to the Company for debt instruments with
similar terms and remaining maturities.
RELATED PARTY NOTES RECEIVABLE AND PAYABLE:
The fair value of the notes receivable and notes payable to
shareholders is based on arms-length transactions and bear interest at
rates comparable to similar debt obligations.
At March 31, 2000 and December 31, 1999, the fair values of the
Company's debt instruments approximate their historical carrying
amounts.
11
STOCK-BASED INCENTIVE PROGRAM
SFAS No. 123, Accounting for Stock-Based Compensation, encourages
entities to recognize compensation costs for stock-based employee
compensation plans using the fair value based method of accounting
defined in SFAS No. 123, but allows for the continued use of the
intrinsic value based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. The Company continues to use the accounting prescribed by
APB Opinion No. 25 and as such is required to disclose pro forma net
income (loss) and earnings (loss) per share as if the fair value based
method of accounting had been applied.
BASIC AND DILUTED LOSS PER COMMON SHARE
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share,
which was effective December 28, 1997. Conforming to SFAS No. 128, the
Company changed its method of computing earnings per share and
restated all prior periods included in the consolidated financial
statements. Basic loss per common share is determined by dividing loss
available to common shareholders by the weighted average number of
common shares outstanding. Diluted per-common-share amounts assume the
issuance of common stock for all potentially dilutive equivalent
shares outstanding. Anti-dilution provisions of SFAS 128 require
consistency between diluted per-common-share amounts and basic
per-common-share amounts in loss periods. For the periods reported,
there were no differences between basic and diluted earnings per
share. All share and per share information has been adjusted for the
shares exchanged for the common stock of Plus Net, Inc.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in
the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the
period of change. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, which amends
SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard
to have a material impact on the Company's results from operations,
financial position or cash flows.
12
2. PURCHASED TECHNOLOGY AND OTHER INTANGIBLES
In November 1997, the Company issued a convertible secured promissory
note in the amount of $1,020,000 and 2,475,066 shares of common stock,
valued at $980,000, to a related party in exchange for certain fixed
assets, liabilities and technology. Core to the technology acquired
was a web to database software application and the underlying
technology to the Company's Internet The City products. Based on the
fair market value of the consideration exchanged, as determined by an
independent appraisal service, the aggregate purchase price was
$2,000,000, and was allocated to the following respective assets and
liabilities based on their fair market value at the time of the
transaction:
Purchased technology $ 1,740,000
Other intangibles $ 150,000
Computers and equipment $ 100,000
Office equipment $ 45,000
Furniture and fixtures $ 5,000
Contracts payable and accrued expenses $ (40,000)
-------------------------------------------------- -----------
$ 2,000,000
================================================== ===========
In 1998, the Company experienced several functional problems with
portions of the purchased technology, namely the web to database
software application, due to those components incompatibility with
subsequent releases of upgraded versions of its operating system.
Following attempts to make these components compatible, the Company
decided, in December 1998, not to spend additional monies on these
components but to replace them. As approximately 50% of the components
of the acquired technology were no longer technically viable with the
upgraded versions of the Company's operating system and provided no
alternative future use, the Company wrote off the unamortized portion
of the impaired technology, resulting in a charge to expense of
$667,000 in the fourth quarter of 1998.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT
LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS
OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES",
"INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON
THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED
BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q
ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED THE COMPANY'S RESULTS
AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN
THE FORWARD-LOOKING STATEMENTS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
OVERVIEW
We were incorporated in October 1997 and launched our web site in July
1998. We are a provider of content-rich and commerce-enabled communities that
offer subscribers, or "citizens", a place to build their home pages or
businesses on the Internet.
The Nettaxi.com web site, at http://www.nettaxi.com, is structured as a
virtual "urban" environment, populated by citizens, that is divided into
thematic "communities," and from there into "streets" and "homes." Nettaxi.com
provides access to information on news, sports, entertainment, health, politics,
finances, lifestyle, travel and other areas of interest, and services such as
free e-mail, personal home pages, chat and messages.
To date, our revenues have been derived principally from the sale of
advertisements. We sell a variety of advertising packages to clients, including
banner advertisements, event sponsorships, and targeted and direct response
advertisements. Currently, our advertising revenues are derived principally from
short-term advertising arrangements, averaging one to six months, in which we
guarantee a minimum number of impressions for a fixed fee. Advertising revenues
are recognized ratably in the period in which the advertisement is displayed,
provided that we have no significant remaining obligations and that collection
of the resulting receivable is probable. Payments received from advertisers
prior to displaying their advertisements on the site are recorded as deferred
revenues and are recognized as revenue ratably when the advertisement is
displayed. To the extent minimum guaranteed impression levels are not met, we
defer recognition of the corresponding revenues until guaranteed levels are
achieved. We expect to continue to derive the majority of our revenue for the
foreseeable future from the sale of advertising space on our web site.
14
In the third quarter of 1999, we began providing web site hosting and
Internet connectivity services for corporate customers. Our services are
delivered through a state-of-the-art Internet data center located in Southern
California using a high-performance Internet backbone network. Customers pay
monthly fees for the professional services utilized, one-time installation fees,
and connectivity charges. These "hosting" revenues are recognized in the period
the services are provided.
In addition to advertising revenues, we derive other revenues from
royalties from the distribution of our CD-ROM tutorial product and our
premium account membership subscriptions. Royalty revenues result from
relationships with computer manufacturers that bundle and distribute our
CD-ROM product with their products. Our membership programs offer premium
services for a monthly fee, providing additional services such as unlimited
personal e-mail accounts for family or friends, unlimited Nettaxi Site
Builder web pages, themed web page templates, a personal event calendar,
discussion groups, and options to customize personal homepages with pictures,
colors and content.
