SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECOND AMENDED
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 24, 2001, there
were 32,296,890 shares of common stock issued and outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(check one):
Yes _____ No X
-----
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
EXPLANATORY NOTE
E-Rex, Inc. has restated its Quarterly Report on Form 10-QSB. This Quarterly
Report is for the quarter ended September 30, 2001, was originally filed with
the Commission on November 14, 2001, and an amended Quarterly Report was filed
with the Commission on April 9, 2002. References throughout this Quarterly
Report are accurate as of the date originally filed. The Company has not
undertaken to update all of the information in this Quarterly Report, but
instead has updated only those areas where changes were deemed necessary.
Please read all of the Company's filings with the Commission in conjunction with
this Quarterly Report.
The financial statements have been revised to present the ongoing financial
information as a development stage enterprise as well as provide more detailed
information regarding the Swartz funding agreement and the inclusion of related
charges, policies regarding revenue recognition, and the policies, treatment,
and charges related to investments the Company holds to better comply with U.S.
GAAP standards.
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 SEPTEMBER 30, 2001 AND DEC 31, 2000.
(A Development Stage Company)
ASSETS
------
30-Sep DEC 31
2001 2000
(Restated) (Restated)
------- -------
CURRENT ASSETS
- --------------
Cash 14,325 19,948
Prepaid Expense 30,906 -
Accounts receivable from related parties 4,960 298
Accounts receivable 9,318 22,757
------------ ------------
Total Current Assets $ 59,509 $ 43,003
------------ ------------
PROPERTY AND EQUIPMENT
- ----------------------
Furniture, equipment and software 130,361 92,792
Less: accumulated depreciation (32,561) (7,800)
------------ ------------
Total Other Assets $ 97,800 $ 84,992
------------ ------------
OTHER ASSETS
- ------------
Investments $ 7,101 $ 62,600
------------ ------------
TOTAL ASSETS $ 164,410 $ 190,595
============ ============
LIABILITIES AND STOCKHOLDERS' DEFECIT
--------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable 158,198 95,440
Accounts payable to related parties 94,898 155,467
Accrued liabilities 18,854 10,838
Accrued interest on bonds 23,514 7,460
Stock Payable 1,044,000 450,000
Work In Progress Deposits 26,623 -
Demand Loan-related party 380,439 298,654
------------ ------------
Total current liabilities $ 1,746,526 $ 1,017,859
------------ ------------
LONG TERM LIABILITIES
- ---------------------
Convertible debenture bonds 100,000 240,000
------------ ------------
Total long term liabilities $ 100,000 $ 240,000
------------ ------------
TOTAL LIABILITIES $ 1,846,526 $ 1,257,859
------------ ------------
STOCKHOLDERS' EQUITY
--------------------
STOCKHOLDERS' DEFICIT
- ----------------------
Common stock, $.001 par value, 100,000,000 authorized
Shares issued and outstanding as of December 31, 2000 23,808,816 23,809
Shares issued and outstanding as of September 30, 2001 31,416,892 31,417 -
Additional paid in capital 11,238,038 9,936,204
Accrued Stock Compensation (18,353) (1,258,045)
Accumulated Other Comprehensive Income, net of tax
Net unrealized gains (losses) on marketable equity securities (542,900) (487,400)
Deficit accumulated during the development stage (12,390,318) (9,281,832)
Total stockholders' deficit $(1,682,116) $(1,067,264)
------------ ------------
TOTAL LIABILITIES AND DEFICIT $ 164,410 $ 190,595
============ ============
See accompanying notes to the financial statements
4
E-REX, INC.
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 2001 AND 2000
AND FOR THE THREE MONTHS ENDING SEPTEMBER 30, 2001 AND 2000
(A Development Stage Company)
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
30-SEP 30-SEP 30-SEP 30-SEP FROM
2001 2000 2001 2000 INCEPTION
(Restated) (Restated) (Restated) (Restated) (Restated)
----------- ------------ ------------ -------------- ---------------
REVENUE . . . . . . . . . . . . . . . . . . . . . . $ 69,489 $ 7,524 $ 31,975 $ 7,524 $ 105,465
- --------------------------------------------------- ------------ ------------ ------------ -------------- ---------------
COST OF SALES . . . . . . . . . . . . . . . . . . . 66,321 - 28,571 - 76,928
- --------------------------------------------------- ------------ ------------ ------------ -------------- ---------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . 3,168 7,524 3,404 7,524 28,537
- --------------------------------------------------- ------------ ------------ ------------ -------------- ---------------
EXPENSES
- ---------------------------------------------------
General and administrative. . . . . . . . . . . . . (2,931,147) (5,702,614) (878,838) (2,509,422) (12,192,366)
Research and development. . . . . . . . . . . . . . (134,484) - (63,295) - (286,213)
------------ ------------ ------------ -------------- ---------------
