As filed with the Securities and Exchange Commission on January 26, 2004
Registration No. _____________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
BESTNET COMMUNICATIONS CORP.
(formerly WAVETECH INTERNATIONAL, INC.)
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 86-1006416
------------------------------ -----------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
5075 Cascade Road SE, Suite A, Grand Rapids, Michigan 49546
(616) 977-9933
-----------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Copies to:
Robert A. Blanchard Gregory R. Hall, Esq.
BestNet Communications Corp. Squire, Sanders & Dempsey L.L.P.
5075 Cascade Road SE, Suite A Two Renaissance Square
Grand Rapids, Michigan 49546 40 North Central Avenue, Suite 2700
(616) 977-9933 Phoenix, Arizona 85004-4498
(602)528-4000
--------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
================================================================================
CALCULATION OF REGISTRATION FEE
======================================= =============== ====================== ===================== ===================
Proposed
Number of Proposed Maximum Maximum
Title of each Class of Shares to be Offering Price Per Aggregate Amount of
Securities to be Registered Registered (1) Share Unit Offering Price Registration Fee
- --------------------------------------- --------------- ---------------------- --------------------- -------------------
Common Stock, $.001 par value (1) 5,625,311 $0.37 2,081,365 (3) $168.38
Units (2) 250,000 $0.30 75,000 $ 6.07
Common Stock, $.001 par 750,000 -- -- --
value per share (2)
Series A Preferred Stock (2) 250,000 -- -- --
Common Stock, $.001 par 500,000 $0.10 50,000 $ 4.05
value per share (2)
Warrants (2) 250,000 -- -- --
Common Stock, $.001 par 250,000 $0.30 75,000 $ 6.07
value per share (2)
Total Fee $184.57
======================================= =============== ====================== ===================== ===================
(1) There are being registered under this registration statement: (i) 1,264,311
shares of common stock, net of 220,000 shares previously registered, issued
upon conversion of $220,000 in aggregate principal amount and accrued
interest of $2,647 of our 6% Convertible Promissory Notes issued to note
holders pursuant to a Note and Warrant Purchase Agreement, dated September
26, 2002, and (ii) 4,361,000 shares of common stock, net of $445,000 shares
previously registered, issuable upon conversion of $445,000 in aggregate
principal amount, plus accrued interest of $35,600, of our 8% Convertible
Promissory Notes. Pursuant to Rule 416(a), this registration statement also
covers an indeterminate number of additional securities that may be offered
or issued in connection with any stock split, stock dividend or similar
transaction.
(2) There are also being registered under this registration statement: (i)
250,000 units issuable upon conversion of $75,000 in aggregate principal of
our 10% Convertible Promossory Notes due January 8, 2005. Each unit
consists of three shares of common stock, a three-year warrant to purchase
one share of common stock, and one share of Series A Preferred Stock; (ii)
750,000 shares of common stock underlying the units; (iii) 250,000 shares
of Series A Preferred Stock underlying the units; (iv) warrants to purchase
an aggregate of 250,000 shares of common stock underlying the units; (v)
500,000 shares of common stock issuable upon conversion of the Series A
Preferred Stock; and (vi) 250,000 shares of common stock issuable upon
exercise of the warrants. Pursuant to Rule 416(a), this registration
statement also covers an indeterminate number of additional securities that
may be offered or issued in connection with any stock split, stock dividend
or similar transaction, or pursuant to the anti-dilution provision of the
Series A Preferred Stock and the warrants.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 (c) and (o) under the Securities Act of 1933, as
amended, on the basis of the closing price for shares of our common stock
reported by the Nasdaq Over the counter Bulletin Board on January 21, 2004.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 26, 2004
Prospectus
BestNet Communications Corp.
7,125,311 Shares of Our Common Stock
250,000 Units
500,000 Shares of Preferred Stock
250,000 Warrants
This prospectus relates to the resale of an aggregate of 1,264,311 shares
of our common stock, net of 220,000 shares previously registered, issuable upon
conversion of our of $220,000 in aggregate principal amount and accrued interest
of $2,647 of our 6% Convertible Promissory Notes issued to note holders by
BestNet pursuant to a Note and Warrant Purchase Agreement, dated September 26,
2002, and the resale of an aggregate of 4,361,000 shares of common stock, net of
445,000 shares previously registered issuable upon conversion of $445,000 in
aggregate principal, plus accrued interest of $35,600, of our 8% Convertible
Promissory Notes. Further, in January 2004, we issued $75,000 in aggregate
principal of 10% Convertible Promissory Notes, which are convertible into units
at a conversion price of $0.30. Each unit consists of the following securities:
three shares of our common stock; one three-year warrant to purchase one share
of common stock at a per share exercise price of $0.30; and one share of Series
A Preferred Stock, convertible into two shares of common stock at a conversion
price of $0.10 per share of common stock. This prospectus also relates to the
resale of the following securities: the 250,000 units, the 250,000 shares of
Series A Preferred Stock, the 250,000 warrants and the 750,000 shares of common
stock that comprise the units, as well as the issuance and resale of 500,000
shares of common stock issuable upon conversion of the Series A Preferred Stock
and 250,000 shares of common stock issuable upon exercise of the warrants.
Holders of the units may not separately trade the warrants, the Series A
Preferred Stock, or the common stock underlying the warrants and the Series A
Preferred Stock until such time as determined by our board of directors. The
shares of common stock covered in this prospectus are being offered by the
selling stockholders identified on pages 25 through 28. The shares of common
stock that may be resold by the selling stockholders constitute 23.8% of our
issued and outstanding common stock on January 21, 2004 and 19.2% of our issued
and outstanding common stock on such date after giving effect to the exercise of
all of the warrants described in this prospectus.
The selling stockholders may sell the common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholders may be deemed to be
underwriters of the shares of common stock, which they are offering. Please see
the "Selling Stockholders" section beginning on page 26 in this prospectus for a
complete description of all of the selling stockholders.
The selling stockholders will receive all of the amounts received upon any
sale by them of the common stock, less any brokerage commissions or other
expenses incurred by them. We will not receive any proceeds from the sale of the
common stock by the selling stockholders.
Our common stock is traded on the NASDAQ Over-the-Counter Bulletin Board
under the symbol BESC.OB. Our units are traded on the Over the Counter Bulletin
Board, as well, under the symbol BESCU.PK. On January 21, 2004, the closing sale
price of our common stock was $0.37 and the closing price of our units was
$1.10.
Investing in our common stock involves a high degree of risk. See Risk
Factors on page 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is January _______,2004.
TABLE OF CONTENTS
Page
----
WHERE YOU CAN FIND MORE INFORMATION............................................2
INCORPORATION OF DOCUMENTS BY REFERENCE........................................2
SUMMARY........................................................................3
THE OFFERING...................................................................7
RISK FACTORS...................................................................9
USE OF PROCEEDS...............................................................23
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................23
SELLING STOCKHOLDERS..........................................................25
PLAN OF DISTRIBUTION..........................................................28
DETERMINATION OF OFFERING PRICE...............................................29
DESCRIPTION OF SECURITIES.....................................................29
LEGAL MATTERS.................................................................29
EXPERTS.......................................................................29
INFORMATION WITH RESPECT TO THE REGISTRANT....................................29
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES...................................................30
i
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the U.S. Securities and Exchange
Commission. You may read and copy any document that we file at the SEC's public
reference facilities at 450 Fifth Street N.W., Room 1024, Washington, D.C.
20549. Please call the SEC at 1-800-732-0330 for more information about its
public reference facilities. Our SEC filings are also available to you free of
charge at the SEC's web site at http://www.sec.gov.
Copies of publicly available documents that we have filed with the SEC can
also be inspected and copied at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus is a part of the registration statement that we filed on
Form S-2 with the SEC. The registration statement contains more information
about us and our common stock than this prospectus, including exhibits and
schedules. You should refer to the registration statement for additional
information about us and the common stock being offered in this prospectus.
Statements that we make in this prospectus relating to any documents filed as an
exhibit to the registration statement or any document incorporated by reference
into the registration statement may not be complete and you should review the
referenced document itself for a complete understanding of its terms.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them. This means that we can disclose information to you by referring you to
those documents. The documents that have been incorporated by reference are an
important part of the prospectus, and you should review that information in
order to understand the nature of any investment by you in the common stock.
Information contained in this prospectus automatically updates and supersedes
previously filed information. We are incorporating by reference the documents
listed below and all of our filings under the Securities Exchange Act of 1934,
as amended, after the date of filing the initial registration statement and
prior to the effectiveness of the registration statement.
o our annual report on Form 10-KSB for the fiscal year ended August 31,
2003;
o our quarterly report on Form 10-QSB for the quarterly period ended
November 30, 2003;
o our Current Report on Form 8-K filed with the SEC on January 15, 2004;
and
o the description of our common stock included in our Registration
Statement on Form 8-A, filed March 11, 1987.
If you would like a copy of any of these documents, at no cost, please
write or call us at:
BestNet Communications Corp.
5075 Cascade Road SE, Suite A, Grand Rapids, Michigan 49546
Attn: Corporate Secretary
Telephone: (616) 977-9933
You should only rely upon the information included in or incorporated by
reference into this prospectus or in any prospectus supplement that is delivered
to you. We have not authorized anyone to provide you with additional or
different information. You should not assume that the information included in or
incorporated by reference into this prospectus or any prospectus supplement is
accurate as of any date later than the date on the front of the prospectus or
prospectus supplement.
We have not authorized any person to provide you with information different
from that contained or incorporated by reference in this prospectus. The selling
shareholders are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of common stock.
2
SUMMARY
The following summary should be read by you together with the more detailed
information in other sections of this prospectus. You should also carefully
consider the factors described under Risk Factors at page 7 of this prospectus.
Throughout this prospectus, we refer to BestNet Communications Corp. as BestNet,
we, our, ours, and us.
BESTNET COMMUNICATIONS CORP.
BestNet is a facilities-based, global communication solutions provider. The
Company's patented, proprietary technology uses widely available Internet and
text messaging network access to control, enable and manage voice communications
over the Public Switched Telecommunication Network. BestNet views its role as a
product development, marketing, sales, sub-licensing, customer service and
billing organization for patented, packet-based communication software
applications that control, manage and enable global communication services. We
are presently focusing substantially all of our financial and other resources on
marketing and developing communication applications to individual clients and
selected companies with international locations and/or clients worldwide. As of
the date of this Report, we have approximately 19,500 clients, making calls from
171 countries and geographic regions and calling to 224 countries and geographic
regions.
We develop, market and sell patented and proprietary communication
applications, technologies and services to corporate and residential clients
worldwide. Bestnetcall, the Company's flagship product, is the industry's first
patented phone-to-phone Internet-enabled long distance service, which combines
global Internet access and the PSTN via our website located at
www.Bestnetcall.com. This service was first made available to the public on
April 17, 2000 and is marketed under the brand name "Bestnetcall." In fiscal
year 2003, the Company introduced two additional and distinctive product
offerings in ClicktoPhoneTM and SMS Call which stands for short message system.
