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 September 30, 2001
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)
1875 South Bascom Ave., No. 116, 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 November 6, 2001, the registrant had 43,124,586 shares of common
stock, $.001 par value per share, outstanding.
NETTAXI.COM
CONTENTS
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, as of September 30,
2001 (unaudited) and and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2001 (unaudited)
and September 30, 2000 (unaudited) 4
Condensed Consolidated Statements of Shareholders' Equity,
September 30, 2001 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2001 (unaudited) and September
30, 2000 (unaudited) 6
Notes to Condensed Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 30
EXHIBIT INDEX 30
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NETTAXI.COM
CONDENSED CONSOLIDATED BALANCE SHEETS
=================================================================================================
December 31, September 30,
2000 2001
- -------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 13,894,700 $ 9,009,500
Accounts receivable, net of allowance for doubtful accounts
of $433,000 and $114,100, respectively 775,100 55,300
Prepaid expenses and other assets 1,035,000 309,500
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 15,704,800 9,374,300
- -------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net 1,748,300 809,100
PURCHASED TECHNOLOGY, net 319,000 --
OTHER INTANGIBLES, net 55,000 --
DEFERRED EXPENSE 272,500 --
DEPOSITS 24,000 30,600
- -------------------------------------------------------------------------------------------------
$ 18,123,600 $ 10,214,000
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,162,400 $ 297,600
Accrued expenses 397,900 232,200
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,560,300 529,800
- -------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.001 par value; 200,000,000 shares
authorized; 43,124,586 shares issued and outstanding 43,100 43,100
Additional paid-in capital 44,637,900 44,802,900
Deferred compensation (429,900) --
Accumulated deficit (27,687,800) (35,161,800)
- -------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 16,563,300 9,684,200
- -------------------------------------------------------------------------------------------------
$ 18,123,600 $ 10,214,000
=================================================================================================
NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
==============================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- --------------------------------------
2000 2001 2000 2001
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
NET REVENUES $ 2,254,000 $ 7,000 $ 8,003,800 $ 2,069,200
OPERATING EXPENSES:
COST OF OPERATIONS 1,653,400 152,400 5,348,700 4,258,100
GENERAL AND ADMINISTRATIVE 1,026,800 769,100 3,715,800 4,354,100
SALES AND MARKETING 1,506,600 -- 5,343,600 932,100
RESEARCH AND DEVELOPMENT 427,700 -- 1,258,100 381,300
- --------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 4,614,500 921,500 15,666,200 9,925,600
- --------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (2,360,500) (914,500) (7,662,400) (7,856,400)
OTHER INCOME (EXPENSE):
INTEREST INCOME 229,500 88,000 476,500 391,800
INTEREST EXPENSE (1,200) -- (4,176,100) (9,400)
- --------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (2,132,200) (826,500) (11,362,000) (7,474,000)
INCOME TAXES -- -- (800) --
- --------------------------------------------------------------------------------------------------------------
NET LOSS $ (2,132,200) $ (826,500) $ (11,362,800) $ (7,474,000)
==============================================================================================================
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.05) $ (0.02) $ (0.29) $ (0.17)
==============================================================================================================
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 42,896,030 43,124,586 38,133,760 43,124,586
==============================================================================================================
NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
==================================================================================================================
Common Stock Additional
------------------------- Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
- ------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2000
(Audited) 43,124,586 $ 43,100 $44,637,900 $ (429,900) $(27,687,800) $16,563,300
Amortization of deferred
compensation -- -- -- 429,900 -- 429,900
Options granted for services -- -- 165,000 -- -- 165,000
Net loss -- -- -- -- (7,474,000) (7,474,000)
- ------------------------------------------------------------------------------------------------------------------
BALANCES, September 30, 2001
(Unaudited) 43,124,586 $ 43,100 $44,802,900 $ -- $(35,161,800) $9,684,200
NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
=================================================================================================
Nine Months Ended September 30,
-------------------------------
2000 2001
- -------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(11,362,800) $(7,474,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 898,000 1,030,400
Loss on disposal of equipment -- 356,100
Allowance for doubtful accounts 162,300 (106,300)
Issuance of common stock for interest on convertible notes 119,900 --
Issuance of common stock for services 730,900 955,700
Compensation expense related to options and warrants granted 1,089,300 554,400
Interest expense related to settlement agreement 2,400,000 --
Interest expense related to issuance of warrants 1,655,000 --
Changes in operating assets and liabilities:
Accounts receivable (804,600) 826,100
Prepaid expenses and other assets (196,500) 82,800
Accounts payable (859,900) (864,800)
Accrued expenses (79,200) (165,700)
Income taxes payable (125,600) --
- -------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (6,373,200) (4,805,300)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 19,200 (6,600)
Capital expenditures (556,900) (73,300)
- -------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (537,700) (79,900)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligations under capital lease (5,400) --
Net proceeds from issuance of common stock 21,416,000 --
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 21,410,600 --
- -------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,499,700 (4,885,200)
CASH AND CASH EQUIVALENTS, beginning of period 987,700 13,894,700
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $15,487,400 $ 9,009,500
=================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID:
Income taxes $ 97,400 $ --
Interest $ -- $ 9,400
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for convertible notes payable
plus accrued interest $ 3,319,900 $ --
Issuance of common stock for consulting services $ 911,000 $ --
Issuance of common stock for trade payables $ 1,558,000 $ --
=================================================================================================
NETTAXI.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
THE COMPANY
Nettaxi.com is a Nevada Corporation, which was incorporated on October 26, 1995.
The Company's principal executive offices are located in Campbell, California.
CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Nettaxi.com 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 condensed consolidated interim financial statements 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 and nine month periods ended September 30,
2001 are not necessarily indicative of the results expected for the full fiscal
year or for any future period. The unaudited historical financial statements
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 the Company's results of operations, financial position
and cash flows. These financial statements should be read in conjunction with
the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's revenues are derived 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 transactions, which are the exchange by
Nettaxi.com of advertising space on Nettaxi.com's web sites for reciprocal
advertising space on other web sites or advertising media. 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. Barter revenues and related
expenses for the three and nine months ended September 30, 2000 were
approximately 41% and 28%, respectively, of total net revenues. There were no
Barter revenues and related expenses in the three or nine months ended September
30, 2001.
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 September 30, 2001, the Company was in
compliance with EITF 99-17.
Royalty revenues are earned on sales of the Company developed CD-Rom "Internet
the City" by third party distributors. Third party distributors package the
CD-Rom with their products for sale to the end-user. The distributor remits
payment to the Company 90 days after the sales of their product to the end-user
and the end-user does not have a right of return. The Company recognizes these
revenues only upon receipt of payment from the distributor. The Company did not
earn any royalty revenues in the nine months ended September 30, 2001.
The Company is in contract with several partners in revenue and expense sharing
agreements. The agreements provide for the Company to earn revenues based on the
sale of third-party suppliers products. For those transactions, where the
Company receives either a percentage of the transaction or a fixed fee, revenues
are recorded net. As of September 30, 2001, the Company has not earned any
revenues or expenses related to these contracts.
The Company charges its co-hosting customers one-time installation fees. Prior
to January 31, 2001, the Company recognized these fees upon completion of the
installation. In accordance with Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition" one-time installation fees are to be deferred and
systematically recognized as the products and/or services are delivered and/or
performed over the term of the arrangement or the expected period of performance
that the fees are earned. The Company did not recognize any one-time
installation fees in 2001.
Our premium subscribers are charged web-site development fees to develop their
web-site upon request. These fees charged and the costs to develop these sites
by the Company are nominal. The Company defers the recognition of the fees
charged over the period of the contract. For the nine months ended September 30,
2001, the Company did not earn any web-site development fee.
In December 1999, the staff of the Securities and Exchange Commission (SEC)
issued its Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition". SAB
No. 101 provides the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. SAB No. 101 is effective for
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company believes that its current revenue recognition policies comply with the
provisions of SAB No. 101.
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 fair value. The
Company periodically reviews other intangible assets to evaluate whether events
or changes have occurred that would suggest an impairment of carrying value. An
impairment would be recognized when expected future operating cash flows are
lower than the carrying value. Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
economic useful lives of the assets, generally ranging from three to five years.
The Company amortizes, on a straight-line basis, the cost of purchased
technology and other intangibles over the shorter of five years or the useful
life of the related technology or underlying asset.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133, as amended by SFAS No 138,
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 September 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 September
15, 2000. The Company has not entered into derivative contracts either to hedge
existing risks or for speculative purposes. Accordingly, the Company's adoption
of the new standard did not have a material impact on the Company's results from
operations, financial position or cash flows.
In March 2000, the Financial Accounting Standards Board issued Interpretation
(Interpretation) No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of ABP Opinion No. 25", which became effective
July 1, 2000. Interpretation No. 44 clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
stock compensation plan qualifies as a noncompensatory plan, (c) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Adoption of the provisions of the
Interpretation had no significant impact on the Company's financial statements.
In June 2001, the Financial Accounting Standards Board (FASB) finalized
Statement No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires that the
Company, upon adoption of SFAS 142, reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company does not expect the adoption of SFAS 141 and SFAS 142 to have a
material effect on its consolidated results of operations or financial position,
but it is currently assessing and has not yet determined the impact the adoption
will have.
BASIC AND DILUTED LOSS PER COMMON SHARE
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.
COMMITMENTS AND CONTINGENCIES
On May 1, 2001 seven shareholders of Nettaxi filed an action against the
Company. The complaint also names the Company's Chief Executive Officer,
President and former Chief Financial Officer as additional defendants. The
complaint alleged that the Company violated securities laws in connection with
its February 2000 private placement. The complaint was amended on May 23, 2001.
The amendment addressed factual matters and added three new plaintiffs to the
lawsuit. Shortly after filing the amended complaint, the Company, pursuant to
the rules of the District Court, met with plaintiffs and pointed out further
factual inaccuracies and deficiencies. Plaintiffs, then, chose to attempt to
amend their complaint for a second time. Six of the plaintiffs purchased shares
of Nettaxi common stock in the February 2000 private placement. Prior to filing
the complaint, the plaintiffs demanded the refund of all of the money invested
in Nettaxi and demanded that the exercise price of the warrants issued in the
private placement be reduced from $4.00 to $0.25 per share. Additionally, prior
to filing the complaint, Nettaxi was asked to invest capital in a company
affiliated with one of the plaintiffs. In the complaint, the plaintiffs seek
compensatory damages, injunctive relief and fees and interest. On October 1,
2001 the Company filed a motion to dismiss the complaint filed by Plaintiffs.
In response, Plaintiffs have given notice that they intend to seek court
permission to file a third amended complaint to attempt to re-characterize their
claims and to remove some claims which Plaintiffs concede are contrary to the
law. Management believes that the allegations made in the complaint are without
merit and that this lawsuit reflects shareholder frustration over the recent
downturn in the stock market and will defend the action vigorously.
From time to time, in the normal course of business, various claims are made
against the Company. At this time, in the opinion of management, there are no
pending claims, the outcome of which is expected to result in a material adverse
effect on the financial position of the Company.
In May 2001, the Company entered into an agreement with an investment banker to
provide, on a semi-exclusive basis, services in connection with identifying a
potential merger candidate and to assist in negotiating and effecting a
transaction. The terms of the agreement provide for compensation to be paid to
the investment banker upon the successful closing of a transaction in the amount
of 5% of the total amount of the transaction up to $3 million and 2% of the
remaining amount of the transaction, payable, at the election of the investment
banker, in cash or common stock of the Company and a warrant exercisable to
purchase up to 5% of the Company's common stock at a purchase price as defined
in the agreement.
