25
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 JUNE 30, 2002
[ ] 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.
v ----
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 August 13, 2002, there
were 97,910,757 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
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
1
E-REX, INC.
BALANCE SHEET
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
(A DEVELOPMENT STAGE COMPANY)
ASSETS
-------------
(UnAudited)
JUNE 30 DEC 31
2002 2001
------------- -------------
CURRENT ASSETS
- --------------------------------------------------------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 7,454
Prepaid Expense. . . . . . . . . . . . . . . . . . . . . . . 15,025 20,938
Accounts receivable from related parties . . . . . . . . . . 404 135
Accounts receivable. . . . . . . . . . . . . . . . . . . . . 9,588 6,969
------------- -------------
Total Current Assets . . . . . . . . . . . . . . . . . . . $ 25,225 $ 35,496
------------- -------------
PROPERTY AND EQUIPMENT
- --------------------------------------------------------------
Furniture, equipment and software. . . . . . . . . . . . . . 141,112 126,212
- --------------------------------------------------------------
Less: accumulated depreciation . . . . . . . . . . . . . . . (64,731) (41,651)
- -------------------------------------------------------------- ------------- -------------
Total Other Assets . . . . . . . . . . . . . . . . . . . . $ 76,381 $ 84,561
------------- -------------
OTHER ASSETS
- --------------------------------------------------------------
Investments. . . . . . . . . . . . . . . . . . . . . . . . . $ 101 $ 12,601
- -------------------------------------------------------------- ------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . $ 101,707 $ 132,658
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------
CURRENT LIABILITIES
- --------------------------------------------------------------
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 319,656 181,734
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 58,110 37,813
Accrued interest on bonds. . . . . . . . . . . . . . . . . . 30,912 26,008
Demand Note Payable. . . . . . . . . . . . . . . . . . . . . 213,198 -
Payable - related party. . . . . . . . . . . . . . . . . . . 64,792 2,837
Demand Note Payable -related party . . . . . . . . . . . . . 332,360 485,811
Convertible debenture bonds. . . . . . . . . . . . . . . . . 100,000 100,000
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . . $ 1,119,028 $ 834,203
------------- -------------
STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------
Common stock, $.0001 par value, 100,000,000 authorized
54,524,223 shares issued and outstanding as of Dec 31-2001 . 54,524
82,095,942 shares issued and outstanding as of June 30-2002. 82,096
Additional paid in capital . . . . . . . . . . . . . . . . . 13,014,946 12,621,494
Accrued Stock Compensation . . . . . . . . . . . . . . . . . - (22,500)
Deficit accumulated during the development stage . . . . . . (13,964,463) (12,817,663)
Accumulated Other Comprehensive Income, net of tax
Net unrealized gains (losses) on marketable securities . . . (149,900) (537,400)
------------- -------------
Total Stockholders' Deficit. . . . . . . . . . . . . . . . $ (1,017,321) $ (701,545)
------------- -------------
TOTAL LIABILITIES AND EQUITY (DEFICIT) . . . . . . . . . $ 101,707 $ 132,658
============= =============
See accompanying notes to the financial statements
2
E-REX, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDING JUNE 30, 2002 AND 2001,
THE THREE MONTHS ENDING JUNE 30, 2002 AND 2001 AND FROM INCEPTION
(A DEVELOPMENT STAGE COMPANY)
UnAudited
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30 FROM
2002 2001 2002 2001 INCEPTION
------------ ------------ -------------- -------------- ------------
REVENUE . . . . . . . . . . . . . . . . . . . . . $ 10,930 $ 37,518 $ 3,380 $ 29,072 $ 134,090
- -------------------------------------------------
COST OF SALES . . . . . . . . . . . . . . . . . . (8,051) (37,750) (4,252) (23,228) (98,495)
- -------------------------------------------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . . 2,879 (232) (872) 5,844 35,596
- -------------------------------------------------
EXPENSES
- -------------------------------------------------
General and administrative. . . . . . . . . . . (493,360) (2,052,312) (301,513) (364,791) (13,089,218)
Research and development. . . . . . . . . . . . (246,400) (71,189) (217,000) (41,397) (544,390)
------------ ------------ -------------- -------------- -------------
