UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________
Commission file number: 0-26975
PREFERENCE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 88-0417949
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
333 NORTH RANCHO DRIVE, SUITE 810
LAS VEGAS, NEVADA 89106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 648-6400
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:
Indicate the numbers of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
At September 30, 2000, there were 28,812,308 shares of the Registrant's $.001
Par Value Common Stock outstanding.
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREFERENCE TECHNOLOGIES, INC.
BALANCE SHEET
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
--------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 3,300 $ 32,791
Accounts receivable, net of allowance
for doubtful accounts of $1,200 and nil, respectively 13,160 -----
Notes receivable - employees 16,439 14,700
Prepaid expenses 52,667 -----
--------------- ---------------
Total current assets 85,566 47,491
Furniture & equipment, net 765,706 637,276
Other assets 51,717 67,756
--------------- ---------------
TOTAL ASSETS $ 902,989 $ 752,523
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Book overdraft $ 288,750 $ 0
Accounts payable 1,058,391 770,912
Accrued expenses 33,600 0
Accrued interest 29,357 0
Notes payable-MDC, related party 45,000 0
Notes payable-senior secured convertible promissory note1,000,000 0
Notes payable-employees 200,0000
Notes payable-advance 500,000 0
Customer deposits 10,193 0
Deferred income 662,917 0
--------------- ---------------
TOTAL CURRENT LIABILITIES 3,828,208 770,912
LONG TERM LIABILITIES
Accrued expenses 33,758 0
--------------- ---------------
TOTAL LIABILITIES 3,861,966 770,912
STOCKHOLDERS' DEFICIT
Common Stock @ $.001 par value
Authorized 200,000,000 shares
Issued and outstanding
28,812,308 and 26,413,052 shares, respectively 28,812 26,413
Additional paid-in capital 34,927,014 8,315,941
Accumulated deficit (37,914,803) (8,360,743)
--------------- ---------------
Total stockholders' deficit (2,958,977) (18,389)
--------------- ---------------
Total liabilities and stockholders' deficit $ 902,989 $ 752,523
=============== ===============
The accompanying notes are an integral part of these financial statements.
2
PREFERENCE TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
For the Three Months Ended February 3, 1999 Nine months
------------------------------ (Inception) to Ended
September 30 September 30 September 30 September 30
1999 2000 1999 2000
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues $ 0 $ 216,390 $ 0 $ 221,488
Cost of Sales 0 28,669 0 28,669
-------------- -------------- -------------- --------------
Gross Profit 0 187,721 0 192,819
Selling, General and Admin. Exp 2,552,652 2,577,878 4,496,318 9,270,705
-------------- -------------- -------------- --------------
Loss from Operations (2,552,652) (2,390,157) (4,496,318) (9,077,886)
Other Income & Expense
Misc. Income 660 203 660 440
Interest Income 8,292 249 17,557 20,369
Forgiveness of Debt 0 0 81,822 0
Interest Expense 0 (32,790) 0 (32,790)
Financing Expense 0 (20,464,193) (1,557,335) (20,464,193)
-------------- -------------- -------------- --------------
Total Other Income 8,952 (20,496,531) (1,457,296) (20,476,174)
-------------- -------------- -------------- --------------
Net Loss ($2,543,700) ($22,886,688) ($5,953,614) ($29,554,060)
============== ============== ============== ==============
Basic Loss per share ($0.10) ($0.80) ($0.24) ($1.05)
Diluted Loss per share ($0.10) ($0.80) ($0.24) ($1.05)
Weighted- Average Shares Outstanding 25,466,656 28,729,278 25,226,236 28,247,498
The accompanying notes are an integral part of these financial statements.
3
PREFERENCE TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM
FOR THE FEBRUARY 3, 1999
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------- ---------------------
Cash flows from operating activities: (unaudited) (unaudited)
Net loss $ (29,554,060) $ (5,953,614)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 258,524 126,699
Common stock issued for services rendered 6,000 100,000
Finance expense for penalty for non-
registration of securities 45,000 0
Financing expense from the issuance of
600,000 warrants 450,000 0
Financing expense resulting from conversion feature
of employee loans 1,674,000 0
Financing expense resulting from conversion feature
of Senior secured promissory notes 18,295,193 0
Financing expense recognized from issuing
below market warrants ----- 693,000
Compensation expense for issuing below
market options 745,963 455,115
Financing expense recognized for issuing below
market stock options ----- 864,335
Common stock issued for employee settlement 69,219 -----
(Increase) decrease in
Accounts receivable (13,160) -----
Notes receivable - employee (1,739) (32,800)
Prepaid expenses (52,667) (28,564)
Prepaid Services ----- (56,922)
Other assets 16,040 (67,756)
Increase (decrease) in
Accounts payable 287,479 742,961
Accrued interest 29,357 0
Accrued expenses 67,358 0
Customer Deposits 10,193 0
Deferred income 662,917 0
Net cash used in operating activities (7,004,383) (3,157,546)
-------------------- ---------------------
4
Cash flows from investing activities:
Purchase of furniture and equipment (386,954) (359,407)
-------------------- ---------------------
Net cash used in investing activities: (386,954) (359,407)
-------------------- ---------------------
Cash flows from financing activities:
Bank overdraft 288,750 0
Proceeds from issuance of common stock,
net of offering costs 68,000 1,057,298
Proceeds from private placement of
common stock 6,060,643 3,200,000
Offering costs (800,547) (300,000)
---------------------
Proceeds from notes payable
MDC-related party 45,000 0
Senior secured promissory notes 1,000,000 0
Employees 200,000 0
Advances 500,000 0
Net cash flows provided by financing activities 7,361,846 3,957,298
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents (29,491) 440,345
Cash and cash equivalents, beginning of period 32,791
-------------------- ---------------------
Cash and cash equivalents, end of the period $ 3,300 $ 440,345
==================== =====================
The accompanying notes are an integral part of these financial statements.