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
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR 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 US 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 OUR
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
Nettaxi.com is an Internet marketing portal that provides a wide range of
content and Internet based services for consumers and businesses. Our web site
at www.nettaxi.com serves as a gathering place for people with shared topics of
interest, as well as an entry point, referred to as a portal, to the Internet.
Through our web site, we provide content addressing a large number of targeted
categories. Subscribers to our web site are also provided with access to
enhanced content such as broadband video clips and email accounts. In 1999, we
developed a diversified revenue model under which we provided subscribers with
access to web site hosting services and a broad range of content, and we
provided affiliated businesses with access to a large population of Internet
users for advertising and promotional purposes. We also provided web site
hosting and Internet connectivity services for corporate customers.
Beginning in April 2001, the bankruptcy and liquidation of many of our
Internet based customers and suppliers caused us to re-evaluate our business
model. Since the Internet infrastructure is unstable and customer base
financially weak, we have begun to take corrective action to significantly
decrease cash burn and determine the best course of action to maintain and
enhance the value of our company. In this regard, we implemented an acquisition
strategy pursuant to which we have been seeking to identify an appropriate
entity with which to merge, acquire or restructure our current business. We have
been reviewing a number of potential merger candidates in a wide variety of
industries.
Beginning in June 2001, we reduced our overhead and burn rate by reducing
the salaries of our employees and reducing the number of personnel, marketing
expenses and costs associated with our hosting activities. Our current
management team, consisting of finance and administrative employees is in place
to maintain our operations and enable our ongoing review and analysis of
acquisition candidates and to assist us in the consummation of an appropriate
transaction. We have also engaged the services of an investment banker, to
assist us in this process. As of the date of this quarterly report on Form 10-Q,
we have not determined a suitable candidate with which to complete a transaction
and there can be no assurance that we will be able to identify an appropriate
candidate that will enhance the value of our company.
We continue to operate our website and sell advertising products, but these
revenues will be significantly lower than prior periods. We do not expect these
revenues to grow in light of the changing market conditions and the recent
actions taken by us.
Prior to June 2001, we provided web site hosting and Internet connectivity
services for corporate customers. Our services were delivered through a
state-of-the-art Internet data center located in Southern California using a
high-performance Internet backbone network. Customers paid monthly fees for the
professional services utilized, one-time installation fees, and connectivity
charges. These "hosting" revenues were recognized in the period the services
were provided. Hosting revenues were variable, based upon bandwidth usage and
services used, and resulted in operating losses from time to time. In June 2001,
we terminated our significant co-hosting customer contracts effective July 7,
2001. In connection with this, we also discontinued the purchase of bandwidth
and premium services from our third party provider, further reducing monthly
expenditures. The terminations have reduced our operating expenses, and
materially affected our revenues beginning in the third quarter of 2001. In
spite of the above, there can be no assurance that our operating losses will not
increase in the future.
We plan to continue our operations while seeking potential acquisitions,
mergers, and other strategic partnerships which could enhance the value of our
company. 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. As of
the date of this quarterly report on Form 10-Q, we have not determined a
suitable candidate with which to complete a transaction and there can be no
assurance that we will be able to identify an appropriate candidate that will
enhance the value of our company.
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000.
NET REVENUES. Net revenues for the three months ended September 30, 2001 were
$7,000 compared with $2.25 million for the three months in 2000. The substantial
decrease is primarily the result of lower advertising and hosting revenues
resulting from the substantial reduction of our operating activities and
expenditures in connection with the adoption of our acquisition strategy and the
current economic climate in the Internet industry. In June 2001, we terminated
our significant co-hosting customer contracts effective July 7, 2001, which
materially decreased our revenues beginning in the third quarter of 2001. The
substantial decrease was also the result of significantly lower advertising
revenues received in the year 2001 and the result of discontinued utilization of
reciprocal advertising agreements. Reciprocal advertising arrangements are
exchanges of similar services between us and the advertiser. For the three
months ended September 30, 2000, we recognized approximately 41% of total net
revenues from reciprocal advertising agreements. There were no reciprocal
advertising revenues recognized in 2001.
For the three months ended September 30, 2001, no single customer accounted
for any significant revenues. For the three months ended September 30, 2000,
five customers, Babenet, CollegeClub.com, Hearme.com, Spinrecords.com, Whitesand
Communications, Inc., each accounted for greater than 10% of total net revenues
for a total of approximately $1.67 million or 74% of the total revenues. In June
2001, we terminated our significant co-hosting customer contracts effective July
7, 2001, which has materially affected revenues beginning in the third quarter
of 2001.
ADVERTISING REVENUES. Advertising revenues for the three months ended
September 30, 2001 and 2000 were approximately $7,000 and approximately $1.3
million, respectively, which represented 100% and 58%, respectively, of total
net revenues. The decline in absolute dollars resulted from the substantial
reduction of our operating activities and expenditures in connection with the
adoption of our acquisition strategy and the current economic climate in the
Internet industry. The decline was also attributable to the discontinued use of
reciprocal advertising transactions and decreases in the number of advertisers
and the decrease in the average rate paid by these advertisers. The decline also
resulted from the bankruptcy and liquidation of many of our customers. This
required us to further tighten our credit terms which lead to the loss of many
customers. Also, we initiated several cost savings strategies in the first
quarter of 2001, which resulted in cancellation of advertising arrangements by
our customers, which decided that these new strategies did not meet their
criteria for advertising promotions. Also, in the first quarter of 2001, we
terminated our free hosting arrangements for our citizens, which resulted in
decreased page views and therefore decreased the number of banner advertisements
served. We believe that the revenues from the sale of banner advertisements can
no longer justify the cost of purchasing bandwidth. Reciprocal advertising
arrangements accounted for approximately 0% and 41% of total revenues for the
three months ended September 30, 2001 and 2000, respectively. Reciprocal
arrangements were used in our strategy in developing strategic relationships
with other advertisers or service providers for non-cash media advertising. We
no longer utilize these agreements as the return on investment for these
agreements no longer benefits us. We continue to operate our website and sell
advertising products, but these revenues will be significantly lower than prior
periods. We do not expect these revenues to grow in light of the changing market
conditions and the recent actions taken by us.