In May 1999, we completed the merger with Plus Net, Inc., a California
corporation, which has allowed us to provide our users with a web based e-mail
program and a robust meta search engine. Plus Net also has an e-commerce
processing engine which enables the acceptance and processing of online credit
card transactions. We believe this merger also enhances our electronic commerce
and advertising opportunities. As a result of this merger, we received
revenues from credit card processing fees during the first half of 1999, with
minimal revenues being earned in the third quarter of 1999. The contract through
which these fees have been derived terminated in December 1999 and we
anticipate that revenues of this type will be minimal in the foreseeable future.
We also receive revenues from e-commerce transactions. Our recent
e-commerce arrangements generally provide us with a share of any sales resulting
from direct links from our site. Revenues from these programs will be recognized
in the month that the service is provided. To date, revenues from e-commerce
arrangements have not been material. However, we expect e-commerce derived
revenues to become a more significant portion of our total revenues in the
foreseeable future, as we increase the number of contractual relationships with
parties offering e-commerce related products and services which can be made
available to our subscribers and parties seeking to make online sales to our
subscribers and other visitors to our site.
To date, we have entered into business and technology license arrangements
in order to build our web site community, provide community-specific
content, generate additional traffic, and provide our subscribers with
additional products and services, including e-commerce tools.
We intend to continue to investigate potential acquisitions and to seek
additional relationships with content providers that fall within the scope of
our business strategy, and will serve to increase our subscriber base and
overall site traffic. Acquisitions carry numerous risks and uncertainties and we
cannot guarantee that we will be able to successfully integrate any businesses,
products, technologies or personnel that might be acquired in the future.
15
RESULTS OF OPERATIONS
NET REVENUES. Revenues for the first quarter of 2000 increased $2.08
million to $2.77 million compared to $0.69 million during the same period of
1999. The increase was, primarily, a result of the increase in the number of
advertisers, the average contract duration, and value offered (higher web site
traffic to nettaxi.com web pages). Revenues were also, favorably affected, by
increased hosting activity, , and to a lesser extent, increases in royalties
and customization fees associated with the distribution of our CD ROM product.
Barter revenues accounted for approximately 24% of total revenues for the first
quarter of 2000. There were no barter revenues for the first quarter of 1999.
Three customers had revenues each greater than 10% of total net revenues for the
three months ended March 31, 2000. There were no customers with revenues
greater than or equal to 10% of the total net revenues for the three months
ended March 31, 1999.
ADVERTISING REVENUES. Advertising revenues were approximately $1.78
million for the first quarter of 2000 compared to $0.20 million for the same
period of 1999, which represented 64% and 29% of total net revenues. The
absolute dollar increases resulted from an increase in the number of advertisers
as well as the increase in average contract commitments of these advertisers as
a result of increased web traffic to our web site. The Company cannot assure
that advertisers will either increase or decrease their activity at the site.
Additionally, the Company cannot predict certain factors that could lower the
advertising prices currently in effect.
TRANSACTION PROCESSING FEES. Transaction processing fees were
approximately $0.41 million for the three months ended March 31, 1999. There
were no transaction processing fees in 2000. Transactions fees consist of
revenue derived from credit card evaluations and from the processing of on-line
credit card transactions. The 1999 revenue is attributable to the merger with
Plus Net, Inc. in 1999. The Company does not expect revenues of this type to be
significant in the future periods.
HOSTING REVENUES. Hosting revenues were approximately $0.99 million for
the first quarter of 2000 or 36% of total net revenues. There were no hosting
revenues in the first quarter of 1999. The Company began providing internet web
hosting and connectivity services for corporate customers in the third quarter
of 1999. Web hosting services are delivered through a state-of-the-art Internet
data center located in Southern California using a high-performance Internet
backbone network. Customers pay monthly fees for the professional services
utilized, one-time installation fees, and monthly connectivity charges. These
"hosting" revenues are recognized in the period the services are provided.
COST OF OPERATIONS. Cost of operations for the first quarter of 2000
increased approximately $1.45 million to $1.77 million compared to $0.32 million
for the first quarter of 1999. The increase was primarily attributed to fees
paid to third parties related to increased costs for co-location expenses
(Internet connection charges). In the third quarter of 1999, the Company began
providing Internet connectivity services to corporate customers which demanded
purchases of additional bandwidth. These costs are expected to continue to
increase as our web traffic increases and our corporate customer require
additional bandwidth for our "citizens". Other items contributing to higher
costs were equipment costs and depreciation, amortization of intangible assets,
and expenses for third party content and development.
16
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the first
quarter of 2000 increased $1.62 million to $1.76 million compared to $0.14
million for the first quarter of 1999. Sales and Marketing expenses consisted
primarily of investments in sales and marketing personnel, marketing,
promotion, advertising and related costs. The absolute dollar increases in
sales and marketing expenses were mostly related to expansion of online and
print advertising, public relations and other promotional expenditures as well
as increased sales and marketing personnel and related expenses required to
implement our marketing strategy.
The Company expects sales and marketing expenses to increase significantly
in future periods. These increases will be principally related to increased
spending on advertising in a variety of media to increase brand awareness and
attract additional visitors to the Web site. There can be no assurance that
these increased expenditures will result in increased visitors to our Web site
or additional revenues. Also to a lesser extent, we expect sales and marketing
expenses to increase as a result of increased cost of hiring additional sales
and marketing personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the first quarter of 2000 increased $0.24 million to $0.46 million compared to
$0.22 million for the first quarter of 1999. The absolute dollar increases were
due to investments in web architecture and development costsThe increases were
also attributable to increased salaries,a result of the highly competitive
recruiting market
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consisted primarily of salaries and related costs for executives,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. General and administrative expenses for the first
quarter of 2000 increased approximately $1.05 million to $1.47 million for the
first quarter of 2000 compared to $0.42 million during the same period of 1999.
