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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2000.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ________ TO ________.
COMMISSION FILE NUMBER 0-16354
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CYNET, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0467099
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
12777 JONES ROAD, SUITE 400
HOUSTON, TX 77070
(Address of principal executive offices)
(281) 897-8317
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value
Class B Common Stock, no par value
------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to be file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes /X/
No / /
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
29,959,593 shares of Class A Common Stock, no par value, as of
November 17, 2000.
1,027,434 shares of Class B Common Stock, no par value, as of
November 17, 2000.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1:
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31,1999 (audited) ................. 3
Condensed Consolidated Statements of Loss (unaudited) for the Three and Nine Months Ended September 30, 2000 and September
30, 1999................................................................................................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2000 and September 30,
1999....................................................................................................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited) .......................................................... 6
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 9
Results of Operations...................................................................................................... 9
Liquidity and Capital Resources............................................................................................ 11
PART II OTHER INFORMATION
Item 1:
Legal Proceedings.......................................................................................................... 13
Item 2:
Changes in Securities...................................................................................................... 13
Item 3:
Defaults Upon Senior Securities............................................................................................ 14
Item 4:
Submission of Matters to a Vote of Security Holders........................................................................ 14
Item 5:
Other Information.......................................................................................................... 15
Item 6(a):
Exhibits................................................................................................................... 15
Item 6(b):
Reports on Form 8-K........................................................................................................ 15
SIGNATURES................................................................................................................. 15
</TABLE>
2
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CYNET, INC. PART I-FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS
as of September 30, 2000 (unaudited) and December 31, 1999 (audited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
Current Assets:
Cash $ 153,917 $ 182,881
Accounts receivable:
Trade, less allowance for doubtful accounts of $230,000 and $140,000, respectively 626,940 306,840
Affiliate 66,440 --
Employees 72,791 82,684
Inventory 1,153,000 --
Prepaid expenses and other 560,993 41,978
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Total Current Assets 2,634,081 614,383
Property and equipment, less accumulated depreciation and amortization 2,551,753 2,122,096
Goodwill, less accumulated amortization of $116,565 and $70,596, respectively 137,579 183,548
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$ 5,323,413 $ 2,920,027
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 3,633,851 $ 2,314,635
Accrued Expenses 432,827 836,043
Dividends Payable -- 361,773
Notes Payable, including accrued interest 328,456 331,575
Accrued Stock and Warrant Rights 148,150 115,748
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Total Current Liabilities 4,543,284 3,959,774
Unearned Revenues 125,050 --
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Total Liabilities 4,668,334 3,959,774
Redeemable Class A Voting Common Stock -- 2,667,299
Stockholders' Equity (Deficit)
Cumulative Convertible Preferred Stock:
Series A, non-voting, $2.00 and $1.43 stated value; 3,600,000 shares authorized; 0 and 66,000
shares issued and outstanding, respectively -- 109,997
Series B, non-voting, $3.00 stated value; 2,000,000 shares authorized; 0 and 60,832 shares
issued and outstanding, respectively -- 126,240
Series D, non-voting, $1.25 stated value; 4,000,000 shares authorized, 3,331,200 and 0 share
issued and outstanding, respectively 4,164,000 --
Series E, non-voting, $1,000 stated value; 1,635 shares authorized; 1,601 and 0 shares issued
and outstanding, respectively 1,601,000 --
Series F, non-voting, $1,000 stated value; 2,185 shares authorized; 2,149 and 0 shares issued
and outstanding, respectively 2,149,000 --
Common Stock:
Class A, no par value; 100,000,000 shares authorized; 29,959,593 and 27,784,207 shares issued
and outstanding, respectively 21,006,508 16,263,783
Class B, no par value; 20,000,000 shares authorized; 1,027,434 and 2,123,264 shares issued and
outstanding, respectively 1,370,018 3,199,119
Additional Paid-in Capital 1,683,384 308,039
Outstanding Warrants 3,009,041 1,888,437
Accumulated Deficit (34,327,872) (25,602,661)
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Total Capital 655,079 (3,707,046)
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$ 5,323,413 $ 2,920,027
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</TABLE>
The accompanying notes are integral part of these condensed consolidated
financial statements.