HOSTING REVENUES. We did not earn any hosting revenues for the three months
ended September 30, 2001. For the three months ended September 30, 2000, hosting
revenues were approximately $0.9 million which represented 40% of total net
revenues. The decline in absolute dollars resulted from the substantial
reduction of our operating activities and expenditures in connection with the
adoption of our acquisition strategy and the current economic climate in the
Internet industry. In June 2001, we terminated our significant co-hosting
customer contracts effective July 7, 2001, which materially decreased our
revenues beginning in the third quarter of 2001.
COST OF OPERATIONS. Cost of operations were approximately $152,400 and $1.65
million for the three months ended September 30, 2001 and 2000, respectively.
Cost of operations decreased in absolute dollars as the result of the
substantial reduction of our operating activities and expenditures in connection
with the adoption of our acquisition strategy. The decline was also
attributable to the termination of our co-hosting customer contracts which
required our purchasing of bandwidth and services from a third party provider.
We have also experienced a substantial decrease in traffic to our website
which resulted in the offset to the cost of purchasing bandwidth. Beginning in
February 2001 we changed our web hosting provider to Alchemy Communications, a
carrier in Southern California. This new provider provides similar services to
our prior provider, but at substantial cost saving to us.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were approximately
$0 and $1.51 million for the three months ended September 30, 2001 and 2000,
respectively. In the third quarter of 2001, we have substantially reduced all
efforts in this area of our business. In relation to our current acquisition
strategy, we will have limited sales and marketing efforts and we intend to
focus more on seeking potential acquisitions, mergers, and other strategic
partnerships which could enhance the value of our company
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately $0 and $427,700 for the three months ended September 30, 2001 and
2000, respectively. In the third quarter of 2001, we have substantially reduced
all efforts in this area of our business. In relation to our current business
strategy, we will have limited research and development efforts and we intend to
focus more on seeking potential acquisitions, mergers, and other strategic
partnerships which could enhance the value of our company. We plan to utilize
consultants for any technical projects. As of October 2001, we have not engaged
any technical
consultants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately $769,100 and $1.03 million for the three months ended
September 30, 2001 and 2000, respectively. General and administrative costs
consisted primarily of salaries and related costs for executives,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. The decrease reflects the reduction of our operating
activities and expenditures in connection with our acquisition strategy. The
decline was also attributable to the amortization of deferred costs related to
the issuance of common stock for services and compensation expense related to
options and warrants granted which were higher in year 2000 and substantially
fully amortized by the end of June 2001.
INTEREST INCOME. Interest income was approximately $88,000 and $229,500 for
the three months ended September 30, 2001 and 2000, respectively. The decrease
was the result of the higher average cash and cash equivalents during the three
months ended September 30, 2000. This higher average cash balance was the result
of the issuance of common stock in a private placement offering in February
2000.
INCOME TAXES. At December 31, 2000, we had net operating loss carryforwards
available to reduce future taxable income that aggregate approximately $19.7
million for Federal income tax purposes. These benefits begin to expire in 2017.
We also had California net operation loss carryforwards in the amount of $19.6
million, which may be applied to future taxable income until these benefits
begin to expire in 2002. Our ability to utilize the net operating loss
carryforwards are dependent upon our ability to generate taxable income in
future periods and may be limited due to restrictions imposed under Federal and
state laws upon change in ownership.
RESULTS OF OPERATIONS - COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000.
NET REVENUES. Net revenues for the nine months ended September 30, 2001 were
$2.07 million compared with $8.0 million for the nine months in 2000. The
substantial decrease is primarily the result of the substantial reduction of our
operating activities and expenditures in connection with the adoption of our
acquisition strategy and the current economic climate in the Internet industry.
In June 2001, we terminated our significant co-hosting customer contracts
effective July 7, 2001, which materially decreased our revenues beginning in the
third quarter of 2001. The substantial decrease was also the result of
significantly lower advertising revenues recognized in the nine months ended
September 30, 2001
For the nine months ended September 30, 2001, three customers each
accounted for greater than 10% of total net revenues for a total of
approximately $1.86 million or 90% of the total revenues. These customers,
Babenet, Whitesand Communications, and Whitehorn Ventures Limited, accounted for
46%, 19%, and 25%, respectively of our total revenues. All three of these
customers were co-hosting customers. For the nine months ended September 30,
2000, five customers, Babenet, Internet Fuel.com, Hearme.com, Spinrecords.com,
CollegeClub.com, each accounted for greater than 10% of total net revenues for a
total of approximately $3.09 million or 54% of the total revenues. In June 2001,
we terminated our significant co-hosting customer contracts effective July 7,
2001, which has materially affected revenues beginning in the third quarter of
2001.
ADVERTISING REVENUES. Advertising revenues for the nine months ended
September 30, 2001 and 2000 were approximately $178,800 and approximately $5.2
million, respectively, which represented 9% and 65%, respectively, of total net
revenues. The decline in absolute dollars resulted from the substantial
reduction of our operating activities and expenditures in connection with the
adoption of our acquisition strategy and the current economic climate in the
Internet industry. The decline was also attributable to the discontinued use of
reciprocal advertising transactions and decreases in the number of advertisers
and the decrease in the average rate paid by these advertisers. As a result of
the increased bankruptcy and liquidation trend in the marketplace, we further
tightened our credit terms and loss many of our customers. Also, we initiated
several cost savings strategies in the first quarter of 2001, which resulted in
cancellation of advertising arrangements by our customers that decided that
these new strategies did not meet their criteria for advertising promotions.