Total expenses. . . . . . . . . . . . . . . . . (739,760) (2,123,501) (518,513) (406,188) (13,633,608)
------------ ------------ -------------- -------------- -------------
LOSS FROM OPERATIONS. . . . . . . . . . . . . . . (736,881) (2,123,733) (519,385) (400,344) (13,598,012)
- ------------------------------------------------- ------------ ------------ -------------- -------------- -------------
OTHER INCOME
- -------------------------------------------------
Interest income . . . . . . . . . . . . . . . . - - - - 1,439
Interest Expense. . . . . . . . . . . . . . . . (28,833) (30,892) (15,597) (15,872) (107,530)
Recovery From Lawsuit . . . . . . . . . . . . . - - - - 120,726
Loss on the sale of investments . . . . . . . . (381,085) - (49,717) - (381,085)
------------ ------------ -------------- -------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . $(1,146,800) $(2,154,625) $ (584,699) $ (416,216) $(13,964,462)
- -------------------------------------------------
Income Taxes. . . . . . . . . . . . . . . . . . - - - - -
------------ ------------ -------------- -------------- -------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . $(1,146,800) $(2,154,625) $ (584,699) $ (416,216) $(13,964,462)
- ------------------------------------------------- ============ ============ ============== ============== =============
EARNINGS PER SHARE
Weighted average
Number of shares Outstanding. . . . . . . . . . 73,283,776 25,293,366 80,629,824 26,425,681
Basic EPS . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.09) $ (0.01) $ (0.02)
============ ============ ============== ==============
Weighted average
Number of shares on a Fully Diluted Basis . . . 73,283,776 25,293,366 80,629,824 26,425,681
Fully Diluted EPS . . . . . . . . . . . . . . . $ (0.02) $ (0.09) $ (0.01) $ (0.02)
============ ============ ============== ==============
See accompanying notes to the financial statements
3
E-REX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
CONTINUED
FOR THE PERIOD FROM INCEPTION (AUGUST 26, 1986) TO JUNE 30, 2002
(A DEVELOPMENT STAGE COMPANY)
Balance, December 31, 2000. . . . . . . . . . . . 23,808,816 23,809 (1,258,045) 10,386,204 (9,281,832) (617,264)
Common shares issued
for consulting services . . . . . . . . . . . . . 15,616,949 15,617 1,088,491 1,104,108
Common shares issued
for Software Development Investment . . . . . . . 127,373 127 33,997 34,124
Accrued Stock Compensation. . . . . . . . . . . . 1,235,545 1,235,545
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. . . . . . . . . . . . . . . . . . . . . 14,091,085 14,091 122,009 136,100
Beneficial Conversion feature of Warrants . . . . 731,673 731,673
Accumulated Other Comprehensive losses, net of tax
Net unrealized gains (losses) on marketable
equity securities (50,000)
Net loss for the period . . . . . . . . . . . . . (3,535,831) (3,535,831)
----------- ------------ ---------- ----------- -------------- ------------
Balance, December 31, 2001. . . . . . . . . . . . 54,524,223 $ 54,524 ($22,500) $12,621,494 ($12,817,663) ($701,545)
UnAudited
Common shares issued
for consulting services . . . . . . . . . . . . . 8,800,000 8,800 94,400 103,200
Accrued Stock Compensation. . . . . . . . . . . . 22,500 22,500
Common Shares Issued
In Conversion of accounts payable . . . . . . . . 4,648,186 4,649 90,176 94,825
Common shares issued
For Cash. . . . . . . . . . . . . . . . . . . . . 14,123,533 14,123 96,776 110,899
Accumulated Other Comprehensive losses, net of tax
Net unrealized gains (losses) on marketable equity
securities 387,499
Beneficial Conversion feature of Warrants . . . . 112,100 112,100
Net loss for the period . . . . . . . . . . . . . ( 1,146,800) ( 1,146,800)
----------- ------------ ---------- ----------- ------------- ------------
Balance, June 30, 2002. . . . . . . . . . . . . . 82,095,942 $ 82,096 $ 0 $13,014,946 ($13,964,463) ($1,017,321)
See accompanying notes to the financial statements
4
E-REX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 26, 1986) TO JUNE 30, 2002
(A DEVELOPMENT STAGE COMPANY)
DEFICIT
ACCRUED ADDITIONAL ACCUMULATED
COMMON STOCK STOCK PAID-IN DURING
SHARES AMOUNT COMPENSATION CAPITAL DEV. STAGE TOTAL
--------- ------------ -------------- ------- ----------- ---------
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,
1993 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) 22,022
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)
See accompanying notes to the financial statements
5
E-REX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
CONTINUED
FOR THE PERIOD FROM INCEPTION (AUGUST 26, 1986) TO JUNE 30, 2002