3
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CYNET, INC. PART I-FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF
LOSS (UNAUDITED)
For the three and nine months ended September 30, 2000 and September 30, 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues...................................................... $ 2,062,762 $ 1,967,595 $ 7,418,758 $ 6,501,849
Cost of revenues.............................................. 1,268,834 1,270,154 3,933,724 3,592,920
------------ ------------ ------------ ------------
Gross profit.................................................. 793,928 697,441 3,485,034 2,908,929
------------ ------------ ------------ ------------
Selling, general and administrative expenses.................. 3,050,728 3,519,729 8,774,025 6,457,362
Depreciation and amortization................................. 287,057 224,086 846,584 697,204
------------ ------------ ------------ ------------
Total operating expenses...................................... 3,337,785 3,743,815 9,620,609 7,154,566
------------ ------------ ------------ ------------
Loss from operations.......................................... (2,543,857) (3,046,374) (6,135,575) (4,245,637)
Other income (expense): ......................................
Interest (net) ............................................. (128,099) (38,701) (1,589,232) (115,249)
Other (net) ................................................ (4,789) 1,521 34,315 (50,711)
------------ ------------ ------------ ------------
Net loss before extraordinary item............................ $ (2,676,745) $ (3,083,554) $ (7,690,492) $ (4,411,597)
Loss on conversion of debt.................................... - - 396,887 -
------------ ------------ ------------ ------------
Net loss before dividends on preferred stock.................. $ (2,676,745) $ (3,083,554) $ (8,087,379) $ (4,411,597)
Dividends on Preferred Stock.................................. (893) (12,866) (24,464) (38,648)
Deemed dividend on convertible preferred stock................ - - (716,667) -
Accretion on redeemable stock-net............................. - - 103,299 -
Dividend requirements for preferred stock..................... (168,690) - (224,919) -
------------ ------------ ------------ ------------
Net loss applicable to common stockholders.................... $ (2,846,328) $ (3,096,420) $ (8,950,130) $ (4,450,065)
============ ============ ============ ============
Net Loss per common share (basic and fully diluted: ..........
Net loss applicable to common stockholders before extraordinary
loss........................................................ $ (0.09) $ (0.12) $ (0.29) $ (0.17)
Extraordinary loss on early retirement of debt................ - - $ (0.02) -
------------ ------------ ------------ ------------
Net loss per common share..................................... $ (0.09) $ (0.12) $ (0.31) $ (0.17)
============ ============ ============ ============
Weighted Average Common Shares Outstanding.................... 30,255,673 26,546,922 29,216,820 25,514,211
============ ============ ============ ============
</TABLE>
The accompanying notes are integral part of these condensed consolidated
financial statements.
4
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CYNET, INC. PART I-FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 2000 and September 30, 1999
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
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Cash flows from operating activities:
Net loss.................................................................................. $(8,087,379) $(4,411,597)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 846,584 697,204
Amortization of debt discount........................................................... 1,349,571 --
Loss on disposal of equipment........................................................... 1,133 27,581
Provision for bad debts................................................................. 123,557 200,358
Stock and warrants issued for compensation and services................................. -- 1,344,004
Stock and warrant rights issued for loan costs and services............................. -- 65,748
Write off of debt cost and unamortized debt discount.................................... 396,887 --
Adjustment to rescission offer.......................................................... (10,600) --
Changes in assets and liabilities:
Accounts receivable..................................................................... (306,647) (93,011)
Inventory............................................................................... (1,153,000) --
Prepaid expenses and other assets....................................................... (519,015) (134,813)
Accounts payable and accrued expenses................................................... 750,588 (463,813)
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Net cash used in operating activities..................................................... (6,608,321) (2,768,339)
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Cash flows from investing activities:
Purchase of property and equipment...................................................... (741,243) (235,939)
Proceeds from sale of property and equipment............................................ 2,100 37,000
Proceeds from affiliate................................................................ 60,000 --
Advance to affiliate.................................................................... (70,000) --
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Net cash used in investing activities..................................................... (749,143) (198,939)
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Cash flows from financing activities:
Issuance of common stock-Class A........................................................ 2,000,000 2,595,000
Issuance of common stock--Class B....................................................... 750,000 --
Issuance of preferred stock--Series C................................................... 1,600,000 --
Issuance of preferred stock--Series E and F............................................. 1,869,500 --
Proceeds from notes payable............................................................. 1,676,973 383,472
Proceeds from warrants exercised........................................................ 116,375 --
Payments on notes payable............................................................... (169,000) (26,419)
Debt offering costs..................................................................... (130,000) --
Dividends paid on preferred stock....................................................... (385,348) --
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Net cash provided by financing activities................................................. 7,328,500 2,952,053
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Net decrease in cash...................................................................... (28,964) (15,225)
Cash, beginning of period............................................................... 182,881 55,007
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Cash, end of period..................................................................... $ 153,917 $ 39,782
============ =============
</TABLE>
The accompanying notes are integral part of these condensed consolidated
financial statements.
