SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER O-27319
E-REX, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0292890
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11645 BISCAYNE BOULEVARD, SUITE 210
MIAMI, FLORIDA 33181
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 895-3350
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No .
---- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No .
---- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of June 5, 2001, there
were 24,989,845 shares of common stock issued and outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(check one):
Yes _____ No __X__
1
E-REX, INC.
TABLE OF CONTENTS
-----------------
PART I
Item 1 Financial Statements
Item 2 Management's Discussion and Analysis or Plan of Operations
PART II
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
2
PART I
This Quarterly Report includes forward-looking statements within the meaning of
the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are
based on management's beliefs and assumptions, and on information currently
available to management. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set
forth under the heading "Management's Discussion and Analysis of Financial
Condition or Plan of Operation." Forward-looking statements also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements.
ITEM 1 FINANCIAL STATEMENTS
3
E-REX, INC.
BALANCE SHEET
AS OF MARCH 31, 2001
ASSETS
------
MARCH 31 MARCH 31
2001 2000
------------ -----------
CURRENT ASSETS
- ---------------------------------------------------------
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . (91) 92,701
Prepaid Expense . . . . . . . . . . . . . . . . . . . . 1,444 7,438,425
Accounts receivable from related parties. . . . . . . . 1,793 -
Accounts receivable . . . . . . . . . . . . . . . . . . 18,693 51,500
------------ -----------
Total Current Assets. . . . . . . . . . . . . . . . . $ 21,839 $7,582,626
------------ -----------
PROPERTY AND EQUIPMENT
- ---------------------------------------------------------
Furniture, equipment and software . . . . . . . . . . . 116,792 4,937
- ---------------------------------------------------------
Less: accumulated depreciation. . . . . . . . . . . . . (10,982) (2,896)
- --------------------------------------------------------- ------------ -----------
Total Other Assets. . . . . . . . . . . . . . . . . . $ 105,810 $ 2,041
------------ -----------
OTHER ASSETS
- ---------------------------------------------------------
Investments . . . . . . . . . . . . . . . . . . . . . . $ 550,000 $ -
- --------------------------------------------------------- ------------ -----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . $ 677,649 $7,584,667
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------
CURRENT LIABILITIES
- ---------------------------------------------------------
Accounts payable. . . . . . . . . . . . . . . . . . . . 168,215 73,179
Accrued liabilities . . . . . . . . . . . . . . . . . . 9,624 20,000
Accrued interest on bonds . . . . . . . . . . . . . . . 13,377 -
Payable - related party . . . . . . . . . . . . . . . . 338,655 409,000
Demand Note Payable . . . . . . . . . . . . . . . . . . 1,000 6,450
------------ -----------
Total current liabilities . . . . . . . . . . . . . . $ 530,871 $ 508,629
------------ -----------
LONG TERM LIABILITIES
- ---------------------------------------------------------
Convertible debenture bonds . . . . . . . . . . . . . . 240,000 -
------------ -----------
Total long term liabilities . . . . . . . . . . . . . $ 240,000 $ -
------------ -----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . $ 770,871 $ 508,629
------------ -----------
STOCKHOLDERS' EQUITY
- ---------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------
Common stock, $.0001 par value, 100,000,000 authorized
and 24,989,845 shares issued and outstanding. . . . 24,990 23,599
Additional paid in capital. . . . . . . . . . . . . . . 10,171,229 8,266,502
Deficit accumulated during the development stage. . . . (6,203,269) -
Retained earnings . . . . . . . . . . . . . . . . . . . (4,086,172) (964,063)
Less Treasury Stock . . . . . . . . . . . . . . . . . . - (250,000)
------------ -----------
Total stockholders' equity. . . . . . . . . . . . . . $ (93,222) $7,076,038
------------ -----------
TOTAL LIABILITIES AND EQUITY (DEFICIT). . . . . . . $ 677,649 $7,584,667
============ ===========
See accompanying notes to the financial statements
4
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDING MARCH 31, 2001 AND 2000
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31 MARCH 31
2001 2000
-------------- --------------
REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,966 $ -
