SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
Commission file number 1-12850
XDOGS, INC.
Formerly known as XDOGS.COM, INC.
(Exact name of small business issuer as specified in its charter)
Minneapolis, Minnesota 55401
(Address of principal executive offices)
Incorporated under the laws of 84-1168832
the State of Nevada ----------------------------
I.R.S. Identification Number
(612) 359-9020
(Small business issuer's telephone number including area code)
----------
Indicate by check mark whether the issuer (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 issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 14,280,543 shares of Common
Stock, $.01 par value per share, outstanding as of November 18, 2002.
XDOGS, INC.
INDEX
Part I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Page
Item 1. Financial Statements
Condensed balance sheet, September 30, 2002 (unaudited)...................... 3
Condensed statements of operations for the three and six months
ended September 30, 2002 and 2001 (unaudited)........................... 4
Condensed statement of changes in shareholders' deficit
for the three and six months ended September 30, 2002 (unaudited)....... 5
Condensed statements of cash flows for the three and six months
ended September 30, 2002 and 2001 (unaudited)........................... 6
Notes to condensed financial statements (unaudited).......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Controls and Procedures.............................................
Part II: OTHER INFORMATION...................................................
2
XDOGS, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2002
(Unaudited)
Assets
Current assets:
Cash ..................................................... $ 10,143
Advances to merger candidate ............................. 2,986
------------
Total current assets ........ 13,129
Furniture and equipment, at cost, net of
accumulated depreciation (Note 5) ....................... 5,025
Deposit ...................................................... 350
------------
$ 18,504
============
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts and notes payable:
Accounts payable and accrued liabilities ............. $ 712,318
Notes payable, related party (Note 2) ................ 145,120
Notes payable, other ................................. 235,000
Dividends payable ....................................... 13,000
Litigation liabilities .................................. 179,926
------------
Total current liabilities ........ 1,285,364
------------
Commitments and contingencies ................................ --
Shareholders' deficit (Notes 2 and 4):
Preferred stock ......................................... 500,000
Common stock ............................................ 135,755
Additional paid-in capital .............................. 10,550,013
Accrued compensation .................................... 2,502,327
Retained deficit ........................................ (14,954,955)
------------
Total shareholders' deficit ........ (1,266,860)
------------
$ 18,504
============
See accompanying notes to condensed financial statements
3
XDOGS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales ..................................................... $ -- $ 2,590 $ -- $ 14,319
Cost of goods sold ............................................ -- (1,295) -- (6,013)
------------ ------------ ------------ ------------
Gross margin -- 1,295 -- 8,306
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses .............. 56,855 119,506 124,240 459,025
Stock-based consulting and compensation expense (Note 2) .. 32,500 82,448 62,500 283,130
Asset impairment (Note 5) ................................. -- -- 25,080 --
------------ ------------ ------------ ------------
Total operating expenses 89,355 201,954 211,820 742,155
------------ ------------ ------------ ------------
Operating loss (89,355) (200,659) (211,820) (733,849)
Non-operating income (expense):
Interest expense .......................................... (10,092) (26,731) (30,183) (59,758)
Litigation liabilities .................................... -- -- -- --
------------ ------------ ------------ ------------
Loss before income taxes (99,447) (227,390) (242,003) (793,607)
Provision for income taxes (Note 3) ........................... -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (99,447) $ (227,390) $ (242,003) $ (793,607)
============ ============ ============ ============
Loss attributable to Common Stock after
preferred stock dividends $ (112,447) $ (227,390) $ (255,003) $ (793,607)
============ ============ ============ ============
Basic and diluted loss per common share ....................... $ (0.01) $ (0.03) $ (0.02) $ (0.14)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding ................................. 12,158,043 6,511,742 11,503,281 5,718,409
============ ============ ============ ============
See accompanying notes to condensed financial statements
4
XDOGS, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
April 1, 2002 Through September 30, 2002
(Unaudited)
Preferred Stock Common Stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance, April 1, 2002 -- $ -- 10,513,043 $ 105,130
Common stock issued to related parties for services
valued at fair value (Note 2) ................... -- -- 150,000 1,500
Common stock issued for cash (Note 4) ............... -- -- 1,462,500 14,625
Shares issued in exchange for related party notes
and related accrued interest (Note 2) .......... 100 500,000 500,000 5,000
Dividends on preferred stock ........................ -- -- -- --
Common stock issued to attorney for services
valued at fair value (Note 4) ................... -- -- 300,000 3,000
Common stock issued to consultants for services
valued at fair value (Note 4) ................... -- -- 650,000 6,500
Net loss ............................................ -- -- -- --
------------ ------------ ------------ ------------
Balance, September 30, 2002 100 $ 500,000 13,575,543 $ 135,755
============ ============ ============ ============
Table continues below.