Total expenses. . . . . . . . . . . . . . . . . . . (3,065,631) (5,702,614) (942,133) (2,509,422) (12,478,579)
------------ ------------ ------------ -------------- ---------------
LOSS FROM OPERATIONS. . . . . . . . . . . . . . . . (3,062,463) (5,695,090) (938,729) (2,501,898) (12,450,042)
- --------------------------------------------------- ------------ ------------ ------------ -------------- ---------------
OTHER INCOME
- ---------------------------------------------------
Interest Income 1,439
Interest Expense. . . . . . . . . . . . . . . . . . (46,023) (15,131) (62,441)
Recovery From lawsuit - - - - 120,726
------------ ------------ ------------ -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . $(3,018,486) $(5,695,090) $ (953,860) $(2,501,898) (12,390,318)
- ---------------------------------------------------
Income Taxes. . . . . . . . . . . . . . . . . . . . - - - - -
------------ ------------ ------------ -------------- ---------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . $(3,108,486) $(5,695,090) $ (953,860) $(2,501,898) (12,390,318)
- --------------------------------------------------- ============ ============ ============ ============== ===============
EARNINGS (LOSS) PER SHARE
Weighted average
Number of shares Outstanding. . . . . . . . . . . . 26,576,013 18,607,310 29,098,552 18,607,310
Basic EPS . . . . . . . . . . . . . . . . . . . . . $ (0.12) $ (0.31) $ (0.03) $ (0.13)
============ ============ ============ ==============
Weighted average
Number of shares on a Fully Diluted Basis . . . . . 26,576,013 18,607,310 29,098,552 18,607,310
Fully Diluted EPS . . . . . . . . . . . . . . . . . $ (0.12) $ (0.31) $ (0.03) $ (0.13)
============ ============ ============ ==============
See accompanying notes to the financial statements
5
E-REX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 26, 1986) TO SEPTEMBER 30, 2001
(A Development Stage Company)
DEFECIT
ACCRUED ADDITIONAL ACCUMULATED
COMMON STOCK STOCK PAID-IN DURING
SHARES AMOUNT COMPENSATION CAPITAL DEV. STAGE TOTAL
(Restated) (Restated) (Restated) (Restated) (Restated) (Restated)
----------- -------- ------------ ----------- ----------- -----------
Issuance of shares of common
stock on Aug. 26 1986, for
$.044 per share 250,000 $250 $10,750 - 11,000
Net (loss) from inception on
Aug. 26, 1986, through Dec.
31, 1986 (15,354) (15,354)
----------- -------- ------------ ----------- ----------- -----------
Balance December 31, 1986 250,000 250 - 10,750 (15,354) (4,354)
Issuance of shares of common
stock to the public for
$1.00 per share 93,215 93 93,122 93,215
Deferred offering cost offset
against additional paid-in capital (7,663) (7,663)
Net (loss) for the year ended
Dec. 31, 1987 (80,103) (80,103)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1987 343,215 343 - 96,209 (95,457) 1,095
Net (loss) for the four year period
ended Dec. 31, 1991 (4,072) (4,072)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1991 343,215 343 - 96,209 (99,529) (2,977)
Issuance of shares of stock on
Feb. 4, 1992 for $1.00 per share 166,716 167 166,549 166,716
Deferred offering cost offset
against additional paid-in capital (26,125) (26,125)
Common stock issued on
Feb. 4, 1992 for services 136,785 137 27,220 27,357
Net (loss) for the year ended
Dec. 31, 1992 (179,027) (179,027)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1992 646,716 647 - 263,853 (278,556) (14,056)
Issuance of shares of common
stock to the public on Feb. 3,
1933 for $4.00 per share 32,000 32 127,968 128,000
Deferred offering cost offset
against additional paid-in capital (74,239) (74,239)
Common stock issued for legal
services on April 29, 1993 110,000 110 21,890 22,000
Net (loss) for the year ended
Dec. 31, 1993 (39,703) (39,703)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1993 788,716 789 - 339,472 (318,259) 22,002
Net (loss) for the year ended
Dec. 31, 1994 (8,357) (8,357)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1994 788,716 789 - 339,472 (326,616) 13,645
Net (loss) for the year ended
Dec. 31, 1995 (19,185) (19,185)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1995 788,716 789 - 339,472 (345,801) (5,540)
6
Balance, December 31, 1995 788,716 789 - 339,472 (345,801) (5,540)
Net (loss) for the year ended
Dec. 31, 1996 (4,500) (4,500)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1996 788,716 789 - 339,472 (350,301) (10,040)
Common stock issued for
services Sep. , 1997 30,000 30 30
Net income for the year
ended Dec. 31, 1997 52,251 52,251
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1997 818,716 819 - 339,472 (298,050) 42,241
Common stock issued for
services Sep. , 1998 1,682,000 1,682 1,000 2,682
Common shares issued
in Reg D-504 exempt offering
Nov. and Dec., 1998 1,539,500 1,539 152,410 153,949
Common stock issued for
services Dec., 1998 100,000 100 9,900 10,000
Net (loss) for the year
ended Dec. 31, 1998 (26,493) (26,493)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 1998 4,140,216 4,140 - 502,782 (324,543) 182,379
Common shares issued
for cash 424,000 424 113,076 113,500
Common shares issued