- ------------------------------------------------------------- --------------
COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . 14,042 -
- ------------------------------------------------------------- --------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . (6,076) -
- ------------------------------------------------------------- --------------
EXPENSES
- -------------------------------------------------------------
General and administrative. . . . . . . . . . . . . . . . . 1,406,721 175,084
Research and development. . . . . . . . . . . . . . . . . . 29,792
--------------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . 1,436,513 175,084
-------------- --------------
LOSS FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . (1,442,589) (175,084)
- ------------------------------------------------------------- -------------- --------------
OTHER INCOME
- -------------------------------------------------------------
Interest income
Interest Expense. . . . . . . . . . . . . . . . . . . . . . (15,020) -
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . $ (1,457,609) $ (175,084)
- -------------------------------------------------------------
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . - -
-------------- --------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . $ (1,457,609) $ (175,084)
- ------------------------------------------------------------- ============== ==============
EARNINGS PER SHARE
Weighted average
Number of shares Outstanding. . . . . . . . . . . . . . . . 24,254,350 13,276,859
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.01)
============== ==============
Weighted average
Number of shares on a Fully Diluted Basis . . . . . . . . . 24,254,350 13,276,859
Fully Diluted EPS . . . . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.01)
============== ==============
See accompanying notes to the financial statements
5
E-REX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDING MARCH 31, 2001
ADDITIONAL
COMMON STOCK PAID-IN INCOME
SHARES AMOUNT CAPITAL (LOSS) TOTAL
----------- ------------ ------------ ------------- ----------
Balance, December 31, 1999 . . . . . . . . . . . . . . . . . 15,701,832 15,702 708,799 (788,979) (64,478)
----------- ------------ ------------ ------------- ----------
Common shares issued
for cash . . . . . . . . . . . . . . . . . . . . . . . . . . 3,290,000 3,290 325,710 329,000
Common shares issued for
services and compensation. . . . . . . . . . . . . . . . . . 9,386,667 9,387 8,069,873 8,079,260
Common shares issued
for consulting services. . . . . . . . . . . . . . . . . . . 311,263 311 127,307 127,618
Common shares issued
as Settlement Agreement. . . . . . . . . . . . . . . . . . . 1,096,670 1,097 448,537 449,634
Allowence for prepaid
stock compensation . . . . . . . . . . . . . . . . . . . . . (1,258,045)
Common shares issued in
exchange of shares as
an investment. . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 1,000 399,000 400,000
Common shares purchased
as treasury stock. . . . . . . . . . . . . . . . . . . . . . (6,977,616) (6,978) (143,022) (150,000)
Net loss for the period. . . . . . . . . . . . . . . . . . . (8,042,853) (8,042,853)
----------- ------------
Balance, December 31, 2000 . . . . . . . . . . . . . . . . . 23,808,816 $ 23,809 $ 9,936,204 $ (8,831,832) $(129,864)
----------- ------------ ------------ ------------- ----------
Common shares issued . . . . . . . . . . . . . . . . . . . . 461,029 461 91,745 92,206
for consulting services
Common shares issued . . . . . . . . . . . . . . . . . . . . 600,000 600 119,400 120,000
in Satisfaction of debt
Common shares issued . . . . . . . . . . . . . . . . . . . . 120,000 120 23,880 24,000
for Software Research & Development
Charge for prepaid Stock Compensation. . . . . . . . . . . . 1,258,045
Net loss for the period. . . . . . . . . . . . . . . . . . . (1,457,609) (1,457,609)
----------- ------------
Balance, March 31, 2001. . . . . . . . . . . . . . . . . . . 24,989,845 $ 24,990 $10,171,229 $(10,289,441) $ (93,222)
=========== ============ ============ ============= ==========
See accompanying notes to the financial statements
6
E-REX, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDING MARCH 31, 2001 AND 2000
THREE MONTHS THREE MONTHS
ENDED ENDED
CASH FLOWS FROM (FOR) . . . . . . . . . . . . . . . . . . . . MARCH 31 MARCH 31
OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . 2001 2000
- ------------------------------------------------------------- -------------- --------------
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . $ (1,457,609) $ (175,084)
Adjustments to reconcile net income to
to net cash provided by (used in )
operating activities:
Stock issued for Services . . . . . . . . . . . . . . . . . 1,350,251 127,175
Stock issued in conversion of debt. . . . . . . . . . . . . 120,000
Stock Issued for Research & Development . . . . . . . . . . 24,000
Depreciation expense. . . . . . . . . . . . . . . . . . . . 3,182
(Increase) Decrease in
Accounts receivable . . . . . . . . . . . . . . . . . . . 2,271 (51,500)
(Increase) Decrease in
Employee advance. . . . . . . . . . . . . . . . . . . . . 298
Increase (Decrease) in
Accounts payable. . . . . . . . . . . . . . . . . . . . . (82,692) (8,896)
Increase (Decrease) in
Accrued liabilities . . . . . . . . . . . . . . . . . . . 4,703
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,444) 20,000
-------------- --------------
Total adjustments to net income . . . . . . . . . . . . . . 1,420,569 86,779
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . . . . . . . . (37,040) (88,305)
CASH FLOWS FROM (FOR)
- -------------------------------------------------------------
INVESTING ACTIVITIES
- -------------------------------------------------------------
Purchase of furniture, Equipment & Software . . . . . . . . (24,000) -
-------------- --------------
Net cash flows provided by (used in)
investing activities. . . . . . . . . . . . . . . . . . . . (24,000) -
CASH FLOWS FROM (FOR)
- -------------------------------------------------------------
FINANCING ACTIVITIES
- -------------------------------------------------------------
Proceeds from loan. . . . . . . . . . . . . . . . . . . . . 41,001 409,000
Proceeds from issuance of stock
Payment on loan
Purchase of treasury stock. . . . . . . . . . . . . . . . . (250,000)
--------------
Net cash provided by (used in) financing. . . . . . . . . . 41,001 159,000
CASH RECONCILIATION
- -------------------------------------------------------------
Net increase (decrease) in cash . . . . . . . . . . . . . . (20,039) 70,695
Cash at beginning of year . . . . . . . . . . . . . . . . . 19,948 22,006
-------------- --------------
CASH BALANCE AT END OF YEAR . . . . . . . . . . . . . . . . . $ (91) $ 92,701
- ------------------------------------------------------------- ============== ==============
See accompanying notes to the financial statements
7
E-REX, INC.
FORM 10-QSB
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2001
1. Summary of significant accounting policies:
Nature of Operations - E-Rex, Inc. (the "Company"), a Nevada corporation, was
incorporated on August 26, 1986 as P.R. Stocks, Inc. On February 26, 1992, the
Company changed its name to National Health & Safety Corporation. On November
12, 1992, the Company changed its name to Medgain International Corporation. On
June 20, 1994 the Company changed its name to E-Rex, Inc. On February 20,
1999 the Company entered into a business combination (see Note 5). Until
September of the year 2000, the Company had no material revenues and was
considered to be in the development stage. The Company now operates an internet
web hosting service. The Company continues its development of computer hardware
and software products that it intends to sell.
Cash Equivalents - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Earnings (Loss) Per Share - Basic earnings per share ("EPS") is computed by
dividing earnings available to common shareholders by the weighted-average
number of common shares outstanding for the period as required by the Financial
Accounting Standards Board (FASB) under Statement No. 128, "Earnings per
Shares". Diluted EPS reflects the potential dilution of securities that could
share in the earnings.
Basis of Accounting - The Company's financial statements are prepared in
accordance with generally accepted accounting principles.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes - The Company records its income tax provision in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes."
Functional Currency - All amounts in the Company's financial statements and
related footnotes are stated in US dollars. The Company had no significant gain
or losses from foreign currency conversions. The Company has closed its foreign
bank accounts during the year 2000 and now operates using U.S. currency.
Property and Equipment - Depreciation and amortization is computed by the
straight line method with the following recovery periods:
Office equipment and software 3-5 Years
Furniture 5-7 Years
8
Maintenance and repairs, as incurred, are charged to expense; betterments and
renewals are capitalized in plant and equipment accounts. Cost and accumulated
depreciation applicable to items replaced or retired are eliminated from the
related accounts; gain or loss on the disposition thereof is included as income.
No depreciation is recorded on property and plant left idle.