(A DEVELOPMENT STAGE COMPANY)
DEFICIT
ACCRUED ADDITIONAL ACCUMULATED
COMMON STOCK STOCK PAID-IN DURING
SHARES AMOUNT COMPENSATION CAPITAL DEV. STAGE TOTAL
----------- --------- ------------ ------------ ----------- -----------
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. . . . . . . . . . . . . . 424,000 424 113,076 113,500
for cash
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 shares purchased
as treasury stock . . . . . . . . . . . . . . . (6,977,616) (6,978) (143,022) (150,000)
Beneficial Conversion feature of Warrants . . . 450,000 450,000
Accumulated other 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) 10,386,204 (9,281,832) (617,264)
See accompanying notes to the financial statements
6
E-REX, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDING JUNE 30, 2002 AND 2001 AND FROM INCEPTION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED
SIX MONTHS SIX MONTHS
ENDED ENDED FROM
CASH FLOWS FROM (FOR) . . . . . . . . . . . . . . . . . . . . JUNE 30 JUNE 30 INCEPTION
- ------------------------------------------------------------- ------------
OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . 2002 2001 TO DATE
- ------------------------------------------------------------- ------------ ------------ -------------
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . $(1,146,800) $(2,154,625) (13,964,463)
Adjustments to reconcile net income to
to net cash provided by (used in )
operating activities:
Stock issued for Services . . . . . . . . . . . . . . . . . 103,200 668,492 8,671,856
Stock issued in conversion of Accts. Payable. . . . . . . . 94,825 - 214,825
Stock Issued for Research & Development . . . . . . . . . . - - 124,595
Amortization of stock issued for services in prior period . 22,500 1,022,554 1,258,045
Amortization of loss on sale of investments . . . . . . . . 381,085 381,085
Warrants Issued for Services. . . . . . . . . . . . . . . . 112,100 280,800 1,293,773
Depreciation expense. . . . . . . . . . . . . . . . . . . . 23,080 13,575 64,731
(Increase) Decrease in
Accounts receivable . . . . . . . . . . . . . . . . . . . (2,619) 7,791 (9,588)
Accounts receivable from related parties. . . . . . . . . (269) (13,767) (404)
Prepaid professional Fees and Expenses. . . . . . . . . . 5,913 (21,122) (15,025)
Deposits & Retainers. . . . . . . . . . . . . . . . . . . (33,201)
Increase (Decrease) in
Accounts payable. . . . . . . . . . . . . . . . . . . . . 137,922 (39,149) 319,656
Accounts payable to related parties . . . . . . . . . . . 61,955 - 64,792
Accrued liabilities . . . . . . . . . . . . . . . . . . . 20,297 6,562 58,110
Accrued Bond & Note Interest. . . . . . . . . . . . . . . 4,904 11,835 30,912
------------ ------------ -------------
Total adjustments to net income . . . . . . . . . . . . . . 964,893 1,904,370 12,457,363
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . . . . . . . . (181,907) (250,255) (1,507,100)
CASH FLOWS FROM (FOR)
- -------------------------------------------------------------
INVESTING ACTIVITIES
- -------------------------------------------------------------
Purchase of furniture, Equipment & Software . . . . . . . . (14,900) (3,215) (48,851)
Proceeds from sale of Investments . . . . . . . . . . . . . 18,915 - 18,915
------------ ------------ -------------
Net cash flows provided by (used in)
investing activities. . . . . . . . . . . . . . . . . . . . 4,015 (3,215) (29,936)
CASH FLOWS FROM (FOR)
- -------------------------------------------------------------
FINANCING ACTIVITIES
- -------------------------------------------------------------
Proceeds from loan. . . . . . . . . . . . . . . . . . . . . 59,747 81,785 870,558
Proceeds from issuance of stock . . . . . . . . . . . . . . 110,899 - 1,101,686
Payment on loan . . . . . . . . . . . . . . . . . . . . . . - - (325,000)
Purchase of treasury stock. . . . . . . . . . . . . . . . . - - (150,000)
Issuance of Conv. Debentures. . . . . . . . . . . . . . . . - - 40,000
------------ ------------ -------------
Net cash provided by (used in) financing. . . . . . . . . . 170,646 81,785 1,537,244
CASH RECONCILIATION
- -------------------------------------------------------------
Net increase (decrease) in cash . . . . . . . . . . . . . . (7,246) (171,685) 208
Cash at beginning of year . . . . . . . . . . . . . . . . . 7,454 19,948 0
------------ ------------ -------------
CASH BALANCE AT END OF PERIOD . . . . . . . . . . . . . . . . $ 208 $ (151,737) $ 208
- ------------------------------------------------------------- ============ ============ =============
See accompanying notes to the financial statements
7
E-REX, INC.