for acquisition 8,137,616 8,138 8,138
Common shares issued
for services 3,000,000 3,000 92,941 95,941
Net loss for the period (464,436) (464,436)
----------- -------- ------------ ----------- ----------- -----------
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
Accrued
stock compensation (1,258,045) (1,258,045)
Common shares issued in
exchange of shares as
an investment 1,000,000 1,000 399,000 400,000
Common share purchased
as treasury stock (6,977,616) (6,978) (143,022) (150,000)
Accumulated Other Comprehensive losses, net of tax
Net unrealized gains (losses) on marketable equity securities (487,400)
Net loss for the period (8,492,853) (8,492,853)
----------- -------- ------------ ----------- ----------- -----------
Balance, December 31, 2000 23,808,816 $ 23,809 (1,258,045) 9,936,204 (9,281,832) (1,067,264)
Common shares issued
for consulting services 5,671,951 5,672 944,646 950,318
Common shares issued
for Software Research &
Development Investment 127,373 127 33,997 34,124
Accrued Stock Compensation 1,239,692 1,239,692
Common shares issued
in Conversion of Accounts Payable 600,000 600 119,400 120,000
Common shares issued
in Conversion of Convertible Debentures 280,000 280 139,720 140,000
Common shares issued for Cash 928,752 929 64,071 65,000
Accumulated Other Comprehensive Losses, net of tax
Net unrealized gains (losses) on marketable equity securities (55,500)
Net loss for the period (3,108,486) (3,108,486)
----------- -------- ------------ ----------- ----------- -----------
Balance, September 30, 2001 31,416,892 $ 31,417 $ (18,353) $ 11,238,038 $(12,390,318) $ (1,682,116)
=========== ======== ============ =========== =========== ===========
See accompanying notes to the financial statements
7
E-REX, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(A Development Stage Company)
NINE MONTHS NINE MONTHS
ENDED ENDED FROM
CASH FLOWS FROM (FOR) 30-SEP 30-SEP INCEPTION
OPERATING ACTIVITIES 2001 2000 TO DATE
(Restated) (Restated) (Restated)
- -------------------- ------------ ----------- --------------
Net (Loss). . . . . . . . . . . . . . . . . . . . . $(3,108,486) $(5,695,090) $ (12,390,318)
------------ ------------ --------------
Adjustments to reconcile net loss to
to net cash provided by
operating activities:
Stock issued for Services. . . . . . . . . . . . . . . . . 950,318 4,816,294 8,414,866
Stock Issued for Research & Development. . . . . . . . . . - 124,595 124,595
Stock Issued in conversion of Accts Payable 120,000 - 120,000
Warrants issued for services 594,000 280,800 1,044,000
Amortization of stock issued for services in prior period. 1,239,692 - 1,239,692
Depreciation expense . . . . . . . . . . . . . . . . . . . 24,761 (2,863) 32,561
(Increase) Decrease in
Accounts receivable. . . . . . . . . . . . . . . . . . . 13,439 7,524 (9,318)
Accounts receivable from related parties . . . . . . . . (4,960) - (4,960)
Prepaid professional Fees and Expenses . . . . . . . . . (29,164) - (29,462)
Deposits & Retainers (1,444) - (1,444)
Increase (Decrease) in
Accounts payable . . . . . . . . . . . . . . . . . . . . 72,518 - 158,198
Accounts payable related parties (70,329) - 94,898
Accrued liabilities. . . . . . . . . . . . . . . . . . . 8,016 125,624 18,854
Accrued Bond Interest. . . . . . . . . . . . . . . . . . 16,054 - 23,514
Work In Progress Deposits. . . . . . . . . . . . . . . . 26,623 - 26,623
------------ ---------- --------------
Total adjustments to net income (loss) . . . . . . . . . . 2,959,524 5,351,974 11,252,617
------------ ---------- --------------
Net cash provided by (used in)
operating activities . . . . . . . . . . . . . . . . . . . (148,962) (343,116) (1,137,701)
------------ ---------- --------------
CASH FLOWS FROM (FOR)
INVESTING ACTIVITES
- ---------------------
Purchase of furniture, Equipment & Software (3,446) (48,852) (38,100)
------------ ------------ --------------
Net cash flows provided by (used in)
investing activities . . . . . . . . . . . . . . . . . . . (3,446) (48,852) (38,100)
------------ ------------ --------------
CASH FLOWS FROM (FOR)
FINANCING ACTIVITIES
- ----------------------
Proceeds from loan from related party. . . . . . . . . . . 81,785 487,013 705,439
Proceeds from issuance of stock. . . . . . . . . . . . . . 65,000 329,000 919,687
Payment on loan. . . . . . . . . . . . . . . . . . . . . . - (314,000) (325,000)
Purchase of treasury stock . . . . . . . . . . . . . . . . - (150,000) (150,000)
Proceeds of Conv. Deb Issue - 20,000 40,000
------------ ------------ --------------
Net cash provided by financing activities. . . . . . . . . 146,785 372,013 1,190,126
------------ ------------ --------------
CASH RECONCILIATION
- -------------------
Net decrease in cash. . . . . . . . . . . . . . (5,623) (19,955) 14,325
Cash at beginning of period. . . . . . . . . . . . . . . . 19,948 22,006 0
------------ ------------ --------------
CASH BALANCE AT END OF PERIOD. . . . . . . . . . . . . . . $ 14,325 $ 2,051 $ 14,325
- ------------------------------- ============ ============ ==============
See accompanying notes to the financial statements
8
E-REX, INC.