2. Basis of Presentation as a Going Concern:
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred a net
loss for the period from inception (August 26, 1986) to September 30, 2000 (the
Company's development stage). The Company continues to operate at a loss. This
factor, among others, raises substantial doubt as to the Company's ability to
continue as a going concern.
The Company's management intends to raise additional operating funds through
equity and/or debt offerings and revenue from its new operation. However, there
can be no assurance management will be successful in its endeavors.
3. Income Taxes:
The Company records its income tax provision in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the liability method of accounting for deferred income
taxes.
Since the Company has not generated cumulative taxable income since inception,
no provision for income taxes has been provided. At March 31, 2001, the Company
did not have significant tax net operating loss carry forwards (tax benefits
resulting from losses for tax purposes have been fully reserved due to the
uncertainty of a going concern). At March 31, 2001 the Company did not have any
significant deferred tax liabilities or deferred tax assets.
4. Development Stage Company:
During the year 2000, the Company's management determined that the Company is no
longer in the development stage. It continues to develop computer hardware and
software components, but has added the service of internet web hosting, design
and consulting as part of its current and ongoing operations.
A development stage company is one for which principal operations have not
commenced or principal operations have generated an insignificant amount of
revenue. Management of a development stage company devotes most of its
activities to establishing a new business. Operating losses have been incurred
through September 30, 2000, and the company continues to use, rather than
provide, working capital for the development of computer hardware and software.
Although management believes that it is pursuing a course of action that will
provide successful future operations, the outcome of these matters is uncertain.
The Company continues this development and has now started operations in the
internet web hosting, design and consulting industry.
9
5. Business Combination:
On February 20, 1999 the Company entered into a merger agreement with Plantech
Communications Systems, Inc. ("Plantech"), a privately held British Columbia,
Canada, Corporation. Plantech is a development stage enterprise in the
software, computer and internet area. From inception in 1992 to date Plantech
has had no revenues.
Under the terms of the merger agreement, Plantech shareholders received one
share of the Company's common stock for each outstanding share of Plantech
stock. The Company issued 8,137,616 shares of its common stock in exchange for
all the Plantech common shares outstanding as of February 20, 1999.
The above business combination was accounted for under the purchase method.
There was no significant difference between the purchase cost and the fair value
of net assets/liabilities acquired, thus no goodwill was recorded. Plantech's
results of operations are included in the Company's statement of operations from
the date of merger, February 20, 1999, until the Company survived during that
year as the surviving corporation. The following table sets forth certain
results of operations for the periods presented as if the Plantech business
combination had been consummated on the same terms at the Plantech inception in
1992.
Inception
Jan. 1, 1999 (8/26/86)
To Feb. 20, To Dec. 31,
1999 1999
------------- -------------
Revenues $ -- $ --
Net (Loss) $ (230,954) $ (616,086)
6. Litigation:
On August 4, 2000, Crusader Capital Group, Inc. filed a complaint against the
company in civil action number CV-N-411-DWH-RAM in the United States District
Court for the district of Nevada. The company was served with this complaint on
or about August 10, 2000. This complaint alleges undetermined damages for
misrepresentations, omissions, breach of contract and unjust enrichment related
to Crusaders purchase of restricted stock in the company during the first
quarter of 2000. The case is in the discovery phase of litigation, however, a
settlement agreement has been reached in principal, subject to execution of the
final settlement documents. If finalized, the Company will issue to Crusader
Capital Group, Inc. a total of 166,667 shares of restricted common stock.
In January, 2000 the Board of Directors resolved to settle a British Columbia
Supreme Court action brought against the Company for an unpaid vendor bill for
$25,000.00. The Company also accepted from the same vendor a return of 50,000
shares of the Company stock that the vendor held.
7. Related Party Transactions:
The Company made an investment in Ultimate Franchise Systems, Inc. (USFI) on
August 1, 2000 in an exchange of 1,000,000 shares of the Company's stock valued
at $400,000 for stock in USFI. Further to the agreement the Company will
develop a home delivery web site and on-line ordering system for a fee of $75.00
per unit per month in approximately 300 restaurants, plus a royalty of 5% of
on-line gross sales.