5
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (unaudited)
================================================================================
NOTE 1- GENERAL
The accompanying financial statements and footnotes have been condensed and
therefore do not contain all disclosures required by generally accepted
accounting principles. The interim financial data are unaudited; however,
in the opinion of Preference Technologies, Inc. (the "Company"), the
interim data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of results for the interim
period. Results for the interim periods are not necessarily indicative of
those to be expected for the full year.
NOTE 2 - DESCRIPTION OF BUSINESS
Preference Technologies, Inc. (the "Company") was incorporated in Nevada in
February 1999 under its former name StockUp.com, Inc. Effective February
23, 2000, StockUp.com, Inc. officially changed its name to Preference
Technologies, Inc.
The Company is developing second-generation Internet technology(TM)
products that will be licensed to other websites and distributed to
end-users. The Company's products offer the end user increased levels of
customization and interactivity. Websites deploying the technology will
benefit from increased traffic, enhanced user retention, and the ability to
build targeted aggregate marketing profiles of users.
Courtleigh Capital, Inc. ("Courtleigh"), a Kansas corporation and a
publicly traded corporation, was first incorporated under the name ANCR,
Inc. on July 30, 1985 under the laws of the State of Colorado. ANCR, Inc.
became an inactive shell corporation, and on July 23, 1997 changed its name
to CEA Lab, Inc. Furthermore, on October 16, 1995, CEA Lab, Inc.
reincorporated in the State of Kansas and subsequently changed its name to
Courtleigh Capital, Inc. In February 1999, Courtleigh subsequently changed
its name to StockUp.com, Inc. and reincorporated in the State of Nevada.
On December 30, 1998, Marketing Direct Concepts, Inc. ("MDC"), a Nevada
corporation, entered into an Asset Purchase and Escrow Agreement, whereby
it sold assets and liabilities, valued at $368,178, to the Company in
exchange for 18,000,000 shares of Courtleigh's common stock.
Courtleigh had minimal assets and liabilities at the date of the
acquisition and did not have operations prior to the acquisition.
Therefore, no pro forma information is presented.
6
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (unaudited)
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
-----------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles that contemplate continuation of
the Company as a going concern. Negative cash flows from operations during
the nine months ended September 30, 2000 and the period from February 3,
1999 (inception) to September 30, 1999 were $7,004,383 and $3,157,546
respectively. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the Company's
development program and its transition to the attainment of profitable
operations is dependent upon the Company achieving a level of sales
adequate to support the Company's cost structure. In addition, realization
of a major portion of the assets in the accompanying balance sheet is
dependent upon the Company's ability to meet its financing requirements and
the success of its plans to sell products. The financial statements do not
include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
In addition to the capital raised as of September 30, 2000 through private
equity offerings, the Company is currently negotiating with certain
investors about raising additional capital through private placement
offerings. Unless the Company raises the additional funds, either by debt
or equity issuances, management believes that its current cash on hand will
be insufficient to cover its working capital needs until the Company's
sales volume reaches a sufficient level to cover operating expenses.
The information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis and financial statements and
notes thereto included in Preferences Technologies, Inc.'s Form 10-K.
Related Party Transactions
----------------------------
The July 14, 2000 loan for $45,000 was secured from MDC Company which is
wholly owned by Michael Calderone, then CEO and Majority shareholder of
Preference Technologies, Inc. See NOTE 11.
The foregoing transaction was approved by the Company's Board of Directors
and are no less favorable than could be obtained from un affiliated third
parties.
7
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (unaudited)
================================================================================
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising costs for
the three months and nine months ended September 30, 2000 were ($5,177) and
$432,733 respectively. A credit was received during the third quarter of
2000. For the three months ended September 30, 1999 and for the period from
February 3, 1999 (inception) to September 30, 1999 advertising costs were
$824,750 and $938,771 respectively.
Net Loss per Share
---------------------
For the periods, the Company adopted SFAS No. 128, "Earnings per Share."