5
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CYNET, INC.
PART I-FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of CYNET, Inc. and its wholly-owned subsidiaries Worldwide
Marketing, Inc. and CYNET Interactive, LLC. All significant intercompany
accounts and transactions have been eliminated. CYNET, Inc., Worldwide
Marketing, Inc., and CYNET Interactive, LLC are collectively referred to
herein as the "Company."
The interim financial statements of the Company which are included
herein are unaudited and have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB. In the opinion of management, these interim
financial statements include all necessary adjustments to fairly present the
results of the interim periods, and all such adjustments are of a normal
recurring nature. The interim financial statements should be read in
conjunction with the audited financial statements for the two years ended
December 31, 1999 included in the Company's Annual Report on Form 10-KSB for
the year then ended. The interim results reflected in the accompanying
financial statements are not necessarily indicative of the results of
operations for a full fiscal year.
The Company is an Internet business solutions provider integrating
full convergent messaging with Internet services. The Company's products and
services are convergent messaging which includes Fax, Data, Voice, E-Mail and
Wireless Messaging, and Internet services which includes custom application
development, e-commerce development, web content creation, web hosting and
Internet access.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line method
for financial reporting purposes and accelerated methods for income tax
purposes. Maintenance and repairs are charged to operations as incurred. The
Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be
fully recoverable.
INVENTORIES
Product inventories are valued at lower of cost or market. Cost is
determined on the basis of the first-in, first-out method (FIFO).
INCOME TAXES
Deferred taxes result from temporary differences between the
financial statement and income tax bases of assets and liabilities. The
Company adjusts the deferred tax asset valuation allowance based on judgments
as to future realization of the deferred tax benefits supported by
demonstrated trends in the Company's operating results.
RESEARCH AND DEVELOPMENT
Expenditures for research and development of telecommunication
technology as it relates to convergent messaging and fax broadcasting and to
various customer interface and application needs are charged to expense as
incurred. For the three months ended September 30, 2000 and 1999, research
and development expenditures were approximately $675,356 and
$131,061,respectively. For the nine months ended September 30, 2000 and 1999,
research and development expenditures were approximately $1,661,658 and
$338,742, respectively.
6
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REVENUE RECOGNITION
Messaging and Internet service revenues are recognized as services
are performed. Revenues from sales of software licenses are recognized when
software is delivered excluding PCS revenues to be deferred and recognized
over the life of the contract. Revenues from sales of customer lists and
other related services are recognized when the list is provided, or the other
services are performed. Revenues from sales of Wireless Cell/Modems are
recognized when shipped to the ultimate customer. The Company also earns
revenue from fees relating to web site design, Internet application
development for e-commerce and other Internet-based applications, and web
site hosting. These fees are recognized as revenue once the related
activities have been performed and the project is complete.
GOODWILL
Goodwill recorded in connection with the acquisition of CYNET
Interactive, LLC is being amortized using the straight-line method over three
years. Periodically, the Company reviews the recoverability of goodwill. In
management's opinion, no impairment exists at September 30, 2000.