10
The second investment the Company made on September 1, 2000 was a purchase of
assets from Webulate LLC. The assets include software, equipment and stock in
DiveDepot.Com, Inc. The transaction was completed with $40,000 cash and
$200,000 in convertible note payables valued for a total of $240,000. The
President of the Company, Mr. Dilley, is also on the Board of Directors of
DiveDepot.Com, Inc.
The Company entered into an agreement on January 21, 2000 with International
Investment Banking, Inc. ("IIBI") whereby IIBI will serve as senior management
of the Company for an initial term of two years unless further extended by
mutual agreement of the parties. The Chairman of the Company, Donald A.
Mitchell, also controls IIBI. Pursuant to the agreement, IIBI receives $10,000
per month and reimbursement of normal business expenses that it incurs on behalf
of the Company and certain expenses of individual consultants that IIBI assigns
to carry out the duties and responsibilities of IIBI. Thereafter the annual
compensation shall increase at a rate of 20% per year. In addition to monthly
compensation, IIBI OR Mr. Mitchell may be entitled to receive an annual bonus as
determined by the Company's Board of Directors payable in common stock or cash.
Mr. Mitchell was granted 2,000,000 shares of common stock representing 1,000,000
common shares for each year of IIBI's engagement. As an addendum of this
agreement, IIBI was directed on the Company's behalf the following: Purchase
8,237,616 shares of stock from two of the Company's former directors for
$250,000; issue 6,000,000 shares of stock to Stockbroker Relations, Inc. per an
investor relations contract; and issue IIBI 1,000,000 shares of restricted
common stock. On February 28, 2001 the board of Directors issued 600,000
restricted shares under Regulation D to IIBI in satisfaction of an outstanding
debt of $120,000.
On February 22, 2001 the board of Directors issued 75,000 free trading shares
under Regulation S to Jeffrey Harvey, a director and officer, under Regulation S
in exchange for legal services valued at $15,000.
On February 22, 2001 the board of Directors issued 75,000 free trading shares
under Regulation S to Carl Dilley, an employee, director and officer, under
Regulation S in exchange for management services valued at $28,500.
The Company assumed a promissory note payable to Valcom Ltd, a West Vancouver,
British Columbia Company, dated March 15, 1997 in the amount of $6,450 with no
interest stated. This note was assumed by the Company from the merger as
described in footnote 5. The Company has also entered into an agreement for
design and integration work with Valcom Ltd, an entity controlled by a
shareholder of the Company, Paul R. Macpherson, that was a director of the
Company at the time the agreement was entered into.
The Company continues an ongoing relationship with Valcom Ltd. in that the
Company uses Valcom Ltd. as its resource for research and development of its
computer hardware and software product development along with a company by the
name of Riotech.
8. Convertible Debenture Bonds:
Refer to Footnote 7 with regard to bonds issued to related parties. These
convertible debentures accrue interest at the rate of 10% per annum.
9. Stockholders' Equity:
Refer to Footnote 7 with regard to equity changes with related parties.
11
On November 20, 2000, the board of directors declared 1,096,670 restricted
common shares to be issued, a value of $449,537, for the purpose of settling
with shareholders that had asserted that the Company had originally issued the
shareholders stock that was stated to be free trading shares. The shares were
issued under a Regulation D section 144 filing. In addition to the shares
issued were 3,290,000 options to purchase shares of the Company's common stock
at an exercise price of $1.00 that expire on November 21, 2002. The Company's
management disagreed with the assertion, but decided to settle with the relevant
shareholders through the issuance of additional shares and options as noted
above. As noted in Footnote 6, Crusader Capital Group, Inc., one of the
shareholders representing about 15% of all shareholders which has asserted a
claim against the Company, has agreed in principal to accept the 166,667 shares
which have been issued and accounted for. There remains uncertainty regarding
the outcome of the Crusader Capital Group, Inc. claim.
Stock options have been granted by the Company to directors and officers with an
expiration date of November 21, 2002. The stock options were issued November 21,
2000 with 325,000 options excercisable at $.40 per share and 325,000 options
excercisable at $.75 per share.
Stock options have been granted by the Company to Ultimate Franchise Systems
Inc., to purchase 3,000,000 shares of E-Rex common stock at an exercise price
equal to the average of the closing ask price plus $.01, as quoted on the NASD
over-the counter bulletin board for the five trading days immediately preceding
the closing.