Although founded as a Nevada corporation on July 10, 1986, we did not
commence operations until 1995. From 1995 until 1999, we operated under the name
"Wavetech International, Inc." and developed software for customized calling
card services and created an infrastructure to market and distribute our
products and services. During this period, our efforts were primarily focused on
hiring management and other key personnel, raising capital, procuring
governmental authorizations and space in central offices, acquiring equipment
and facilities, developing, acquiring and integrating billing and database
systems. We marketed these systems to the business traveler and to large
organizations or companies with a membership base. In the late 1990's, due to
the wide scale deployment of cellular telephones with messaging capability, the
market for business related calling card services greatly diminished. In June
1999, we discontinued our calling card services. Since then, we have focused
substantially all of our efforts and resources on developing and commercializing
our Bestnetcall web-enabled and other communication applications for long
distance and conference calling services. On September 27, 2000, we changed our
name to BestNet Communications Corp.
As of August 31, 2003 and November 30, 2003, BestNet had an accumulated
deficit of $28,585,017 and $29,949,970 (unaudited), respectively. Prior year's
financial information has no particular bearing on future years' results.
We believe that our future profitability and success will depend in a large
part on our ability to generate both revenue and profit from the sale of
communication solutions to both businesses and individual users. Revenues are
also anticipated from sub-licensing our proprietary technology and continued
development of private labeled websites for channel partners around the world.
Based on recent operating results as of August 31, 2003, the Company has
sufficient working capital to fund operations only through January 2004. The
profitability and success of BestNet will depend on:
o our ability to obtain further funding to reach breakeven;
o our ability to sustain existing accounts and current contribution
margin;
o our ability to grow revenue at current or enhanced contribution
margin; and
o our ability to maintain selling, general and administrative costs at
current levels.
Accordingly, we expect to continue to expend significant financial and
management resources on the items listed above in the short term. As a result,
we expect to incur additional losses and continued negative cash flow from
operations prior to the achievement of breakeven. Should BestNet fail to achieve
the key result items listed above, it will have a material detrimental effect on
our Company. We expect to continue to spend considerable financial and
management resources on the roll-out of our Bestnetcall service, which is
described below. Further, we have substantial future capital requirements with
3
respect to the roll-out of our Bestnetcall service. Accordingly, we expect to
continue to incur significant additional losses and continued negative cash flow
from operations for the foreseeable future.
Users of our services are able to perform the following activities by
accessing our websites at WWW.BESTNETCALL.COM and WWW.CLICKTOPHONE.COM:
o Register to use our services
o Access and launch communication applications
o Access current rate tables
o Access a full suite of call management features
o Access customer service immediately via the Internet
o Maintain call account security
o Obtain real time billing detail
BestNet calling applications do not require the purchase of special
hardware or software by the customer and use existing telephone equipment. Users
only need access to the Internet or text messaging network and an available
phone line, land line or mobile. BestNet applications also offer immediate real
time billing detail to all users and accept various payment methods, including
post-paid credit card payments, invoicing options and prepaid accounts. The
architecture of our services allows for total security regarding both the FROM
and TO legs of each call. The FROM and TO numbers are never displayed, thus it
is impossible to determine from where a call is being placed.
Following the completion of a telephone call, the total cost for that call
can be viewed on the user's online account. Call detail records may be printed
or exported to Word or text applications. BestNet's services also include
features such as speed dialing, personalized directories, client billing codes,
world-time country/city code lookup and immediate access to customer service via
our website. Account administrators may add or delete users, view a user's
calling activity and create reports detailing call activity.
The methodology upon which our Bestnetcall service is based is subject to a
license agreement with Softalk, Inc., an Ontario, Canada-based technology
company. We entered into this licensing arrangement in April 1999 and later
amended and restated that arrangement in October 1999. Under the terms of our
license agreement with Softalk, we were granted exclusive global rights to
distribute, market, service, sell, and sublicense Softalk's services and
products to commercial accounts and on a worldwide non-exclusive basis to
individual consumer accounts. In fiscal 2003, BestNet announced a new chapter in
its history with the completion of development, successful testing and
implementation of its own next generation technology called GlobalPlex.
GlobalPlex technology has been specifically developed and designed by BestNet to
easily interface with current and future commercially standard communication
applications and evolving technology such as Voice over Internet Protocol,
commonly referred to as VoIP and mobile solutions. GlobalPlex was also designed
to easily interface with other networks as well. This allows BestNet greater
scalability, customization and flexibility to serve our current and future
customers.
We own and operate telecommunication equipment and network infrastructure
in Toronto, Ontario and New York, New York including high-capacity switches, web
servers, data base servers, calling servers and security systems. In addition,
we make use of specialized software for data management, billing and customer
service requirements. Today's telecom industry is being shaped dramatically by
globalization, new competition, and use of technology. The telecommunications
market is one of the largest markets in the world, second only to the financial
markets. Our goal is to become a leading provider of Web-enabled application
services. We hope to capture a share of this large and growing market.
Our principal executive offices are located at 5075 Cascade Road SE, Suite
A, Grand Rapids, Michigan 49546. Our telephone number is (616) 977-9933. We
wholly own our four subsidiaries, Interpretel, Inc., Interpretel (Canada) Inc.,
Telplex International Communications, Inc. and International Environment
Corporation.
4
SELECTED AND SUMMARY CONSOLIDATED FINANCIAL DATA
The following selected and summary consolidated financial data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and our financial statements included in our
Form 10-KSB for the year ended August 31, 2003 and the related notes included
elsewhere in this prospectus. The selected consolidated statement of operations
data for the fiscal years ended August 31, 1999, 2000, 2001, 2002 and 2003 are
derived from our audited financial statements not included elsewhere in this
prospectus.
Year Ended August 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Statement of Operations
Data:
Revenue $ 13,580 $ 28,670 $ 360,615 $ 1,060,582 $ 1,471,358
Cost of revenue 9,468 51,722 382,298 1,432,196 1,287,328
Development 0 0 0 0 0
Selling, general and administration 691,479 1,188,032 2,044,720 1,849,483 1,868,925
Depreciation & amortization 146,977 1,545,636 1,979,975 2,277,525 2,231,383
----------- ----------- ------------ ------------ ------------
Total cost and expenses 847,924 2,785,390 4,024,695 4,127,008 4,100,308
Loss from operations (834,344) (2,756,720) (4,046,378) (4,498,622) (3,916,278)
Other Income and Expenses:
Interest income 70,519 76,129 227,691 3,023 4,815
Rental income 36,000 22,500 0 0 0
Miscellaneous income 0 4,014 0 0 0
Interest and finance charges (8,995) (60,512) (36) (943,937) (870,684)
License agreement termination income 0 0 0 0 0
Loss on sale of investment in Switch 0 0 0 0 0
Debt conversion expense 0 0 0 0 0
Proposed merger costs (118,450) 0 0 0 0
Write-off of intangibles & other (36,125) 0 0 0 0
assets
Foreign asset tax expense 0 0 (50) (30,050) 0
Preferred stock conversion penalty (144,000) (221,226) 0 (35,944) (17,847)
Loss on arbitration 0 0 0 0 (12,965)
Gain on sale of fixed assets 0 0 0 2,405 (17,290)
Other miscellaneous expenses (15,000) 0 (1,304) (800) (782)
----------- ----------- ------------- ------------- -------------
Total Other Income and Expenses (216,051) (179,095) 226,301 (1,005,303) (914,753)
----------- ----------- ------------ ------------- -------------
Net loss from continuing operations $(1,050,395) $(2,935,815) (3,820,077) $ (5,503,925) $ (4,831,031)
Income (loss) from discontinued 0 0 17,280 (5,800) 0
operations
Cumulative preferred dividends
Declared and preferred stock
conversion benefit 36,500 2,602,046 212,013 958,723 265,006
----------- ----------- ------------ ------------ ------------
Net loss available to common $(1,086,895) $(5,537,861) $ (4,014,810) $ (6,468,448) $ (5,096,037)
shareholders
Net loss per share, basic & diluted $ (0.37) $ (1.72) $ (0.45) $ (0.41) $ (0.22)
Weighted average shares outstanding,
basic & diluted 2,904,693 3,221,225 9,013,669 15,933,908 23,445,307
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Balance Sheet Data:
Cash & Cash Equivalents $ 889,620 $ 2,581,492 $ 285,518 $ 351,784 $ 226,559
Working Capital 618,440 2,394,852 197,796 (526,923) (551,636)
Total Assets 1,574,395 13,862,867 11,264,956 9,500,400 5,719,150
Total Liabilities 281,288 210,542 164,196 1,046,125 908,966
Accumulated Deficit (7,467,861) (13,005,722) (17,020,532) (23,488,980) (28,585,017)
Stockholders' Equity 1,293,107 13,652,325 11,100,760 8,454,275 4,810,184
- ------------
(1) As restated to reflect a one-for-six reverse stock split effective December 18, 1998.
5
SELECTED AND SUMMARY UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following selected and summary consolidated financial data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and our unaudited financial statements
included in our unaudited Form 10-QSB for the quarter ended November 30, 2003
and the related notes included in these filings, which accompany this
prospectus. The selected unaudited consolidated statement of operations data for
the quarters ended November 30, 2002 and 2003 are derived from our unaudited
financial statements not included elsewhere in this prospectus.
Quarter Ended November 30,
--------------------------
2002 2003
---- ----
Statement of Operations
Data:
Revenue $ 300,208 $ 545,027
Cost of revenue 287,764 377,697
Selling, general and administration 707,365 341,494
Depreciation & amortization 556,455 504,379
------------ ------------
Total cost and expenses 1,551,584 1,223,570
Loss from operations (1,251,376) (678,543)
Other Income and Expenses:
Interest income 910 330
Interest and finance charges (188,188) (146,772)
Preferred stock conversion penalty (17,847) --
Conversion expense -- (541,182)
Other income (expenses) (2,130) 1,214
------------ ------------
Total Other Income and Expenses (207,255) (686,410)
------------ ------------
Loss available to common shareholders $ (1,458,631) $ (1,364,953)
============ ============
Net loss per share, basic & diluted $ (.08) $ (0.05)
Weighted average shares outstanding,
basic & diluted 18,399,469 28,408,756
6
THE OFFERING
This prospectus relates to the resale of an aggregate of 7,125,311 shares
of our common stock, 250,000 units, 500,000 shares of our preferred stock, and
250,000 warrants to be sold by the selling stockholders identified on pages 27
through 29 of this prospectus. The number of shares covered by this prospectus
represents 23.8% of our issued and outstanding common stock as of January 21,
2004 and 19.2% after issuance of all currently unissued shares included in this
prospectus.
As of January 21, 2004, we had 29,952,415 shares of common stock issued and
outstanding.
SECURITIES BEING ISSUED
Resale of Common Stock Underlying 6% Convertible Notes and Warrants
In this prospectus we are registering the resale of an aggregate of
1,246,311 shares of our common stock, net of 220,000 shares previously
registered, issuable upon the conversion of $220,000 in aggregate principal
amount, plus accrued interest of $2,647, of our 6% Convertible Promissory Notes.