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share except
that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common
shares had been issued and if the additional common shares were dilutive.
For the periods from February 3, 1999 (inception) to September 30, 1999 and
the nine months ended September 30, 2000, the Company incurred a net loss.
Basic and diluted loss per share is the same.
Stock Split
------------
On February 23, 2000, the Company effected a two-for-one stock split of its
common stock. All share and per share data have been retroactively restated
to reflect this stock split.
Concentrations of Credit Risk
--------------------------------
The financial instrument which potentially subjects the Company to
concentrations of credit risk is cash. The Company places its cash with
high quality financial institutions, and at times it may exceed the Federal
Deposit Insurance Corporation $100,000 insurance limit. As of September 30,
2000, there were no uninsured portions held at the financial institutions.
Revenue Recognition
--------------------
Revenue from the sale of CD's and setup fees are recognized as shipments
occur. Revenues from advertising, internet service providers and "opt-ins"
are recognized per the individual controlling contract, which stipulates
the detail and frequency of the billing procedure. Licensing fees (under
contract) are recognized over the period of time covered by the contract.
NOTE 4 - STOCKHOLDERS EQUITY
On July 10, 2000 one shareholder was issued 30,000 shares resulting from a
penalty for non-registration of securities. No funds were involved with the
issuance of these shares.
During August, the Company issued share of 23,334 and 40,000 as a result of
share price miscalculations of the initial shares distributed. No funds
were involved with the issuance of these shares.
As part of the contract with E. J. Conner, Jr., the interim CFO, he is to
receive 3,000 shares per month during his service. During the period from
July 1, 2000 to September 30, 2000, 6,000 shares were issued resulting from
this contract. As of November 14, 2000, Mr. Conner has completed all the
terms and conditions of his interim CFO agreement with Preference
Technologies, Inc. The Company is continuing its search for a permanent
CFO.
8
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (unaudited)
================================================================================
As of December 31, 1999, the number of shares of common stock outstanding
totaled 26,413,052. As of the September 30, 2000, common stock shares
outstanding totaled 28,812,308.
NOTE 5 - NOTES PAYABLE-RELATED PARTY
On July 14, 2000 the Company secured a $45,000 loan from MDC for working
capital purposes. This is a demand note and carries an interest rate of 8%
per annum. There are no security or escrow agreements associated with the
Note nor does the note include any agreements regarding common stock
purchase, registration rights or UCC arrangements.
NOTE 6 - NOTES PAYABLE-SENIOR CONVERTIBLE SECURED PROMISSORY NOTES
On August 1, 2000, the Company secured a Senior Secured Convertible
Promissory Note for $500,000 from Wall & Broad Securities. This is part of
a $3,500,000 Convertible Note currently being negotiated. It is anticipated
that the Convertible Note will be rolled over into a potential permanent
equity arrangement via a private placement offering. This Note bears an
interest rate of 12% per annum, secured by the business and intellectual
property of the Company (convertible into shares of the company equaling
25% of the fully diluted total shares of the company, upon default, at the
Lenders option). The Notes matures on September 30, 2000. The Note also
carries two 45 day extensions as is included within a Credit Agreement
dated August 1, 2000. The Note is in default as conditions have not been
met to secure the initial 45 day extension.
On August 1, 2000, the Company secured a Senior Secured Convertible
Promissory Note for $500,000 from Harglen Financial Limited. This is also
part of the $3,500,000 Convertible Note currently being negotiated, noted
in the preceding paragraph. It is anticipated that the Convertible Note
will be rolled over into a potential permanent equity arrangement via a
private placement offering. This Note bears an interest rate of 12% per
annum, secured by the business and intellectual property of the Company
(convertible into shares of the company equaling 25% of the fully diluted
total shares of the company, upon default, at the Lenders option). The
Notes matures on September 30, 2000. The Note also carries two 45 day
extensions as is included within a Credit Agreement dated August 1, 2000.
The Note is in default as conditions have not been met to secure the
initial 45 day extension.
On August 1, 2000, the Company entered into a CREDIT AGREEMENT under which
two $500,00 Secured Promissory Notes were negotiated. Principal items
within that CREDIT AGREEMENT are:
Obligations of Michael Calderone
-----------------------------------
This agreement calls for the delivery to the company of 6,000,000 shares of
common stock owned by Michael Calderone, to be held in escrow. The shares
are to be canceled and included as authorized but unissued upon the receipt
of $7,500,000 of Equity Funds at a price of $1.00 per share of Series A
Preferred Stock. This Preferred stock is convertible, one for one, into
common stock on or before to December 31, 2000. If the $7,500,00 is not
received then the shares will be returned to Michael Calderone. The voting
rights of which are not removed from Michael Calderone while it is in
escrow.