FORM 10-QSB
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2002
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.
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.
8
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 identi-
fication. 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 June 30, 2002, 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.
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.
9
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 $0.04 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.
10
Since the Company has not generated cumulative taxable income since inception,
no provision for income taxes has been provided. At June 30, 2002, 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 June 30, 2002 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, 2002, 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 soft-
ware, 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)
11
6. Litigation:
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.
This suit was dismissed with prejudice on August 5th, 2002
In April 2002, the Company was served with a lawsuit brought by Chris Ford,
Successor Trustee to the Carol J. Gamble Trust 86, in the Circuit Court of
the 11th Judicial Circuit in and for Miami-Dade County, Florida, General
Jurisdictional Division, case number 02 10265CA1S. The defendants in the action
are International Investment Banking, Inc. ("IIBI"), the Company, its Board of
Directors, and a former Director.
The Complaint alleges, among other things that the plaintiff agreed to lend
money to IIBI for the purpose of development of E-Rex's Dragonfly electronic
device. The Complaint further alleges theft, diversion of the corporate assets,
and breach of fiduciary duties by the defendants in diverting the loan proceeds
for the directors' own benefit.
The Complaint requests treble damages in the amount of $750,000 under the note,
plus penalties, interest, and attorneys' fees, and an accounting from all
defendants.
The Company is vigorously defending this lawsuit as management believes that the
action is without merit. The plaintiff in this case is the same plaintiff as in
the case described below. 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:
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.
The Company entered into an agreement on January 21, 2000 with International
Investment Banking, Inc. ("IIBI") whereby IIBI would 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 this agreement, IIBI received $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.
12
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%. The total of loan advances, services invoices outstanding and interest
has been assigned to designees of IIBI. This demand loan has a balance
including interest of $485,811 at December 31, 2001 and $332,360 at June 30,
2002.
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. The company has since disposed of it's holding in Ultimate
Franchise Systems, Inc.
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.
On November 16, 2001 the Company issued 300,000 shares of common stock to Donald
A. Mitchell, a director and officer, for management services valued at $3,000.
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 the company Riotech LLC.
On September 30, 2002 the Board of Directors extended and modified the terms of
the employment agreement with Carl Dilley president and CEO, a director and
officer as follows.
13
Term. - The term of the Employment Agreement shall be extended for an
additional two year period, such that the Employment Agreement shall now expire
at the end of the day on May 30, 2004.
Compensation and Benefits. - Effective as of the date hereof, in addition to
any compensation due Employee under the Employment Agreement or otherwise and
except as otherwise provided herein, Employee shall be entitled to the following
compensation and benefits:
Employee's salary shall increase by 15% over the prior year's salary, effective
April 1, 2002 and each April 1 thereafter.
Company shall provide to Employee, without cost, or reimburse Employee 100% of
the cost, of health insurance, effective April 1, 2002.
Employee shall be entitled to an annual bonus to be determined by the Board of
Directors, which bonus may be paid either in cash or common stock registered on
Form S-8.
The amount of Employee's vacation shall increase by one (1) week for each year
of completed service, effective April 1, 2002 and each April 1 thereafter, up to
a maximum of six (6) weeks of paid vacation.
Employee shall be entitled to participate in any bonus, profit sharing or 401(K)
program sponsored by Company and in any other benefit or perquisite that Company
may offer to its employees.
The agreement was also amended April 4, 2002 as follows.
Promptly upon the full execution of this Amendment, Company shall issue to
Employee warrants to purchase shares of its common stock having an exercise
value of $128,700.00 to supplement the depreciation of the stock compensation
previously paid to Employee (as provided by the Employment Agreement) and as
additional compensation in order to cover the tax liabilities generated by the
payment in stock rather than cash required by Company. The warrants shall have
a two year term and be exercisable upon written notice to Company setting forth
an exercise effective date, at a price of $.0042 per share." The company will
have the right at its option to repurchase all or part of these warrants on a
prorata basis for a total of $64,350.00.