The aggregate principal and accrued interest on these notes were converted into
shares of our common stock at a conversion price of $0.15 per share. These
notes, together with warrants to purchase our common stock, were issued pursuant
to the terms of a Note and Warrant Purchase Agreement, dated September 26, 2002.
The transactions set forth in the Note and Warrant Purchase Agreement were
completed on October 30, 2002.
The 6% Convertible Promissory Notes bear interest at the rate of 6% per
annum and are due and payable one year from the date of issuance. Each holder of
6% Convertible Promissory Notes has the option, on or prior to the maturity
date, to convert the principal amount of the note, together with accrued and
unpaid interest, into shares of common stock. As of November 5, 2003, $220,000
principal amount, plus $2,647 in accrued interest had been converted into common
stock at a conversion rate of $.15 per common share. This conversion rate
reflects a modification from our original purchase agreement with respect to
these securities. Effective upon the conversion of the principal and accrued
interest of these notes into common stock, the warrants issued to the note
holders, at a per share exercise price of $1.50, were cancelled and returned to
the Company. The cancellation of these warrants was part of the Company's
modification of the original terms of these securities.
We granted demand registration rights to the purchasers of the notes and
warrants pursuant to the terms of a registration rights agreement. Holders of
the majority of the shares issuable upon conversion of the notes and underlying
the warrants have requested that we file a registration statement to register
the resale of the shares of common stock issuable upon conversion of the notes
and upon exercise of the warrants. We must follow the procedures set forth in
the registration rights agreement if we are asked to file a registration
statement. We are only required to do this once. There are limitations on our
obligation to comply with a demand to register shares of common stock underlying
these securities.
Resale of Common Stock Underlying 8% Extended Convertible Notes and Warrants
In this prospectus we are also registering the resale of an aggregate of
4,361,000 shares of our common stock, net of 445,000 shares previously
registered, issuable upon conversion of $445,000 in aggregate principal amount,
plus accrued interest of $35,600, of our 8% Convertible Promissory Notes. These
notes and warrants were issued pursuant to the terms of a Note and Warrant
Purchase Agreement, dated September 26, 2002. The transactions set forth in the
Note and Warrant Purchase Agreement were completed on October 30, 2002. As of
November 30, 2003, these notes were extended one full year from their original
maturity date.
The extended 8% Convertible Promissory Notes bear interest at the rate of
8% per annum. Each holder of 8% Convertible Promissory Notes has the option, on
or prior to the maturity date, to convert the principal amount of the note,
together with accrued and unpaid interest, into shares of our common stock at a
new conversion rate of $0.10 per common share.
Effective upon the conversion of the principal and accrued interest into
common stock, the warrants issued to the note holders under the terms of the
original note agreements, at a per share exercise price of $1.50, will be
cancelled and returned to the Company.
7
We granted demand registration rights to the purchasers of the notes and
warrants pursuant to the terms of a registration rights agreement. Holders of
the majority of the shares issuable upon conversion of the notes and underlying
the warrants have requested that we file a registration statement to register
the resale of the shares of common stock issuable upon conversion of the notes
and upon exercise of the warrants. We must follow the procedures set forth in
the registration rights agreement if we are asked to file a registration
statement. We are only required to do this once. There are limitations on our
obligation to comply with a demand to register shares of common stock underlying
these securities.
Resale of Common Stock Underlying 10% Convertible Promissory Notes
In this prospectus we are registering the resale of an aggregate of 250,000
Units issuable upon conversion of $75,000 principal amount of our 10%
Convertible Promissory Notes, as well as the securities underlying the units.
These notes were issued pursuant to the terms of a Note and Purchase Agreement,
dated January 8, 2004. Each holder of the 10% Convertible Promissory Notes has
the option, on or prior to the maturity date, to convert the principal amount of
the note, together with accrued and unpaid interest, into shares of units of the
Company at a conversion rate of $0.30 per unit. Accordingly, this prospectus
covers the resale, by the selling stockholders, of 250,000 units, 250,000
warrants, 250,000 shares of Series A Preferred Stock and 750,000 shares of
common stock, issuable to the selling shareholders pursuant to the sale of the
units. This prospectus also covers the issuance, subject to shareholder approval
of an increase in the authorized capital stock of the Company to accommodate
such issuance, and resale of the 750,000 shares of the underlying common stock,
250,000 shares of which are issuable upon exercise of the warrants, and 500,000
shares of which are issuable upon conversion of the Series A Preferred Stock.
Our shareholders approved an increase in our authorized capital at our 2003
annual meeting of shareholders.
Units
In this prospectus we are registering the resale by the selling
shareholders of 250,000 units issuable upon conversion of our 10% Convertible
Promissory Notes. Each unit consists of three shares of common stock, one
three-year warrant to purchase one share of common stock at an exercise price of
$0.30 per share of common stock, and one share of Series A Preferred Stock,
convertible into two shares of common stock at a conversion price of $0.10 per
share of common stock.
Warrants
In this prospectus we are registering the resale by the selling
shareholders of 250,000 warrants. The warrants, which were issued as part of the
units, entitle the warrant holders to purchase one share of common stock at the
exercise price of $0.30 per share of common stock. The warrants may be exercised
following the date the Company's shareholders adopted a proposal authorizing an
increase in the Company's authorized capital stock, which occurred at the
Company's 2003 annual meeting of shareholders. The warrants expire on the third
anniversary of their issuance date. The exercise price and the number of shares
of common stock purchasable upon exercise of the warrants are subject to
adjustment upon the occurrence of certain events, including stock dividends,
stock splits and reverse stock splits, combinations and reclassifications of
common stock, and any reorganization, merger or combination of the Company with
or into another Corp. or the sale of all or substantially all of our assets.
Warrant holders do not have any voting or other rights as common shareholders.
As of the date of this prospectus, the warrants remain unexercised. Although we
are registering the resale of the warrants in this registration statement as
part of the units, the warrants will not be separately tradable or transferable
apart from the units.
Series A Convertible Preferred Stock
In this prospectus, we are registering the resale by the selling
shareholders of 250,000 shares of Series A Convertible Preferred Stock. The
shares of Series A Preferred Stock, which were issued as part of the sale of the
units, are entitled to a liquidation preference amount of $0.001 per share, and
each share is convertible into two shares of common stock at an exercise price
of $0.10 per common share. The Shares of the Series A Preferred Stock may be
converted at any time following the date the Company's shareholders adopted a
proposal authorizing an increase in the Company's authorized capital stock,
which occurred at the Company's 2003 annual meeting of shareholders. Series A
Preferred Stockholders do not have any voting or other rights as common
shareholders.
8
As of the date of this prospectus, all of the 250,000 outstanding shares of
the Series A Preferred Stock remain outstanding. The Series A Preferred Stock
will not be separately tradable or transferable apart from the units until such
time as determined by our board of directors.
RISK FACTORS
BEFORE BUYING ANY OF THE SHARES OF COMMON STOCK BEING OFFERED BY THIS
PROSPECTUS, YOU SHOULD CAREFULLY READ AND CONSIDER EACH OF THE RISK FACTORS WE
HAVE DESCRIBED IN THIS SECTION.
BESTNET HAS A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE OPERATING
INCOME FROM THE SALE OF ITS COMMUNICATION SOLUTIONS.
As of August 31, 2003 and November 30, 2003, BestNet had an accumulated
deficit of $28,585,017 and $29,949,970 (unaudited), respectively. Prior year's
financial information has no particular bearing on future years' results.
We believe that our future profitability and success will depend in a large
part on our ability to generate both revenue and profit from the sale of
communication solutions to both businesses and individual users. Revenues are
also anticipated from sub-licensing our proprietary technology and continued
development of private labeled websites for channel partners around the world.
Based on recent operating results as of August 31, 2003, the Company has
sufficient working capital to fund operations only through January 2004. The
profitability and success of BestNet will depend on:
o our ability to obtain further funding to reach breakeven;
o our ability to sustain existing accounts and current contribution
margin;
o our ability to grow revenue at current or enhanced contribution
margin;
o our ability to maintain selling, general and administrative costs
at current levels.
Accordingly, we expect to continue to expend significant financial and
management resources on the items listed above in the short term. As a result,
we expect to incur additional losses and continued negative cash flow from
operations prior to the achievement of breakeven. Should BestNet fail to achieve
the key result items listed above, it will have a material detrimental effect on
our Company.
WE ARE DEPENDENT ON COMPONENTS OF OUR LICENSE AGREEMENT WITH SOFTALK, WHICH, IF
MATERIAL CHANGES IN THIS AGREEMENT OCCURRED, COULD ADVERSELY IMPACT OUR BUSINESS
AND FUTURE OPERATIONS.
We are dependent on components of our license agreement with Softalk, which
gives us a worldwide exclusive license to distribute, market, service, sell and
sublicense communication solutions and software based on the methodology
protected by Softalk, Inc. patents (US 6,188,683 and Canadian 2,198,024) to
commercial accounts. This agreement also grants us a worldwide nonexclusive
license to distribute, market, service, sell and sublicense communication
solutions and software protected by Softalk, Inc. patents to individual
accounts. While our October 9, 2003 agreement solidifies our rights to the
license agreement, any further developments that could result in the termination
thereof, could materially adversely impact our business and future operations.
IF OUR BESTNETCALL SERVICE IS NOT ACCEPTED BY TARGETED CUSTOMERS, OUR FUTURE
OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED.
9
BestNet has operated at a loss for the last eleven years. The Bestnetcall
service is a unique value-generating product. Based on our marketing efforts to
date it is still too early to determine if the Bestnetcall service will achieve
broad commercial acceptance. The failure to achieve broad market acceptance will
have a material adverse effect on BestNet's business, financial condition and
results of operations. BestNet's risks include the following:
o future funding;
o continued user acceptance, based on BestNet's marketing and sales
efforts;
o the ability of BestNet to continue to establish relationships with
strategic partners; and
o the maintenance of BestNet's network at a high level of quality to
support commercial acceptance of our communication solutions.
To address these risks BestNet must, among other things:
o attract and retain frequent users of its services in its target
markets;
o continue to provide value creating services for current and future
customers;
o grow usage by our existing customer base;
o continue to increase contribution margin;
o expand value-added communication services;
o successfully respond to competitive developments;
o continue to form and maintain relationships with strategic partners;
o continue to attract, retain and motivate qualified personnel; and
o provide superior customer service.
A FAILURE BY PARTIES THAT MAINTAIN PHONE AND DATA LINES TO SERVICE SUCH LINES OR
AN INCREASE IN THE PRICE FOR MAINTAINING PHONE AND DATA LINES MAY DISRUPT
BESTNET'S BUSINESS.
BestNet's business strategy depends on the availability of the Internet,
cellular and fixed line transmission of voice and data. Specifically, BestNet
relies on third parties who provide traditional phone lines and Internet
service. Some of these third parties are national telephone carriers. If any of
these carriers increase their charges for using these lines, which has become
increasingly likely in light of the deregulation, then BestNet's profitability
will be materially adversely affected. They may also fail to properly maintain
their lines and disrupt BestNet's ability to provide service to its customers.