The agreement also call for the delivery of 1,500,000 additional share of
common stock owned by Michael Calderone. These shares are to held in escrow
to be issued as needed to holders of warrants and other options to purchase
or other purchasers of common stock of the company. If PREFERENCE
TECHNOLOGIES, INC. (formerly STOCKUP.COM, INC.) NOTES TO FINANCIAL
STATEMENTS September 30, 2000 (unaudited) any such shares are not issued by
9
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (unaudited)
================================================================================
the company by December 31, 2002, then such shares shall be returned to
Michael Calderone. Michael Calderone shall exercise the voting rights of
such shares lesser of $1.50 per share for each share issued or the value of
the closing bid price on the date of grant.
Michael Calderone's options to buy stock has been reduced to the following:
1) the right to purchase 500,000 currently at a price of $1.10 per share
and 2) the right to purchase 1,100,000 additional options at $1.10 per
share providing that the company meets or exceeds its pre-tax earnings
projections. Should this not occur, then the number of options reduces to
1,000,000 and is further reduced by the ratio of actual earnings for the
calendar period 2000-2002 to projections for that same period.
Right to Purchase
-------------------
Any current lender or and other lender introduced by any current lender
shall have the right to purchase up to $7,500,000 of Series A Preferred
Stock or other preferred securities of the company at a price of $.40 per
share and purchase Convertible Notes (convertible into common stock on a
one to one basis) at a price $.40 per share. If the investor group does not
sell a minimum of $3,500,000 of the Company's securities, the investor
group shall have the right to exercise option at any time from January
1,2001 to January 30, 2001.
Modification of Existing Warrants to Investors
---------------------------------------------------
The Company agreed to extend the first date on which such warrant or option
may be exercised to no earlier than a date six months after the shares of
common stock underlying such option or warrant become freely tradable
without restriction under the securities Act of 1933 as amended.
Lockup
------
Michael Calderone agrees not to dispose or in any way encumber any of the
shares beneficially held until August 1, 2002.
Also entered into on August 1, 2000:
WARRANT AGREEMENT
As part of the overall CREDIT AGREEMENT, the Company issued 500,000 Common
Stock Purchase Warrants, at a purchase price of $1.10 per share. The
Warrants expire on August 8, 2005. The number of warrants and the
conversion price shall be adjusted to reflect the distribution of the
Company's capital stock. Adjustments for number of warrants and price will
also be made for the Company's stock affected by splits, reorganization and
merger or any other adjustment in the number of Company shares. The
adjustments for price and usage is made to keep the holders of the Warrants
"whole". However, no such adjustment to price shall be made unless the
impact is $.125 per share or more. The price adjustment is subject to the
impact of an event affecting the price or volume of underlying shares of
the Company.
Purchase Rights
----------------
Should the Company sell any new security, then should the holders of the
Warrants who own at least 25% of the Warrants acquired herein (as adjusted)
may purchase shares of the new issue.
10
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (unaudited)
================================================================================
FIRST AMENDMENT TO OPTION AGREEMENT AND CERTIFICATE
Within this amendment, Michael Calderone agrees to reduce the number of
options he owns from 2,395,000 as was within the Original Agreement, dated
April 9, 2000 to 1,500,000 and to adjust the Exercise price from $2.13 per
share to $1.10 per share. The repricing of the stock options changes these
options into a variable plan. On the date of the repricing, August 1, 2000,
the fair market value was $1.031.
NOTE 7 - NOTES PAYABLE-EMPLOYEES
On September 1, 2000 the Company secured a $50,000 loan from William
Louden, the President of Preference Technologies, Inc. for working capital
purposes. The Note carries no security arrangements, escrow arrangements,
registration rights nor UCC agreements. The loan is due on September 11,
2000 and has an interest rate of 12% per annum, 25,000 common stock
warrants, with a strike price of $1.10 and a five year expiration on the
due date. Should the Note not be paid promptly, the Note holders at their
option can convert the payment to shares of common stock at a conversion
price of $.10 per share. The Note was extended to October 11, 2000 and is
not yet paid.
On September 1, 2000 the Company secured a $150,000 loan from Jeffrey
Jolcover, an employee of Preference Technologies, Inc. for working capital
purposes. The Note carries no security arrangements, escrow arrangements,
registration rights nor UCC agreements. The loan is due on September 11,
2000 and has an interest rate of 12% per annum, 75,000 common stock
warrants, with a strike price of $1.10 and a five year expiration on the
due date. Should the Note not be paid promptly, the Note holders at their
option can convert the payment to shares of common stock at a conversion
price of $.10 per share. The Note was extended to October 11, 2000 and is
not yet paid.
NOTE 8 - NOTES PAYABLE-ADVANCES
On September 11, 2000, the Company received $250,000 as an advance as part
of a $3,500,000 Convertible Note currently being negotiated.
On September 13, 2000, the Company received $250,000 as an advance as part
of a $3,500,000 Convertible Note currently being negotiated.
NOTE 9 - FINANCE EXPENSE
During the third quarter of 2000, the company incurred financing expense
totaling $20,464,193.