Also, in the first quarter of 2001, we terminated our free hosting arrangements
for our citizens, which resulted in decreased page views and therefore decreased
the number of banner advertisements served. We believe that the revenues from
the sale of banner advertisements can no longer justify the cost of purchasing
bandwidth. Reciprocal advertising arrangements accounted for approximately 0%
and 28% of total revenues for the nine months ended September 30, 2001 and 2000,
respectively. Reciprocal arrangements were used in our strategy in developing
strategic relationships with other advertisers or service providers for non-cash
media advertising. We no longer utilize these agreements as the return on
investment for these agreements no longer benefits us. We continue to operate
our website and sell advertising products, but these revenues will be
significantly lower than prior periods. We do not expect these revenues to grow
in light of the changing market conditions and the recent actions taken by us.
HOSTING REVENUES. Our hosting revenues were approximately $1.89 million and
$2.7 million for the nine months ended September 30, 2001 and 2000, which
represented 91% and 34%, of total net revenues, respectively. The decline in
absolute dollars resulted from the substantial reduction of our operating
activities and expenditures in connection with the adoption of our acquisition
strategy and the current economic climate in the Internet industry. For the nine
months ended September 30, 2001, hosting revenues were a higher percentage of
total net revenue as advertising revenues significantly decreased in the nine
months ended September 30, 2001. 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 monthly
connectivity charges. These hosting revenues were recognized in the period the
services were provided. We did not receive any one-time installation fees in the
nine months ended September 30, 2001 and 2000, respectively. In June 2001, we
terminated our significant co-hosting customer contracts effective July 7, 2001,
which materially affected revenues beginning in the third quarter of 2001.
COST OF OPERATIONS. Cost of operations were approximately $4.26 million and
$5.35 million for the nine months ended September 30, 2001 and 2000,
respectively. Cost of operations decreased as a result of the substantial
reduction of our operating activities and expenditures in connection with the
adoption of our acquisition strategy. The decline was also attributable to the
termination of our co-hosting customer contracts which required our purchasing
of bandwidth and services from a third party provider. We have also experienced
a substantial decrease in traffic to our website which resulted in the
offset to the cost of purchasing bandwidth. Beginning in February 2001 we
changed our web hosting provider to Alchemy Communications, a carrier in
Southern California. This new provider provides similar services but at
substantial cost saving to us. We entered into traffic directive arrangements
whereas selected web traffic or page views are diverted to interest specific
areas of our website and advertisements. These arrangements require special
tools and costs to third parties. We began these new arrangements in the fourth
quarter 2000. As a result of our new acquisition strategy these arrangements
have been terminated in June 2001. There were no similar costs in the nine
months ended September 30, 2000.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were approximately
$932,100 and $5.34 million for the nine months ended September 30, 2001 and
2000, respectively. The decline in sales and marketing expenses was attributable
to the substantial reduction of our operating activities and expenditures in
connection with the adoption of our acquisition strategy. The decline was also
attributable to the discontinued use of reciprocal online advertising
arrangements to increase brand awareness and traditional print and media
marketing advertising. We recorded reciprocal advertising expenses in relation
to the reciprocal advertising revenues of approximately $2.2 million for the
nine months ended September 30, 2000. There were no similar expenses in 2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately $381,300 and $1.26 million for the nine months ended September 30,
2001 and 2000, respectively. The decline in expense was primarily attributable
to the decrease in salaries expense for personnel as the result of decreased
personnel. We terminated all research and development personnel in the beginning
of the second quarter 2001. Currently, we have no hiring plan in effect for
replacement of these individuals. We plan to utilize consultants for any
technical projects. As of October 2001, we have not engaged any technical
consultants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
approximately $4.35 million and $3.72 million for the nine months ended
September 30, 2001 and 2000, respectively. General and administrative costs
consisted primarily of salaries and related costs for executives,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. Approximately $0.3 million of the increase in general
and administrative expenses, were attributable to the acceleration amortization
of deferred costs related to the issuance of common stock for services and
compensation expense related to options and warrants granted. In addition to the
above we recognized a write-down of approximately $356,100 on capital equipment
that we have disposed of during our move to smaller facilities in the June 2001.
Due to the market conditions, we were unable to sell the capital equipment and
the costs for storage and moving the equipment would have exceeded any gain
realized on the sale. In June 2001 we negotiated an early termination of our
facilities lease and recognized a one-time charge of approximately $94,000,
which included the forfeited deposit. This fee was necessary as a result of the
market conditions in the San Francisco Bay Area. We entered into a facilities
lease of smaller space in Campbell, California. We believe that this space will
be sufficient to conduct our current activities. We also recognized
approximately $141,000 in one-time costs associated with the termination of our
intended acquisition with LookupGuide.com. The above increases were offset
decreases in personnel costs as a result of termination of personnel in the
first and second quarter of 2001.
INTEREST INCOME. Interest income was approximately $391,800 and $476,500 for
the nine months ended September 30, 2001 and 2000, respectively. The higher
average cash balance in the nine months ended September 30, 2000, was the result
of the issuance of common stock in a private placement offering in February 2000
for which cash proceeds became available in March 2000.
INTEREST EXPENSE. Interest expense was approximately $9,400 and $4.18 million
for the nine months ended September 30, 2001 and 2000, respectively. For the
year 2000 period, the interest expense was primarily the result of non-cash
deemed interest expense related to the implied beneficial conversion feature and
the value of warrants issued in connection with the settlement agreement that we
reached with the holder of the convertible debentures issued on March 31, 1999.
The convertible note was fully converted in the second quarter of 2000 and
therefore no interest expense was recorded on this note in 2001.