The increases in absolute dollars were primarily due to increases in personnel
and the increase in fees for professional services. The increased salaries
reflect the highly competitive nature of hiring internet personnel in Northern
California. We expect general and administrative expenses to grow as we hire
additional personnel and incur additional expenses related to the growth of our
business and our operations as a public company.
INTEREST EXPENSE. Net interest expense for the first quarter of 2000
increased approximately $73,800 to $71,700 compared to a net interest income of
$2,100 during the same period of 1999. The increase in net interest was
primarily due to a convertible promissory that was issued on March 31, 1999 and
to amortization of deferred interest related to warrants issued in conjunction
with the convertible promissory note.
17
INCOME TAXES. At December 31, 1999, we had net operating loss carryforwards
available to reduce future taxable income that aggregate approximately $11.20
million for Federal income tax purposes. These benefits expire through 2019.
Pursuant to a "change in ownership" as defined by the provisions of the Tax
Reform Act of 1986, utilization of our net operating loss carryforwards may be
limited if a cumulative change of ownership of more than 50% occurs over a
three-year period. We have not determined if an ownership change has occurred.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had cash and cash equivalents of
approximately $19.27 million, compared to approximately $0.99 million at
December 31, 1999.
Net cash used in operating activities equaled approximately $3.6 million
for the three-month period ended March 31, 2000. Net cash provided by
operating activities equaled approximately $1.04 million for the three-month
period ended March 31, 1999. We had significant negative cash flows from
operating activities for the three month period ended March 31, 2000 primarily
from our net operating losses, adjusted for non-cash items, and increases in
accounts receivable balances due to the time lag between revenue recognition
and the receipt of payments from advertisers and decreases in accounts payable.
These factors were offset by significant increases in accrued expenses.
Net cash used in investing activities was approximately $14,000 and
$192,200 for the three month periods ended March 31, 2000 and 1999,
respectively. Substantially all of the cash used in investing activities for
both periods was primarily related to the purchase of capital equipment in
connection with the build out of our web site and infrastructure.
Net cash provided by financing activities was approximately $21.9 million
and $0.20 million for the three month periods ended March 31, 2000 and 1999,
respectively. Net cash provided by financing activities in 2000 consisted
primarily of net proceeds from the issuance of our common stock. Net cash
provided by financing activities in 1999 consisted of both net proceeds from
issuance of common stock and issuance of a promissory note.
We incurred net losses of approximately $2.8 million and $0.5 million for
the year ended March 31, 2000, and 1999, respectively. At March 31, 2000, we had
an accumulated deficit of approximately $16.1 million. The net losses and
accumulated deficit resulted from the significant operational,
infrastructure and other costs incurred in the development and marketing of our
services and the fact that revenues failed to keep pace with such costs.
As a result of our expansion plans and our expectation that our operating
expenses, especially in the areas of sales and marketing, will continue
to increase significantly, we expect to incur additional losses from
operations for the foreseeable future. To the extent that increases in our
operating expenses precede or are not subsequently followed by commensurate
increases in revenues, or that we are unable to adjust operating expense
levels accordingly, our business, results of operations and financial condition
would be materially and adversely affected. There can be no assurance that
we will ever achieve or sustain profitability or that our operating losses
will not increase in the future.
18
We recently completed a private placement of our common stock. As a
result, we raised approximately $23 million in exchange for approximately 15
million shares of common stock issued to investors. The investors also received
warrants to purchase up to an equal number of shares of common stock
exercisable at an exercise price of $4.00. All of the investors completed
subscription agreements and represented to us that they are accredited
investors, purchasing the shares for their own account.
We currently believe that we have sufficient cash to fund our operations
through December 2000. After that time, we will be required to seek
additional capital to sustain our operations, fund expansion of our
business, to develop new or enhanced services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. We expect to generate a portion of the necessary cash flow
through advertising and hosting revenues, but will also need to obtain capital
through other sources such as equity or debt financing. We are currently
negotiating with prospective investors; however to date, no agreements for
additional financing have been consummated. We cannot assure you that we will
be able to achieve and sustain positive cash flow or profitability or that we
will have other sources available to provide the financial resources necessary
to continue our operations. If we are unsuccessful in generating resources
from one or more of the anticipated sources and are unable to replace any
shortfall with resources from another source, we may be able to extend the
period for which available resources would be adequate by deferring the creation
or satisfaction of various commitments, deferring the expansion or introduction
of various services, and otherwise scaling back operations. If we were unable
to generate the required resources, our ability to meet our obligations and
to continue our operations would be adversely affected.
IMPACT OF THE YEAR 2000
In our previous filings with the Securities and Exchange Commission, we
have discussed the nature and progress of our plans to deal with potential Year
2000 problems. These problems arise from the fact that many currently installed
computer systems and software products were coded to accept or recognize only
two digit entries in the date code field. These systems may recognize a date
using "00" as the year 1900 rather than the year 2000. As a result, computer
systems and/or software used by many companies and governmental agencies needed
to be upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities. Prior to
December 31, 1999, we completed our assessment of all material information
technology and non-information technology systems at our headquarters, as well
as our review of Year 2000 compliance by our key vendors, distributors and
suppliers. To date, we have experienced no significant disruptions in mission
critical information technology and non-information technology systems and we
believe those systems successfully responded to the Year 2000 date changes. We
are not aware of any material problems resulting from Year 2000 issues, either
with our own internal systems or the products and services of third parties. We
will continue to monitor our mission critical computer applications and those of
our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
19
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Our business, financial condition or results of operations
could be materially and adversely affected by any of the following risks.
WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED LOSSES SINCE INCEPTION, AND
EXPECT LOSSES FOR THE FORESEEABLE FUTURE
We were incorporated in October 1997. Accordingly, we have only a limited
operating history upon which you can evaluate our business and prospects. Since
our inception, we have incurred net losses, resulting primarily from costs
related to developing our web site, attracting users to our web site and
establishing the Nettaxi.com brand. At March 31, 2000, we had an accumulated
deficit of $16,105,400. Losses have continued to grow faster than our revenues
during our limited operating history. This trend is reflective of our continued
investments in technology and sales and marketing efforts to grow the business.
Because of our plans to continue to invest heavily in marketing and promotion,
to hire additional employees, and to enhance our web site and operating
infrastructure, we expect to incur significant net losses for the foreseeable
future. We believe these expenditures are necessary to strengthen our brand
recognition, attract more users to our web site and generate greater online
revenues. If our revenue growth is slower than we anticipate or our
operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability. If we do achieve
profitability, we may be unable to sustain or increase profitability on a
quarterly or annual basis.
WE REQUIRE FURTHER CAPITAL TO PURSUE OUR BUSINESS OBJECTIVES
We currently believe that we have sufficient cash to fund our operations
through December 2000. After that time, we will be required to seek
additional capital to sustain our operations. We expect to generate a
portion of the necessary cash flow through advertising and hosting revenues,
but will also need to obtain capital through other sources such as equity or
debt financing. We are currently negotiating with prospective investors;
however to date, no agreements for additional financing have been consummated.
We cannot assure you that we will be able to achieve and sustain positive cash
flow or profitability or that we will have other sources available to provide
the financial resources necessary to continue our operations. Given our
limited resources and our history of losses from operations, we will also need
to raise additional funds in order to fund expansion of our business, to
develop new or enhanced services or products, to respond to competitive
pressures or to acquire complementary products, businesses or
technologies. No assurances can be given, however, that we will be able to
obtain such additional resources. If we are unsuccessful in generating
anticipated resources from one or more of the anticipated sources, and
unable to replace the shortfall with resources from another source, we may
be able to extend the period for which available resources would be adequate by
deferring the creation or satisfaction of various commitments, deferring the
introduction of various services or entry into various markets, and otherwise
scaling back operations. If we are unable to generate the required resources,
our ability to meet our obligations and to continue our operations would be
adversely affected.
20
OUR NEED TO RAISE ADDITIONAL CAPITAL MAY CAUSE OUR STOCKHOLDERS TO EXPERIENCE
SIGNIFICANT DILUTION IN THE FUTURE
It is likely that we will need to raise additional funds in the future in
order to pursue our business objectives. If additional funds are raised through
the issuance of equity or convertible debt securities, the percentage ownership
of our stockholders will be reduced, stockholders may experience additional
dilution and such securities may have rights, preferences and privileges senior
to those of our common stock. This may make an investment in our common stock
less attractive to other investors, thereby weakening the trading market for our
common stock.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES FREQUENTLY ENCOUNTERED BY EARLY
STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS
Due to our limited operating history, we are subject to many of the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets, such as e-commerce. Among other things, we are faced
with the need to establish our credibility with customers, advertising, content
providers, and companies offering e-commerce products and services, and such
parties are often understandably reluctant to do business with companies that
have not had an opportunity to establish a track record of performance and
accountability. For example, our ability to enter into exclusive relationships
to provide content over the Internet will be dependent on our ability to
demonstrate that we can handle high volumes of traffic through our site.
Similarly, early stage companies must devote substantial time and resources to
recruiting qualified senior management and employees at all levels, and must
also make significant investments to establish brand recognition. If we are
unable to overcome some of these obstacles, we may be unable to achieve our
business goals and raise sufficient capital to expand our business.
OUR REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH AND WE
CANNOT ACCURATELY PREDICT OUR FUTURE REVENUES
We had revenues of approximately $2,764,900 and $689,300 for the three
months ended March 31, 2000 and 1999, respectively. While our growth rate
has been strong, it is unlikely that revenue will continue to grow at this
rate in the future and our performance during these periods should not be
taken as being indicative of future trends. Accurate predictions regarding
our revenues in the future are difficult and should be considered in light
of our limited operating history and rapid changes in the ever evolving
Internet market. For example, our ability to generate revenues in the future
is dependent in part on the success of our capital-raising efforts and the
investments that we intend to make in sales and marketing, infrastructure,
and content development. Our revenues for the foreseeable future will
remain primarily dependent on the number of customers that we are able to
attract to our web site, and secondarily on sponsorship and advertising
revenues. We cannot forecast with any degree of certainty the number of
visitors to our web site, the number of visitors who will become customers, or
the amount of sponsorship and advertising revenues. Similarly, we cannot
provide any guarantees regarding the revenues that will be generated from
e-commerce products and services that we intend to make available on our site.
21
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THEREBY INCREASING
THE VOLATILITY OF OUR STOCK PRICE
In addition to the uncertainties regarding the rate of growth of our future
revenues, we anticipate that our operating results will fluctuate significantly
from quarter to quarter. These fluctuations may be due to seasonal and cyclical
patterns that may emerge in Internet e-commerce and advertising spending. For
example, we believe that the use of our web site will be somewhat lower during
periods of the year if the patterns that currently effect traditional media,
such as television and radio where advertising sales are lower during the first
and third calendar quarters because of the summer vacation period and post
winter holiday season slowdown, develop in the Internet industry. It is likely
that similar seasonal patterns will develop in the Internet industry and thus
result in decreasing revenues for us during periods of the year. Quarterly
results may also vary for some of the same reasons and because it is difficult
to predict the long-term revenue growth of our business. If investments in
marketing and content development are delayed, we may experience corresponding
delays in anticipated revenues from such investments, thereby leading to uneven
quarterly results. Because of these factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of investors
in future periods, then our stock price may decline.