Additional
Paid-in Accrued Retained
Capital Compensation Deficit Total
------------ ------------ ------------ ------------
Balance, April 1, 2002 $ 10,414,313 $ 2,502,327 $(14,699,952) $ (1,678,182)
Common stock issued to related parties for services
valued at fair value (Note 2) ................... 13,500 -- -- 15,000
Common stock issued for cash (Note 4) ............... 64,450 -- -- 79,075
Shares issued in exchange for related party notes
and related accrued interest (Note 2) .......... 19,750 -- -- 524,750
Dividends on preferred stock ........................ -- -- (13,000) (13,000)
Common stock issued to attorney for services
valued at fair value (Note 4) ................... 12,000 -- -- 15,000
Common stock issued to consultants for services
valued at fair value (Note 4) ................... 26,000 -- -- 32,500
Net loss ............................................ -- -- (242,003) (242,003)
------------ ------------ ------------ ------------
Balance, September 30, 2002 $ 10,550,013 $ 2,502,327 $(14,954,955) $ (1,266,860)
============ ============ ============ ============
See accompanying notes to condensed financial statements
5
XDOGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
September 30,
----------------------
2002 2001
--------- ---------
Net cash (used in) operating activities $ (68,988) $(214,000)
--------- ---------
Cash flow from financing activities:
Net proceeds from sale of common stock ....................... 79,075 214,000
--------- ---------
Net cash provided by financing activities 79,075 214,000
--------- ---------
Net change in cash 10,087 --
Cash at beginning of period .......................................... 56 --
--------- ---------
Cash at end of period ................................................ $ 10,143 $ --
========= =========
Supplemental cash flow information:
Cash paid for interest ........................................ $ -- $ --
========= =========
Cash paid for income taxes .................................... $ -- $ --
========= =========
Noncash investing and financing activities:
Liability accrued for web site development ................. $ -- $ 200,000
========= =========
Stock issued for retirement of AP, debt and interest ....... $ -- $ 453,423
========= =========
Shares issued for retirement of notes and interest (Note 2) $ 524,750 $ --
========= =========
See accompanying notes to condensed financial statements
6
XDOGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Unaudited Financial Information
The unaudited condensed financial statements presented herein have been prepared
by the Company in accordance with the accounting policies in its annual Form
10-KSB report dated March 31, 2002 and should be read in conjunction with the
notes thereto.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to provide a fair presentation of
operating results for the interim periods presented have been made. The results
of operations for the three months period ended June 30, 2002 are not
necessarily indicative of the results to be expected for the fiscal year ending
March 31, 2003.
Note 2: Related Party Transactions
During the six months ended September 30, 2002, the Company issued 40,000 shares
of its common stock, valued at $4,000, to an officer in lieu of a salary
payment. The Company also accrued, but did not pay, the officer $30,000 for the
six months ended September 30, 2002. In addition, the Company issued 10,000
shares of common stock, valued at $1,000, to an employee in lieu of a severance
payment. Also, the Company issued a Director of the Company 100,000 shares of
common stock, valued at $10,000, as compensation in lieu of Director's fees. For
financial accounting purposes, the Company valued the common stock transactions
based on the OTCBB quoted market price.