FORM 10-QSB/A
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 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 is
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 Share".
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.
Revenue Recognition - The Company performs all services or delivers all
products prior to recognizing revenue. Monthly services are considered to be
performed ratably over the term of the arrangement. Professional consulting
services are considered to be performed when the services are complete.
Fees for certain monthly services, including certain portions of networking,
web hosting, and e-mail services, are variable based on an objectively
determinable factor such as usage. Such factors are included in the
written contract such that the customer's fee is determinable. The customer's
fee is negotiated at the outset of the arrangement and is not subject to refund
or subject to adjustment during the initial term of the arrangement.
The Company determines that collectibility is reasonably assured prior to
recognizing revenue. Collectibility is assessed on a customer by customer
basis based on criteria outlined by management. New customers are subject to a
credit review process, which evaluates the customer's financial position and
ultimately its ability to pay. The Company does not enter into
arrangements unless collectibility is reasonably assured at the outset.
Existing customers are subject to ongoing credit evaluations based on
payment history and other factors. If it is determined during the arrangement
that collectibility is not reasonably assured, revenue is recognized on a
cash basis.
9
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 U.S. 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
Maintenance and repairs are charged to expense as incurred; 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.
The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This statement requires securities which are
available-for-sale to be carried at fair value, with changes in fair value
recognized as a separate component of stockholders' equity.
Realized gains and losses are determined on the basis of specific
identification. Declines in the fair value of individual available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs
are included in earnings as realized losses.
Non-marketable securities - The Company accounts for investments for which
the Company does not have the ability to exercise significant influence or for
which there is not a readily determinable market value, under the cost
method of accounting. Additionally, certain securities are restricted and
are not transferable.
The Company periodically evaluates the carrying value of its investments
accounted for under the cost method of accounting and as of September 30, 2001,
such investments were recorded at the lower of cost or estimated net realizable
value.
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 has incurred a
net loss from inception (August 26, 1986) and is considered to be in its
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.
10
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.
E-Rex has entered into an investment agreement with Swartz Private Equity, LLC
to raise up to $15 million through a series of sales of our common stock. The
dollar amount of each sale is limited by our common stock's price, trading
volume, and a minimum period of time that must elapse between each sale. At the
current market price of our common stock, the amount of money we can raise
through the Swartz agreement is very limited, and we cannot be sure how much
money we can raise through the Swartz agreement in the future. Each sale will
be to Swartz. In turn, Swartz will either hold our stock in its own portfolio,
sell our stock in the open market, or place our stock through negotiated
transactions with other investors. The investment agreement provides, in
summary:
From time to time at our request, Swartz will purchase from us that number of
shares of our common stock equal to 15% of the number of shares traded in the
market in the 20 business days immediately before the date of the requested
purchase, excluding certain block trades, or 15% of the number of shares traded
in the 20 business days preceding the date of our advance notice of our put
right, excluding certain block trades, whichever is less;
The purchase price per share is the lesser of 91% of the lowest closing bid
price per share during the 20 Business days after our request, or that closing
bid price minus $0.075, but in no event will the purchase price be less than the
minimum price we select in our sole discretion; Swartz will not be required to
purchase at any one time shares having a value in excess of $2,000,000.
We may make additional requests at intervals of approximately 30 days as a
commitment fee, we granted to Swartz commitment warrants to purchase 2,700,000
shares of our common stock, which warrants can be exercised at $0.041 per share
(subject to potential future adjustment) through September 22, 2007.
The commitment warrants exercise price is reset to the lowest closing price of
our common stock during the five trading days ending on the six month
anniversary of the warrant issuance date, if the lowest price is lower than the
then-current exercise price; Swartz can only exercise its commitment warrants to
the extent that, after exercise, Swartz does not own more than 4.99% of our
outstanding shares; the commitment warrants are subject to antidilution
provisions, in the case of stock splits.
Our agreement with Swartz is not a convertible debenture, convertible preferred
stock, or similar type of investment instrument. In addition, we are not
borrowing from Swartz as with a conventional cash line of credit. Rather,
subject to the limitations set forth above, our agreement with Swartz permits us
to decide, in our sole discretion (subject to penalties for non-use), whether
and the extent to which we wish to require that Swartz purchase our stock.
Until our registration statement is declared effective, we have no plans to sell
shares to Swartz, and we are currently in compliance with the terms of the
investment agreement.
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.
11
Since the Company has not generated cumulative taxable income since inception,
no provision for income taxes has been provided. At September 30, 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 September 30, 2001 the Company
did not have any significant deferred tax liabilities or deferred tax
assets.
4. Development Stage Company:
The Company is a development stage company. 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 June 30, 2001, and the company continues to
use, rather than provide, working capital in this operation. Although management
believes that it is pursuing a course of action that will provide successful
future operations, the outcome of these matters is uncertain.
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. 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. A settlement agreement has been reached and
the Company has issued a total of 166,667 shares of restricted common stock that
was delivered to Crusader Capital Group, Inc. in conjunction with the final
settlement agreement.