The Company shall issue to Employee 90,000 shares of its common stock as
additional compensation in order to account for the dilution of Employee's
original stock position (as contemplated by the Employment Agreement). The
foregoing shares of stock shall be immediately, or shall have been prior to
delivery, registered with the Securities and Exchange Commission on Form S-8 or
otherwise, so that such shares shall be immediately free trading and able to be
sold on the open market upon receipt.
Share Adjustment in the Event of Devaluation. To the extent not otherwise
addressed in the Employment Agreement, in the event the aggregate market value
of any shares issued pursuant to the Employment Agreement, as amended, declines
after issuance, then Company shall from time-to-time as reasonably appropriate
(but in no event less frequently than is necessary to provide periodic payments
equal to the salary and other sums then due) issue to Employee additional shares
of its common stock, registered or to be registered on Form S-8 as provided
above, to compensate Employee for any lost value.
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. At June 30, 2002 there was a total of
$100,000 principal convertible debentures and accrued interest of $30,912
outstanding.
9. Stockholders' Equity:
Refer to Footnote 7 with regard to equity changes with related parties.
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 28, 2001 the board of Directors issued 600,000 restricted shares
under Regulation D to IIBI in satisfaction of debt valued at $120,000.
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 2001 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:
15
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 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 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 on
form S-8 in exchange for advisory board member services valued at $66,343.
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 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 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 200,000 free trading
shares registered on form S-8 in exchange for marketing and stock exchange
listing services valued at $16,000. On October 28th, 2001 the board of
Directors issued 400,000 free trading shares and warrants exercisable into
$150,000 of Free trading shares registered on form S-8 in exchange for
consulting services as follows.
Duties of Consultant, The Consultant will provide such services and advice to
the Company so as to advise the Company in business development, mergers and
acquisitions, business strategy and corporate image. Without limiting the
generality of the foregoing, Consultant will also assist the Company in
developing, studying and evaluating acquisition proposals, prepare reports and
studies thereon when advisable, and assist in matters of executive compensation
and discussions pertaining thereof. Nothing contained herein constitutes a
commitment on the part of the Consultant to find an acquisition target for the
Company or, if such target is found, that any transaction will be completed.
This Agreement is not a contract for listing services, and nothing in this
Agreement will require the Consultant to negotiate on behalf of the Company with
corporations that are involved with listings or making a market in corporate
securities in the OTC markets. Consultant would undertake such services under
the direction of Carl Dilley, Company President and CEO.
Duties Expressly Excluded. - This Agreement expressly excludes the Consultant
from providing public relation services to the Company inclusive of but not
limited to (i) direct or indirect promotion of the Company's securities; (ii)
assistance in making of a market in the Company's securities. The Consultant
shall not have the power of authority to bind the Company to any transaction
without the Company's prior written consent.
16
The Company shall compensate the Consultant with free trading shares of the
Company's Common Stock, and warrants for shares of Company's Common Stock. The
Company shall issue the Consultant 400,000 free trading shares of the Company's
Common Stock upon execution of this agreement. In addition, the Company will
issue warrants to purchase $150,000 in freely trading shares of the Company's
Common Stock according to the schedule below.
The warrants will expire 90 days from the date of issue according to the
schedule below, and Consultant may exercise any available warrants in any
increments of 100,000 or more at any time prior to expiration according to the
schedule below. The aforementioned warrants shall be executable at a "Market"
price determined by taking the average closing price per share for ten days
previous to execution of the warrants and multiplying by 65%. The afore-
mentioned warrants shall be considered earned upon execution of the agreement.
The Company shall immediately file a form S-8 registration including these
shares. The Company agrees to file additional S-8 registrations if necessary
to fulfill the terms of the contract.
Schedule For Compensation
Date Description Amount/Number
1. Execution Issue Shares 400,000
2. Execution Warrants at 65% of Market $30,000
3. 11/01/01 Warrants at 65% of Market $40,000
4. 12/01/01 Warrants at 65% of Market $40,000
5. 1/01/02 Warrants at 65% of Market $40,000
During the year ended December 31, 2001 the board of Directors issued 131,935
free trading shares registered on form S-8 exchange for professional services
valued at $24,637.
During the year ended December 31, 2001 the board of Directors issued 8,196,745
free trading shares to Mark Wilson, Jonathan Knigin, Sepehr Niakan, Andy
Sikorski, Paul Storti, Anne Balduzzi, Steve Marinkovitch, Jonathan Keane, and
Mitch Ackles registered on form S-8 in exchange for consulting services valued
at $258,852.