Penalty for non-registration of securities 30,000 shares at $1.50 $ 45,000
Warrants associated with Credit agreement, 500,000 @ $.75 per the
Black Scholes model 375,000
Options associates with the Loans for $200,000, 100,000 common stock
Warrants @$.75 75,000
Beneficial conversion of Promissory Notes (for $50,000 & $150,000)
in default, into 2,000,000 Common stock shares at $0.10 per share,
market price at default $0.937 1,674,000
Beneficial conversion of Senior Secured Convertible Promissory Notes
in default, into 15,436,154 shares at $0.065 per share, market
price at default $1.25 18,295,193
11
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (unaudited)
================================================================================
NOTE 10 - UNFULFILLED ORDERS
As of September 30 2000, the company has sales contracts totaling $284,924
that have not yet been fulfilled. These contracts are for CD's $282,349 and
set up fees $2,575.
NOTE 11 - SUBSEQUENT EVENTS
It is anticipated that the $1,000,000 Bridge Loan and the $245,000 working
capital loans will be repaid from the proceeds of a $3,500,000 convertible
note being negotiated. This note is to be rolled over into a private
placement of the company's securities; however, there is no assurance that
the Company will be able to complete a Convertible Note or private
placement. This Credit Agreement also called for the issuance of a warrant
for 500,000 shares at a price per share of $1.10. The Company's inability
to obtain additional financing will severely impact the company.
Subsequent to September 30, 2000, the Company received $1,200,000 as
advances as part of the $3,500,000 being negotiated.
On October 23, 2000, the Company entered into an agreement with its Founder
& CEO to resign his position as CEO. The agreement calls for a monthly fee
for consulting services, in addition to his appointment as Vice-Chairman of
the Board, a non-executive voting position. In addition, the Founder agreed
to retire shares of stock such that he will have no more than 7,000,000
shares and to cancel his 2,400,000 options. The seven million (7,000,000)
shares he will hold will have restrictive legends reflecting a twenty-four
(24) months restriction upon them and will be restricted under rule 144.
The founder also gave the Board of Directors the voting proxy for all his
shares for a period of 24 months. The agreement is for a period of 18
months
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND
FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND 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. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. THE CAUTIONARY STATEMENTS MADE IN THIS DOCUMENT SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR
IN THIS DOCUMENT. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS. THE
COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE
SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. IN EVALUATING THE COMPANY'S
BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH BELOW.
12
OVERVIEW
The Company was incorporated in Nevada in February 1999 and has developed
second-generation Internet technology products. The Global Information Gateway
(GIG) is the Company's first product. The GIG aggregates news and other
information customized to the users preference and delivered to the desktop in
real time. The Corporation Information Gateway (CIG) is a branded version of
the Global Information Gateway. By deploying the CIG, companies create a
two-way communication link and establish a permanent presence on the user's
desktop. The CIG provides business to business (B2B) and business to consumer
(B2C) marketing solutions.
From its inception to date, the Company has incurred costs associated with the
development and launch of its products, probable markets, and business. The
Company has established relationships with information providers that increase
the quality and marketability of the Company's products. The Company's products
commenced generating revenues during the second quarter of 2000.
The Company has historically financed its operations to date through the sale of
its common stock. Since inception through September 30, 2000, the company
issued 28,812,308 shares of its common stock. The Company raised $2.9 million,
net of offering costs, from four accredited investors as follows: (i) February
1999 ("the February Offering") - Issuance of 2,666,664 shares of common stock in
exchange for $900,000; and (ii) Issuance of options under Rule 506 of Regulation
D, promulgated under Section 4 (2) of the Securities Act of 1933, to acquire
units comprised of 2,400,000 shares of common stock, and 1,200,000 warrants
exercisable at $1.25 per share, and options to acquire 581,672 shares of common
stock at an aggregate exercise price of $31,250 in exchange for $2.3 million
cash. The February 1999 Offering was conducted under Rule 504. It provided the
necessary seed capital to commence implementation of the Company's business
plan. 2,400,000 of these shares are currently restricted and subject to a
demand registration rights as of January 1, 2000. The 2,400,000 shares and the
shares underlying the 1,200,000 warrants are subject to reasonable underwriter
trading restrictions in the event of a public offering. The investors holding
these securities are also entitled to anti-dilution rights in the event the
Company issues stock at less than $1.25 per share.
In June 1999, the Company entered into a private placement agreement to offer up
to $12,000,000 worth of shares of common stock for 4,000,000 shares. The
Company extended the minimum offering of $600,000 through October 31, 1999, for
which the minimum was timely met. The Company is also issuing two warrants for
every six shares of common stock to investors that provide a minimum of $18,000
at an exercise price of $5 per share with a two-year term. The shares
underlying these warrants shall be subject to piggy-back registration rights.