FUTURE EXERCISE OF WARRANTS OR ISSUANCES OF SECURITIES MAY SIGNIFICANTLY DILUTE
YOUR HOLDINGS
As of April 30, 2000 warrants to purchase 16,006,624 shares of common stock
issued and outstanding and are exercisable over the next five years.
We filed a registration statement on form S-1 seeking to register the shares
underlying these warrants. Additionally, warrants to purchase 150,000 shares
of common stock issued to the purchasers of our convertible debentures
were outstanding and are exercisable over the next five years at a price
of $7.857, subject to adjustment. In addition, under an agreement with the
purchasers of our convertible debentures, we are required to issue 1,750,000
shares of common stock and five-year warrants to purchase up to 2,200,000
shares of common stock, having an exercise price of $1.50 per share once these
shares have been registered under the Securities Act of 1933. Until these shares
have been registered, the purchasers of our convertible debentures may
continue to convert the outstanding principal balance, including interest
accrued, of the debenture into shares of common stock using the fixed
conversion price of $1.42. As of April 30, 2000 conversion of the entire
principal amount of the convertible debentures and accrued interest thereon,
would yield 1,781,690 shares of common stock. Any shares issued upon such
conversions will be subtracted from the 1.75 million shares to be issued
under the agreement. If the holders of our outstanding warrants and other
convertible securities were to exercise their rights, purchasers of our
common stock could experience substantial dilution of their investment.
22
OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT
SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE
We plan to pursue aggressive marketing campaigns online and in traditional
media to promote the Nettaxi.com brand and attract an increasing number of
visitors to our web site. We believe that maintaining and strengthening the
Nettaxi.com brand will be critical to the success of our business. This
investment in increased marketing carries with it significant risks, including
the following:
- Our advertisements may not properly convey the Nettaxi.com brand
image, or may even detract from our image. Advertising in print and
broadcast media is expensive and is often typically difficult to modify
quickly in order to take into account feedback that may indicate that we
have failed to convey the optimal message. If our advertisements fail to
positively promote our brand and image, the damage to our business may be
long-lasting and costly to repair.
- Even if we succeed in creating the right messages for our promotional
campaigns, these advertisements may fail to attract new visitors to our web site
at levels commensurate with their costs. We may fail to choose the optimal mix
of television, radio, print and other media to cost effectively deliver our
message. Moreover, if these efforts are unsuccessful, we will face difficult and
costly choices in deciding whether and how to redirect our marketing dollars.
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT
SPONSORSHIP AND ADVERTISING REVENUES
To date, we have relied principally on outside advertising agencies to
develop sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal sales organization. Our internal sales team
currently has nine members. We will need to substantially increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected by our inability to attract sponsorship and
advertising revenues.
WE RELY HEAVILY ON THIRD PARTIES FOR DEVELOPMENT OF SOFTWARE AND CONTENT AND FOR
ESSENTIAL BUSINESS OPERATIONS AND MAY BE ADVERSELY AFFECTED BY OUR FAILURE TO
MAINTAIN SATISFACTORY RELATIONSHIPS WITH SUCH PARTIES
We depend on third parties for important aspects of our business,
including Internet access, the development of software for new web site
features, content, and telecommunications.
We have limited control over these third parties, and we are not their only
client. We may not be able to maintain satisfactory relationships with any of
them on acceptable commercial terms, and there is no guarantee that we will be
able to renew these agreements at all. Further, we cannot be sure that the
quality of products and services that they provide may remain at the levels
needed to enable us to conduct our business effectively.
23
WE ARE HEAVILY RELIANT ON THIRD PARTIES TO HOUSE AND SERVICE OUR WEB SITE AND
ARE VULNERABLE TO POSSIBLE DAMAGE TO OUR OPERATING SYSTEMS
We maintain substantially all of our computer systems at our Campbell,
California site and the Santa Clara, California site of Exodus Communications.
We are heavily reliant on the ability of Exodus to house and service our web
site. This system's continuing and uninterrupted performance is critical to our
success. Growth in the number of users accessing our web site may strain its
capacity, and we rely on Exodus to upgrade our system's capacity in the face of
this growth. Exodus also provides our connection to the Internet. Sustained or
repeated system failures or interruptions of our web site connection services
would reduce the attractiveness of our web site to customers and advertisers,
and could therefore have a material and adverse effect on our business due to
loss of membership and advertising revenues.
In 1999 and 1998, we experienced several interruptions and degradations of
service as a result of our third party service provider's inability to deliver
the contractual bandwidth required to handle our traffic volume. These
interruptions result in decreased web usage volume and therefore impact our
ability to serve advertising impressions for our customers. These interruptions
can materially impact our revenues. We estimate that during 1998 we lost
approximately $35,000 in revenue because of this, and during 1999 we lost an
additional $35,000 in revenues.
In addition, our operations are dependent in part on our ability to protect
our operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins or other similar events.
Furthermore, our servers are vulnerable to computer viruses, break-ins and
similar disruptive problems. The occurrence of any of these events could result
in interruptions, delays or cessations in service to our users and result in a
decrease in the number of visitors to our site. Our insurance policies
may not adequately compensate us for any losses that may occur due to any
failures or interruptions in our systems.
WE PLAN TO GROW RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT
Our business plan contemplates a period of significant expansion. In order
to execute our business plan, we must grow significantly. This growth
will strain our personnel, management systems and resources. To manage our
growth, we must implement operational and financial systems and controls and
recruit, train and manage new employees. These individuals have had little
experience working with our management team. We cannot be sure that we will
be able to integrate new executives and other employees into our organization
effectively. In addition, there will be significant administrative burdens
placed on our management team as a result of our status as a public company. If
we do not manage growth effectively, we will not be able to achieve our
financial and business goals.