700,000 options were issued to Corporate Service Providers Inc. for the purpose
of providing investment banking services to the company. Terms as per corporate
resolution dated 8/1/00 as follows:
Exercisable at $1.00 during the 1st 12 months from date of issue.
Exercisable at $1.50 during the 2nd 12 months from date of issue.
Options are callable with a 21 day notification by the company if the stock
trades for 20 consecutive business days at a 50% premium to the exercise price.
500,000 options were issued to Crusader Capital Group as an inducement to settle
the suit detailed in Footnote 6. The options are exercisable at $1.00 during
the 24 months from date of issue.
E-Rex has also offered $1,000,000 in units of the company's securities pursuant
to its Memorandum of terms dated June 21, 2000. The units consist of either a
Series A 10% Convertible Debenture or a Series B 10% Convertible Debenture
together with 50,000 attached warrants to purchase common stock at an exercise
price of $1.00 per share and a two year expiration. The Company has issued
$240,000 of these bonds, $200,000 of which were in exchange for assets purchased
in the Webulate LLC transaction. The transaction is not a public offering as
defined in section 4(2) of the Securities Act of 1933, and accordingly, the
units will not be registered under the Act or laws of any state but are being
offered pursuant to exemptions from registration.
On February 22nd the board of Directors issued 223,529 free trading shares under
Regulation S in exchange for services valued at $44,706.
12
On February 22nd the board of Directors issued 75,000 free trading shares under
Regulation S to Jeffrey Harvey, a director and officer, under Regulation S in
exchange for legal services valued at $15,000.
On February 22, 2001 the board of Directors issued 75,000 free trading shares
under Regulation S to Carl Dilley, an employee, director and officer, under
Regulation S in exchange for management services valued at $28,500.
On February 22, 2001 the board of Directors issued 120,000 free trading shares
under Regulation S in exchange for Software Research and development valued at
$24,000.
On February 28, 2001 the board of Directors issued 600,000 restricted shares
under Regulation D to IIBI in satisfaction of debt valued at $120,000.
On March 1, 2001 the board of Directors issued 100,000 free trading shares under
Regulation S valued at $20,000 and 100,000 options which terms are to be decided
by the board of directors upon implementation of the employee stock option plan
to Jeffrey Harvey, a director and officer, pursuant to an agreement for legal
services.
Per a one year investor relations contract dated March 23, 2000 6,000,000 shares
of stock were issued to Stockbroker Relations, Inc. At December 31, 2000 an
unexpensed balance of $1,258,045 in prepaid stock compensation for services was
carried in the equity of the company. This amount was expensed during the first
quarter of 2000 and subsequently removed from the stockholders equity of the
company.
Subsequent Events
On April 2, 2001 the board of Directors issued 346,153 restricted shares to
Action Stocks, Inc and James Williams under Regulation D in exchange for
investor relations services valued at $58,846. Under terms of the 12 month
agreement Action Stocks, Inc. will provide services to the company including
website marketing, email services, direct client promotion, investor relations,
affiliate promotions, research reports, and promotional spots on radio shows.
On May 1st the board of Directors issued 1,100,000 restricted shares to Big
Apple Consulting U.S.A., Inc. under Regulation D in exchange for investor
relations services valued at $209,000. The agreement requires a further 100,000
restricted shares to be issued on the first of every month for the next 5 months
of the agreement. Under terms of the 6 month agreement Big Apple Consulting
U.S.A., Inc. will provide stock broker relations services to the company
including, direct broker promotion, investor relations including conference
calls, and investor lead management.
On May 25th the board of Directors issued 195,000 restricted shares to Big Apple
Consulting U.S.A., Inc. under Regulation D in exchange for marketing services
valued at $39,000. Under terms of the 6 month agreement Big Apple Consulting
U.S.A., Inc. will provide marketing services to the company in order to
introduce the Dragonfly product into the Northern European Market. The services
rendered will include a market study and analysis, introduction to major
wireless and other telecom entities that may have an interest in purchasing,
distributing manufacturing the Dragonfly. The agreement calls for the payment
of pre-approved expenses and a 5% commission on sales effected by the
consultant.