Institutional investors shall receive the same type and number of warrants,
except the exercise price shall be $5 per share. The Company shall pay to each
broker-dealer warrants to purchase shares equal to 10% of the Company's common
stock sold by such broker-dealer with an exercise price of $7.50. The shares
are not freely traded until the registration of the private placement agreement.
The warrants may be exercised, commencing upon the date the Company closes a
public offering of its stock pursuant to a Registration Statement registering
the shares underlying the warrants and terminating 180 days thereafter. The
investment period expired on December 1, 1999.
13
On December 3, 1999, the Company entered into a subscription agreement to offer
units at a price of $9 per unit. For Investors investing at least $1,000,000,
the price per unit will be decreased to $7.50 per unit. Each unit is comprised
of six shares of the Company's common stock and two warrants. There is no
minimum or maximum total investment related to this agreement. The Company
shall pay to each broker-dealer warrants to purchase shares equal to 10% of the
Company's total units issued. All warrants shall have an exercise price of $5
per share. In the event the Company has not filed a Registration Statement on
or prior to September 1, 2000, the investor shall have the right to demand
registration of the shares and the warrant shares, and the number of warrants
issued shall be increased by 5% of the original number of warrants issued,
commencing September 1, 2000 and upon the first of each month thereafter, until
the shares and warrants are registered. In the even the Company, during the
six-month period of time following the date of the agreement, sells shares at
less than $3 per share (or $2.50 per share in the event an investor is providing
$1,000,000), then the Company shall be required to issue additional securities
to the investor in an amount such that the investor would receive, in the
aggregate, the same securities as if he had participated in the reduced price
offering.
On December 5, 1999, the Company entered into another private placement
agreement to offer up to $4,000,000 worth of units to accredited investors with
a minimum offering of $2,000,000. During the nine months ended September 30,
2000, the Company received $2,910,978 net of offering costs, and issued
1,301,600 shares of common stock and 433,866 warrants. Each unit was comprised
of six shares of the Company's common stock and two warrants at an exercise
price of $5 per share. The warrants may be exercised, commencing upon the date
the Company closes a public offering of its stock pursuant to a Registration
Statement registering the shares underlying the warrants and terminating three
years thereafter. Each warrant shall be callable upon providing the holder 20
days' written notice in the event the shares have been registered and the
closing bid price of the shares is at a price of $10 per share during 10
consecutive trading days. The securities comprising the units shall not be
detachable unless and until a Registration Statement is declared effective.
The offering also included distribution of warrants to broker-dealers in the
amount of 20% of the aggregate proceeds raised by a broker, divided by 3.75 at
an exercise price of $5 per share. At September 30, 2000, a total of 178,600
warrants were issued to brokers. In the event the Company registers its
securities, the Company shall register the shares and the shares underlying the
warrants, subject to a trading lock-up, (i) upon the effective date of the
Registration Statement ("the Effective Date"), 33.33% of such securities shall
be free trading; (ii) 45 days after the Effective Date, 33.33% of such
securities shall be free-trading, and (iii) 90 days after the Effective Date,
33.33% of such securities shall be free-trading. In the event the Company has
not filed a Registration Statement registering the shares and the shares
underlying the warrants prior to July 1, 2000, then a majority of the holders of
the units issued shall have the right to demand that the Company immediately
register all such securities. In the event of such a demand, then upon the
first of each month after such demand during which the Registration Statement is
not effective, commencing no earlier then October 1, 2000, the number of
warrants issued hereunder shall be increased, on a pro-rata basis, to the
holders of the units, by an amount equal to 2% of the warrants issued.
At December 31, 1999, a total offering of $1,201,247, net of offering costs, was
completed, and 458,334 shares of common stock were issued. In connection with
the offering, the Company granted 113,106 warrants to investors at December 31,
1999 at an exercise price of $5 per share. The Company granted 45,832 warrants
to broker-dealers at an exercise price of $7.50 per share.
14
As of March 31, 2000, a total offering of $3,435,577, net of offering costs, was
completed, and 1,436,314 shares of common stock were issued. In connection with
the offering, a total of 47,878 and 478,780 warrants were issued to brokers and
investors, respectively.
The Company has incurred significant net losses and negative cash flows from
operations since our inception. At September 30, 2000, we had an accumulated
deficit of $37,914,803. These losses have been funded primarily through the
issuance of our equity securities and short-term debt. We intend to continue to
invest heavily in marketing and brand development, content enhancements, and
technology and infrastructure development. As a result, we believe that we will
continue to incur net losses and negative cash flows from operations for the
foreseeable future.
For the three months ended September 30, 2000 and for the Year-to-date period
ended September 30, 2000, the Company's selling, general and administrative
expenses were $2,577,878 and $9,270,705 respectively. For the three months
ended September 30, 1999 and from February 3, 1999 (inception) to September 30,
1999, the Company's Selling, General and Administrative expenses were $2,552,652
and $4,496,318 respectively. The Company earned $452 in other income for the
three months ended September 30, 2000 and $20,809 for the nine months ended
September 30, 2000. For the comparable periods of 1999 the Company earned
$8,952 and $18,217 respectively. The net loss for the three months and nine
months ended September 30, 2000 totaled $22,886,688 and $29,554,060
respectively. The net loss for the three months ended September 30, 1999 and
for the period from February 3, 1999 (inception) to September 30, 1999 totaled
$2,543,700 and $5,953,614, respectively.