12
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.
In February 2002, the Company was served with a lawsuit brought by a group of
ten (10) plaintiffs, namely Carol Gamble Trust 86, June L. Blackwell, June L.
Blackwell and Christopher Ford, as joint tenants, Terry Shores, Steve Rigg, Karl
Weinacker, Ressoyia Anderson, Mel Goodman, Slawomir Kownacki, and John
Bussjeager, in the United States District Court, District of Nevada. The
defendants in the action are the Company, its Board of Directors, a former
Director, the Company's legal counsel, and two corporate entities.
The Complaint alleges, among other things, that the plaintiffs are shareholders
of the Company, that they acquired stock of the Company based on
misrepresentations, that management of the Company misappropriated assets of the
Company, and further alleges violations of the Securities Act of 1933 and the
Securities Exchange Act of 1934. The Complaint requests an unspecified amount
of damages, that the Board of Directors and officers of the Company be removed,
and that a receiver or custodian be appointed to operate the business, as well
as a judicial determination that the action be maintained as a class action. A
hearing has been set for March 7, 2002, on plaintiff's motion for appointment of
a receiver and/or custodian, or in the alternative for call of a special meeting
of shareholders.
The Company is vigorously defending this lawsuit although the Company believes
that the action lacks merit. The case is at a stage where no discovery has been
taken and no prediction can be made as to the outcome of this case.
7. Related Party Transactions:
In the year 2000 the company purchased software, equipment and 100,000 shares of
DiveDepot.com, Inc. stock from Webulate LLC. The transaction was completed with
cash of $40,000 and convertible notes payable valued at $200,000. The President
of the Company, Mr. Dilley, was on the Board of Directors of DiveDepot.Com, Inc.
at the time of the transaction and the director Mr. Mitchell, is also on the
Board of Directors of DiveDepot.Com, Inc.
DiveDepot.Com, Inc has restated it's earnings for this period reflecting a
substantial write off of it's investment in internet related projects resulting
in negative shareholders equity as of Sept 30, 2000. DiveDepot.com, Inc is not
publicly traded and therefore the company has written down the value of the
investment in DiveDepot.Com, Inc. to $100.00 reflecting the par value of the
stock at as of Sept 30, 2000.
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 to this
agreement, IIBI was directed on the Company's behalf to execute 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. This service agreement was terminated by mutual
agreement on June 30, 2001.
13
At Sept 30, 2001 the Company has an amount of $94,89`8 outstanding to
("IIBI") for services that is comprised of $10,548 in interest accrued on
the demand loan payable to ("IIBI") and $84,350 for management related
services.
The Company entered into an agreement on September 11, 2000 with International
Investment Banking, Inc. ("IIBI") whereby IIBI provides the company with a
credit line financing on a demand basis with interest accruing at prime rate
plus 4%. This loan has a balance of $380,439 and $298,654 at September 30,
2001 and December 31, 2000 respectively.
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 1,000,000 shares of common stock in USFI and other
consideration, valued at $400,000. 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.
On February 22, 2001 the Company issued 75,000 shares of common stock to Jeffrey
Harvey, a director and officer, for legal services valued at $15,000, and 75,000
shares of common stock to Carl Dilley, for management services valued at
$28,500. The issuances were registered on Form S-8.
On June 12, 2001 the Company issued 85,714 shares of common stock to Jeffrey
Harvey, a director and officer, for legal services valued at $36,857, and
162,857 shares of common stock to Carl Dilley, for management services valued at
$70,029, and 115, 000 shares of common stock to Brian Lebrecht, the attorney for
the corporation, for legal services valued at $49,450. The issuances were
registered on Form S-8.
On August 13, 2001 the Company issued 166,667 shares of common stock to Jeffrey
Harvey, a director and officer, for legal services valued at $26,667, and
279,167 shares of common stock to Carl Dilley, for management services valued at
$70,029, and 250,000 shares of common stock to Brian Lebrecht, the attorney for
the corporation, for legal services valued at $40,000. The issuances were
registered on Form S-8.
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, who was also 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.
14
8. Convertible Debenture Bonds:
Refer to Footnote 7 with regard to bonds issued to related parties. These
convertible debentures mature July 1, 2002 are convertible anytime at the
holders option on the basis of 1 common share for each $.50 of debenture par
value converted. The debentures accrue interest at the rate of 10% per annum. On
August 1, 2001 $140,000 principal of convertible debentures was converted to
280,000 common shares of E-rex, Inc.
9. Stockholders' Equity:
Refer to Footnote 7 with regard to equity changes with related parties.
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., accepted as
settlement the 166,667 shares, which have been issued and accounted for.
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
exercisable 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.
15
On February 22, 2001 the board of Directors issued 223,529 free trading shares
under Regulation S in exchange for services valued at $44,706.
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.
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.
