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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 JUNE 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
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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:
26,119,773 shares of Class A Common Stock, no par value as of July 31, 2000.
3,004,952 shares of Class B Common Stock, no par value as of July 31, 2000.
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1:
Condensed Consolidated Balance Sheets as of June 30,2000 (unaudited) and December 31,1999 (audited)....................... 3
Condensed Consolidated Statements of Loss (unaudited) for the Three and Six Months Ended June 30, 2000 and June 30, 1999.. 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2000 and June 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........................................................................................... 10
PART II OTHER INFORMATION
Item 1:
Legal Proceedings......................................................................................................... 12
Item 2:
Changes in Securities..................................................................................................... 12
Item 3:
Defaults Upon Senior Securities........................................................................................... 13
Item 4:
Submission of Matters to a Vote of Security Holders....................................................................... 13
Item 5:
Other Information......................................................................................................... 14
Item 6(a):
Exhibits.................................................................................................................. 15
Item 6(b):
Reports on Form 8-K....................................................................................................... 15
SIGNATURES................................................................................................................ 15
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CYNET, INC. PART I-FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2000 (unaudited) and December 31, 1999 (audited)
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JUNE 30, DECEMBER 31,
2000 1999
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ASSETS
Current Assets:
Cash $ 934,717 $ 182,881
Accounts receivable:
Trade, less allowance for doubtful accounts of $170,000 and $140,000, respectively 636,713 306,840
Affiliate 70,000 --
Employees 104,030 82,684
Inventory 985,000 --
Prepaid expenses and other 243,159 41,978
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Total Current Assets 2,973,619 614,383
Property and equipment, less accumulated depreciation and amortization 2,348,060 2,122,096
Goodwill, less accumulated amortization of $112,954 and $70,596, respectively 141,190 183,548
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$ 5,462,869 $ 2,920,027
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 3,237,813 $ 2,314,635
Accrued Expenses 438,145 836,043
Dividends Payable -- 361,773
Notes Payable, including accrued interest 229,548 331,575
Accrued Stock and Warrant Rights 148,150 115,748
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Total Current Liabilities 4,053,656 3,959,774
Unearned Revenues 137,000 --
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Total Liabilities 4,190,656 3,959,774
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Redeemable Class A Voting Common Stock -- 2,667,299
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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 shares 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, $1,000 stated value; 2,185 shares authorized; 2,149 and
0 shares issued and outstanding, respectively 2,149,000 --
Common Stock:
Class A, no par value; 100,000,000 shares authorized; 26,119,773 and 27,784,207
shares issued and outstanding, respectively 16,478,728 16,263,783
Class B, no par value; 20,000,000 shares authorized; 3,004,952 and 2,123,264
shares issued and outstanding, respectively 4,015,686 3,199,119
Additional Paid-in Capital 1,675,337 308,039
Outstanding Warrants 2,838,700 1,888,437
Accumulated Deficit (31,650,238) (25,602,661)
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Total Capital 1,272,213 (3,707,046)
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$ 5,462,869 $ 2,920,027
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The accompanying notes are integral part of these condensed consolidated financial statements.