Any failure by these third parties to maintain these lines and networks that
leads to a material disruption of BestNet's ability to provide communication
solutions to its customers will have a material adverse affect on BestNet's
business, financial condition and results of operations. The Company may be
unable to continue purchasing such services from these third parties on
acceptable terms, if at all. If BestNet is unable to purchase the necessary
services to maintain and expand its network as currently configured, then
BestNet's business, financial condition and results of operations would be
materially adversely affected.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC AND INTERNATIONAL
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES, WHICH, IF INCREASED OR CHANGED,
COULD MATERIALLY ADVERSELY AFFECT THE COMPANY'S BUSINESS.
10
Despite our operating under a section 214 International License issued by
the FCC, and a Class "A" License issued by the CRTC in Canada, the international
regulatory environment remains dynamic. Further taxes and the imposition of such
surcharges or regulations could increase our cost of doing business. We may not
be able to recover these costs from our clients. These surcharges or regulations
could also adversely impact where we do business and thus reduce current and
future revenue. This could materially adversely affect BestNet's business,
financial condition and results of operations.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO INTERNATIONAL GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES, WHICH COULD MATERIALLY ADVERSELY AFFECT
BESTNET'S BUSINESS.
BestNet is marketing its services to international long distance callers in
over 171 countries and geographic regions around the world. Because it will be
conducting business internationally, BestNet is subject to certain direct or
indirect risks. These risks could include:
o unexpected changes in regulatory requirements for communication
solutions;
o foreign currency fluctuations, which could increase or decrease
operating expenses and increase or decrease revenue;
o foreign taxation;
o the burdens of complying with a variety of foreign laws, trade
standards, tariffs and trade barriers; and
o changes in regulations and tax could have an adverse effect on
BestNet's revenue and costs.
All of these could potentially adversely impact BestNet's financial
condition and results of operations.
DIFFICULTIES COULD ARISE IN FINDING QUALIFIED PEOPLE TO MONITOR AND MAINTAIN
BESTNET'S COMMUNICATION NETWORK.
We employ highly talented and skilled people who operate, maintain and
enhance our network. Our team is very familiar with our technology as well as
other available technology used in the delivery of communication solutions. We
could experience difficulty retaining the resources we have and further
difficulty replacing the skills and talents on our operational team. This could
result in higher operating costs and may have a material adverse effect on the
results of our operations and our financial condition.
CONFLICTS OF INTEREST COULD ARISE WHICH COULD MATERIALLY ADVERSELY AFFECT
BESTNET, ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Conflicts of interest could continue to arise between BestNet and its
affiliates, including Softalk, in areas relating to past, ongoing and future
relationships, including:
o the Bestnetcall license agreement, corporate opportunities, indemnity
arrangements, tax and intellectual property ownership matters;
o potential acquisitions or financing transactions; and
o sales or other dispositions by BestNet principals.
These conflicts also may include disagreements regarding the Bestnetcall
license agreement, including with respect to possible amendments to, or
modifications or waivers of provisions of such agreement. Such amendments,
modifications or waivers may adversely affect BestNet's business, financial
condition and results of operations. Ownership interests of directors or
officers in BestNet common stock, or serving as both a director/officer of
BestNet could create or appear to create potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for BestNet.
11
OUR INABILITY TO BE COMPETITIVE INTERNATIONALLY OR TO SATISFY REGULATORY
REQUIREMENTS WHEN WE EXPAND GLOBALLY COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
A significant aspect of our growth strategy is to expand our business
internationally, through direct and indirect channels. Such expansion will place
additional burdens upon our management, personnel and financial resources and
may cause us to incur additional losses. We will also face different and
additional competition in international markets. These risks could impair our
ability to expand internationally as well as have a material adverse effect upon
our overall business operations, growth and financial condition. In addition,
international regulations continue to change and could adversely affect business
that we currently have along with business that we will develop in the future.
ON-LINE SECURITY BREACHES OR FAILURES MAY MATERIALLY ADVERSELY AFFECT BESTNET.
In order to successfully provide services and receive payment for these
services via the Internet, it is necessary that we are able to ensure the
security of confidential customer information both voice and data. We employ
certain technology in order to protect such information, including customer
credit card information. However, we may be unable to ensure that such
information will not be intercepted and or obtained illegally. Advances in
cryptography or other developments that could compromise the security of
confidential customer information could have a direct negative impact upon our
electronic commerce business. In addition, the perception by consumers that the
Internet is not secure, even if unfounded, means that fewer consumers might use
our services. Finally, any breach in security, whether or not a result of our
acts or omissions, may cause us to be the subject of litigation, which could be
very time-consuming and expensive to defend.
OUR OUTSTANDING SHARES MAY BE DILUTED RESULTING IN LESS PERCENTAGE OF SHARES
HELD BY EACH SHAREHOLDER AND A LOWER MARKET PRICE PER SHARE OF OUR COMMON STOCK.
Our Company is now authorized to issue up to 100,000,000 million shares of
common stock. The Board of Directors may issue shares of stock for such
consideration, as it deems adequate. Additional shares of common stock may be
issued to raise capital, to purchase property or rights, and upon exercise of
warrants, options, or other derivative instruments. Preferred stock may be
issued that is convertible into shares of common stock at conversion prices that
might not be related to the then current market price. The market price of our
common stock may decrease as more shares of common stock become available for
trading. The equity interest of the shareholders in BestNet also may be reduced
through the issuance of new common stock required to further fund our company.
THE CURRENT CAPITALIZATION COULD DELAY, DEFER, OR PREVENT A CHANGE OF CONTROL.
The Company is authorized to issue up to 100,000,000 shares of common stock
and up to 10,000,000 shares of preferred stock, in one or more series, and to
determine the price, rights, preferences and privileges of the shares of each
such series without any further vote or action by the stockholders. The issuance
of preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring, or preventing a change of control of the Company.
THE FORWARD-LOOKING STATEMENTS IN THIS REPORT MAY NOT COME TRUE AND ACTUAL
RESULTS COULD MATERIALLY DIFFER FROM THE ANTICIPATED RESULTS.
This report contains forward-looking statements that involve risks and
uncertainties. These statements may include BestNet's plans:
o to grow its communication solutions businesses;
o to expand the range of services it offers;
o to increase the number of customers and overall revenues;
o to otherwise expand its business activities in new cities and foreign
countries; and
o to retain key personnel or otherwise to implement its strategy as well
as its beliefs regarding consumer acceptance of our services.
These forward looking statements reflect the belief or current expectation
of BestNet's management and are based on management's current understanding of
the markets and industries in which BestNet operates. That understanding could
change or could prove to be inconsistent with actual developments. BestNet's
actual results could differ materially from the results discussed in this
report, including those anticipated in or implied by any forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed above, as well as those discussed elsewhere in this report.
12
BESTNET COMMUNICATIONS CORP.
COMPANY OVERVIEW
BestNet is a facilities-based, global communication solutions provider. The
Company's patented, proprietary technology uses widely available Internet and
text messaging network access to control, enable and manage voice communications
over the PSTN. BestNet views its role as a product development, marketing,
sales, sub-licensing, customer service and billing organization for patented,
packet-based communication software applications that control, manage and enable
global communication services. We are presently focusing substantially all of
our financial and other resources on marketing and developing communication
applications to individual clients and selected companies with international
locations and/or clients worldwide. As of the date of this Report, we have
approximately 19,500 clients, making calls from 171 countries and geographic
regions and calling to 224 countries and geographic regions.
We develop, market and sell patented and proprietary communication
applications, technologies and services to corporate and residential clients
worldwide. Bestnetcall, the Company's flagship product, is the industry's first
patented phone-to-phone Internet-enabled long distance service, which combines
global Internet access and the PSTN via our website located at
www.Bestnetcall.com. This service was first made available to the public on
April 17, 2000 and is marketed under the brand name "Bestnetcall." In fiscal
year 2003, the Company introduced two additional and distinctive product
offerings in ClicktoPhoneTM and SMS Call.
Although founded as a Nevada corporation on July 10, 1986, we did not
commence operations until 1995. From 1995 until 1999, we operated under the name
"Wavetech International, Inc." and developed software for customized calling
card services and created an infrastructure to market and distribute our
products and services. During this period, our efforts were primarily focused on
hiring management and other key personnel, raising capital, procuring
governmental authorizations and space in central offices, acquiring equipment
and facilities, developing, acquiring and integrating billing and database
systems. We marketed these systems to the business traveler and to large
organizations or companies with a membership base. In the late 1990's, due to
the wide scale deployment of cellular telephones with messaging capability, the
market for business related calling card services greatly diminished. In June
1999, we discontinued our calling card services. Since then, we have focused
substantially all of our efforts and resources on developing and commercializing
our Bestnetcall web-enabled and other communication applications for long
distance and conference calling services. On September 27, 2000, we changed our
name to BestNet Communications Corp.
BESTNET SOLUTIONS
Users of our services are able to perform the following activities by
accessing our websites at WWW.BESTNETCALL.COM and WWW.CLICKTOPHONE.COM:
o Register to use our services
o Access and launch communication applications
o Access current rate tables
o Access a full suite of call management features
o Access customer service immediately via the Internet
o Maintain call account security
o Obtain real time billing detail
BestNet calling applications do not require the purchase of special
hardware or software by the customer and use existing telephone equipment. Users
only need access to the Internet or text messaging network and an available
phone line, land line or mobile. BestNet applications also offer immediate real
time billing detail to all users and accept various payment methods, including
13
post-paid credit card payments, invoicing options and prepaid accounts. The
architecture of our services allows for total security regarding both the FROM
and TO legs of each call. The FROM and TO numbers are never displayed, thus it
is impossible to determine from where a call is being placed.
Following the completion of a telephone call, the total cost for that call
can be viewed on the user's online account. Call detail records may be printed
or exported to Word or text applications. BestNet's services also include
features such as speed dialing, personalized directories, client billing codes,
world-time country/city code lookup and immediate access to customer service via
our website. Account administrators may add or delete users, view a user's
calling activity and create reports detailing call activity.
The methodology upon which our Bestnetcall service is based is subject to a
license agreement with Softalk, Inc., an Ontario, Canada-based technology
company. We entered into this licensing arrangement in April 1999 and later
amended and restated that arrangement in October 1999. Under the terms of our
license agreement with Softalk, we were granted exclusive global rights to
distribute, market, service, sell, and sublicense Softalk's services and
products to commercial accounts and on a worldwide non-exclusive basis to
individual consumer accounts. In fiscal 2003, BestNet announced a new chapter in
its history with the completion of development, successful testing and
implementation of its own next generation technology called GlobalPlex.
GlobalPlex technology has been specifically developed and designed by BestNet to
easily interface with current and future commercially standard communication
applications and evolving technology such as Voice over Internet Protocol and
mobile solutions. GlobalPlex was also designed to easily interface with other
networks as well. This allows BestNet greater scalability, customization and
flexibility to serve our current and future customers.