We incurred cumulative deferred compensation, which represents the difference
between the exercise price of stock options granted, and the fair market value
of the underlying common stock at the date of grant. The difference is recorded
and amortized over the vesting period of the applicable options. Options
granted through December 1999 typically vest over 15 months, although a portion
of those options vested immediately. Options granted after December 1999
generally vest over 36 months. Of the total deferred compensation amount,
approximately $34,457 and $142,349 was amortized during the three months ended
September 30, 2000 and 1999. For the nine months ended September 30, 2000
approximately $745,963 was amortized and $455,115 for the period from
(inception) February 3, 1999 to September 30, 1999.
As of September 30, 2000, the Company had current assets of $85,566, and
$817,423 in furniture, equipment, and other assets, resulting in total assets of
$902,989. The Company's total liabilities were $3,861,966.
RESULTS OF OPERATIONS
The Company has generated operating revenues totaling $216,390 and $221,488 for
the three and nine months ended September 30, 2000, respectively and $0 for the
period from February 3, 1999 (inception) to September 30, 1999. While the
Company continues to focus its efforts on developing quality products, it is
moving forward with its sales and marketing efforts to establish a large
consumer base for these products. Revenues have initiated and are expected to
grow. While there is no assurance, the Company anticipates that by continuing
developing quality products and establishing a consumer base, it will be in a
position to generate greater revenues in the future.
15
Sales
- -----
During the period from July 1, 2000 to September 30, 2000, the Company had sales
totaling $216,390: $182,083 from License sales, CD sales of $22,834, Advertising
sales of $10,773 and $700 of Set Up Fees.
It should be noted that the Company sold Annual License Agreements totaling
$845,000. $182,083 was "earned" in the 3rd Quarter of 2000 with the balance to
be "earned" over the next nine months.
Operating Expenses
- -------------------
Selling, General and Administrative Expenses
- ------------------------------------------------
For the three months ended September 30, 2000 and for the comparable period in
1999, the Company incurred $2,577,878 and $2,552,652 respectively in operating
expenses. For the nine months ended September 30, 2000 and for the period from
inception (February 3, 1999) through September 30, 1999, operating expenses were
$9,270,705 and $4,496,318 respectively. These expenses were primarily for sales
and marketing expenses, product development and general administrative costs.
The increase is due to the increased activity in sales, continuing product
development and increased general business activity.
Other Income
- -------------
Miscellaneous Income and Interest Income totaled $452 and $20,809 for the three
months and nine months ended September 30, 2000, respectively. Investment
income in future periods may fluctuate as a result of fluctuations in average
cash balances maintained by the Company and changes in the market rates of its
investments.
Financing Expense
- ------------------
For the three months ended September 30, 2000 and September 30, 1999,
$20,464,193 and no finance expense incurred, respectively. For the nine months
ended September 30, 2000 and for the period from February 3, 1999 (inception) to
September 30, 1999, finance expense was $20,464,193 and $1,557,335,
respectively. Financing expense consists primarily of cost associated with
registration penalties, the issuance of warrants as part of the August 1, 2000
Credit Agreement, beneficial conversion value of Promissory Notes in default and
the issuance of below market options and warrants. See NOTE 9, above.
Depreciation and Amortization
- -------------------------------
For the three months ended September 30, 2000 and for the comparable period in
1999, depreciation and amortization expenses totaled $98,459 and $59,279
respectively. For the nine months ended September 30, 2000 and the period from
February 3, 1999 (inception) to September 30, 1999, depreciation and
amortization expenses were $258,524 and $126,699 respectively.
16
Stock-Based Compensation Expense
- ----------------------------------
For the three months ended September 30, 2000, $34,957 of compensation expense
was recorded. For the nine months ended September 30, 2000, $746,463 of
compensation expense was recorded. The unamortized balance is being amortized
over the vesting period for the individual options, which is typically 15 months
for options issued earlier than December 1999 and 36 months for options issued
since that date.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated revenues totaling $216,390 for the three months and
$221,488 for the nine months ended September 30, 2000. However, the Company
anticipates that it will continue to incur net losses and negative cash flows
from operations for the foreseeable future. The rate at which these losses will
be incurred is anticipated to remain at current levels and may deteriorate
subject to the sales activity for the remainder of the year. The Company's
source of capital from February 3, 1999 (inception) to September 30, 2000 has
been, principally, investment capital and short-term loans, provided by third
parties and collections from sales. Further, the Company anticipates it will
require additional capital contributions to fund its operations during the year
2000. In December 1999, the Company commenced two private offerings of its
securities. The Company is now seeking to raise additional funds via a private
placement of its securities.