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CYNET, INC. PART I-FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)
For the three and six months ended June 30, 2000 and June 30, 1999
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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2000 1999 2000 1999
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Revenues......................................................... $2,840,393 $2,380,422 $5,355,996 $4,534,254
Cost of revenues................................................. 1,156,094 1,156,110 2,664,890 2,322,766
------------------------------- -------------------------------
Gross profit..................................................... 1,684,299 1,224,312 2,691,106 2,211,488
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Selling, general and administrative expenses..................... 3,323,923 1,632,195 5,723,297 2,937,633
Depreciation and amortization.................................... 318,207 132,160 559,527 473,118
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Total operating expenses......................................... 3,642,130 1,764,355 6,282,824 3,410,751
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Loss from operations............................................. (1,957,831) (540,043) (3,591,718) (1,199,263)
Other income (expense):
Interest (net)................................................. (765,014) (38,525) (1,461,133) (76,548)
Other (net).................................................... (4,680) (13,933) 39,104 (52,232)
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Net loss before extraordinary item $(2,727,525) $(592,501) $(5,013,747) $(1,328,043)
Loss on conversion of debt 396,887 - 396,887 -
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Net loss before dividends on preferred stock..................... $(3,124,412) $(592,501) $(5,410,634) $(1,328,043)
Dividends on Preferred Stock..................................... (18,057) (12,726) (23,571) (25,602)
Deemed dividend on convertible preferred stock................... (716,667) - (716,667) -
Accretion on redeemable stock-net................................ 103,299 - 103,299 -
Dividend requirements for preferred stock........................ (56,228) - (56,228) -
------------------------------- -------------------------------
Net loss applicable to common stockholders....................... $(3,812,065) $(605,227) $(6,103,801) $(1,353,645)
=============================== ===============================
Net Loss per common share (basic and fully diluted:
Net loss applicable to common stockholders before
extraordinary loss............................................. $(0.12) $(0.02) $(0.20) $(0.05)
Extraordinary loss on early retirement of debt................... $(0.01) - $(0.01) -
Net loss per common share........................................ $(0.13) $(0.02) $(0.21) $(0.05)
Weighted Average Common Shares Outstanding....................... 28,472,760 25,746,263 28,765,633 25,015,773
The accompanying notes are integral part of these condensed consolidated financial statements.
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CYNET, INC. PART I-FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2000 and June 30, 1999
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999
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Cash flows from operating activities:
Net loss .................................................................. $(5,410,634) $(1,328,043)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 559,527 473,118
Amortization of debt discount ........................................... 1,349,571 --
Loss on disposal of equipment ........................................... 1,133 50,176
Provision for bad debts ................................................. 63,498 92,304
Write off of debt cost and unamortized debt discount .................... 396,887 --
Adjustment to rescission offer .......................................... (10,600) --
Changes in assets and liabilities:
Accounts receivable ..................................................... (424,717) (225,876)
Inventory ............................................................... (985,000) --
Prepaid expenses and other assets ....................................... 14,465 (43,401)
Accounts payable and accrued expenses ................................... 662,280 (1,037,587)
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Net cash used in operating activities ..................................... (3,783,590) (2,019,309)
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Cash flows from investing activities:
Purchase of property and equipment ...................................... (664,574) (167,680)
Proceeds from sale of property and equipment ............................ 2,000 37,000
Advance to affiliate..................................................... (70,000) --
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Net cash used in investing activities ..................................... (732,574) (130,680)
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Cash flows from financing activities:
Issuance of common stock-Class A ........................................ -- 2,215,000
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 --
Proceeds from warrants exercised ........................................ 55,875 --
Payments on notes payable ............................................... (169,000) --
Debt offering costs...................................................... (130,000) --
Dividends paid on preferred stock ....................................... (385,348) --
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Net cash provided by financing activities ................................. 5,268,000 2,215,000
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Net increase in cash ...................................................... 751,836 65,011
Cash, beginning of period ............................................... 182,881 55,007
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Cash, end of period ..................................................... $ 934,717 $ 120,018
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The accompanying notes are integral part of these condensed consolidated financial statements.
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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 June 30,
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2000 and 1999, research and development expenditures were approximately $617,580
and $104,467, respectively. For the six months ended June 30, 2000 and 1999,
research and development expenditures were approximately $1,007,631 and
$207,682, respectively.
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 June 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 June 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.
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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 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.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues increased to $2,840,393, for the three months ended June
30, 2000 from $2,380,422 for the three months ended June 30, 1999. The
increase of $459,971 or 19% 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 June 30, 2000 and 1999,
revenues from site licenses for the Company's Convergent Messaging software
applications represented 20% and 0% respectively, of the Company's total
revenues. For the three months ended June 30, 2000 and 1999, revenues from
the Company's data services represented 10% and 8% respectively, of the
Company's total revenues. For the three months ended June 30, 2000 and 1999,
revenues from the Company's Internet services represented 5% and 0%,
respectively, of the Company's total revenues. For the three months ended
June 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 June 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 39% and 8%, respectively, of the Company's
total revenues. Revenues from sales of broadcasting services decreased from
$2,195,797 or 92% of revenues, during the three months ended June 30, 1999,
to $1,796,400 or 61% of revenues during the three months ended June 30, 2000.