We own and operate telecommunication equipment and network infrastructure
in leased facilities in Toronto, Ontario and New York, New York including
high-capacity switches, web servers, data base servers, calling servers and
security systems. In addition, we make use of specialized software for data
management, billing and customer service requirements.
14
PRODUCT SUITE
BestNet Communication services include the following suite of communication
applications:
BestNet webCALL - Long Distance Calling
Clients utilizing our webCall can decrease the cost of their long distance
service while still retaining the toll quality for global communication needs.
BestNet provides the core benefits of lower prices, quality service and on-line
real-time billing. Other significant benefits include point and click FROM and
TO directories, point and click dialing using directories from Microsoft
Outlook, speed dialing, e-mail calling, billing codes, country and city code
look-up, time zone information and dialing examples.
BestNet conferenceCALL - Conference Calling
BestNet offers a conference-calling product that can be used to initiate
immediate or scheduled conference calls. The chairperson can either launch
successive legs for an immediate conference call or enter and save information
for a conference call to be launched automatically at a future date. There are
no set-up or administrative charges for the BestNet conference calling facility.
This service can reduce the cost of conference calls by up to 80% as compared to
traditional conferencing services currently offered by carriers. We have
compared the value of our conference-calling service to competitors in the
marketplace and believe ours to be "best in class".
BestNet desktopCALL - Desktop Application
BestNet also has a desktopCall application that can be downloaded from our
website. Calls can then be launched from the desktop application instead of from
a web browser. This feature is particularly useful for clients with slow
Internet connections. Calls are launched in a similar manner to our web product.
All calls are still charged to the same account and on-line billing information
may also be viewed. Calls can also be launched directly from Microsoft Outlook
using an Outlook add-in and desktopCall.
BestNet emailCALL - E-mail Application
BestNet's e-mail application can be used from any e-mail device such as MS
Outlook, Blackberry and cell phones to initiate calls. This technology uses
simple commands sent by e-mail to launch calls to any nearby phone, such as a
pay phone, home phone or cell phone. Clients enter defined calling instructions
to the destination of their choice. Email Call has many convenience features,
such as using your personal webCall directories and billing codes.
BestNet satCALL - Satellite Calls
BestNet has a direct circuit to an international satellite uplink carrier
for launching the Inmarsat satellite leg of calls. This circuit provides our
BestNet service with the capability to complete calls to remote platforms such
as ships, airplanes and oilrigs via our web site at WWW.BESTNETSAT.COM.
BestNet pdaCALL - Mobile Calling
BestNet has developed a Palm OS application, which is ideal for wireless
PDA devices, including devices offered by Palm, Handspring and Kyocera. Our
software, which emulates our BestNet desktop service, gives the user the ability
to launch low-cost long distance calls or conference calls using a PDA device to
control the call. Applications also have been developed for micro-browser
equipped PDA's such as Compaq's iPAQ.
BestNet SMS CALL - Mobile Calling
BestNet's SMS Call application allows registered users to launch calls via
text messaging networks worldwide. This application enables users to access
BestNet's feature-rich services anywhere, anyplace, anytime. This application
expands BestNet's potential user base to customers that do not have access to a
computer and Internet connection, but that do have an SMS-capable mobile phone.
15
ClicktoPhone - A New Online Communication Tool
BestNet created the ClicktoPhone voice application to bridge the virtual
world of the web and electronic documents to the physical world of businesses,
call centers and web marketing campaigns to add a voice telephone call to any
electronic e-mail, logo, ad, picture or banner. ClicktoPhone is unique to
Internet related technologies in that it does not rely on any special software,
hardware, retraining of staff, nor does it force users to talk over a PC.
ClicktoPhone users talk using ordinary telephones. Simply click, call, and
connect.
This voice enabling technology has adaptable security options authorizing
only welcome calls and permits blocking of unwelcome calls. No caller-ID is
passed and no origination phone numbers are disclosed. The calling network is
fully secure and safe. BestNet is offering ClicktoPhone service at
WWW.CLICKTOPHONE.COM on a pay-for-usage basis, allowing individuals and
companies to add voice applications to web sites, e-mail, interactive marketing,
and banner ads without capital investment.
All calls from these devices are billed in the same way as calls placed
through our web product.
MARKETING STRATEGIES
We offer our BestNet services through both direct sales and indirect sales
channels. Our target markets include:
o Mid-sized to SOHO Business (Small Office Home Office)
o Marketing and Channel Partners
o Reseller, Value Added Reseller's (VAR) and Integrators
o Technology and Telecommunication Consultants
o Large Corporations
o Consumers
Our marketing efforts are targeted at international long distance and
conference calling clients in a number of key geographic areas in the world. We
are focused primarily on the following geographic regions:
o Central and South America
o Carribbean
o North America
o Asia Pacific
o Europe
o Middle East
16
DIRECT SALES
Our direct sales activities are comprised of the following marketing and
sales strategies designed to generate revenue and increase customer usage of our
BestNet services:
o Web Channel - This method of marketing, which represents the majority
of our revenue, consists of marketing all of our branded service
offerings to individuals and businesses through a combination of
mutli-channel marketing and third party sales relationships.
o Sales Calls - We call directly on potential clients for whom we
believe we can create value, and where relationships are built to help
establish a user base that has synergy with BestNet's product line.
o Direct Mail and E-mail Solicitations - We send solicitation materials
to pre-qualified potential users of our BestNet services. These
materials refer or link the potential user to WWW.BESTNETCALL.COM or
WWW.CLICKTOPHONE.COM to facilitate activation of our BestNet services.
Recipients are invited to use the service or request more information.
These direct mail or e-mail solicitations are launched on a continuous
basis currently by in-house staff. Future direct mail initiatives will
be launched using a combination of in-house resources and external
resources.
o Media Advertising and Promotion - We have initiated limited
advertising in print and electronic media targeted at specific market
segments in the form of national or international publications. We
will consider additional initiatives such as advertising in specific
trade publications and Internet advertising during fiscal 2004 based
on an analysis of the cost-effectiveness and anticipated results of
these activities.
o Public Relations Activities - We have a corporate communications and
public relations strategy in place for developing a comprehensive
communications program. This communications program includes
initiating appropriate news releases, feature print articles in
industry and trade specific publications, local print media and
editorial support. Our WWW.BESTNETCALL.COM website was redeveloped and
includes a frequently asked questions section to facilitate direct
communication with shareholders, customers and the public-at-large.
Our WWW.BESTNETCALL.COM website is part of our overall public
relations strategy.
INDIRECT SALES
Our indirect sales efforts are centered on the following four types of
organizations:
o Agent/Distributors - We are establishing a global network of agents
and distributors who market our services to corporate organizations
and consumers via private labeled web sites.
o Telecom Providers - The Bestnetcall services are being made available
to other telecommunication providers, resellers, and Internet service
providers for resale to their clients. These types of indirect sales
organizations solicit through direct mail, e-mail, fax and direct
sales calls by their personnel.
o Professional Service Firms - Marketing firms, consultants, integrators
and legal firms are being solicited to use our BestNet services and to
provide these services to their clients as a means of saving money.
o Licensed Services Channel - We seek to offer a sub-license program to
generate additional revenue and to offer others in our industry the
features and benefits of our intellectual property.
INDUSTRY BACKGROUND AND MARKET DEMAND
The Internet and mobile technology are significant interactive worldwide
mediums for communications, collaborative technologies, and the communications
market. Meanwhile, global deregulation, the proliferation of new technologies
enabling convergence between computers, applications, Internet, mobile and the
telephone are significantly expanding the world's communication market.
17
We believe there are key trends influencing the communications industry and
Internet deployment today. We expect the following trends to have a direct and
positive effect on the communications market and demand for our applications:
o Telecommunications Industry Association (TIA) forecast that the global
telecommunications industry would see a 9% increase in compound annual
growth between 2003 and 2006.
o Globalization of the world's economies increases the international
mobility of workforces, and the opportunities that exist in the global
Internet roaming marketplace. A recent report published by Frost &
Sullivan projected that the global roaming services market is set to
grow from $285 million in 2000 to $7.6 billion in 2006.
o According to CIBC World Markets Equity Research, the conferencing
industry is projected to grow from $3.5 billion in 2001 to nearly $7
billion in 2006 (five-year Compound Average Growth Rate (CAGR) of
15%). The most pronounced growth will likely occur in the unattended
audio conferencing, more than 20% CAGR and Web Conferencing more than
a 40% CAGR. The international market is growing faster than the North
American market, given the immaturity of these conferencing markets.
o According to Strategic Analytics, a global research and consulting
firm, worldwide cellular subscribers are projected to grow at a 13.6%
rate, from 1.1 billion in 2002 to 2 billion subscribers in 2006.
We believe the above market trends and projections reflect a large and
growing market for potential users of alternative communication services. We
believe these market trends and projections will translate into increased demand
for providers of innovative communication solution services and that we are well
positioned to capture a portion of this market.
We believe these market trends strongly favor use of our products and
services. Our ability to offer cost effective, highly efficient and dynamic
products in terms of features and capabilities is of key importance during poor
economic periods as companies are forced to find ways to trim budgets. Companies
also have a general reticence towards air travel particularly following the
events of September 11, 2001 and since the SARS outbreak. We hope to capture the
promise of this sector through the increased use of conference calls.
THE OPPORTUNITY
We believe our most strategic business opportunity is in servicing the
communication needs of the small to medium size business and mobile markets,
which still rely on traditional carriers for supplying their international long
distance and conferencing services. There exists a notable price disparity
between the cost of long distance originating from the U.S., versus origination
from most international locations. The advantage of BestNet's service is
three-fold. The first advantage is our proprietary applications, which provide
universal access to our network without the requirement for special software or
hardware, and now with SMS Call, there is no need for Internet connectivity. The
second advantage is our patented methodology, which uses a two-leg call,
origination and destination leg, which works with any telephone or legacy phone
system. The third advantage is our international long-distance transport. Our
intelligent network is connected to multiple Tier-1 carriers where routes are
chosen on the basis of price and quality. With our current network architecture,
we can easily route calls over Voice over Internet Protocol networks, if there
is an advantage to do so.
This hybrid approach to routing calls allows the universal access and cost
advantages associated with VoIP transport, without any of the disadvantages. For
this reason, business and mobile users in over 171 countries and geographic
regions rely on BestNet to provide a simple, viable alternative to their
existing long distance provider. BestNet provides its service without contracts
or hidden charges. Our service easily integrates within any existing legacy or
PBX system.
18
BestNet's approach to the marketplace is based on:
o Speed of communication - easy deployment within any environment
o Quality of communication - interconnection with Tier-1 carriers
ensures highest standards
o Reliability of communication - carrier-class network with full
redundancy
o Ease of operation - user adoption is simple and straight forward
o Interoperability - operation with legacy systems, fixed or mobile
phones
o Capital requirement - investment by users is not required
We use the Internet and text messaging network to enable, control and
manage PSTN calls accessed from our central offices in New York and Toronto.