LOSS PER COMMON SHARE
The Company is required to provide basic and dilutive earnings
(loss) per common share information. The basic net loss per common share is
computed by dividing the net loss applicable to common stockholders by the
weighted average number of common shares outstanding.
Diluted net loss per common share is computed by dividing the net
loss applicable to common stockholders, adjusted on an "as if converted"
basis, by the weighted average number of common shares outstanding plus
potential dilutive securities. For the periods ended September 30, 2000 and
1999, certain potential dilutive securities had an anti-dilutive effect and
were not included in the calculation of diluted net loss per common share.
STOCK OPTIONS AND WARRANTS
The Company accounts for stock options and warrants issued to
employees in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. For financial statement disclosure
purposes and issuance of options and warrants to non-employees for services
rendered, the Company follows statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation.
RISKS AND UNCERTAINTIES
The Company is subject to the business risks inherent in the
Messaging and Internet services industry. These risks include, but are not
limited to, a high degree of competition within the Messaging and Internet
service industry and continuous technological advances. Future technological
advances in the Messaging and Internet service industry may result in the
availability of new services or products that could compete with the enhanced
messaging and Internet services currently provided by the Company or
decreases in the cost of existing products or services that could enable the
Company's established or potential customers to fulfill their own needs for
enhanced messaging and Internet services more cost efficiently. There can be
no assurance that the Company would not be adversely affected in the event of
such technological change.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The reported amounts of financial instruments, such as cash,
accounts receivable, accounts payable and short-term notes payable
approximate fair value because of their short-term maturities, generally less
than one year in duration. The Company extends credit to customers in a wide
variety of industries and does not consider there to be a concentration of
credit risk.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
7
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forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2001 to
affect its financial statements.
FORWARD LOOKING STATEMENTS
When used in this Form 10-QSB and elsewhere by the Company from time
to time, the words "believes," "anticipates," "expects," "will" and similar
expressions are intended to identify forward-looking statements concerning
the Company's operations, economic performance and financial condition. These
include, but are not limited to, forward-looking statements about the
Company's business strategy and means to implement the strategy, the
Company's objectives, the amount of future capital expenditures, the
likelihood of the Company's success in developing and introducing new
products and services and expanding its business, and the timing of the
introduction of new and modified products and services. For those statements,
the Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
These statements are based on a number of assumptions and estimates
inherently subject to significant risks and uncertainties, many of which are
beyond the control of the Company, and reflect future business decisions,
which are subject to change. A variety of factors could cause actual results
to differ materially from those anticipated in the Company's forward-looking
statements.
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
For the nine months ended September 30, 2000 and 1999, the Company
incurred net losses totaling $8,087,379 and $4,411,597, respectively, and at
September 30, 2000 had total capital of $665,079. Because of these recurring
losses, the Company will require additional working capital to develop and
support its technologies and business until the Company either (1) achieves a
level of revenues adequate to generate sufficient cash flows from operations;
or (2) receives additional financing necessary to support the Company's
working capital requirements.
During the period from January 1, 2000 to September 30, 2000, the
Company raised a total of $8.1 million through debt and equity financing
agreements. Additionally, the Company intends to raise additional working
capital through private placements, public offerings and/or bank financing.
There are no assurances that the Company will be able to either (1)
achieve a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private
placement, public offerings and/or bank financing necessary to support the
Company's working capital requirements. To the extent that funds generated
from operations and any private placements, public offerings and/or bank
financing are insufficient, the Company will have to raise additional working
capital. No assurance can be given that additional financing will be
available, or if available, will be on terms acceptable to the Company. If
adequate working capital is not available the Company may be required to
curtail its operations.
These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
On January 31, 2000, the Company received a letter from a
telecommunications carrier asserting that the Company had failed to meet
certain financial obligations including both payment for services rendered
totaling approximately $290,000 and certain shortfall penalties on volume
commitments for long distance services totaling approximately $1,100,000. The
alleged liability to the Company as a result of this agreement, including
future year volume commitments and other expenses is approximately
$4,000,000. The Company has disputed the claim based on the Company's
assertion that the carrier breached the contract with respect to services
rendered. The parties are presently in preliminary discussions to resolve
their disputes. The Company believes it will resolve the issues related to
this dispute by entering into a new multi-year agreement for long distance or
related services and does not expect this dispute will have a material
adverse effect on the Company.