Cost of revenues decreased to $1,156,094 for the three months ended
June 30, 2000 from $1,156,110 for the three months ended June 30, 1999. The
cost of revenues as a percentage of revenues decreased to 41% for the three
months ended June 30, 2000 as compared to 49% for the three months ended June
30, 1999. The percentage decrease of 8% was primarily attributable to the
addition of site licenses for the Company's Convergent Messaging software
applications. Gross margins increased to 59% for the three months ended June
30, 2000 from 51% for the three months ended June 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 increased to
$3,323,923 for the three months ended June 30, 2000 from $1,632,195 for the
three months ended June 30, 1999. The increase of $1,691,728 was primarily
attributable to (i) an increase of approximately $547,000 in personnel costs
from expansion of the Company's sales force and administrative staff and from
increased commissions paid,(ii) an increase of approximately $288,000 in
advertising and investor relations expense, (iii) an increase of approximately
$285,000 in research and development expense , and (iv) an increase of
approximately $114,000 in legal and $52,000 in accounting fees.
Depreciation and amortization increased to $318,207 for the three
months ended June 30, 2000 from $132,160 for the three months ended June 30,
1999. The increase was attributable primarily to additional equipment acquired
during 1999 in the expansion of the Company's messaging infrastructure.
Other expense totaled $769,694 for the three months ended June 30,
2000 compared to other expense of $52,458 for the three months ended June 30,
1999. The increase in other expense was primarily attributable to interest
expense of $765,014 on a promissory note issued for financing a revolving
account receivable lending agreement. 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.
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An extraordinary loss was incurred during the second quarter related to
the conversion of debt to equity totaling $396,887 related to the unamortized
balances of debt issuance costs and debt discount.
The Company incurred a net loss of $3,124,412 for the three months
ended June 30, 2000 compared to a net loss of $592,501 for the three months
ended June 30, 1999. The increase in net loss was due to the factors discussed
above.
Net loss per common share increased to $0.13 from $0.02 for the three
months ended June 30, 2000 compared to the year ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues increased to $5,355,996 for the six months ended June 30,
2000 from $4,534,254 for the six months ended June 30, 1999. The increase of
$821,742 or 18% 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 six months ended June 30, 2000 and 1999, revenues from
site licenses for the Company's Convergent Messaging software applications
represented 11% and 0% respectively, of the Company's total revenues. For the
six months ended June 30, 2000 and 1999, revenues from the Company's data
services represented 10% and 8% respectively, of the Company's total
revenues. For the six months ended June 30, 2000 and 1999, revenues from the
Company's Internet services represented 8% and 0%, respectively, of the
Company's total revenues. For the six months ended June 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 six
months ended June 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 33%
and 8%, respectively, of the Company's total revenues. Revenues from sales of
broadcasting services decreased from $4,171,514 or 92% of revenues, during
the six months ended June 30, 1999, to $3,594,186 or 67% of revenues during
the six months ended June 30, 2000.
Cost of revenues increased to $2,664,890 for the six months ended
June 30, 2000 from $2,322,766 for the six months ended June 30, 1999. The
cost of revenues as a percentage of revenues decreased to 50% for the six
months ended June 30, 2000 as compared to 51% for the six months ended June
30, 1999. The percentage decrease of 1% was primarily attributable to the
addition of site licenses for the Company's Convergent Messaging software
applications. Gross margins increased to 50% for the six months ended June
30, 2000 from 49% for the six months ended June 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
$5,723,297 for the six months ended June 30, 2000 from $2,937,633 for the six
months ended June 30, 1999. The increase of $2,785,664 was primarily
attributable to (i) an increase of approximately $795,000 in personnel costs
from expansion of the Company's sales force and administrative staff and from
increased commissions paid, (ii) an increase of approximately $406,000 in
advertising and investor relations expense, (iii) an increase of approximately
$572,000 in research and development expense, and (iv) an increase of
approximately $291,000 in legal and $82,000 in accounting fees.