In June 2002, the Company issued 100 shares of its Series A Preferred Stock and
500,000 shares of common stock, respectively, to an officer in exchange for the
extinguishment of notes payable totalling $500,000 and accrued interest payable
on the notes totalling $24,795. The 100 shares of Series A Preferred Stock are
convertible into the number of shares of common stock sufficient to represent 40
percent of the fully diluted shares outstanding after their issuance. The Series
A Preferred Stock pays eight percent dividends. The dividends are cumulative and
payable quarterly. The Series A Preferred Stock carries a liquidating
preference, over all other classes of stock, equal to the amount paid for the
stock plus any unpaid dividends. The Series A Preferred Stock provides for
voting rights on an "as converted to common stock" basis.
The Company signed a letter of intent to acquire a private company in June 2002.
However, no definitive agreement has been executed. Since the signing of the
letter of intent, the president of the Company has been engaged in a due
diligence evaluation of the target company. In addition, the president of the
Company has been assisting the target company with financing matters. The
accompanying financial statements include the travel and other out-of-pocket
costs of the Company's president to conduct the due diligence evaluation.
The Board of Directors has the authority to issue, at any time or from time to
time, up to 1 million shares of preferred stock in one or more series. The
voting rights and such designations, preferences, limitations and special rights
are, subject to terms of the Company's Articles of Incorporation, determined by
the Board of Directors.
7
XDOGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 3: Income Taxes
The Company records its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". The Company incurred net operating losses during
the six months ended September 30, 2002 resulting in a deferred tax asset, which
was fully allowed for; therefore, the net benefit and expense resulted in $-0-
income taxes.
Note 4: Shareholders' Deficit
During the six months ended September 30, 2002, the Company issued 650,000
shares of its common stock, valued at $32,500, to three consultants. For
financial accounting purposes, the Company valued the common stock transactions
based on the OTCBB quoted market price.
During the six months ended September 30, 2002, the Company issued 300,000
shares of its common stock, valued at $15,000, to its attorney. For financial
accounting purposes, the Company valued the common stock transactions based on
the OTCBB quoted market price.
During the six months ended September 30, 2002, the Company sold 1,462,500
shares of its common stock for $79,075.
Note 5: Asset Impairment
Effective April 1, 2002, management reviewed its property and equipment for
impairment and wrote down the property and equipment to its salvage value. The
Company took a charge to operations during the quarter of $25,080.
8
PART I - 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, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
based on certain assumptions and describe our future plans, strategies and
expectations. They are generally identifiable by use of the words "believe",
"expect", "intend", "anticipate", "estimate", "project" or similar expressions.
These statements are not guarantees of future performance, events or results and
involve potential risks and uncertainties. Accordingly, actual performance,
events or results may differ materially from such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from current
expectations include, but are not limited to, changes in general economic
conditions, changes in interest rates, legislative and regulatory changes, the
unavailability of equity and debt financing, unanticipated costs associated with
our potential acquisitions, expanding a new line of business, ability to meet
competition, loss of existing key personnel, ability to hire and retain future
personnel, our failure to manage our growth effectively and the other risks
identified in this filing or our other reports filed with the U.S. Securities
and Exchange Commission. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
The following information should be read in conjunction with the condensed
financial statements and the notes thereto included in Item 1 of this Quarterly
Report, and our other filings made with the Securities and Exchange Commission.
RESULTS OF OPERATIONS AND PLAN OF OPERATION
Limited or No Real Operations
As of September 30, 2002, we had limited operations with no revenues that
generated a loss. In our current form, we expect to continue to generate
significant losses and without additional funding through private placements of
our common stock, which cannot be guaranteed, it is highly unlikely that we can
continue to operate. As a result, we have been focusing all of our efforts on
acquiring bigTime sports apparel, inc., an Oklahoma corporation ("bigTime") as
explained below to enhance shareholder value.