Accordingly, our technology allows us to bring the best wholesale long distance
rates, which are in the U.S., to users anywhere in the world. We can offer
access to global markets including direct access to North American business and
consumer markets to any carrier worldwide wishing to connect to our switches in
the U.S. and Canada.
INTERNET AND TELEPHONY
We believe Voice over Internet Protocol, also known as VoIP, has changed
the face of global telephony, as such technology has provided millions of users
worldwide a viable alternative to expensive long-distance services provided in
highly regulated or closed markets. Use of the Internet to transport voice has
many advantages, including global access and low cost per minute rates.
Providers of VoIP services, more specifically PC-to-phone services (which
terminate calls over the public switched telephone network), have experienced
the greatest adoption by personal home users, versus business users. However,
the disadvantages of PC-to-phone services are notable. VoIP is not available for
cellular users and is difficult to use with legacy PBX systems. Other
disadvantages include the requirement to buy software, configuration of hardware
and reduction in voice quality - notably echoes and voice delay. The new VoIP
technology has greatly improved the quality - however interoperability within
legacy phone systems remains the biggest challenge. For this reason, the
business market has been slower to adopt VoIP on any large scale.
Despite the challenges, however, the Internet telephony market is expected
to grow substantially over the next five years. Since 2002, there has been a
dramatic uptake in enterprise VoIP, particularly IP-PBX's, IP phones, and IP
Centrex. The trend toward voice/data convergence is slowly building momentum, as
enterprises recognize the long-term benefits of IP and converged communication
platforms.
Our technology simply requires Internet access or text messaging
capabilities. No special hardware, software, or start up costs are required. The
inherent diversification of our product suite addresses the above challenges
directly.
INMARSAT TELEPHONY MARKET
One of the faster growing telephony markets in the world is global
satellite telephony communications. The Inmarsat communication system consists
of five geostationary satellites circling the globe. These satellites provide
voice and data services to remote locations through a global network of
terrestrial uplink carriers. The major sectors for satellite communication
include maritime, land and aeronautical markets, with companies in the oil and
gas industry, mining and merchant marine industry being the largest customers.
According to Inmarsat, there are currently 240,000 Inmarsat terminals in use,
distributed in 150 countries, generating an estimated $1.3 billion in annual
long distance charges.
In 2000, BestNet developed a site specifically for the Inmarsat market
called WWW.BESTNETSAT.COM. In 2002, BestNet upgraded its service to interconnect
directly with Stratos Global, a leading Land Earth Station operator and Inmarsat
carrier. The direct connectivity to Stratos (and to the Inmarsat network) gives
BestNet a pricing advantage over other providers - particularly foreign
telecoms. This pricing advantage, coupled with BestNet's patented
call-initiation methodology, gives the Company a unique advantage in this
market. BestNet is actively developing new customer relationships and markets
19
for WWW.BESTNETSAT.COM service, as the tangible cost benefits associated with
its patented technology are easily quantified in a highly competitive and
lucrative global market.
FUTURE PRODUCT STRATEGY
Communication around the globe is rapidly changing, as voice, mobile and
data networks converge, and as mediums such as instant messaging and Internet
delivery cross from the domain of desktop users to mobile devices. The Internet
and mobile markets' reach is wider than imagined and its growth faster than
expected. The Internet has become one of the world's largest distribution
systems. It was designed and engineered to have an abundance of routes,
connections and elasticity. Recognizing these trends, we continue to look for
new value added communication applications for BestNet to bring to our existing
and future clients.
The growth and universal acceptance of the Internet and mobile technology
is creating new opportunities for BestNet, where its core technology can be
leveraged in unique and creative ways. BestNet is a highly efficient interface,
linking traditional circuit switched networks (PSTN) with the global access of
the Internet and text messaging network. BestNet's goal is to make access to its
long distance and conference network as transparent as possible, using a variety
of interfaces and devices. For enterprise markets, this could include
integration into CRM applications, company Intranet's, websites, PBX systems and
IP devices. For personal users, the BestNet application can be easily integrated
into Internet appliances, PDA's, and mobile devices, using technology such as
WAP, SMS or instant messaging as a conduit to BestNet's network.
BestNet intends to further develop its core network to be a universal
interface, where intelligence and functionality can easily be added to the
front-end, without having to modify its core database and call control
functionality. The development of GlobalPlex technology enables BestNet to
expand and embrace new technologies as they become commercially viable.
In fiscal 2004, we plan to introduce a variety of new services and product
enhancements - all based on the core technology platform of GlobalPlex. These
new services and products include the following:
o Conferencing - The conferencing sector represents one of the strongest
growth segments within the communications arena. Conferencing is in
the middle of a growth cycle, due to declining costs, the emergence of
innovative technologies and fundamental shifts in the economy that are
causing permanent changes in the way business is conducted. According
to CIBC World Markets Equity Research, it is projected the
conferencing industry will grow from $3.5 billion in 2001 to nearly $7
billion in 2006 (five-year Cumulative Adjusted Growth Rate (CAGR) of
15%). The most pronounced growth will likely occur in the unattended
audio conferencing, more than 20% CAGR and web conferencing more than
a 40% CAGR. The international market is growing faster than the North
American market, given the immaturity of these conferencing markets.
With infrastructure costs already in place, growth in conference
calling offers BestNet substantial opportunity to improve gross
margins on added revenue. As a result of customer feedback, BestNet
intends to enhance the functionality of its service. This new
functionality will include the addition of dial-in capability (800 or
toll), call recording, operator services and other collaborative
applications.
o Mobile Access - BestNet's future product development strategy includes
a website specializing in value-added mobile applications. These
applications will include PDA Call, Email Call and newly developed SMS
Call. The SMS market is one the largest, fastest growing and most
dynamic in the world. This is a break thru from previous business
models for BestNet, as all other applications require Internet
connectivity. SMS calling only requires a cell phone with text
messaging or SMS ability. According to Cellular Online,
www.cellular.co.za:
|X| 23% of worldwide mobile users use SMS once a day
|X| SMS sent in 2002 = 366 Billion + growing!
|X| Total Global Mobile Users = 1.3 Billion
According to Cellular Online, Wireless devices are the most powerful
communication devices with respect to immediacy, interactivity and
mobility and therefore can act as a very powerful marketing and
application devices. The mobile revolution is changing the way we live
and work. Mobile phones are already pervasive in all major developed
economies and in an increasing number of developing ones as well. The
mobile Internet is a powerful enabling technology that will make
possible new services and applications.
20
o IP Telephony - According to The Insight Research Corporation, over the
next five years, VoIP technologies will garner an increasing share of
the world's telecommunications services revenue. From a $13 billion in
2002, VoIP-based services will grow to just under $197 billion by
2007. This is a large and fast growing market opportunity and will
require a number of products and applications that are designed for
specific market segments. We are uniquely positioned to develop IP
voice applications to take advantage of converged networks. We will
continue to monitor deregulation and opening of markets worldwide to
evaluate our positioning in this growth segment. GlobalPlex was
specifically built to add VoIP applications and services. We believe
that we will provide proprietary applications and services to launch
international calling and conference calling over VoIP networks
without the need for additional hardware, adapters, configuring
software, and need to broadband access.
NETWORK STRUCTURE
Our network equipment is currently housed in central office facilities
located in New York and Toronto. Our system capacity can be easily increased as
demand for our services increases. Currently we have substantial excess
capacity. During fiscal 2003, we created and implemented our proprietary
GlobalPlex technology. GlobalPlex, which is the engine of our network and
applications, was developed to be an open platform easily integrating new ways
to access our network. It was also designed to interface with other networks. We
have just begun to realize the benefits of our new GlobalPlex technology.
In fiscal 2003, we entered into a new contractual agreement with Trivalent,
Inc. to host our web servers. This new agreement allowed us to upgrade our
servers for increased speed and improved reliability. In addition, their cost
effective program allows us to save $110,000 during the three-year life of the
contract, versus our previous supplier. Our configuration has redundant servers
that are monitored on a 24 x 7 basis.
Our switching matrix is located in our central office facilities and
includes direct connectivity to Tier-1 carriers. We have multiple carrier
connections at each switch location, which provides excellent back-up coverage
and the ability to reroute calls to obtain the highest quality connections
available. Our carrier configuration also allows us to take advantage of the
highest value (highest quality/lowest price) service offered by our carriers to
every country we service. The blackout in the Northeast during fiscal 2003
resulted in us acquiring generator backup power, in addition to previous battery
backup power, in both Toronto and New York.
Currently all of our voice traffic is carried by Tier-1 carriers via their
preferred traffic routes. We continue to monitor developments of VoIP.
GlobalPlex is fully capable of incorporating this technology into our network.
Our strategy remains to move forward with VoIP once market demand dictates.
SOFTALK LICENSE AGREEMENT
On October 9, 2003 a settlement between BestNet Communications Corp. and
Softalk, Inc. was reached. This settlement ends both our arbitration proceeding
in Canada and Softalk's counter claim. Although the settlement occurred after
August 31, 2003, the Company's fiscal year end, and the final execution of all
releases were not completed until December 3, 2003, for reporting purposes, the
financial effects have been reflected in the Company's fiscal 2003 financial
statements as filed within Form 10-KSB with the Securities and Exchange
Commission on December 12, 2003. BestNet's license agreement with Softalk
remains in effect with BestNet retaining commercial exclusivity in accordance
with the terms of the License Agreement and subject to the following terms and
conditions:
Both parties continue to have the right to terminate the license agreement
under certain conditions, including:
o Upon 30 days written notice to the other party, if such other party
fails to comply in any material respect with certain terms or
conditions of the license agreement and such failure to comply is not
corrected within 30 day notice period;
o In the event the other party becomes bankrupt or insolvent, suffers a
receiver to be appointed, or makes an assignment for the benefit of
its creditors.
21
Softalk also has the right to terminate the license agreement upon 60 days
written notice following a change of control (as defined in the license
agreement) of BestNet.
Upon termination of the license agreement for any reason whatsoever, we are
permitted to continue using Softalk's patented methodology in providing services
to all our existing clients.
Terms of the Settlement Agreement affect balances carried by BestNet in the
following manner:
o BestNet will release its claim to the Loan Facility plus all unpaid
accrued interest. As of August 31, 2003, the balance of the Loan
Facility plus accrued interest was $1,589,768. As of August 31, 2003,
a total of $211,048 of interest had been accounted for as deferred
interest income.
o Softalk has agreed to release BestNet from claims related to certain
outstanding invoices. As of August 31, 2003, total accounts payable
that will be released as a result of the Settlement Agreement is
$481,465.
o Prior to August 31, 2003, BestNet had placed on deposit $27,709 as
partial payment for royalties then due under the Amended and Restated
License Agreement. This amount had been classified as deposits and
other assets; however, as part of the terms of the Settlement
Agreement, these funds were paid to Softalk, for full and complete
settlement of all royalties for both now and in the future. In
addition, BestNet relinquishes its rights to future communication
software developed by Softalk.
o Softalk is to return all previously issued warrants to purchase
BestNet stock. These warrants are described more fully in other parts
of this footnote.
o Softalk is also to return 1,900,000 shares of BestNet's common stock
that Softalk had previously acquired through the terms of the Purchase
Agreement described above in full and final satisfaction of the Loan
Facility.