24
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Robert A. Rositano, Jr., our Chief Executive Officer, and Dean Rositano, our
Chief Operating Officer. The loss of the services of any of our executive
officers could materially and adversely affect our business due to their
experience with our business plan and the disruption in the conduct of our
day-to-day operations. Additionally, we believe we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future.
OUR PROJECTED E-COMMERCE SERVICES MAY NOT BE LAUNCHED ON A TIMELY BASIS AND MAY
NOT GENERATE THE ANTICIPATED LEVEL OF REVENUES
Our strategic growth plan calls for development and implementation of
e-commerce tools for our citizens. The availability of many of these tools is
dependent on our ability to enter into satisfactory contractual relationships
with parties offering e-commerce related products and services which can be
made available to our subscribers, as well as relationships with parties
seeking to make online sales to our subscribers and other visitors to our
site. To date, our revenues from e-commerce services have not been material,
and we have yet to launch a number of the services that we hope to provide to
our citizens and visitors to the our site. We may not be able to commence those
services on a timely basis, and there is no assurance that the services will
generate the anticipated amount of revenues.
INTENSE COMPETITION FROM OTHER INTERNET-BASED BUSINESSES MAY REDUCE OUR MARGINS
AND MARKET SHARE AND CAUSE OUR STOCK PRICE TO DECLINE
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software.
Competition could result in price reductions for our products and services,
reduced margins or loss of market share. Consolidation within the online
commerce industry may also increase competition.
We currently or potentially compete with a number of other companies
including a number of large online communities and services that have expertise
in developing online commerce, and a number of other small services, including
those that serve specialty markets. Many of our potential competitors have
longer operating histories, larger customer bases, greater brand recognition in
other business and Internet markets and significantly greater financial,
marketing, technical and other resources than us.
25
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES
We intend to establish numerous strategic relationships with popular web
sites to increase the number of visitors to our web site. There is intense
competition for placements on these sites, and we may not be able to enter into
these relationships on commercially reasonable terms or at all. Even if we enter
into relationships with other web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships and expand our existing ones could have a material and adverse
effect on our business due to our inability to increase the number of users of
our site.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE
To be successful, we must adapt to rapidly changing Internet technologies
and continually enhance the features and services provided on our web site. We
could incur substantial, unanticipated costs if we need to modify our web site,
software and infrastructure to incorporate new technologies demanded by our
audience. We may use new technologies ineffectively or we may fail to adapt our
web site, transaction-processing systems and network infrastructure to user
requirements or emerging industry standards. If we fail to keep pace with the
technological demands of our web-savvy audience for new services, products and
enhancements, our users may not use our web site and instead use those of our
competitors.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
PROPRIETARY RIGHTS
Our Nettaxi.com brand and our web address, www.nettaxi.com, are critical to
our success. We have filed a trademark application for "Nettaxi", among other
trademark applications. We cannot guarantee that any of these trademark
applications will be granted. In addition, we may not be able to prevent third
parties from acquiring web addresses that are confusingly similar to our
addresses, which could harm our business. Also, while we have entered into
confidentiality agreements with our employees, contractors and suppliers in
order to safeguard our trade secrets and other proprietary information, there
can be no assurance that technology will not be misappropriated or that others
may lawfully develop similar technologies.
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD PARTY SYSTEMS ARE NOT YEAR 2000-COMPLIANT
We have not devised a Year 2000 contingency plan. Although we did not
experience any Year 2000-related problems on January 1, 2000, and have not
experienced any such problems to date, the failure of our internal systems, or
any material third party systems, to be Year 2000-compliant could have a
material and adverse effect on our business, results of operations and financial
condition if the compliance problems significantly impair access to and use of
our web site.
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In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions has
been a successful strategy used by other Internet companies. We do not have any
present understanding relating to any such acquisition or investment. If we were
to buy a content, service or technology company, the amount of time and level of
resources required to successfully integrate their business operation could be
substantial. The challenges in assimilating their people and organizational
structure, and in encountering potential unforeseen technical issues in
integrating their content, service or technology into ours, could cause
significant delays in executing other key areas of our business plan. This
could include delays in integrating other content, services or technology into
our communities, or moving forward on other business development relationships,
as management and employees, both of which are time constrained, may be
distracted. In addition, the key personnel of the acquired company may decide
not to work for us, which could result in the loss of key technical or business
knowledge to us. Furthermore, in making an acquisition, we may have to incur
debt or issue equity securities to finance the acquisition, the issuance of
which could be dilutive to our existing shareholders.
WE ARE VULNERABLE TO ADDITIONAL TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE
COMMERCE TRANSACTIONS
We do not expect to collect sales or other similar taxes in respect of
transactions engaged in by customers on our web site. However, various states
or foreign countries may seek to impose sales tax obligations on us and other
e-commerce and direct marketing companies. A number of proposals have been made
at the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce and cause purchasing through our
web site to be less attractive to customers as compared to traditional retail
purchasing. The United States Congress has passed legislation limiting for three
years the ability of the states to impose taxes on Internet-based transactions.
Failure to renew this legislation could result in the imposition by various
states of taxes on e-commerce. Further, states have attempted to impose sales
taxes on catalog sales from businesses such as ours. A successful assertion by
one or more states that we should have collected or be collecting sales taxes on
the sale of products could have a material and adverse effect on our business
due to the imposition of fines or penalties or the requirement that we pay for
the uncollected taxes.
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WE MAY NOT BE ABLE TO TAKE FULL ADVANTAGE OF POTENTIAL TAX BENEFITS FROM OUR NET
OPERATING LOSS CARRYFORWARDS
At December 31, 1999 we had net operating loss carryforwards available to
reduce future taxable income that aggregated approximately $11,200,000
for Federal income tax purposes. These benefits expire through 2019. Pursuant
to a "change in ownership" as defined by the provisions of the Tax Reform
Act of 1986, utilization of our net operating loss carryforwards may be
limited, if a cumulative change of ownership of more than 50% occurs within a
three-year period. We have not determined if an ownership change has occurred.