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10. Other Agreements:
On March 1st the company entered into an engagement agreement with Riotech, LLC.
to provide internet website development, on line marketing services, e-commerce
services and back office systems services. Under the terms of this 24 month
agreement Riotech, LLC. will be compensated at the rate of 70% of the gross
amount of any services provided to end customers of E-Rex, Inc. Riotech will
also manage and provide project managers and development staff on an exclusive
basis for all projects undertaken during the term of the agreement. Riotech
will also supply 300 hours of work towards the development of E-rex proprietary
websites and systems.
11. Concentrations of Risk:
Other than capital financing, the Company relies principally on operating
revenue from, internet web hosting, design and consulting services. Development
of computer hardware and software products continues, but is not funded by the
Company's current operation.
12. Required Cash Flow Disclosure:
The Company had no interest income and income taxes paid for the quarter.
The Company entered into agreements for non-cash exchanges of stock for services
totaling $92,206
The Company entered into agreements for non-cash exchanges of free trading
shares stock for Software Research and development valued at $24,000.
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
QUALIFIED REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Our independent accountant has qualified his report. They state that the
audited financial statements of E-Rex, Inc. for the period ending December 31,
2000 have been prepared assuming the company will continue as a going concern.
They note that the significant losses of our company as of December 31, 2000
raise substantial doubt about our ability to continue in business.
RESULTS OF OPERATIONS
The Company had significant losses of $1,457,609 for the quarter ended
March 31, 2001. Losses have been funded by the sale of additional securities
and the issuance of stock for services. We expect losses to continue and have no
firm commitments or sources of long-term capital.
The Company intends to pursue its business plan and meet its reporting
requirements utilizing cash made available from the private and future public
sale of its securities as well as income for the web site design division of the
Company. The Company's management is aggressively pursuing relationships and
markets for this division and is of the opinion that revenues from the sales of
its securities will be sufficient to pay its expenses until its business
operations create positive cash flow. The Company does not currently have
sufficient capital to continue operations for the next twelve months and will
have to raise additional capital to meet its business objectives as well as 1934
Act reporting requirements.
On a long-term basis, the Company's liquidity is dependent on revenue
generation, additional infusions of capital and potential debt financing.
Company management believes that additional capital and debt financing in the
short term will allow it to pursue it's business plan and thereafter result in
revenue and greater liquidity in the long term. However, there can be no
assurance that the Company will be able to obtain the needed additional equity
or debt financing in the future.
The Company is presently completing the initial prototypes of the
"Dragonfly" after two "Dragonfly" mock-up prototypes were successfully
demonstrated at the Java One conference at the Moscone Centre in San Francisco
sponsored by Sun MicroSystems. There have been unexpected delays in producing
the prototypes and although the technology has been tested and is proven
operational it is anticipated that the approximate time frame for completion of
the prototypes including testing will be 45 to 90 days. As soon as the initial
prototypes are fully operational, demonstrations with major OEM corporations
will be arranged.
The Company will not establish its own manufacturing plant, however, it
will provide quality control personnel at these plants and will also maintain
research and development programs through the Canadian engineering firm of
Valcom, Ltd. to secure development of products presently in the planning stage.
The Company does not expect to purchase any significant plant or equipment
within the next twelve months.
Other than described above, the Company does not expect significant changes
in the number of employees during the next twelve months and anticipates
expansion of the web site design division by utilizing sub contractors and
independent commission-based sales personnel.
Revenue
The Company's total revenue for the quarter ended March 31, 2001 was
$7,966, all of which were earned from web site design and consulting services
rendered by the Company. The cost of sales for this period was $14,042,
resulting in gross profit of ($6,076) for the quarter. The Company reported
revenue of $35,976 for the year ended December 31, 2001 and did not have any
revenues for the years ended December 31, 1999 and 1998.
15
General and Administrative
The Company's general and administrative expenses totaled $1,406,721 for
the quarter ended March 31, 2001, as compared to $175,084 for the period ended
March 31, 2000. Of the total general and administrative expenses, $1,470,251 is
attributable to stock issued for services to various consultants, advisors,
employees, and service providers to the Company. Because the Company does not
have sufficient revenues or current assets to pay these providers in cash, it
has continued to issue common stock for services, and anticipates that this
pattern will continue during the coming year. The Company also recorded $29,792
in research and development expenses related to its Dragonfly product.