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, 2001 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. In addition to the compensation provided
for the agreement, throughout the term of this Agreement, Big Apple shall be
eligible to receive a bonus in the form of callable warrants based on its
performance in the 90 day period beginning on the Effective Date and in each 90
day period thereafter (each, a "Bonus Period"). Big Apple's eligibility to
receive warrants, if any, shall be based on the Average Closing Share Bid Price
(the "ACSBP") for the twenty-one (21) trading days ending on the last day of
each Bonus Period. The number of warrants, if any, to be issued to Promoter for
a Bonus Period shall be determined as follows:
16
If the ACSBP equals or exceeds: Promoter shall receive: Exercisable at:
- ------------------------------- ----------------------- ---------------
$0.25 per share 175,000 $0.17 per share
$0.40 per share 100,000 $0.25 per share
$0.50 per share 100,000 $0.40 per share
On August 23, 2001 E-Rex, Inc. terminated the services and marketing agreements
with Big Apple Consulting U.S.A., Inc. for breach of contract.
On May 1st the board of Directors issued 100,000 free trading shares under
Regulation S to Jeffrey Harvey, a director and officer, under Regulation S in
exchange for legal services valued at $20,000.
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. This agreement was terminated on August 23, 2001.
On June 1st, 2001 the board of Directors issued 100,000 restricted shares to Big
Apple Consulting U.S.A., Inc. under Regulation D in exchange for investor
relations services valued at $20,000 as part of the services agreement executed
May 1, 2001.
On June 12th, 2001 the board of Directors issued 85,714 free trading shares
under Regulation S to Jeffrey Harvey, a director and officer, under Regulation S
in exchange for legal services valued at $36,857.
On June 12th, 2001 the board of Directors issued 162,857 free trading shares
under Regulation S to Carl Dilley, an employee, director and officer, under
Regulation S in exchange for management services valued at $70,029.
On June 12th, 2001 the board of Directors issued 173,824 free trading shares
under Regulation S in exchange for legal services valued at $74,744.
On June 12th, 2001 the board of Directors issued 70,000 free trading shares
under Regulation S in exchange for accounting services valued at $30,100.
On June 12th, 2001 the board of Directors issued 154,286 free trading shares
under Regulation S in exchange for marketing services valued at $66,343.
17
On June 12th, 2001 the board of Directors issued 171,429 free trading shares
under Regulation S in exchange for web site development and R & D software
services valued at $73,714.
On July 30th, 2001 the board of Directors issued 200,000 restricted shares to
Big Apple Consulting U.S.A., Inc. under Regulation D in exchange for investor
relations services valued at $38,000 as part of the services agreement executed
May 1, 2001.
On August 7th, 2001 the board of Directors issued 40,000 restricted shares under
Regulation S in exchange for advisory board member services valued at $66,343.
On August 13th, 2001 the board of Directors issued 279,167 free trading shares
to Carl Dilley, an employee, director and officer, under Regulation S in
exchange for management services valued at $44,667.
On August 13th, 2001 the board of Directors issued 166,667 free trading shares
to Donald Mitchell, a director, under Regulation S in exchange for management
services valued at $26,667.
On August 13th, 2001 the board of Directors issued 166,667 free trading shares
to Jeffrey Harvey, a director, under Regulation S in exchange for management
services valued at $26,667.
On August 13th, 2001 the board of Directors issued 467,187 free trading shares
under Regulation S in exchange for marketing and web site design services valued
at $74,750.
On August 13th, 2001 the board of Directors issued 107,812 free trading shares
under Regulation S in exchange for legal services valued at $40,000.
On August 14th, 2001 the board of Directors issued 280,000 free trading shares
in conversion of the principle amount of $140,000 in convertible debentures.
On September 9th, 2001 the board of Directors issued 928,572 restricted shares
to Mr. Terry Shores for $65,000 in cash.
On September 28th, 2001 the board of Directors issued 499,524 free trading
shares under Regulation S in exchange for marketing and stock exchange listing
services valued at $29,476.
10. Other Agreements
On March 1, 2001 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 to third-party clients of
the Company. 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 the Company. Riotech will manage and provide project managers
and development staff on an exclusive basis for all projects undertaken during
the term of the agreement, and will also supply 300 hours of work towards the
development of the Company's proprietary websites and systems.
18
E-Rex has entered into an investment financing agreement with Swartz private
equity LLC. As part of this agreement the company has issued 900,000 warrants to
acquire the common stock of E-Rex at the exercisable for seven (7) years at a
price of $.50 per share. The agreement also provides for the repricing of these
warrants as per the following formula:
The Exercise Price per share ("Exercise Price") shall initially equal (the
"Initial Exercise Price") the lowest Closing Price for the five (5) trading days
immediately preceding September 22, 2000, which is $0.50. If the lowest Closing
-----
Price of the Company's Common Stock for the five (5) trading days immediately
preceding the date, if any, that Swartz Private Equity, LLC executes an
Investment Agreement pursuant to the Letter of Agreement (the "Closing Market
Price") is less than the Initial Exercise Price, the Exercise Price shall be
reset to equal the Closing Market Price, or, if the Date of Exercise is more
than six (6) months after the Date of Issuance, the Exercise Price shall be
reset to equal the lesser of (i) the Exercise Price then in effect, or (ii) the
"Lowest Reset Price," as that term is defined below. The Company shall
calculate a "Reset Price" on each six-month anniversary date of the Date of
Issuance which shall equal the lowest Closing Price of the Company's Common
Stock for the five (5) trading days ending on such six-month anniversary date of
the Date of Issuance. The "Lowest Reset Price" shall equal the lowest Reset
Price determined on any six-month anniversary date of the Date of Issuance
preceding the Date of Exercise, taking into account, as appropriate, any
adjustments made pursuant to Section 5 hereof. Notwithstanding the above if all
of the following are true on the date of an Exercise of this Warrant, then the
Exercise Price with respect to that Exercise only shall be $.50 (subject to any
adjustments required under Section 5 of this Warrant), notwithstanding any price
resets that would otherwise apply pursuant to this Section 3: (A) the Company
has not completed a reverse stock split anytime after the Date of Issuance
through and including the date of such Exercise, (B) the lowest Closing Price of
the Company's Common Stock for the five (5) trading days immediately preceding
the date of such Exercise is $3.00 or greater.