8
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues increased to $2,062,762, for the three months ended September 30,
2000 from $1,967,595 for the three months ended September 30, 1999. The
increase of $95,167 or 5% was primarily attributable to an increase in sales
of site licenses for the Company's Convergent Messaging software
applications, the Company's Internet and data services and Wireless
Cell/Modem product offerings. For the three months ended September 30, 2000
and 1999, revenues from site licenses for the Company's Convergent Messaging
software applications represented 4% and 1% respectively, of the Company's
total revenues. For the three months ended September 30, 2000 and 1999,
revenues from the Company's data services represented 11% and 9%
respectively, of the Company's total revenues. For the three months ended
September 30, 2000 and 1999, revenues from the Company's Internet services
represented 6% and 0%, respectively, of the Company's total revenues. For the
three months ended September 30, 2000 and 1999, revenues from the Company's
Wireless Cell/Modem product represented 4% and 0% respectively, of the
Company's total revenues. In aggregate, for the three months ended September
30, 2000 and 1999, revenues from site licenses for the Company's Convergent
Messaging software applications, the Company's Internet and data services and
Wireless Cell/Modem product offerings represented 25% and 10%, respectively,
of the Company's total revenues. Revenues from sales of broadcasting services
decreased from $1,765,206 or 90% of revenues, during the three months ended
September 30, 1999, to $1,551,365 or 75% of revenues during the three months
ended September 30, 2000.
Cost of revenues decreased to $1,268,834 for the three months ended
September 30, 2000 from $1,270,154 for the three months ended September 30,
1999. The cost of revenues as a percentage of revenues decreased to 62% for
the three months ended September 30, 2000 as compared to 65% for the three
months ended September 30, 1999. The percentage decrease of 3% was primarily
attributable to the addition of site licenses for the Company's Convergent
Messaging software applications. Gross margins increased to 38% for the three
months ended September 30, 2000 from 35% for the three months ended September
30, 1999 due to higher margins associated with the Company's new product
offering. Management expects that its gross margins will fluctuate from
quarter to quarter until critical mass is obtained, however, management
expects continued improvement year over year with the delivery of higher
gross margin, value-added products and services.
Selling, and general and administrative expenses decreased to
$3,050,728 for the three months ended September 30, 2000 from $3,519,729 for
the three months ended September 30, 1999. The net decrease of $469,001 was
primarily attributable to (i) an increase of approximately $80,000 in
personnel costs from expansion of the Company's sales force and
administrative staff and from increased commissions paid, (ii) an increase of
approximately $780,000 in research and development expense, (iii) a decrease
of approximately $53,000 in bad debt expense and (iv) a decrease of
approximately $1,344,000 in stock and warrants issued for compensation and
services.
Depreciation and amortization increased to $287,057 for the three
months ended September 30, 2000 from $224,086 for the three months ended
September 30, 1999. The $62,971 increase was attributable primarily to
additional equipment acquired during 1999 and 2000 in the expansion of the
Company's messaging infrastructure.
Other expense totaled $132,888 for the three months ended September
30, 2000 compared to other expense of $37,180 for the three months ended
September 30, 1999.
The Company incurred a net loss of $2,676,745 for the three months
ended September 30, 2000 compared to a net loss of $3,083,554 for the three
months ended September 30, 1999. The decrease in net loss was due to the
factors discussed above.