During the year ended December 31, 2001 the board of Directors issued 127,373
free trading shares registered on form S-8 in exchange for Software Research and
development valued at $31,124.
During the year ended December 31, 2001 the board of Directors issued 3,665,925
free trading shares registered on form S-8 in exchange for legal services valued
at $213,984.
17
During the year ended December 31, 2001 the Company issued 1,441,191 free
trading shares registered on form S-8 to Donald A. Mitchell and Carl E. Dilley,
directors and officers, for management services valued at $146,933.
During the year ended December 31, 2001 the board of Directors issued 13,162,333
free trading shares registered on form S-8 pursuant to the exercise of warrants
for cash of $71,100.
During the period ended June 30, 2002 the board of Directors issued 14,123,533
free trading shares registered on form S-8 pursuant to the exercise of warrants
for cash of $110,899.
During the period ended June 30, 2002 the board of Directors issued 4,648,186
restricted shares in payment of outstanding debt to Valcom, Ltd. of $94,825.
During the period ended June 30, 2002 the board of Directors issued 8,800,000
free trading shares registered on form S-8 in exchange for legal, marketing and
other consulting services valued at $103,200.
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.
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.
18
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 E-Rex and assist them with the following:
Designing their network architecture for wireless data flow to and from mobile
Dragonfly units to E-Rex hosted back-end or customer centric systems as
required. Designing and recommending complete "end-to-end" solutions where
E-Rex fully hosts the connectivity and back-end systems for Dragonfly con-
nectivity 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 E-Rex in choosing the necessary
hardware infrastructure components and suitable configurations. Assist E-Rex in
providing technical explanations to its customers and investors regarding the
potential uses of the Dragonfly and the E-Rex network as required.
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 currently holds one investment in marketable Securities. The first
investment was in Ultimate Franchise Systems, Inc. in an exchange of 1,000,000
shares of the Company's stock valued at $400,000. The second investment was a
purchase of 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 Chairman and director of the
Company Mr. Mitchell is also on the Board of Directors of DiveDepot.Com, Inc.
19
The company has sold its holdings in Ultimate Franchise Systems, Inc. for net
proceeds of $18,915 and recorded a loss of $331,368.
DiveDepot.Com, Inc has restated its earnings for this period reflecting a
substantial write off of its 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 reflecting the fair value of the stock
as of Sept 30, 2000.
DiveDepot.Com, Inc. has restated its earnings for this period reflecting a
substantial write off of its investment in internet related projects resulting
in negative shareholders equity as of September 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 reflecting the fair value of the
stock as of September 30, 2000. In reviewing financial and other information
supplied to the company by management of the investee it is our opinion that the
decline in value of this investment is temporary in nature. The DiveDepot.Com,
Inc. generates significant operating revenues and it seems likely that the
company will return to profitability as the economy improves. If it seems
likely that the future value of DiveDepot.Com, Inc. will not improve management
will effect a charge to earnings and a permanent writedown of the investment
value.
13. Required Cash Flow Disclosure:
The Company had interest expense of $28,833 and no income taxes paid for the
period ended June 30, 2002.
For the period ended June 30, 2002, the Company entered into agreements for
non-cash exchanges of stock for services totaling $103,200.
For the period ended June 30, 2002, the Company entered into agreements for
non-cash exchanges of stock for accounts payable satisfaction totaling $94,825.
For the period ended June 30, 2002, the Company issued stock from the exercise
of warrants for cash totaling $110,899.