Net Losses
Net losses for the quarter ended March 31, 2001 were $1,457,609 as compared
to $175,084 for the period ended March 31, 2000. The Company expects that it
will continue to incur operating and net losses as a result of its insufficient
revenue and continued issuance of stock for services.
The loss per share, based on a weighted average number of shares of
24,254,350 was $0.06 per share, compared with the loss per share of $0.04 for
the period ended March 31, 2000.
Liquidity and Capital Requirements
The Company requires substantial capital in order to meet its ongoing
corporate obligations and in order to continue and expand its current and
strategic business plans. Working capital has been primarily obtained through
advances from the Company's Investment Banker, International Investment Banking,
Inc. and the private placement of common stock. The web design, hosting and
consulting business of the Company is in its infancy and is a minor part of the
overall business. It is not expected that revenues from this area of the
business will be sufficient in the near term to fund ongoing operations and
development and the bringing to market of the Dragonfly.
The company's plans for manufacturing, sales and distribution of the
Dragonfly are focused on establishing an OEM licensing agreement with one or
more electronics manufacturers who have the available resources and wholesale
and retail distribution channels to satisfactorily bring the product to market.
The company will therefore need available capital to complete the Dragonfly
prototypes estimated at approximately $150,000 and an estimated additional
$300,000 for product testing, packaging and consumer research prior to
manufacturing. Capital to promote the product and accomplish the sales and
marketing to the OEM entities is estimated at $1,000,000 over the next 12
months. Head office and corporate operations including salaries, rent,
miscellaneous office expenses, investor relations, legal and accounting for the
next 12 months is estimated at $650,000. The total capital requirement is
therefore estimated at $2,100,000.
16
It is anticipated that the short-term credit line extended by International
Investment Banking, Inc., in addition to an equity line from Swartz Private
Equity, LLC, will be sufficient to meet those needs, however, there can be no
assurance that the Company will be able to obtain the needed additional equity
or debt financing in the future. In addition, the Swartz line of credit can
only be utilized by the Company upon the effectiveness of a registration
statement with the SEC, and then only if certain conditions are met and certain
conditions precedent exist. The Company does not currently have a registration
statement on file. It is possible that the company may not have sufficient
capital to meet its short term requirements prior to the funding from the Swartz
equity line becoming available and there is the potential due to market
conditions that the amount of funding available under the Swartz financing
agreement may be limited and not necessarily cover all operating and Research
and Development expenses. The company may also raise additional operating
capital through other equity and/or debt offerings. However there can be no
assurances that it will be successful in its endeavors.
The Company received proceeds from loans of $41,001.00 for the quarter
ended March 31, 2001 resulting in net cash provided by financing activities of
$41,001.00.
The Company invested $24,000.00 in development of an on-line ordering
system for the fast food franchise industry during the three months ended March
31, 2000.
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PART II
ITEM 1 LEGAL PROCEEDINGS
There have been no material developments to the reportable events in the
Company's Form 10-KSB filed with the SEC on May 18, 2001.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2001, the Company issued 75,000 shares of common stock to
Jeffrey M. Harvey, 142,500 shares of common stock to Carl E. Dilley, 119,720
shares to Ben Grocock, 61,935 shares to Byron Rambo, 53,958 shares to J. Knigin,
53,958 shares to S. Niakan, and 53,958 shares to A. Sikorski for services
rendered to the Company. The issuances were registered on Form S-8.
In February 2001, the Company issued 20,000 shares of common stock,
restricted in accordance with Rule 144, to M. Wilson, an employee of the
Company. The issuance was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
There have been no events which are required to be reported under this
Item.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
applicable period.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: June 11, 2001 E-Rex, Inc.
/s/ Carl E. Dilley
_____________________________
By: Carl E. Dilley
Its: President
Dated: June 11, 2001 E-Rex, Inc.
/s/ Jeffrey M. Harvey
_____________________________
By: Jeffrey M. Harvey
Its: Treasurer
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