Net loss per common share increased to $0.09 from $0.12 for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues increased to $7,418,758 for the nine months ended September
30, 2000 from $6,501,849 for the nine months ended September 30, 1999. The
increase of $916,909 or 14% was primarily attributable to an increase in
sales of site licenses for the Company's Convergent Messaging software
applications, the Company's Internet and data services, and Wireless
Cell/Modem product offerings. For the nine months ended September 30, 2000
and 1999, revenues from site licenses for the Company's Convergent Messaging
software applications represented 9% and 0% respectively, of the Company's
total revenues. For the nine months ended
9
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September 30, 2000 and 1999, revenues from the Company's data services
represented 10% and 8% respectively, of the Company's total revenues. For the
nine months ended September 30, 2000 and 1999, revenues from the Company's
Internet services represented 8% and 0%, respectively, of the Company's total
revenues. For the nine months ended September 30, 2000 and 1999, revenues
from the Company's Wireless Cell/Modem product represented 4% and 0%
respectively, of the Company's total revenues. In the aggregate, for the nine
months ended September 30, 2000 and 1999, revenues from site licenses for the
Company's Convergent Messaging software applications, the Company's Internet
and data services, and Wireless Cell/Modem product offerings represented 31%
and 8%, respectively, of the Company's total revenues. Revenues from sales of
broadcasting services decreased from $5,950,116 or 92% of revenues, during
the nine months ended September 30, 1999, to $5,116,696 or 69% of revenues
during the nine months ended September 30, 2000.
Cost of revenues increased to $3,933,724 for the nine months ended
September 30, 2000 from $3,592,920 for the nine months ended September 30,
1999. The cost of revenues as a percentage of revenues decreased to 53% for
the nine months ended September 30, 2000 as compared to 55% for the nine
months ended September 30, 1999. The percentage decrease of 2% was primarily
attributable to the addition of site licenses for the Company's Convergent
Messaging software applications. Gross margins increased to 47% for the nine
months ended September 30, 2000 from 45% for the nine months ended September
30, 1999 due to higher margins associated with the Company's new product
offering. Management expects that its gross margins will fluctuate from
quarter to quarter until critical mass is obtained, although management
expects continued improvement year over year with the delivery of higher
gross margin, value-added products and services.
Selling, and general and administrative expenses increased to
$8,774,025 for the nine months ended September 30, 2000 from $6,457,362 for
the nine months ended September 30, 1999. The net increase of $2,316,663 was
primarily attributable to (i) an increase of approximately $875,000 in
personnel costs from expansion of the Company's sales force, operations and
administrative staff and from increased commissions paid, (ii) an increase of
approximately $512,000 in advertising and investor relations expense, (iii)
an increase of approximately $1,352,000 in research and development expense,
(iv) an increase in legal and accounting fees of $462,000 and $86,000,
respectively, and (v) a decrease of approximately $1,344,000 in stock and
warrants issued for compensation and services.
Depreciation and amortization increased to $846,584 for the nine
months ended September 30, 2000 from $697,204 for the nine months ended
September 30, 1999. The $149,380 increase was attributable primarily to
additional equipment acquired during 1999 and 2000 in the expansion of the
Company's messaging infrastructure.
Other expense totaled $1,554,917 for the nine months ended September
30, 2000 compared to other expense of $165,960 for the nine months ended
September 30, 1999. The increase in other expense was primarily attributable
to interest expense recorded against a debt discount. On issuance of the
promissory note, the Company recorded a debt discount of approximately
$1,600,000 to record the effect of the beneficial conversion rate of the
promissory note at the date of issuance and warrants issued. The debt
discount was amortized as a non-cash charge to interest expense from the date
the promissory note was issued through May 26, 2000, the date the promissory
note was converted to Preferred E and F shares. Accordingly, the Company
incurred a non-cash interest charge of approximately $706,000 in the second
quarter of 2000.
An extraordinary loss was incurred during the second quarter related
to the conversion of debt to equity totaling $396,887 related to the
unamortized portion of debt issuance costs.
The Company incurred a net loss of $8,087,379 for the nine months
ended September 30, 2000 compared to a net loss of $4,411,597 for the nine
months ended September 30, 1999. The increase in net loss was due to the
factors discussed above.
Net loss per common share increased to $0.31 from $0.17 for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999.