14. Summarized Quarterly Data (Unaudited)
Following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000:
March June September December
2001 31 30 30 31 Total
----------- ----------- ----------- ----------- -----------
Net revenue 7,966 $29,072 $31,975 18,172 $87,185
Loss from Operations (1,723,389) (400,344) (938,729) (411,090) (3,473,552)
Net income (loss) (1,738,409) (416,216) (953,860) (427,346) (3,535,831)
Basic earnings (loss)
per share (0.07) (0.02) (0.03) (0.01) (0.12)
Diluted earnings (loss)
per share (0.07) (0.02) (0.03) (0.01) (0.12)
Weighted average shares
Outstanding 24,122,005 26,425,681 29,098,552 39,082,212 29,649,570
20
2000
Net revenue - - $ 7,524 $ 28,452 $ 35,976
Loss from Operations (175,084) (2,023,162) (2,501,898) (3,776,291) (8,476,435)
Net income (loss) (175,084) (2,023,162) (2,501,898) (3,792,709) (8,492,853)
Basic earnings (loss)
per share (0.01) (0.11) (0.13) (0.16) (0.45)
Diluted earnings (loss)
per share (0.01) (0.11) (0.13) (0.16) (0.45)
Weighted average shares
Outstanding 13,276,859 17,973,048 18,607,310 23,025,226 18,841,966
15. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 141, "Business Combinations". Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also specifies criteria that intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable to an
assembled workforce may not be accounted for separately. Based upon our initial
assessment, we do not expect the adoption of this statement to have a
significant impact on our financial condition or results of operations.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires companies to cease amortizing goodwill and other
intangible assets with indefinite lives after December 31, 2001. SFAS No. 142
also establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. We
expect that the impact to 2002 net income associated with the discontinuation of
the amortization of goodwill to be a pre-tax increase of approximately $174,000.
We have not completed our initial assessment of goodwill impairment. Upon
adoption of this standard, any resulting impairment charges recorded may have a
material impact on our results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The statement provides accounting and reporting standards for
recognizing the cost associated with obligations related to the retirement of
tangible long-lived assets. Under this statement, legal obligations associated
with the retirement of long-lived assets are to be recognized at their fair
value in the period in which they are incurred if a reasonable estimate of fair
value can be made. The fair value of the asset retirement costs is capitalized
as part of the carrying amount of the long-lived asset and expensed using a
systematic and rational method over the asset's useful life. Any subsequent
changes to the fair value of the liability will be expensed. We will be
required to adopt this statement no later than January 1, 2003. Based on our
initial assessment, we do not expect the adoption of this statement to have a
significant impact on our financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and replaces the provisions of APB Opinion No. 30, "Reporting
21
the Results of Operations - Reporting the Effects of Disposal of Segments of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of segments of a business. SFAS No. 144 retains
the fundamental provisions of SFAS No. 121 for the recognition and measurement
of the impairment of long-lived assets to be held and used and the measurement
of long-lived assets to be disposed of by sale. Impairment of goodwill is not
included in the scope of SFAS No. 144 and will be treated in accordance with
SFAS No. 142. Under SFAS No. 144, long-lived assets are measured at the lower
of carrying amount or fair value less cost to sell. We are required to adopt
this statement no later than January 1, 2002. Based on our current assessment,
we do not expect the adoption of this statement to have a significant impact on
our financial condition or results of operations.
22
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,
2001 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, 2001
raise substantial doubt about our ability to continue in business.
QUARTERS ENDED JUNE 30, 2001 AND 2002
Results of Operations
We had significant losses of $584,699 for the quarter ended June 30, 2002.
We have funded losses by the sale of additional securities, loans and the
issuance of stock for services. We expect losses to continue. Other than the
Swartz financing, we have no sources of long-term capital. To the extent losses
continue and we are unable to fund them, we may have to curtail aspects of our
operations or cease operations altogether.
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 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. 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 quarter ended June 30, 2002 was $3,380,
all of which was earned from web site design and consulting services rendered by
the Company. The cost of sales for this period was $4,252, resulting in gross
profit of ($872) for the quarter. The Company had total revenue for the quarter
ended June 30, 2001 of $29,072, all of which were earned from web site design
and consulting services rendered by the Company. The cost of sales for this
period was $23,228, resulting in gross profit of $5,844.
General and Administrative
The Company's general and administrative expenses totaled $301,513 for the
quarter ended June 30, 2002, as compared to $364,791 for the previous year,
A decrease of approximately 18%. Of the total general and administrative
expenses, $58,400, or 19.3%, 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 throughout the current fiscal
year. The Company also recorded $217,00 in research and development expenses
related to its Dragonfly product.
23
Net Losses
Net losses for the quarter ended June 30, 2002 were $584,699 as compared to
$416,216 for the prior year, an increase of approximately 40%. The Company
expects that it will continue to incur large 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
80,629,824, was $0.01 per share, a substantial decrease from the loss per share
of $0.02 for the previous year.
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 and loan advances. The web design and
hosting business of the Company has not expanded significantly due to the
recessionary economic climate 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 has successfully demonstrated it's initial prototype and will be
focusing on the completion of 20 field test units in the near term. The Company
will therefore need available capital to complete the Dragonfly filed test
prototypes estimated at approximately $150,000 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 $2,125,000.