Depreciation and amortization increased to $559,527 for the six
months ended June 30, 2000 from $473,118 for the six months ended June 30,
1999. The $86,409 increase was attributable primarily to additional equipment
acquired during 1999 in the expansion of the Company's messaging
infrastructure.
Other expense totaled $1,422,029 for the six months ended June 30,
2000 compared to other expense of $128,780 for the six months ended June 30,
1999. The increase in other expense was primarily attributable to interest
expense of $1,464,149 on a promissory note issued for financing a
revolving account receivable lending agreement (offset by increases in
miscellaneous income of $43,784). 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 $5,410,634 for the six months
ended June 30, 2000 compared to a net loss of $1,328,043 for the six months
ended June 30, 1999. The increase in net loss was due to the factors
discussed above.
Net loss per common share increased to $0.21 from $0.05 for the six
months ended June 30, 2000 compared to the year ended June 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 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 $3,783,590 and $2,019,309 for
the six months ended June 30, 2000 and 1999, respectively. The increase in net
cash used in operating activities for the period ended June 30, 2000 was
primarily due to the increase in the Company's net operating loss.
Net cash used in investment activities was $732,574 and $130,680 for
the six months ended June 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 $5,268,000 and
$2,215,000 for the six months ended June 30, 2000 and 1999, respectively. The
Company has obtained financing primarily through a series of private
placements of Preferred Stock, Class B Common Stock and issuance of notes
payable.
As of June 30, 2000 the Company had a cash balance of $934,717 and a
deficit working capital position of $1,080,037. In the first six months of
fiscal year 2000, the Company raised a total of $6,100,000 through private
placement of debt and equity securities of which $2,900,000 was raised in the
second quarter ended June 30, 2000.
Subsequent to the quarter ended June 30, 2000, the Company closed an
additional $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
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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.
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.
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. Additionally, the Company has had
discussions with CYNET Holdings, LLC regarding an additional equity infusion of
up to $7.4 million pursuant to the remaining option outstanding on the CYNET
Holdings Subscription Agreement. CYNET Holdings, LLC has indicated that it
intends to exercise the full $7.4 million option prior to the expiration on
December 31, 2000.
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.
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
From time to time, the Company becomes involved in complaints
related to the distribution of unsolicited faxes for customers.
The distribution of unsolicited faxes is subject to restrictions
under federal law and some state laws. The Company has developed
procedures designed to minimize its exposure to claims of this
type.
The Company and its subsidiary, CYNET Interactive, have been
named as defendants in a suit filed November 19, 1999 in the
District Court of Harris County, Texas, 61 Judicial District
(Cause No. 1999-57579) by Bank & Estate Liquidators, Inc., a
former customer of CYNET Interactive. The plaintiff alleges among
other things, that CYNET Interactive failed to complete the
design and development of an Internet live auction project in
accordance with alleged contract terms and conditions and is
seeking to recover actual and treble damages. The Company is
defending the matter vigorously. Although discovery has not been
completed in this matter, the Company does not believe that this
suit will have a material adverse effect on the Company.
The Company has been named as defendant in a suit filed June 26,
2000 in the United States District Court, Southern District of
California (Cause No. 00CV 1282 W (NLS)) by Clearfax, Inc. The
plaintiff alleges, among other things, that the Company infringed
upon plaintiff's federal copyright by unauthorized use of
plaintiff's software in certain of our fax resolution software
and is seeking to recover actual and punitive damages. The
Company has retained counsel to defend the matter. Although the
Company has not completed its discovery investigation of the
claims asserted by the plaintiff in this matter, the Company does
not believe that this suit will have a material adverse effect on
the Company.
The Company is a party to other legal proceedings, none of which
it believes will have a material adverse effect.