INCOME TAXES. At December 31, 2000, we had net operating loss carryforwards
available to reduce future taxable income that aggregate approximately $19.7
million for Federal income tax purposes. These benefits begin to expire in 2017.
We also had California net operation loss carryforwards in the amount of $19.6
million, which may be applied to future taxable income until these benefits
begin to expire in 2002. Our ability to utilize the net operating loss
carryforwards are dependent upon our ability to generate taxable income in
future periods and may be limited due to restrictions imposed under Federal and
state laws upon change in ownership.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company had cash and cash equivalents of
approximately $9.0 million, compared to approximately $13.9 million at December
31, 2000. Net cash used in operating activities equaled approximately $4.8
million and $6.4 million for the nine month periods ended September 30, 2001 and
2000, respectively. The decline in cash used was related to the decrease of
approximately $3.9 million in net loss for the nine months ended September 30,
2001 compared to the same nine months ended September 30, 2000.
Net cash used in investing activities was approximately $79,900 and $537,700
for the nine months ended September 30, 2001 and 2000, respectively.
Substantially all of the cash used in investing activities for both periods was
primarily related to the purchase of capital equipment.
Net cash provided by financing activities was approximately $0 and $21.4
million for the nine months period ended September 30, 2001 and 2000,
respectively. Net cash provided by financing activities in 2000 consisted
primarily of net proceeds from the issuance of our common stock.
We incurred net losses of approximately $7.5 million and $11.4 million for
the nine months ended September 30, 2001, and 2000, respectively. At September
30, 2001, we had an accumulated deficit of approximately $35.2 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.
Beginning in the fourth quarter of 2000, we initiated cost reductions in all
areas of operations. In the first quarter of 2001, we switched our bandwidth
provider and expect future costs savings of approximately $2.0 million per year.
We are continuing to review and reduce all expenditures that do not contribute
toward our profitability. There can be no assurance that we will ever achieve or
sustain profitability or that our operating losses will not increase in the
future.
We do not have any long-term commitments that currently require a specified
capital budget other than normal operations. We believe that current cash, cash
equivalents and marketable securities balances will be sufficient to meet our
anticipated operating cash needs for at least the next 12 months. With the
current control measures implemented in the first, second, and third quarters
of 2001, we believe that we will be able to continue to direct our efforts in
pursuit of our acquisition strategy. We have determined that we may also need to
seek additional capital in connection with a potential merger or acquisition
transaction, which might impact our liquidity requirements or cause us to issue
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all. We
continually evaluate opportunities to sell additional equity or debt securities,
obtain credit facilities from lenders for strategic reasons or to further
strengthen our financial position. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders.
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
adequately 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.
We plan to continue our operations while seeking potential acquisitions,
mergers, and other strategic partnerships which could enhance the value of our
company. 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.
RISK FACTORS
Our business, financial condition or results of operations could be
materially and adversely affected by any of the following risks.
WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, AND EXPECT LOSSES FOR THE
FORESEEABLE FUTURE.
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 December 31, 2000, we had an accumulated
deficit of $27,687,800. Losses have continued to grow faster than our revenues
during our limited operating history. Because of the bankruptcy and liquidation
of many of our Internet based customers and suppliers and because of the
reduction of our operating activities and expenditures in connection with our
acquisition strategy, we expect to incur significant net losses for the
foreseeable future. We may never achieve profitability.
ACQUISITIONS IN CONNECTION WITH OUR ACQUISITION STRATEGY MAY DISRUPT OR
OTHERWISE HAVE A NEGATIVE IMPACT ON THE VALUE OF OUR BUSINESS.
We are seeking to acquire businesses when we believe they will enhance the
value of our business. We do not have any present understanding relating to any
such acquisition or investment. We may be unable to identify a business which
would enhance the value of our company. If we do identify an appropriate
candidate, we may be unable to negotiate terms for the acquisition which would
be favorable to our shareholders. If we were to acquire a company, the amount of
time and level of resources required to successfully transition our operations
could be substantial. There can be no assurance that new management would be
able to successfully operate the business going forward. 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.
OUR ADVERTISERS ARE EMERGING INTERNET COMPANIES THAT REPRESENT CREDIT RISKS.
Some of our advertisers have limited operating histories, are operating at a
loss, have limited cash reserves or have limited access to capital. If any
significant part of our customer base experiences financial difficulties, is not
commercially successful or is unable to pay our advertising fees for any reason,
our business, operating results and financial condition may be materially and
adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
As of September 30, 2001, approximately 28 million 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, approximately 14 million shares of
common stock were eligible for sale under Rule 144.
We have filed a registration statement on Form S-8 (File No. 333-32678) to
register 6,300,000 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 are eligible for resale in
the public market without restriction. We also 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 (File No. 333-36826), declared effective by
the Securities and Exchange Commission on June 12, 2000 registering 32,730,849
shares issued and issuable pursuant to recent private placement transactions.
Additionally, we have filed a registration statement on Form S-1 (File No.
333-38538), declared effective by the Securities and Exchange Commission on
September 21, 2000, registering 4,219,692 shares of common stock issued and
issuable pursuant to recent private placement transactions.
If our stockholders sell substantial amounts of our common stock under Rule
144 or pursuant to the aforementioned registration statements, 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.
FUTURE EXERCISE OF WARRANTS OR ISSUANCES OF SECURITIES MAY SIGNIFICANTLY DILUTE
YOUR HOLDINGS.
There are currently warrants to purchase 18,525,816 shares of our common
stock outstanding and exercisable over the next four to five years having
exercise prices ranging from $1.50 to $12.38, subject to adjustment. The shares
underlying all of these warrants have been registered pursuant to our
registration statements on Form S-1 filed with the Securities and Exchange
Commission. There are also warrants to purchase 1,850,000 shares of our common
stock outstanding having exercise prices ranging from of $0.13 to $0.35 per
share. 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.