In the future the Company may experience significant fluctuations in
its results of operations. Such fluctuations may result in volatility in the
price of the Company's common stock. Results of operations may fluctuate as a
result of a variety of factors, including the demand for the Company's
services, the introduction of new services and service enhancements by the
Company or its competitors, the market acceptance of new services, the mix of
revenues between Internet-based versus telephony-based delivery, the timing
of significant marketing programs, the number and timing of hiring of
additional personnel, competitive conditions in the industry and the general
condition of the economy. Shortfalls in revenues may adversely and
disproportionately affect the Company's results of operations because a high
percentage of the Company's operating expenses are relatively fixed.
Accordingly, the Company believes that period-to-period comparisons of
results of operations are not necessarily meaningful and should not be relied
upon as an
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indication of future results of operations. There can be no assurance that
the Company will be profitable or that the Company's operating results will
meet management's current expectations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $6,608,321 and $2,768,339
for the nine months ended September 30, 2000 and 1999, respectively. The
increase in net cash used in operating activities for the period ended
September 30, 2000 was primarily due to the increase in the Company's net
operating loss.
Net cash used in investment activities was $749,143 and $198,939 for
the nine months ended September 30, 2000 and 1999, respectively. These
amounts were due primarily to capital expenditures for operating equipment,
including computer equipment and software, furniture and fixtures and
telecommunications equipment.
Net cash provided by financing activities was $7,328,000 and
$2,952,053 for the nine months ended September 30, 2000 and 1999,
respectively. The Company has obtained financing primarily through a series
of private placements of Preferred Stock, Class A and B Common Stock and
issuance of notes payable.
As of September 30, 2000 the Company had a cash balance of $153,917
and a negative working capital position of $1,909,203. In the first nine
months of fiscal year 2000, the Company raised a total of $8,100,000 through
private placement of debt and equity securities. During the third quarter
ended September 30, 2000, the Company closed $2,000,000 in equity for the
Company's Class A Common Stock with CPQ Holdings, Inc., a wholly-owned
subsidiary of Compaq Computer Corporation, (collectively "Compaq"). The
transaction with Compaq resulted in a $1.0 million cash investment and in an
aggregate $1.0 million in equipment and in equipment credit for Compaq
hardware.
The Company's internally generated cash flows from operations have
historically been and continue to be insufficient for its cash needs. The
Company does not expect that internal sources of liquidity will improve until
additional operating revenues are generated and, until such time, the Company
will continue to rely on external sources for liquidity. Until the Company
can obtain monthly gross revenues of approximately $1,600,000, which the
Company believes would be sufficient to fund current working capital needs,
there is uncertainty as to the ability of the Company to expand its business
and continue as a going concern. There is also no assurance that the current
working capital will be sufficient to cover cash requirements during that
period or to bring the Company to a positive cash flow position. In addition,
lower than expected earnings resulting from adverse economic conditions or
otherwise, could restrict the Company's ability to expand its business as
planned, and, if severe enough, may shorten the period in which the current
working capital may be expected to satisfy the Company's requirements, force
curtailed operations, or cause the Company to sell assets.
The Company's capital requirements depend on a number of factors
including market acceptance of its products and services, the amount of
resources the Company devotes to network expansion, new product development,
sales and marketing expansion, brand promotions and other factors. The
Company expects a substantial increase in capital expenditures and operating
leases consistent with the planned growth in its convergent messaging and
Internet infrastructures and anticipates that this will continue for the
foreseeable future. Additionally, the Company expects to make additional
investments in technologies and its network, and plans to expand its sales
and marketing programs and conduct more aggressive brand promotions.
The Company currently does not have sufficient capital to meet
its cash flow requirements over the next 12 months. As a result, the Company
will be required to satisfy cash flow shortages through private placements,
public offerings and/or bank financing. The Company is currently in
discussions with several investors, including existing capital partners, and
financial institutions regarding additional equity and debt financing;
however no definitive agreements have been reached.
There can be no assurance that the Company will either (i) achieve a
level of revenues adequate to generate sufficient cash flow from operations,
or (ii) receive additional debt or equity financing necessary to support the
Company's working capital requirements. To the extent that funds generated
from operations and any additional financing are insufficient, the Company
will have to raise additional working capital. No assurance can be given that
additional financing will be available, or if available, will be on terms
acceptable to the Company and further could be dilutive to existing
shareholders. If adequate working capital is not available, the Company may
be required to curtail its operations. Accordingly, the Company's independent
public accountants have issued their report for the years ending 1999 and
1998 containing a paragraph discussing substantial doubt surrounding the
Company's ability to continue as a going concern.