Item 2: Changes in Securities
On May 30, 2000, the Houston Economic Opportunity Fund, LP
("HEOF") exchanged 1,600,000 shares of the Company's Series C
Callable Redeemable Preferred for 1,395,200 shares of the
Company's Series D Preferred Stock. In addition, the Company
issued to HEOF additional 169,577 shares of Series D Preferred
Stock in consideration for eliminating a two year $1.51 per share
put option on the Series D Preferred Stock. The Series D
Preferred Stock is pari passu with the Company's Series E
Preferred Stock and senior to the Series F Preferred Stock, and
contains a covenant by the Company not to issue any other
capital stock with a senior liquidation or dividend preference
to the Series D Preferred Stock. Furthermore, a 9% annual
dividend rate was added to the Series D Preferred and the
conversion rate to Class A Common Stock was adjusted from a
one-to-one conversion to a floating formula of either 1.111 or
1.218 shares of Class A Common Stock for each share of Series D
Preferred Stock converted. The Company also agreed to register
for resale the number of shares of the Class A Common Stock
underlying the conversion of the Series D Preferred Stock in the
next registration statement filed by the Company.
On May 26, 2000, Augustine Fund, L.P. ("Augustine") exchanged its
$1,600,000 Series A 8% Convertible Notes and paid an additional
$900,000 for 1,067 shares of the Company's Series E Convertible
Preferred Stock and 1,433 shares of the Company's Series F
Convertible Preferred Stock. The Series E Preferred Stock is
pari passu with the Company's Series D Preferred Stock and
senior to the Series F Preferred Stock, and is convertible into
Class A Common Stock on a floating formula based on the lessor of
110% of the average closing bid price (calculated based on the
five days prior to the closing) for the Company's Class A Common
Stock or 75% of the average of the
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three lowest closing bid prices 30 days prior to the election to
convert the Series E Preferred Stock and/or Series F Preferred
Stock to Class A Common Stock. The Company also agreed to
register for resale the number of shares of the Class A Common
Stock issuable upon the conversion of the Series E and Series F
Preferred Stock in the next registration statement filed by the
Company. Also, on May 26, 2000, the Company issued to Augustine
five-year warrants to purchase 90,000 shares of the Company's
Class A Common Stock at an exercise price of $1.76 per share.
On May 26, 2000, simultaneously with the foregoing transactions
with Augustine, The Shaar Fund Ltd., and Triton Private Equities
Fund, L.P. purchased 534 shares of the Company's Series E
Preferred Stock and 716 shares of the Company's Series F
Preferred Stock for $1,250,000. The Company issued to The Shaar
Fund Ltd. five-year warrants to purchase 100,000 shares of the
Company's Class A Common Stock at an exercise price of $1.76 per
share. Also, the Company issued to Triton Private Equities Fund,
L.P. five-year warrants to purchase 25,000 shares of the
Company's Class A Common Stock at an exercise price of $1.76 per
share.
On May 26, 2000, the Company issued to Delano Securities Group
five-year warrants to purchase 100,000 shares of the Company's
Class A Common Stock at an exercise price of $1.76 per share as
part of Delano Securities Group's compensation for arranging the
Company's financing transactions with Augustine, The Shaar Fund
Ltd. and Triton Private Equities Fund, L.P.
On June 15, 2000, the Company entered into an agreement with
American Nortel Communications, pursuant to which the Company
agreed to issue American Nortel Communications 750,000 shares of
Class B Common Stock and three-year warrants to purchase 250,000
shares of Class A Common Stock at an exercise price of $1.50 per
share for $750,000 paid to the Company by American Nortel
Communications. The Company agreed to exchange American Nortel
Communications' Class B Common Stock for an equal number of
shares of the Company's Class A Common Stock after the Company's
shareholders approved the expansion of the number of authorized
shares of Class A Common Stock from 40,000,000 to 100,000,000. At
the June 28, 2000 Annual Meeting of Shareholders, the
shareholders approved the expansion of the number of authorized
shares of Class A Common Stock.