During the three months ended September 30, 2000, the company did not receive
any funds from the sale of capital stock. For the nine months ended September
30, 2000, total capital raised was $5,328,096 (net of offering costs) for the
issuance of 2,399,256 shares.
During the period from July 1, 2000 to September 30, 2000, the Company secured
$1,745,000 in loans for working capital requirements. A $1,000,000 Note, dated
August 1, 2000 bearing an interest rate of 12% per annum, secured by the
business and intellectual property of the Company (convertible into shares of
the company equaling 25% of the fully diluted total shares of the company, upon
default, at the Lenders option). The Notes matures on September 30, 2000. The
company also secured a $45,000 working capital loan on July 14, 2000. This Note
is payable on demand and carries an interest rate of 8% per annum. On September
1, 2000, the Company secured an additional working capital loan for $200,000.
The loan is due on September 11, 2000 and has an interest rate of 12% per annum,
100,000 common stock warrants, with a strike price of $1.10 and a five year
expiration on the due date. Should the Note not be paid promptly, the Note
holders at their option can convert the payment to shares of common stock at a
conversion price of $.10 per share. The Company also received $1,700,000 in
advances against the Private Placement offering. It is anticipated that all
these Notes will be paid with fund secured with a future permanent financing.
Capital expenditures totaled $3,903 for the period from July 1, 2000 to
September 30, 2000. For the period from January 1, 2000 through September 30,
2000, capital expenditures totaled $386,954. For the three months from July 1,
1999 and for the period from inception (February 3, 1999) to September 30, 1999,
capital expenditures were $129,484 and $359,407, respectively. In general,
capital expenditures have been comprised of purchases of computer hardware and
software as well as leasehold improvements related to leased facilities and are
expected to remain constant in future periods.
17
The Company currently has commitments including those under operating lease
agreements. The Company has experienced a substantial increase in its capital
expenditures and operating lease arrangements since its inception, which is
consistent with increased staffing, and does not anticipate that this will
continue to grow in the future. It is estimated that the reduced expense levels
for the period from July 1, 2000 to September 20, 2000 should continue.
However, normal business operations may require the incurrence of additional
expenditures. Additionally, the Company will continue to evaluate possible
acquisitions of or investments in businesses, products, and technologies that
are complementary to those of the Company, which may require the use of cash.
Management believes existing cash and investments will not be sufficient to meet
the Company's operating requirements for the next twelve months; however, the
Company may sell additional equity or debt securities or obtain credit
facilities to further enhance its liquidity position. The sale of additional
securities could result in additional dilution to the Company's shareholders.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various actions and proceedings incident to its normal
business operations. The Company believes that the outcome of such litigation
and proceedings, individually and in the aggregate, will not have a material
adverse effect on the business or financial condition of the Company.
Item 2. Changes in Securities
During the three months ended September 30, 2000, the Company also issued 63,334
shares as a result of an incorrect price used in calculating the initial
distribution of the December 9, 1999 issue; issued 30,000 shares as a penalty
for non-registration of securities and issued 6,000 as part of the compensation
agreement with the interim CFO. For the nine months September 30, 2000, the
Company received $5,328,097 (net of offering costs) for 2,399,256 shares of
common stock.
As of December 31, 1999, the number of shares of common stock outstanding
totaled 26,413,052. As of the March 31, 2000, common stock shares outstanding
totaled 28,650,964. As of June 30, 2000 the number of outstanding shares of
common stock totaled 28, 712, 974. As of September 30, 2000 the number of
outstanding shares of common stock totaled 28,812,308.
Item 3. Defaults Upon Senior Securities
The Company is currently in default for four debt obligations: $150,000 to
Jeffrey Jolcover, due date September 11, 2000; $50,000 to William Louden, due
date September 11, 2000; $500,000 to Harglen Financial Limited, due date
September 30, 2000; $500,00 to Wall & Broad Equities Corp., due date September
30, 2000. Charges to the financial statements have been made accordingly.
Details are noted in NOTE 9.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
The Company's Chief Executive Officer, Michael Calderone, resigned October 23,
2000. The Chief Executive Officer position remains open. The Company's chief
executive is its President and Chief Operating Officer, William Louden.
On November 9, 2000, the Company laid off 80 employees as part of a general
restructuring of the Company.
Interim Chief Executive Officer, E.J. Conner, Jr., resigned November 14, 2000.
Todd Rustman was appointed Treasurer of the Company on November 15 , 2000.
Item 6.
(A) Exhibits
27. Financial Data Schedule
------------------------------
(B) During the three months ended September 30, 2000, no Form 8-K reports
were filed.
19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Signature Title Date
--------- ----- ----
/s/ William Louden
- ------------------------ President November 20, 2000
William Louden Chief Operating Officer
(Principal Executive Officer)
/s/ Todd Rustman
- ------------------------ Treasurer November 20, 2000
Todd Rustman
20