COMPETITION
Incumbent telecommunication companies continue to have strategic advantage
by owning the local loop monopoly. Long distance carriers have faltered, as
voice services became a lower margin commodity. As cellular margins shrink and
providers look towards more lucrative Internet based wireless services, the
industry will continue to go through consolidations of larger players. The
breakup of the Bell System had a profound worldwide impact, spurring competition
in long distance and data communications, equipment and wireless services, and
driving lower prices with increased quality and availability. Competition in the
markets we currently compete, and will compete in the future, is intense.
Competitors range from large well established telephone companies to upstart
service providers. We currently do not have a significant market share in any of
our markets. The established telephone companies have long-standing
relationships with their clients, financial, technical and marketing resources
substantially greater than ours and the potential to fund competitive services
with cash flows from a variety of businesses. These established companies also
currently benefit from existing regulations that favor the established telephone
companies.
Telecommunication services are increasingly mobile, that is, delivered by
the medium of radio waves rather than fixed-line network. Until about 50 years
ago, the majority of the international telephone calls were delivered over
short-wave radio, and people tuned into the radio for the latest news. Looking
ahead to the future, the majority of international calls may be made from, and
delivered to, hand held devices. Those same devices will receive updates from
the Internet, websites and real-time video streams from multiple sources around
the globe. Radio is now being increasingly used to provide access to networks,
while wired networks provide the long distance component.
Insight Research reveals that VoIP services will grow at a compounded rate
of over 72 percent from 2002 to 2007, making packet voice services one of the
fastest-growing segments in the battered telecommunications segment. VoIP
includes all forms of packet voice including VoIP, voice over frame relay and
voice over ATM.
Cost savings for both customers and carriers are driving the near-term
growth of the VoIP market. As packet-switched voice displaces the older
circuit-switched voice technology, VoIP carrier revenues will explode, fueled by
lower operational costs to carry a voice call along with new service offerings
such as follow-me, unified messaging and multimedia communications. Phone
22
companies are accelerating their use of the Internet and other packet networks
to carry voice calls, says a new research study from Insight Research. From a
mere $13 billion in 2002, VoIP-based services will grow to nearly $197 billion
by 2007, according the study. Last year, 10% of international calls used VoIP,
says research firm Telegeography.com.
However, recent competitor operating performance has been poor, resulting
in price increases for services like long distance and conference calling. We,
in response, have held prices steady and therefore increased/improved our value
proposition to current and potential clients and specific geographic areas.
APPLICABLE REGULATIONS
Telecommunications services are generally subject to federal, state,
provincial and local regulation. In the United States, the Federal
Communications Commission, also known as the FCC, exercises jurisdiction over
all facilities and services of telecommunications common carriers to the extent
those facilities are used to provide, originate, or terminate interstate or
international communications. Internationally and within the United States, we
operate under a Section 214 License issued to us by the FCC. In Canada, based on
our point of presence and service provision, we hold a Class "A" Operating
License issued to us by the Canadian Radio-television and Telecommunications
Commission, also known as the CRTC. Currently we believe these licenses are
sufficient for the services we provide. We continue to monitor changes in
regulations and plan to fully comply in areas we operate around the world.
EMPLOYEES
On January 21, 2004, we employed 6 full-time employees. We believe our
future success will depend on our ability to attract and retain highly skilled
and qualified employees. None of our employees are currently represented by
collective bargaining agreements. We believe we have an excellent team and our
relations with employees are good.
USE OF PROCEEDS
We will not receive any proceeds from the resale of the securities included
in this prospectus. We will use the proceeds from the exercise of the warrants
described in this prospectus, if exercised, for working capital purposes.
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock was quoted on the NASDAQ Small Cap Market until
May 4, 1999, and then on the OTC Bulletin Board from June 28, 1999 to the
present. The high and low bid prices of the Company's common stock as reported
from September 1, 2000 through August 31, 2003 by fiscal quarters (i.e., 1st
Quarter = September 1 through November 30) were as follows.
High Low
---- ---
FISCAL YEAR ENDED:
August 31, 2000
First Quarter 4.25 1.47
Second Quarter 10.25 4.13
Third Quarter 9.50 5.00
Fourth Quarter 7.25 3.81
FISCAL YEAR ENDED:
August 31, 2001
First Quarter 6.13 .88
Second Quarter 3.38 .56
Third Quarter 3.60 .55
Fourth Quarter 4.40 2.05
23
High Low
---- ---
FISCAL YEAR ENDED:
August 31, 2002
First Quarter 3.00 1.55
Second Quarter 1.56 .65
Third Quarter 1.58 .35
Fourth Quarter 2.50 .71
FISCAL YEAR ENDED:
August 31, 2003
First Quarter 1.59 .71
Second Quarter .72 .34
Third Quarter .41 .24
Fourth Quarter .61 .26
FISCAL YEAR ENDED:
August 31, 2004
First Quarter .65 .30
Second Quarter
(thru 1/25/04) .37 .23
The bid and asked prices of our common stock on January 21, 2004, were $.35
and $.37, respectively.
As of November 5, 2003, the Company had 161 shareholders of record of its
common stock. As of November 5, 2003, the Company had 1,836 shareholders that
beneficially own the stock in the name of various brokers.
The Company has never declared any cash dividends on common stock and
currently plans to retain future earnings, if any, for business growth.
NASDAQ Delisting. Our common stock was delisted from the NASDAQ Small Cap
Market on May 4, 1999, due to our lack of compliance with NASDAQ's $1.00 minimum
bid price requirement. Since June 28, 1999, our common stock has been traded on
the OTC Bulletin Board under the symbol BESC.OB.
On August 26, 2003, the Company's Units began trading under the symbol
BESCU.PK. Each Unit consists of the following underlying securities: (a) three
shares of the Company's common stock; (b) one share of Series A Convertible
Preferred Stock, par value $.001 per share; and (c) one three-year warrant to
purchase one share of common stock at a per share price of $0.30. Each share of
Series A Convertible Preferred Stock is convertible into two shares of the
Company's common stock in exchange for $0.10 per common share ($.20 for each
Series A Convertible Preferred share converted). The high and low bid prices of
the Company's Units as reported from August 26, 2003 by fiscal quarters (i.e.,
1st Quarter = September 1 through November 30) were as follows.
High Low
---- ---
FISCAL YEAR ENDED:
August 31, 2003
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter 1.50 .51
FISCAL YEAE ENDED:
August 31, 2004
First Quarter 1.85 1.20
Second Quarter
(1/25/04) 1.20 .97
The bid and ask prices of our units on January 21, 2004 were $1.10.
As of November 5, 2003, the Company had 5 shareholders of record of its
Units. As of November 5, 2003, the Company had 96 shareholders that beneficially
own the Units in the name of various brokers.
24
SELLING STOCKHOLDERS
The table on the following page sets forth information concerning the
resale by the selling stockholders of the units and the shares of our common
stock by the selling stockholders. We will not receive any proceeds from the
resale of the units, the securities underlying the units or the common stock by
the selling stockholders. We will not receive any proceeds from the exercise of
the warrants since they will be returned to the Company upon conversion of the
note into common stock. Because the selling stockholder may sell all, a portion
or none of their shares, no estimate can be made of the aggregate number of
shares that may actually be sold by any selling stockholder or that may be
subsequently owned by any selling stockholder.
The following table also sets forth the name of each selling stockholder
who is offering the resale of shares of common stock by this prospectus, the
number of shares of common stock beneficially owned by such selling stockholder,
the number of shares of common stock that may be sold in this offering and the
number of shares of common stock each selling stockholder will own after the
offering, assuming they sell all of the shares offered.
25
Total
Total Shares of Percentage of Percentage Percentage
Common Stock Common Stock, of of
Issuable Upon Assuming Full Shares of Common Common
Exercise of Exercise/ Common Beneficial Stock Beneficial Stock
Warrants/ Conversion Stock Ownership Before Ownership Owned
Conversion ------------ Included in Before Offering After After
of Notes (1) Prospectus(1) Offering (1) (1) Offering(2) Offering(2)
---------- --- ------------- ------------ -- ----------- ----------
Mercedes Group 172,867(3) * 172,867 172,867 * -0- -0-
Limited
Partnership
Michael D. Mercer 227,111(4) * 227,111 227,111 * -0- -0-
S & J Veal 288,111(5) * 288,111 377,661 1.26% 89,550 *
Sanders Family
Limited
Partnership
576,222(6) 1.92% 576,222 1,276,222 4.22% 700,000 2.31%
Morgan Stanley,
Custodian for
Jerry Peterson
IRA Rollover 1,960,000(7) 6.14% 1,960,000 2,949,000 15.21% 2,949,000 9.38%
Marlene Huls 245,000(8) * 245,000 0 * -0- -0-
Hulzar 490,000(9) * 490,000 0 * -0- -0-
Marlin Hull LLC 245,000(10) * 245,000 521,400 2.60% -0- 1.79%
Gary L. Boster 490,000(11) 1.61% 490,000 0 2.00% -0- *
IRA
Thomas &
Virginia Miller
686,000(12) 2.24% 686,000 600,000 4.16% -0- 1.94%
Gary L. Boster 245,000(13) * 245,000 0 1.21% -0- *
Fred Burstein 1,000,002(14) 3.23% 1,000,002 0 5.49% -0- 2.30%
Stanley L. Schloz
499,998(15) 1.64% 499,998 481,668 3.20% -0- 1.57%
----------- ------- ------- ---
Totals 7,125,311 7,125,311 6,494,263 3,738,550
========= ========= ========= =========
* Less than one percent (1%).
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended,
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rule, beneficial ownership includes any shares as
to which the selling stockholder has sole or shared voting power or investment
power and also any shares that the selling stockholder has the right to acquire
26
within 60 days. The actual number of shares of common stock purchasable upon
exercise of the warrants is subject to adjustment based on certain corporation
events that may or may not occur in the future, and could vary materially from
the number set forth in the table. The beneficial ownership for each person
listed in this table is provided to the Company's knowledge.
(1) Amounts and percentages are based upon 29,952,415 shares of our common
stock outstanding as of January 21, 2004 plus, for each person or entity in this
table, the shares to be issued upon conversion of the notes.
(2) Assumes that all securities registered will be sold.
(3) Consists of 172,867 shares of common stock issued, with legend, upon
the conversion of 6% convertible promissory notes. This note was converted prior
to November 5, 2003. These shares are included in the 29,952,415 common stock
shares outstanding as of January 21, 2004.
(4) Consists of 227,111 shares of common stock issued, with legend, upon
the conversion of 6% convertible promissory notes. This note was converted prior
to November 5, 2003. These shares are included in the 29,952,415 common stock
shares outstanding as of January 21, 2004.