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YEAR 2000 COMPLIANCE
The Company has incorporated a compliance standard with rules and
definitions into its operations systems with respect to Year 2000 compliance.
Based upon an initial evaluation of its broader list of vendors and results
of operations in the first seven months of the year 2000, the Company has no
reason to believe that these providers are not in compliance with Year 2000
protocol.
The Company does not anticipate any material future costs associated
with Year 2000 compliance. However, if the Company's customers, providers of
hardware and software or other third parties with whom the Company does
business fail to remedy any Year 2000 issues, the Company's services could be
interrupted and it could experience a material loss of revenues that could
have a material, adverse effect on its business, prospects, results of
operations and financial condition. The Company is unable to reasonably
estimate the duration and extent of any such interruption, or quantify the
effect it may have on future revenues.
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PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
NONE
ITEM 2: CHANGES IN SECURITIES
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On August 4, 2000, for a combined consideration of cash, equipment
and future equipment credit, the Company issued to CPQ Holdings,
Inc., a wholly-owned subsidiary of Compaq Computer Corporation
("Compaq"), 1,801,802 shares of Class A Common Stock and three-year
warrants to purchase 270,270 shares of Class A Common Stock. In
connection with their investment, Compaq and the Company entered
into an agreement contemplating that Compaq equipment will be used
to deliver certain of the Company's products and services.
The Company believes the foregoing transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933
as transactions by an issuer not involving a public offering.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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ITEM 5: OTHER INFORMATION
NONE
<TABLE>
<CAPTION>
ITEM 6(a): EXHIBITS
<S> <C>
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on
Form SB-2, No. 333-60765, filed September 17, 1999).
3.2 Bylaws of the company (incorporated by reference to the same
numbered exhibit to Amendment No. 2 to the Company's
Registration Statement on Form SB-2, No. 333-60765, filed
September 17, 1999).
4.1 Form of Certificate Representing Class A Common Stock
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on
Form SB-2, No. 333-60765, filed September 17, 1999).
4.2 Form of Certificate Representing Class B Common Stock
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on
Form SB-2, No. 333-60765, filed September 17, 1999).
4.3 Form of Certificate Representing the Series D Redeemable
Callable Preferred Stock (incorporated by reference to Exhibit
4.4 to the Company's Form 10-KSB filed March 30, 2000).
4.4 Form of Certificate Representing the Series E Convertible
Preferred Stock (incorporated by reference to the same
numbered exhibit to the Company's Form 10-QSB filed
August 14, 2000).
4.5 Form of Certificate Representing the Series F Convertible
Preferred Stock (incorporated by reference to the same
numbered exhibit to the Company's Form 10-QSB filed
August 14, 2000).
4.6 Statement of the Powers, Designations, Preferences and Rights
of the Series D Convertible Preferred Stock (incorporated by
reference to the same numbered exhibit to the Company's
Form 10-QSB filed August 14, 2000).
4.7 Statement of the Powers, Designations, Preferences and Rights
of the Series E Preferred Stock (incorporated by reference to
the same numbered exhibit to the Company's Form 10-QSB filed
August 14, 2000).
4.8 Statement of the Powers, Designations, Preferences and Rights
of the Series F Convertible Preferred Stock (incorporated by
reference to the same numbered exhibit to the Company's
Form 10-QSB filed August 14, 2000).
27.1 Financial Data Schedule.
</TABLE>
ITEM 6(b): REPORTS ON FORM 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report be signed on its behalf by the
undersigned thereunto duly authorized.
CYNET, INC.
(Registrant)
Date: 11/20/00 /s/ Vincent W. Beale, Sr.
Vincent W. Beale, Sr., Chairman of the Board
and Chief Executive Officer
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Date: 11/20/00 /s/ R. Greg Smith
R. Greg Smith, Vice President and Chief
Financial Officer
16