Acquisition Strategy
On June 18, 2002, we filed a Form 8-K disclosing that on June 11, 2002, we
signed a non-binding letter of intent to acquire bigTime sports apparel, inc.,
an Oklahoma corporation ("bigTime") which sells sports and athletic apparel
under its brand "bigTime" to the collegiate market. We intend to issue
14,000,000 shares of our common stock for either all of the outstanding capital
stock of bigTime or all of its assets necessary and useful in its operations, as
determined by us. The proposed acquisition is subject to completion of due
diligence review by us, negotiation and execution of a definitive transaction
agreement, a determination by our independent accountants that bigTime's
financial statements are auditable for SEC financial reporting compliance
purposes, and approvals of the respective boards of directors of each company
and the shareholders of bigTime.
9
The parties originally intended to execute a definitive transaction
agreement prior to December 5, 2002, and have verbally agreed to a thirty day
extension until January 5, 2003. We are continuing our due diligence
investigation of bigTime's business.
Since signing the letter of intent, our Chief Executive Officer, Kent
Rodriguez, has spent a significant amount of time at bigTime in Oklahoma
conducting due diligence and managing its business as an in-house CFO and COO in
an effort to position bigTime for the proposed transaction and to attract
capital and financing opportunities. Neither the Company nor Mr. Rodriguez has
received separate compensation from bigTime for these services.
There can be no assurance that we will consummate a transaction with
bigTime, or if consummated, that the combined operations will be successful or
profitable.
Financing Activities
We have most recently been funding our obligations through the issuance of
our common stock for services rendered or for cash in private placements. We may
seek additional funds in the private or public equity or debt markets in order
to execute its plan or operation and business strategy. There can be no
assurance that we will be able to attract capital or obtain such financing when
needed on acceptable terms, or at all, in which case our ability to execute our
business strategy will be impaired and we may need to cease operations.
Operations for the Three Months Ended September 30, 2002
As of September 30, 2002, we had current assets of $13,129, total assets of
$18,504 and total current liabilities of $1,285,364. We had no net sales for
this period. During this period, our total expenses were $89,355, compared to
$201,954 for the same period last year. Our selling, general, and administrative
expenses were $56,855, compared to $119,506 for the same period last year, and
our interest expense was $10,092, compared to $26,731 for the same period last
year. We had a net loss for the quarter ended September 30, 2002 of $99,447 and
a basic and diluted loss of $0.01 per common share.
LIQUIDITY AND CAPITAL RESOURCES
We have very little cash. Our cash and cash equivalents were $10,143 on
September 30, 2002, compared to $-0- on September 30, 2001. As a result of
having little cash, we meet our liquidity needs through the issuance of our
common shares for cash or for services rendered. For the six months ended
September 30, 2002, we issued 1,100,000 shares of our common stock, valued at
$62,500, for consultant services and compensation, and sold 1,462,500 shares of
common stock for $79,075.
During the six months ended September 30, 2002, we used no cash in
investing activities. Our financing activities for this period provided cash of
$79,075 as compared to $214,000 for the same period in 2001.
We plan to raise additional capital during the coming fiscal year, but
currently have not located additional funding. Our ability to continue
operations is highly dependent upon our ability to obtain immediate additional
financing, or generate revenues from a combined operation with bigTime or
another acquisition candidate, none of which can be guaranteed. Unless
additional funding is located, it is highly unlikely that we can continue to
operate. Ultimately, our success is dependent upon our ability to generate
revenues from a combined operation with one of our acquisition candidates and to
achieve profitability, which is dependent upon a number of factors, including
the sustained profitability of the operations of these candidates. There is no
assurance that even with adequate financing or combined operations, we will
generate revenues and be profitable.
10
CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, Kent Rodriguez, our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15b under the Securities Exchange Act of 1934. Based on his review of
our disclosure controls and procedures, Mr. Rodriguez has concluded that our
disclosure controls and procedures are effective in timely alerting him to
material information relating to us that is required to be included in our
periodic SEC filings. Further, there were no significant changes in the internal
controls or in other factors that could significantly affect these controls
after the evaluation date and the date of this report.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
Mr. Henry Furst filed a complaint against us in the U.S. District Court for
the District of Minnesota alleging that we breached our contractual obligations
to him and seeking $144,000 in damages. The parties subsequently negotiated a
settlement whereby we agreed to pay Mr. Furst $94,000 in installments and
executed a confession of judgment in favor of Mr. Furst for that amount. We
failed to pay Mr. Furst in accordance with this settlement agreement. In June
2002, pursuant to an agreement, we agreed with Mr. Furst to pay him $14,500 on
June 13, 2002 in satisfaction of his judgment against us. We have not made this
payment yet.