(5) Consists of 288,111 shares of common stock issued, with legend, upon
the conversion of 6% convertible promissory notes. This note was converted prior
to November 5, 2003. These shares are included in the 29,952,415 common stock
shares outstanding as of January 21, 2004.
(6) Consists of 576,222 shares of common stock issued, with legend, upon
the conversion of 6% convertible promissory notes. This note was converted prior
to November 5, 2003. These shares are included in the 29,952,415 common stock
shares outstanding as of January 21, 2004.
(7) Consists of 2,160,000 shares of common stock issuable upon conversion
of an extended 8% convertible promissory note, plus accrued interest, of which
200,000 shares were previously registered on a registration statement filed with
Securities and Exchange Commission in 2003.
(8) Consists of 270,000 shares of common stock issuable upon conversion of
an extended 8% convertible promissory note, plus accrued interest, of which
25,000 shares were previously registered on a registration statement filed with
Securities and Exchange Commission in 2003.
(9) Consists of 540,000 shares of common stock issuable upon conversion of
an extended 8% convertible promissory note, plus accrued interest, of which
50,000 shares were previously registered on a registration statement filed with
Securities and Exchange Commission in 2003.
(10) Consists of 270,000 shares of common stock issuable upon conversion of
an extended 8% convertible promissory note, plus accrued interest, of which
25,000 shares were previously registered on a registration statement filed with
Securities and Exchange Commission in 2003.
(11) Consists of 540,000 shares of common stock issuable upon conversion of
an extended 8% convertible promissory note, plus accrued interest, of which
50,000 shares were previously registered on a registration statement filed with
Securities and Exchange Commission in 2003.
(12) Consists of 756,000 shares of common stock issuable upon conversion of
an extended 8% convertible promissory note, plus accrued interest, of which
70,000 shares were previously registered on a registration statement filed with
Securities and Exchange Commission in 2003.
(13) Consists of 270,000 shares of common stock issuable upon conversion of
an extended 8% convertible promissory note, plus accrued interest, of which
25,000 shares were previously registered on a registration statement filed with
Securities and Exchange Commission in 2003.
(14) Consists of 1,000,002 shares of common stock underlying 166,667 of the
Company's units issuable upon conversion of a 10% Convertible Promissory Note.
(15) Consists of 499,998 shares of common stock underlying 83,333 of the
Company's units issuable upon conversion of a 10% Convertible Promissory Note.
27
We may amend or supplement this prospectus, from time to time to update the
disclosure.
PLAN OF DISTRIBUTION
The selling stockholder may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market, or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. There is no assurance that the selling stockholder
will sell any or all of the common stock in this offering. The selling
stockholder may use any one or more of the following methods when selling
shares:
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers.
o Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction.
o An exchange distribution following the rules of the applicable
exchange.
o Privately negotiated transactions.
o Short sales or sales of shares not previously owned by the seller.
o A combination of any such methods of sale any other lawful method.
The selling stockholder may also engage in:
o Short selling against the box, which is making a short sale when the
seller already owns the shares.
o Other transactions in our securities or in derivatives of our
securities and the subsequent sale or delivery of shares by the
stockholder.
o Pledging shares to their brokers under the margin provisions of
customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer to sell the pledged
shares.
Broker-dealers engaged by the selling stockholder may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from selling stockholder in amounts to be negotiated. If any
broker-dealer acts as agent for the purchaser of shares, the broker-dealer may
receive a commission from the purchaser in amounts to be negotiated. The selling
stockholder does not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
Penny Stock Rules
Our common shares are subject to the "penny stock" rules that impose
additional sales practice requirements because our common shares are below $5.00
per share. For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchase of the common shares and
must have received the purchaser's written consent to the transaction prior to
the purchase. The "penny stock" rules also require the delivery, prior to the
transaction, of a risk disclosure document mandated by the Securities and
Exchange Commission relating to the penny stock market. The broker-dealer must
also disclose:
o the commission payable to both the broker-dealer and the registered
representative,
o current quotations for the securities, and
o if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the
market.
Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
These rules apply to sales by broker-dealers to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse), unless our common shares trade above $5.00 per share.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common shares, and may affect the ability to sell the common shares
in the secondary market as well as the price at which such sales can be made.
Also, some brokerage firms will decide not to effect transactions in "penny
stocks" and it is unlikely that any bank or financial institution will accept
"penny stock" as collateral.
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Underwriter Status
The selling stockholder and any broker-dealers or agents that are involved
in selling the shares may be considered to be "underwriters" within the meaning
of the Securities Act for such sales. An underwriter is a person who has
purchased shares from an issuer with a view towards distributing the shares to
the public. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
considered to be underwriting commissions or discounts under the Securities Act.
Because the selling shareholder is deemed an "underwriter" within the
meaning of Section 2(11) of the Securities Act, it will be subject to the
prospectus delivery requirements.
We are required to pay all fees and expenses incident to the registration
of the shares in this offering. However, we will not pay any commissions or any
other fees in connection with the resale of the common stock in this offering.
We have agreed to indemnify the selling shareholder and its officers, directors,
employees and agents, and each person who controls any selling shareholder, in
certain circumstances against liabilities, including liabilities arising under
the Securities Act. The selling shareholder has agreed to indemnify us and our
directors and officers in certain circumstances against certain liabilities,
including liabilities arising under the Securities Act.
If the selling stockholder notifies us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholder and the broker-dealer.
DETERMINATION OF OFFERING PRICE
The price at which the common stock is sold may be based on market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices, or at negotiated prices.
DESCRIPTION OF SECURITIES
COMMON STOCK
For a description of our common stock see our Registration Statement on
Form 8-A filed with the SEC on March 11, 1987.
PREFERRED STOCK
For a description of our preferred stock see our Registration Statement on
Form S-2 filed with the SEC on March 6, 2003.
UNITS
For a description of our units see our Registration Statement on Form S-2
filed with the SEC on March 6, 2003.
LEGAL MATTERS
Certain legal matters have been passed upon for us by Squire, Sanders &
Dempsey L.L.P., Phoenix, Arizona.
EXPERTS
Our consolidated financial statements included in our Annual Report on Form
10-KSB for the fiscal years ended August 31, 2003 and 2002, have been audited by
Semple & Cooper LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such financial statements
have been incorporated herein by reference, in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
INFORMATION WITH RESPECT TO THE REGISTRANT
This prospectus is being delivered in conjunction with our Annual Report on
Form 10-KSB, incorporated by reference, for the fiscal year ended August 31,
2003 and our Quarterly Report on Form 10-QSB for the quarterly period ended
November 30, 2003..
29
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the small business issuer according to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable.
PART II TO FORM S-2
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth our estimated costs and expenses in
connection with the offering other than commissions and discounts, if any.
SEC Registration Fee $ 185
Legal Fees and Expenses $ 5,000
Accounting Fees and Expenses $ 5,000
Printing and Engraving Expenses $ 1,000
Miscellaneous $ 5,000
-------
Total $16,185
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Articles 11 and 12 of our Articles of Incorporation provide as follows:
1. To the fullest extent permitted by the laws of the State of Nevada, as
the same exist or may hereinafter be amended, no director or officer of the
Corporation shall be personally liable to the Corporation or its shareholders
for monetary damages for breach of fiduciary duty as a director or officer,
provided, however, that nothing contained herein shall eliminate or limit the
liability of a director or officer of the Corporation to the extent provided by
applicable laws (i) for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law or (ii) for authorizing the payment of
dividends in violation of Nevada Revised Statutes Section 78.300. The limitation
of liability provided herein shall continue after a director or officer has
ceased to occupy such position as to acts or omissions occurring during such
director's or officer's term or terms of office. No repeal, amendment or
modification of this Article, whether direct or indirect, shall eliminate or
reduce its effect with respect to any act or omission of a director or officer
of the Corporation occurring prior to such repeal, amendment or modification.
2. The Corporation shall indemnify, defend and hold harmless any person who
incurs expenses, claims, damages or liability by reason of the fact that he or
she is, or was, an officer, director, employee or agent of the Corporation, to
the fullest extent allowed under Nevada law.
30
ITEM 16. EXHIBITS
Exhibit Page Number or
Number Description Method of Filing
------ ----------- ----------------
4.2 Form of Warrant Issued to the Purchasers Previously Filed
of BestNet's 6% Convertible Promissory
Notes in October 2002
10.2 Form of Note and Warrant Purchase Previously Filed
Agreement, dated as of October 30, 2002,
between BestNet and the Investors
Signatory thereto (including form of
note)
10.3 Form of Registration Rights Agreement, Previously Filed
dated as of October 30, 2002, between
BestNet and the Investors Signatory
thereto
5.1 Opinion re: legality of the securities
being registered (1)
23 Consent of Independent Auditors,
Semple & Cooper LLP (1)
24 Powers of Attorney Included in
Signature Page
- ---------
31
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
provided, however, that paragraphs (a) and (b) shall not apply if such
information is contained in periodic reports filed by the registrant under
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended,
that is incorporated by reference into this Registration Statement.
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, as amended, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
3. The undersigned registrant hereby undertakes to remove from registration
by means of a post-effective amendment any of the securities being registered
that remain unsold at the termination of the offering.
4. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report under Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934, as amended (and, where applicable, each
filing of an employee benefit plan's annual report under Section 15(d) of the
Securities Exchange Act of 1934, as amended) that is incorporated by reference
into this registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
5. The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished under and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934, as amended;
and, where interim financial information required to be presented by Article 3
of Regulation S-X are not set forth in the prospectus, to deliver, or cause to
be delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
6. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the undersigned registrant according the foregoing provisions, or
otherwise, the undersigned registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
32
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grand Rapids, State of Michigan, on January 26, 2004.
BESTNET COMMUNICATIONS CORP.
By: /s/ Robert A. Blanchard
--------------------------------
Robert A. Blanchard,
President and
Chief Executive Officer
By: /s/ Michael A. Kramarz
--------------------------------
Michael A. Kramarz,
Controller and
Principal Accounting
Officer
The officers and directors of BestNet Communications Corp. whose signatures
appear below, hereby constitute and appoint Robert A. Blanchard and Michael A.
Kramarz as their true and lawful attorneys-in-fact and agents, with full power
of substitution, with power to act alone, to sign and execute on behalf of the
undersigned any amendment or amendments to this registration statement on Form
S-2, and each of the undersigned does hereby ratify and confirm all that said
attorneys-in-fact and agents, or their substitutes, shall do or cause to be done
by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this amended Registration Statement has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert A. Blanchard President, January 26, 2004
- ----------------------------- Chief Executive Officer,
Robert A. Blanchard and Director
/s/ Michael A. Kramarz Controller and January 26, 2004
- ----------------------------- Principal Accounting Officer
Michael A. Kramarz
/s/ Richard Bourke Chairman of the Board January 26, 2004
- -----------------------------
Richard Bourke
/s/ Marco Messina Director January 26, 2004
- -----------------------------
Marco Messina
/s/ Stanley L. Schloz Director January 26, 2004
- -----------------------------
Stanley L. Schloz
33