It is possible that we will need to raise additional funds in the future in
order to execute a transaction pursuant to our acquisition strategy or if we are
to execute our strategic growth plan. 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 EXPECT OUR REVENUES TO DECLINE SIGNIFICANTLY.
We had revenues of approximately $9,418,400, $5,032,800 and $258,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. While our growth
rate in prior years has been strong, revenues have substantially declined in
2001. We expect current market conditions to have a continued material adverse
effect on our revenues. We continue to operate our website and sell advertising
products, but these revenues will be significantly lower than prior periods. We
expect these revenues to decline significantly in light of the changing market
conditions and the reduction of our operating activities and expenditures in
connection with our acquisition strategy. In June 2001, we terminated our
significant co-hosting customer contracts effective July 7, 2001, which
materially decreased our revenues beginning in the third quarter of 2001.
Approximately $1.28 million of the revenues for the year ended December 31, 1999
were derived from credit card transaction processing fees, a revenue stream that
has declined significantly and that we do not believe will be material in future
periods. In the year 2000, we generated approximately $2.22 million in revenue
from reciprocal advertising transactions. These transactions were terminated in
year 2000. 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. 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 web hosting,
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.
WE MAY REQUIRE FURTHER CAPITAL TO PURSUE OUR BUSINESS OBJECTIVES.
We currently believe that we have sufficient cash to fund our current
operations through September 2002. However, to complete an acquisition in
connection with our acquisition strategy, we may be required to seek additional
capital. We may need to obtain capital through sources such as equity or debt
financing. We cannot assure you that we will have sources available to provide
the financial resources necessary to complete such an acquisition. No assurances
can be given 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.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THEREBY INCREASING
THE VOLATILITY OF OUR STOCK PRICE
We anticipate that our operating results will fluctuate significantly from
quarter to quarter. These fluctuations may be due to seasonal and cyclical
patterns that have emerged in Internet related spending. For example, the use of
our web site is somewhat lower during periods of the year during the first and
third calendar quarters because of the summer vacation period and post winter
holiday season slowdown. This results in lower revenues for us during periods of
the year. Quarterly results may also vary because it is difficult to predict the
long-term revenue growth of our business. 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.
WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED SECURITY
MEASURES IN RESPONSE TO TERRORISM.
Our business depends on the free flow of products and services through the
channels of commerce. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial or other services could have a material adverse
effect on our business, results of operations and financial condition.
Furthermore, we may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the activities and
potential activities. We may also experience delays in receiving payments from
payers that have been affected by the terrorist activities and potential
activities. The U.S. economy in general is being adversely affected by the
terrorist activities and potential activities and any economic downturn could
adversely impact our results of operations, impair our ability to raise capital
or otherwise adversely affect our ability to operate our business and pursue our
acquisition strategy.
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. In light of our reduction of
our operating activities and our expenditures in connection with our acquisition
strategy, we have engaged in very limited sales and marketing activities.
Our ability to increase our sales force involves a number of risks and
uncertainties, including whether or not the current market conditions will
improve, 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.
OUR PROJECTED BROADBAND SERVICES AND ENHANCED CONTENT 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
broadband services and enhanced content for our subscribers. We have put our
strategic growth plan on hold so that we may attempt to execute our acquisition
strategy. Should we choose to implement our strategic growth plan, the
availability of many of these broadband services will be dependent on our
ability to enter into satisfactory contractual relationships with parties
offering related content 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 web site. To date, our revenues
from broadband services and enhanced content have not been material. In light of
the reduction of our operating activities and expenditures in connection with
our acquisition strategy, we may not be able to commence those services on a
timely basis, and there can be no assurance that the services will generate the
anticipated amount of 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;
- 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.
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 Los Angeles, California site of Alchemy Communications.
We are heavily reliant on the ability of Alchemy Communications to house and
service our web site. This system's continuing and uninterrupted performance is
critical to the success of our web site. Alchemy Communications 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 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.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS.
Our performance is substantially dependent on the continued services and on
the performance of our executive officers, Robert A. Rositano, Jr., our Chief
Executive Officer, and Dean Rositano, our President and Chief Operating Officer.
The loss of the services of any of our executive officers could materially and
adversely affect our business due to their ability to help identify appropriate
acquisition target companies, their experience with our business plan and the
disruption in the conduct of our day-to-day operations.
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. 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.
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 have attempted to establish numerous strategic relationships with popular
web sites to increase the number of visitors to our web site. These efforts have
been substantially slowed by the reduction of our operating activities and
expenditures in connection with our acquisition strategy. 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.
For our web site 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
the success of our web site. 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 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. 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.
WE MAY NOT BE ABLE TO TAKE FULL ADVANTAGE OF POTENTIAL TAX BENEFITS FROM OUR NET
OPERATING LOSS CARRYFORWARDS.
At December 31, 2000 we had Federal net operating loss carryforwards
available to reduce future Federal taxable income that aggregated approximately
$19.7 million for Federal income tax purposes. These benefits will begin to
expire in 2017. Our ability to utilize the net operating loss carryforwards are
dependent upon our ability to generate taxable income in future periods and may
be limited due to restrictions imposed under Federal and state laws upon change
in ownership
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. Web usage may be inhibited for a
number of reasons. If Internet 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.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. Our computer systems are
supplied primary power by power companies in California. In addition, the
systems are connected to battery backup systems. This alternative source of
power is provided by our hosting provider and is subject to upkeep and
maintenance. Our current insurance does not provide coverage for any damages our
customers or we may suffer as a result of any interruption in our power supply.