For purposes hereof, the term "Closing Price" shall mean the closing price on
the Nasdaq Small Cap Market, the National Market System ("NMS"), the New York
Stock Exchange, or the O.T.C. Bulletin Board, or if no longer traded on the
Nasdaq Small Cap Market, the National Market System ("NMS"), the New York Stock
Exchange, or the O.T.C. Bulletin Board, the "Closing Price" shall equal the
closing price on the principal national securities exchange or the
over-the-counter system on which the Common Stock is so traded and, if not
available, the mean of the high and low prices on the principal national
securities exchange on which the Common Stock is so traded.
On June 15, 2001 the company entered into an agreement with Anne Balduzzi to
develop a sales and marketing plan for the Dragonfly and strategy for
introducing the Dragonfly into the marketplace. The study will include
researching overall consumer sales and distribution markets (wholesale, retail,
OEM and otherwise) for the Dragonfly, and preparing a report of its research
results and a strategic plan for introducing and distributing the Dragonfly into
and throughout appropriate markets and market segments. The agreement calls for
the payment of pre-approved expenses.
On August 2, 2001 the company entered into an agreement with Steve Marinkovich
to act as a Senior Technology and Network Systems Consultant for Erex and assist
them with the following: Designing their network architecture for wireless data
flow to and from mobile Dragonfly units to Erex hosted back-end or customer
centric systems as required. Designing and recommending complete "end-to-end"
solutions where Erex fully hosts the connectivity and back-end systems for
Dragonfly connectivity and document transfer, hosts a wireless gateway to the
Internet and a customer's back-end system or provides recommendation on software
that allows customers to host in-house systems for data transfer. Recommend
software required to create the "end-to-end" solutions for each of the
transmission scenarios above. This will include mobile software, as well as any
required backend, middleware, transaction, and portal server software. Recommend
a Security Infrastructure for their network as well as security options for
secure data transmission from the Dragonfly. Assist Erex in choosing the
necessary hardware infrastructure components and suitable configurations. Assist
Erex in providing technical explanations to its customers and investors
regarding the potential uses of the Dragonfly and the Erex network as required.
19
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 operations.
12. Investments
The company has written down the value of the investment in Ultimate Franchise
Systems, Inc. to $7,000.00 reflecting the closing market price of the stock at
as of Sept 30, 2001.
DiveDepot.Com, Inc has restated it's earnings for this period reflecting a
substantial write off of it's investment in internet related projects resulting
in negative shareholders equity as of Sept 30, 2000. DiveDepot.com, Inc is not
publicly traded and therefore the company has written down the value of the
investment in DiveDepot.Com, Inc. to $100.00 reflecting the par value of the
stock at as of Sept 30, 2000.
The write-downs in investments in DiveDepot.Com, Inc and Ultimate Franchise
Systems, Inc. resulted in a decline in the book value of investment assets of
$55,499.00 for the period ending Sept 30, 2001.
13. Required Cash Flow Disclosure:
The Company had no interest income and income taxes paid for the nine-month
period ending September 30, 2001.
For the nine months ending September 30, 2001, the Company entered into
agreements for non-cash exchanges of stock for services totaling $950,318.
For the nine months ending September 30, 2001, the Company entered into
agreements for non-cash exchanges of free trading shares of stock for software
research and development valued at $31,275.
For the nine months ending September 30, 2001, the Company converted $140,000
principle of convertible debentures to 280,000 free trading common shares of
E-rex, Inc.
For the nine months ending September 30, 2001, the Company entered into
agreements for non-cash exchanges of stock for accounts payable satisfaction
totaling $120,000.
For the nine months ending September 30, 2001, the Company issued stock for cash
totaling $65,000.
20
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 $953,860 for the three month period
ended September 30, 2001, as compared to $2,501,898 for the three month period
ended September 30, 2000, and losses of $3,108,486 for the nine month period
ended September 30, 2001. The reduction in losses for this quarter as compared
to the same quarter of last year is due primarily to the reduction in general
and administrative expenses associated with restructuring and changing
management. 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 Internet consulting 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 its business plan and thereafter result in
revenue and greater liquidity in the long term. However, we currently have no
arrangements for such financing and there can be no assurance that the Company
will be able to obtain the needed additional equity or debt financing in the
future.