On or about March 14, 2000, our former advisory consultant, Stephen
Carlson, loaned us $100,000. We executed a note in favor of Mr. Carlson that
required payment in full on December 31, 2000. We are in default and Mr. Carlson
on March 9, 2001, initiated a legal action against us in the District Court of
Hennepin County to collect the loan. We also granted to Mr. Carlson options to
purchase 60,000 shares of Common Stock, all of which are not-in-the money. In
November 2001, we entered into a settlement agreement with Mr. Carlson whereby
we agreed to pay him $125,000 over time and on or before June 30, 2002 and
secured our obligation with our President's personal assets. To date, we have
paid Mr. Carlson $45,000 and own him $80,000.
In October 2001, Gage Marketing Services filed an action against us in the
U.S. District Court for the District of Minnesota alleging nonpayment for
services. Pursuant to a settlement agreement in January 2002, we agreed to pay
Gage Marketing Services $9,000 in February 2002 to settle this dispute. We have
not made this payment yet.
We also have various matters pending alleging nonpayment for services and
aggregating not more than $25,000.
ITEM 2.- CHANGES IN SECURITIES
a. None.
b. None.
c. Recent Sales of Unregistered Securities. During the three months ended
September 30, 2002, we issued 350,000 shares of our Common Stock to two
consultants. We also issued an aggregate of 1,037,500 shares of our Common
Stock to investors for $75,075. We relied on Section 4(2) of the Securities
Act of 1933, as amended, for the issuance of all of these securities.
c. None.
11
ITEM 3.- DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4.- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None
ITEM 5.- OTHER INFORMATION. None.
ITEM 6.- EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits -
Exhibit Description Page Number
- ------- ----------- -----------
3.1 Restated Articles of Incorporation (Incorporated by *
reference to Exhibit 3.1 to Registration Statement on
Form SB-2, Registration No. 33-74240C).
3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 *
to Registration Statement on Form SB-2, Registration No.
33-74240C).
3.3 Articles of Incorporation for the State of Nevada. *
(Incorporated by reference to Exhibit 2.2 to Form 10-KSB
filed February 2000)
3.4 Articles of Merger for the Colorado Corporation and the *
Nevada Corporation (Incorporated by reference to Exhibit
3.4 to Form 10-KSB filed February 2000)
3.5 Bylaws of the Nevada Corporation (Incorporated by *
reference to Exhibit 3.5 to Form 10-KSB filed February
2000)
4.1 Specimen of Common Stock (Incorporated by reference to *
Exhibit 4.1 to Registration Statement on Form SB-2,
Registration No. 33-74240C).
4.2 Certificate of Designation of Series and Determination of *
Rights and Preferences of Series A Convertible Preferred
Stock (Incorporated by reference to Exhibit 4.2 to Form
10-KSB filed July 12, 2002.)
10.1 Incentive Compensation and Employment Agreement for Kent *
A. Rodriguez (Incorporated by Reference to Exhibit 10.12
of our Form 10-KSB filed July 20, 2001)
99.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Incorporated by reference to a previously filed exhibit or report.
b. Reports on Form 8-K. None.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
XDOGS, INC.
By: /s/ Kent Rodriguez
---------------------------------
Date: November 25, 2002 Kent Rodriguez
Chief Executive Officer
Chief Accounting Officer
13
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kent Rodriguez, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Xdogs, Inc. (the
"Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
Registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on myr
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the Registrant's
auditors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 25, 2002.
By: /s/ Kent Rodriguez
----------------------
Kent Rodriguez, Chief Executive Officer
and Chief Accounting Officer