If blackouts interrupt our third party power supply, we would be temporarily
unable to continue operations at our affected facilities. Although, our third
party bandwidth provider has assured us that alternative energy supply resources
are available, there can be no assurance that such alternative energy supplies
will be adequate. Any interruption may affect our ability to continue operations
at our corporate facilities, could damage our reputation and could result in
lost revenue, which could have a material adverse effect on our business,
operating results and financial condition. In addition, our employees may be
personally impacted and unable to commute to or from work during these rolling
blackouts. Any or all of these factors may have adverse impact on our business.
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.
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.
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 May 1, 2001 seven shareholders of Nettaxi filed a law suit against
Nettaxi in the United States District Court for the Central District of
California (Case No. SACV 01-459 AHS). The complaint names Robert Rositano, Jr.
our Chief Executive Officer, Dean Rositano, our President and Glenn Goelz our
former Chief Financial Officer as additional defendants. The complaint alleges
the company violated securities laws in connection with the Company's February
2000 private placement. The complaint was amended on May 23, 2001. The amendment
addressed factual matters and added three new plaintiffs to the lawsuit. Six of
the plaintiffs purchased shares of Nettaxi common stock in the February 2000
private placement completed by Nettaxi. Shortly after filing the amended
complaint, we, pursuant to the rules of the District Court, met with plaintiffs
and pointed out further factual inaccuracies and deficiencies. Plaintiffs then
chose to attempt to amend their complaint for a second time. On October 1, 2001
we filed a motion to dismiss the complaint filed by Plaintiffs. In response,
Plaintiffs have given notice that they intend to seek court permission to file a
third amended complaint to attempt to re-characterize their claims and to remove
some claims which Plaintiffs concede are contrary to the law. Although we
believe the allegations made in the complaint are without merit and will defend
the action vigorously, there can be no assurance 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
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. Our articles of
incorporation provide that our board of directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it more
difficult for a third party to acquire us. All of the foregoing could adversely
affect prevailing market prices for our common stock.
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 decreased substantially within the last 18 months. The
market downturn and adjustment for the high valuations for internet companies
may not return to the levels of late 1999 and early 2000. We cannot assure you
that our stock will trade at the same levels of other Internet stocks or that
Internet stocks in general will regain their prior market prices. The per share
closing price of our common stock in 2001 ranged from a high of $0.46 as of June
11, 2001 to a low of $0.085 as of October 9, 2001. In addition, an active
public market for our common stock may not continue.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the nine months ended September 30, 2001, we did not have any long
term debt obligations. Therefore, an immediate 10% increase in market interest
rates would not have a material adverse effect on our financial position. We
currently do not have any material market rate risks. We could be exposed to
market risk related to any 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. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We have resolved the dispute filed on July 9, 1999, by four shareholders in
Simply Interactive, Inc. in the Santa Clara County Superior Court against
Nettaxi, our wholly owned subsidiary Nettaxi Online Communities, Inc., Robert A.
Rositano, Jr., Dean Rositano, Glenn Goelz, Warren J. Kaplan, Frank McGrath,
Bruno Henry, Alan K. Fetzer, Robert Divenere, Robert A. Rositano, Sr., SSN
Properties, LLC and others. The Case Number was Case Number CV 783127. The
parties have entered into a settlement agreement releasing claims and causes of
action against each other. Each party admitted no wrong doing or liability in
connection with the settlement.
We previously announced that, on May 1, 2001 seven shareholders of Nettaxi
filed an action against Nettaxi in the United States District Court for the
Central District of California (Case No. SACV 01-459 AHS). The complaint also
names Robert Rositano, Jr. our Chief Executive Officer, Dean Rositano, our
President, and Glenn Goelz our former Chief Financial Officer as additional
defendants. The complaint alleged that we violated securities laws in connection
with our February 2000 private placement. Six of the plaintiffs purchased shares
of Nettaxi common stock in the February 2000 private placement. Prior to filing
the complaint, the plaintiffs demanded the refund of all of the money invested
in Nettaxi and demanded that the exercise price of the warrants issued in the
private placement be reduced from $4.00 to $0.25 per share. Additionally, prior
to the filing the complaint, Nettaxi was asked to invest capital in a company
affiliated with one of the plaintiffs. In the complaint, the plaintiffs seek
compensatory damages, injunctive relief and fees and interest. Due to factual
misrepresentations in the complaint, we anticipated that an amended complaint
would be filed. The complaint was amended on May 23, 2001. The amended added
three new plaintiffs to the lawsuit. Shortly after filing the amended complaint,
we, pursuant to the rules of the District Court, met with plaintiffs and pointed
out further factual inaccuracies and deficiencies. Plaintiffs then chose to
attempt to amend their complaint for a second time. On October 1, 2001 we filed
a motion to dismiss the complaint filed by Plaintiffs. In response, Plaintiffs
have given notice that they intend to seek court permission to file a third
amended complaint to attempt to re-characterize their claims and to remove some
claims which Plaintiffs concede are contrary to the law.
We believe that the allegations made in the complaint are completely
without merit and that this law suit reflects shareholder frustration over the
recent downturn in the stock market. We will defend the action vigorously.
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 September, 2001 the Company under its 1998 and 1999
Stock Option Plans issued options to purchase up to 3,005,000 shares of common
stock to employees, with exercise prices ranging from $0.13 to $0.24 per share,
which was not less than the fair market value of the shares on the date of
grant. Options to purchase 1,702,500 of these shares have expired as of
September 30, 2001. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Rule 701 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 the investments, and who represented to the Company that the
shares were being acquired for investment.
(2) In April 2001, we issued warrants to purchase up to 1,500,000 shares of
common stock to a consultant at an exercise price of $0.13 per share, which was
not less than the fair market value of the shares on the date of grant. 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 the
investment, and who represented to the Company that the shares were being
acquired for investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September 30,
2001.
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: November 14, 2001 By: /s/ Dean Rositano
---------------------
Dean Rositano,
President and Interim Chief Financial Officer
(Principal Accounting Officer)