Revenue
The Company's total revenue for the three month period ended September 30,
2001 was $31,972 all of which was earned from web site design and consulting
services rendered by the Company. The cost of sales for this period was
$28,571, resulting in gross profit of $3,401 for the three month period. The
Company reported revenues of $7,524 for the same period in 2000. The company
reported revenue of $35,976 for the year ended December 31, 2000 and did not
have any revenues for the years ended December 31, 1999 and 1998.
The Company's total revenue for the nine month period ended September 30,
2001 was $69,489, all of which were earned from web site design and consulting
services rendered by the Company. The cost of sales for this period was $66,321,
resulting in gross profit of $3,168. The Company reported revenues of $7,526 for
the same period in 2000.
21
General and Administrative
The Company's general and administrative expenses totaled $878,838 for the
three month period ended September 30, 2001, as compared to $2,509,422 for the
three month period ended September 30, 2000. Of the total general and
administrative expenses, $287,826 is attributable to stock issued for services
to various consultants, advisors, employees, and service providers to the
Company. The substantial decline in operating expenses in the period ended
September 2001 is due to final amortizing of accrued management fees expenses in
the first quarter of 2001 in the amount of $1,258,045. These fees were related
to the restructuring of the management team in early 2000 and are non-recurring.
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 $63,295 in research and development expenses related to
its Dragonfly product. No research and development expenses were recorded in the
three month period ended September 30, 2000.
The Company's general and administrative expenses totaled $2,931,147 for
the nine month period September 30, 2001. Of the total general and
administrative expenses, $950,318 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 $134,484 in research and development expenses
related to its Dragonfly product for the period.
Net Losses
Net losses for the three month period ended September 30, 2001 were
$953,860 as compared to $2,501,898 for the three month period ended September
30, 2000, as a result of the change in general and administrative expenses as
described above. 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 for the quarter, based on a weighted average number of
shares of 29,098,552 was $0.03 per share, compared with the loss per share of
$0.13 based on a weighted average number of shares of 18,607,310 for the quarter
ended September 30, 2000.
Net losses for the nine months ended September 30, 2001 were $3,108,486.
The loss per share, based on a weighted average number of shares of 26,576,013
was $0.12 per share, compared with the loss per share of $0.31 based on a
weighted average number of shares of 18,607,310 for the period ended September
30, 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
the private placement of common stock. The web design and hosting 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.
22
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 $125,000 and an estimated additional
$325,000 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.
It is anticipated that 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 filed with the SEC,
and then only if certain conditions are met and certain conditions precedent
exist. For example, at the current market price of our common stock, the amount
of money we can raise through the Swartz agreement is very limited, and we
cannot be sure how much money we can raise through the Swartz agreement in the
future. 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 no proceeds from loans and cash from the issuance of
stock of $65,000 for the quarter ended September 30, 2001 resulting in net cash
provided by financing activities of $65,000. The Company received proceeds from
loans of $81,785 during the nine month period ended September 30, 2001 resulting
in net cash provided by financing activities of $146,875.
The Company invested $31,275.00 in development of an on-line ordering system for
the fast food franchise industry during the nine months ended September 30,
2001.
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.
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. A final settlement agreement has
been reached and the Company has issued a total of 166,667 shares of restricted
common stock that was delivered to Crusader Capital Group, Inc. in conjunction
with the final settlement agreement.
23
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 2001, the Company issued 200,000 shares of common stock, restricted
in accordance with Rule 144, to Big Apple Consulting U.S.A., Inc. as
consideration under the Business Development Agreement. The issuance was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.
In August 2001, the Company issued 20,000 shares of common stock,
restricted in accordance with Rule 144, to each of M. Balduzzi and A. Balduzzi
as consideration under a services agreement. The issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In August 2001, the Company issued 280,000 shares of common stock,
restricted in accordance with Rule 144, to Frank Horwich as consideration for
the conversion of debt. The issuance was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In September 2001, the Company issued 928,572 shares of common stock,
restricted in accordance with Rule 144, to Terry Shores as consideration under a
settlement agreement. 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
The Company held its annual meeting of stockholders on September 7, 2001.
Proxies were solicited from the shareholders.
Three individuals were elected to the Company's Board of Directors, namely
Carl E. Dilley, Jeffrey M. Harvey, and Donald A. Mitchell, all three of which
were Directors of the Company prior to the meeting. The results of the voting
were as follows:
Director Votes For Votes Against Votes Withheld
Carl E. Dilley 15,619,176 0 2,301,816
Jeffrey M. Harvey 15,619,176 0 2,301,816
Donald A. Mitchell 15,619,176 0 2,301,816
The other matters on which the shareholders voted, and the results of
voting, were:
(i) To approve the E-Rex, Inc. 2001 Stock Option Plan.
Votes For Votes Against Votes Withheld
8,136,519 2,541,756 104,050
(ii) To ratify the appointment of Perez-Abreu, Aguerrebere, Sueiro, LLC
as independent auditors of the Company for the fiscal year ending December 31,
2001.
Votes For Votes Against Votes Withheld
15,809,175 1,958,667 153,150
24
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.
25
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: July 12, 2002 E-Rex, Inc.
/s/ Carl E. Dilley
______________________________
By: Carl E. Dilley
Its: President and Chief
Financial Officer
26