On June 15, 2000, the Company entered into a consulting agreement
with Fegen & Associates, pursuant to which the Company agreed,
among other things, to issue to Fegen & Associates three-year
warrants to purchase 500,000 shares of Class A Common Stock at an
exercise price of $1.50 per share. The Company issued the
warrants on July 25, 2000.
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
On June 28, 2000, the Company held its Annual Meeting of
Shareholders. The following matters were submitted to a vote of
the Company's security holders: (i) election of the Board of
Directors; (ii) approval of an amendment to the Company's
Articles of Incorporation to increase the number of authorized
shares of the Company's Class A Common Stock, no par value, from
40,000,000 to
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100,000,000 shares; (iii) approval of an amendment to the
Company's 1997 Stock Option Plan to increase the number of shares
of the Company's Class A Common Stock authorized for issuance
under the plan from 2,000,000 shares to an aggregate of 5,000,000
shares; (iv) approval of the Company's state of incorporation
from Texas to Delaware; (v) approval of the establishment of a
classified board of directors when the reincorporation occurs;
and (vi) approval and ratification of the selection of BDO
Seidman, LLP as the Company's independent auditors.
A brief description of each matter voted upon at the Annual
Meeting of Shareholders, including the number of votes cast for,
against or withheld, as well as the number of abstentions and
broker non-votes as to each such matter, is summarized below.
PROPOSAL #1 ELECTION OF DIRECTORS FOR WITHHOLD
Vincent W. Beale, Sr. 19,196,079 542,536
Bernard B. Beale 19,193,079 545,536
Samuel C. Beale 19,196,079 542,536
R. Greg Smith 19,196,079 542,536
Wayne Schroeder 19,190,579 548,036
Daniel C. Lawson 19,196,079 542,536
Craig T. Jackson 19,196,079 542,536
Gerald W. McIntosh 19,196,079 542,536
Gregory E. Webb 19,196,079 542,536
PROPOSAL #2 APPROVAL OF THE AMENDMENT TO THE ARTICLES OF INCORPORATION OF
THE COMPANY.
FOR AGAINST ABSTAIN
19,286,032 437,413 15,170
PROPOSAL #3 APPROVAL OF THE AMENDMENT TO THE 1997 STOCK OPTION PLAN OF THE
COMPANY.
FOR AGAINST ABSTAIN
19,138,761 584,684 15,170
PROPOSAL #4 APPROVAL OF THE CHANGE OF THE STATE OF INCORPORATION OF THE
COMPANY.
FOR AGAINST ABSTAIN
18,522,019 1,176,339 40,257
PROPOSAL #5 APPROVAL OF THE ESTABLISHMENT OF A CLASSIFIED BOARD OF
DIRECTORS UPON REINCORPORATION OF THE COMPANY.
FOR AGAINST ABSTAIN
17,015,897 2,629,624 93,094
PROPOSAL #6 RATIFICATION OF THE APPOINTMENT OF BDO SEIDMAN, LLP AS
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS OF THE COMPANY.
FOR AGAINST ABSTAIN
19,422,931 287,614 28,070
Item 5: Other Information
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NONE
Item 6(a): Exhibits
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 of the Company's Form 10-KSB filed March 30,
2000).
4.4 Form of Certificate Representing the Series E Convertible
Preferred Stock.
4.5 Form of Certificate Representing the Series F Convertible
Preferred Stock.
4.6 Statement of the Powers, Designations, Preferences and
Rights of the Series D Convertible Preferred Stock.
4.7 Statement of the Powers, Designations, Preferences and
Rights of the Series E Preferred Stock.
4.8 Statement of the Powers, Designations, Preferences and
Rights of the Series F Convertible Preferred Stock.
27.1 Financial Data Schedule.
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: 08/14/00
/s/ Vincent W. Beale, Sr.
Vincent W. Beale, Sr., Chairman of the Board
and Chief Executive Officer
Date: 08/14/00
/s/ R. Greg Smith
R. Greg Smith, Vice President and Chief
Financial Officer
15