If it has, we may not be able to take full advantage of potential tax
benefits from our net operating loss carry forwards.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business is highly dependant
on the growth of the internet industry and would be adversely affected if web
usage and e-commerce does not continue to grow. Internet usage may be inhibited
for a number of reasons, including inadequate Internet infrastructure,
security concerns, inconsistent quality of service, the unavailability of
cost-effective, high-speed service, the imposition of transactional taxes,
or the limitation of third party service provider's ability and willingness
to invest in new or updated equipment to handle traffic volume.
If web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. We are highly dependant on third party service providers. Any
interruption experienced by these service providers may have a material impact
on our business due to our inability to serve our advertising customers or end
users. In addition, web sites, including ours, have experienced a variety of
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, web usage, including usage of our web site,
could grow slowly or decline. This may have a material impact on future
revenues.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH
IS UNCERTAIN
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Internet as an effective medium of commerce by
consumers. Rapid growth in the use of the Internet and commercial online
services is a recent phenomenon. Demand for recently introduced services and
products over the Internet and online services is subject to a high level of
uncertainty. The development of the Internet and online services as a viable
commercial marketplace is subject to a number of factors. For example,
e-commerce is at an early stage and buyers may be unwilling to shift their
purchasing from traditional vendors to online vendors, there may be insufficient
availability of telecommunication services or changes in telecommunication
services could result in slower response times and adverse publicity and
consumer concerns about the security of commerce transactions on the Internet
could discourage its acceptance and growth.
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ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Also,
technological developments could slow the growth of sponsorships and advertising
on the Internet. For example, widespread use of filter software programs that
limit access to advertising on our web site from the Internet user's browser
could reduce advertising on the Internet. Our business, financial condition and
operating results would be adversely affected if the market for Internet
advertising fails to further develop due to the loss of anticipated revenues.
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF E-COMMERCE AND WEB
ADVERTISING AND SUBJECT US TO LIABILITY
The need to securely transmit confidential information, such as credit card
and other personal information, over the Internet has been a significant barrier
to e-commerce and communications over the Internet. Any well-publicized
compromise of security could deter more people from using the Internet or from
using it to conduct transactions that involve transmitting confidential
information, such as purchases of goods or services. Furthermore, decreased
traffic and e-commerce sales as a result of general security concerns could
cause advertisers to reduce their amount of online spending. To the
extent that our activities or the activities of third party contractors
involve the storage and transmission of proprietary information, such as
credit card numbers, security breaches could disrupt our business, damage our
reputation and expose us to a risk of loss or litigation and possible
liability. We could be liable for claims based on unauthorized purchases
with credit card information, impersonation or other similar fraud claims.
Claims could also be based on other misuses of personal information, such as for
unauthorized marketing purposes. We may need to spend a great deal of money
and use other resources to protect against the threat of security breaches or
to alleviate problems caused by security breaches.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEB SITE
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or based on other theories relating to the information we
publish on our web site. These types of claims have been brought, sometimes
successfully, against Internet companies as well as print publications in the
past. Based on links we provide to other web sites, we could also be subjected
to claims based upon online content we do not control that is accessible from
our web site. Claims may also be based on statements made and actions taken as
a result of participation in our chat rooms or as a result of materials posted
by members on bulletin boards at our web site. We also offer e-mail services,
which may subject us to potential risks, such as liabilities or claims resulting
from unsolicited e-mail, lost or misdirected messages, illegal or fraudulent
use of e-mail, or interruptions or delays in e-mail service. These claims could
result in substantial costs and a diversion of our management's attention and
resources.
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Efforts to regulate or eliminate the use of mechanisms which automatically
collect information on users of our web site may interfere with our ability to
target our marketing efforts and tailor our web site offerings to the tastes of
our users.
Web sites typically place a tracking program on a user's hard drive without
the user's knowledge or consent. These programs automatically collect data on
anyone visiting a web site. Web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from users'
Internet activity. Most currently available web browsers allow users to elect to
remove these mechanisms at any time or to prevent such information from being
stored on their hard drive. In addition, some commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of these
tracking mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could have a material and adverse effect on our
business, results of operations and financial condition due to increased costs
of doing business. Laws and regulations directly applicable to Internet
communications, commerce and advertising are becoming more prevalent. The law
governing the Internet, however, remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws governing intellectual property, copyright, privacy,
obscenity, libel and taxation apply to the Internet. In addition, the growth and
development of e-commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad. We also may be subject
to future regulation not specifically related to the Internet, including laws
affecting direct marketers.
WE COULD INCUR MONETARY DAMAGES FROM LITIGATION ARISING OUT OF OUR BUSINESS
ACTIVITIES
On July 9, 1999, we were named as one of several defendants in a lawsuit
filed by four disaffected shareholders in Simply Interactive, Inc. The lawsuit
arises out of a series of events relating to certain assets our operating
company, Nettaxi Online Communities, purchased from SSN Properties in October
1997. The complaint alleges that we owed, and either intentionally or
negligently breached, fiduciary duties to the plaintiffs. The suit also claims
that we either intentionally or negligently interfered with the plaintiffs'
contract or prospective advantage. While our officers and directors believe
that the suit is without merit, we cannot provide you with any assurances that
we will prevail in this dispute. If the plaintiffs successfully prosecute any
of their claims against us, the resulting monetary damages and reduction in our
working capital could significantly harm our business. For more information
please see the section of this prospectus called "Legal Proceedings".