It is anticipated that the 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. In such an event, the Company may raise additional operating capital
through private placements of equity and/or debt securities. However there can
be no assurances that it will be successful in its endeavors.
The Company received proceeds from the sale of common stock of $17,000 for
the quarter ended June 30, 2002. The Company received proceeds from loan
advances of $59,747 for the quarter ended June 30, 2002 resulting in net cash
provided by financing activities of $76,747.
24
The Company did not purchase any fixed assets during the three months ended
June 30, 2002 and made no fixed asset purchases during the same period in 2001.
The company received proceeds from the sales of investments held in Ultimate
Franchise Systems, Inc., of $2,601 during the three months ended June 30, 2002
resulting in net cash flows from investing activities of $18,915 during the
period ended June 30, 2002.
In the opinion of the Company's management, lawsuits currently pending or
threatened against the Company, unless dismissed or settled within a short
period of time, will have a material adverse effect on the financial position
and results of operations of the Company because the Company does not have the
cash flow to continue to fund defense costs. Management is currently reviewing
several strategies for continuing to fund defense costs while at the same time
funding the ongoing development of the Dragonfly product. Such strategies may
include seeking shareholder approval to increase the authorized common stock so
that additional funds can be raised, selling some or all of the Company's
current assets, and/or acquiring one or more businesses with positive cash flow.
No decisions have been made as of this time.
25
PART II
ITEM 1 LEGAL PROCEEDINGS
Carol Gamble Trust 86, et al v. E-Rex, Inc., et al
- ------------------------------------------------------------
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 were the Company, its Board of Directors, a former Director, the
Company's legal counsel, and two corporate entities.
At a hearing on July 29, 2002, the Court in the above-referenced case found
that the plaintiff's had not met their pleading standard under the Private
Securities Litigation Reform Act (PSLRA) and dismissed the case, with prejudice,
as to all defendants. The order of dismissal was entered on August 5, 2002.
Management's Discussion
- ------------------------
In the ordinary course of business, the Company is from time to time
involved in various pending or threatened legal actions. The litigation process
is inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon the financial condition and/or results
of operations of the Company.
In the opinion of the Company's management, despite the dismissal of the
above-referenced Nevada lawsuit, matters currently pending or threatened against
the Company, unless dismissed or settled within a short period of time, will
have a material adverse effect on the financial position and results of
operations of the Company because the Company does not have the cash flow to
continue to fund defense costs. Management is currently reviewing several
strategies for continuing to fund defense costs while at the same time funding
the ongoing development of the Dragonfly product. Such strategies may include
seeking shareholder approval to increase the authorized common stock so that
additional funds can be raised, selling some or all of the Company's current
assets, and/or acquiring one or more businesses with positive cash flow. No
decisions have been made as of this time.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
There have been no events which are required to be reported under this
Item.
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
There have been no events which are required to be reported under this
Item.
26
ITEM 5 OTHER INFORMATION
Restated Financial Statements
- -------------------------------
On March 28, 2002, the Company restated certain of its financial statements
by filing an amended Quarterly Report on Form 10-QSB/A for the quarter ended
September 30, 2000, and an amended Annual Report on Form 10-KSB/A for the year
ended December 31, 2000.
On April 9, 2002, the Company restated certain of its financial statements
by filing an amended Quarterly Report on Form 10-QSB/A for each of the quarterly
periods ended March 31, 2001, June 30, 2001, and September 30, 2001.
On July 16, 2002, in response to additional comments from the Securities
and Exchange Commission, the Company restated certain of its financial state-
ments by filing an amended Quarterly Report on Form 10-QSB/A for each of the
quarterly periods ended March 31, 2001, June 30, 2001, and September 30, 2001,
as well as its Annual Report on Form 10-KSB/A for the year ended December 31,
2001.
In each instance, the restatements were made to clarify and provide
additional information as requested by the Securities and Exchange Commission,
including classifying the Company as a development stage enterprise, clarifying
policies regarding revenue recognition, and the policies, treatment, and charges
related to investments the Company holds.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1
(b) Reports on Form 8-K
On April 29, 2002, the Company filed a Current Report on Form 8-K dated
April 29, 2002, updating several open litigation matters involving the Company.
27
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: August 14, 2002 E-Rex, Inc.
/s/ Carl E. Dilley
-------------------------------------------
By: Carl E. Dilley
Its: President and Chief Financial Officer