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SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
As of April 30, 2000, 7,561,808 shares of our common stock were
immediately eligible for sale in the public market without restriction or
further restriction under the Securities Act of 1933, unless purchased by or
issued to any "affiliate" of ours, as that term is defined in Rule 144
promulgated under that Act. Additionally, we have filed a registration
statement on Form S-8 (File No. 333-32678) to register 6,300,000 of the shares
of common stock issuable upon exercise of options granted or to be granted
under our 1998 and 1999 stock option plans. As a result, shares issued upon
exercise of stock options, including options for 1,170,704 shares that were
exercisable as of April 30, 2000, are eligible for resale in the public market
without restriction. Additionally, we intend to file a registration statement on
Form S-8 to register the additional 5,600,000 shares of common stock under our
1999 Stock Option Plan, as amended. We have also filed a registration statement
on form S-1 seeking to register 32,730,949 shares issued and issuable pursuant
to recent private placement transactions. As of April 30, 2000 approximately 14
million shares of common stock were eligible for sale under Rule 144 and as of
May 8, 2000 an additional 7 million shares became eligible for sale under Rule
144. If our stockholders sell substantial amounts of our common stock under Rule
144 or pursuant to the aforementioned registration statement, the market price
of our common stock could be adversely affected and our ability to raise
additional capital at that time through the sale of our securities could be
impaired.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION OF US DIFFICULT
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. In addition, our
articles of incorporation provide that our board of directors may issue
preferred stock in one or more series. Our board of directors can fix the
price, rights, preferences, privileges and restrictions of the preferred stock
without any further vote or action by our stockholders. If our board of
directors issues preferred stock, potential acquirers may not make acquisition
bids for us, our stock price may fall and the voting rights of existing
stockholders may diminish as a result.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET
COMPANIES
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last 52 weeks and
have reflected valuations substantially above historical levels. During the
same period, these companies' stocks have also been highly volatile and have
recorded lows well below historical highs. We cannot assure you that our stock
will trade at the same levels of other Internet stocks or that Internet stocks
in general will sustain their current market prices.
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Factors that could cause such volatility may include, among other things
actual or anticipated fluctuations in our quarterly operating results,
announcements of technological innovations, conditions or trends in the Internet
industry, and changes in the market valuations of other Internet companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We could be exposed to market risk related to any and all of our debt
obligations for financing working capital and capital equipment requirements in
the future. Historically we have financed such requirements from the issuance
of both preferred and common stock. In addition, we have augmented our equity
financing activities via the issuance of convertible debt financing. We
continue to consider financing alternatives, which may include the incurrence of
long-term indebtedness. Actual capital requirements may vary based upon the
timing and success of the expansion of our operations. We believe that based on
the terms and maturities of any future debt obligations that the market risk
would be minimal. We currently do not have any material market rate risks.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Please refer to our previous disclosures on our Form 8-K filed on May 8,
2000 for a description of certain matters related to convertible debentures held
by RGC International Investors, LDC.
From time to time, we are involved in legal proceedings incidental to our
business. We believe that these pending actions, individually and in the
aggregate, will not have a material adverse effect on our financial condition,
and that adequate provision has been made for the resolution of such actions and
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(1) From January to April, 2000 the Company under its 1999 Stock
Option Plan issued options to purchase up to 3,257,200 shares of common
stock to members of its board of directors who were not employees of the
Company, 3 officers, and 33 employees and 7 consultant with exercise prices
ranging from $2.44 per share, which was not less than the fair market value of
the shares on the date of grant. The issuances were made in reliance on
Section 4(2) of the Securities Act of and was made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate the investments,
and who represented to the Company that the shares were being acquired for
investment.
32
(2) In February 2000 we issued 175,000 shares of common stock to
Sinclair Davis Trading Corp. in exchange for consulting services. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and was made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate these investments,
and who represented to the Company that the shares were being acquired for
investment.
(3) In February 2000 we issued 15,367,133 shares of common stock and
warrants to purchase up to 15,367,133 shares of common stock in exchange
for approximately $23 million. The issuances were made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
(4) In February 2000 we issued 6,250 shares of common stock to PPC
Racing pursuant to a letter of intent agreement. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(5) In March and April, 2000 we issued 778,982 shares of common stock
and warrants to purchase up to 389,491 shares of common stock to consultants in
exchange for the conversion of approximately $1.6 million in debt owed to the
consultants. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant
information necessary to evaluate these investments, and who represented
to the Company that the shares were being acquired for investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Please refer to our previous disclosures on our Form 8-K filed on May 8,
2000 for a description of certain matters related to convertible debentures
held by RGC International Investors, LDC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 14, 2000, we solicited the consent of our stockholders to an
increase in the number of authorized shares of common stock to 200,000,000. We
received consents from holders of a majority of the then-outstanding shares of
common stock and the amendment to our Articles of Incorporation became effective
on May 8, 2000. The number of votes cast for the amendment was 21,620,209. The
number of votes cast against the amendment was 518,885. The number of shares
abstaining from voting was 26,675.
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ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description of Exhibit
- --------------- ------------------------
3.5 Certificate of Amendment of Articles of Incorporation of
the Company. (Incorporated by reference to the Company's
Registration Statement on Form S-1 as filed with as of
May 12, 2000)
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
We did file reports on Form 8-K on April 20, 2000 and May 8,2000 which included
a decription of certain matter related to convertible debentures held by RGC
International Investors, LDC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETTAXI.COM
Date: May 15, 2000 By: /s/ Dean Rositano
-------------------
Dean Rositano,
President and
Interim Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description of Exhibit
- --------------- ------------------------
3.5 Certificate of Amendment of Articles of Incorporation of the Company.
(Incorporated by reference to the Company's Registration Statement on
Form S-1 as filed with as of May 12, 2000)
27.1 Financial Data Schedule
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