<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to _________
Commission file number 0-24687
INFORUM COMMUNICATIONS, INC.
___________________________
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-1360029
________________________________ ______________________________
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
600 South Cherry Street, Suite 400, Denver, Colorado 80246
______________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 316-0400
_______________________________________________________
(Former Name or Address if Changed Since Last Report)
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 for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the Registrant has filed all documents and reports required to
be filed by Sections 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [ ]
No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 20, 2000, the Company had 24,247,741 shares of its $0.001 par
value common stock outstanding.
Transitional Small Business Disclosure Format (Check one). Yes [ ] No [X]
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INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2000 (unaudited) 4
Consolidated Statements of Operations for the three- and nine-
month periods ended September 30, 2000 and 1999 6
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2000 and 1999 8
Notes to Consolidated Financial Statements 10
Item 2. Management's discussion and analysis of financial
condition and results of operations
Changes of Business Strategy 18
Results of Operations 19
Income Taxes 21
Liquidity and Capital Resources 21
Comprehensive Income 22
Recently Issued Accounting Pronouncements 22
Year 2000 Issues 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
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ITEM 1. FINANCIAL STATEMENTS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Form 10-QSB are "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform
Act of 1995) regarding the plans and objectives of management for future
operations. Such statements involve known and unknown risks, uncertainties
and other factors that may cause actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. The
forward-looking statements made in this Report are based on current
expectations that involve numerous risks and uncertainties. The Company's
plans and objectives are based, in part, on assumptions involving the growth
and expansion of business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive
and market conditions and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that its assumptions
underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the forward-looking statements made in this Report will prove to be
accurate. In light of the significant uncertainties inherent in the forward-
looking statements made in this Report, particularly in view of the Company's
early state of operations, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
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<TABLE>
<CAPTION>
INFORUM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
_____________________________________________
ASSETS September 30, 2000
______ __________________
(unaudited)
<S> <C>
CURRENT ASSETS:
Cash $ 2,211,527
Accounts receivable, net of allowance for
doubtful accounts of $279,523 1,088,991
Prepaid expenses and other current assets 342,887
Assets held for sale 240,000
__________________
Total current assets 3,883,405
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $2,030,187 3,316,339
GOODWILL AND INTANGIBLE ASSETS, net of accumulated
amortization of $5,872,007 10,775,582
INVESTMENT IN SUBSIDIARY 400,000
OTHER ASSETS 234,090
__________________
Total assets $ 18,609,416
__________________
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,472,729
Deferred revenue 1,001,495
Obligations under capital leases, current 463,952
Dividends payable on preferred stock 478,191
Notes payable, current 11,169
______________
Total current liabilities 3,427,536
OBLIGATIONS UNDER CAPITAL LEASES, net of current 169,341
______________
Total liabilities 3,596,877
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A 821,434
Convertible preferred stock, Series C 2,150,624
Convertible preferred stock, Series D-1 1,137,261
Convertible preferred stock, Series F 9,535,912
Common stock 23,788
Additional paid-in capital 83,681,910
Accumulated deficit (82,338,390)
_______________
Total stockholders' equity 15,012,539
_______________
Total liabilities and stockholders' equity $ 18,609,416
_______________
</TABLE>
The accompanying notes are an integral part of this consolidated balance
sheet.
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<TABLE>
<CAPTION>
INFORUM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
_______________________________________________________________________
Three Months Ended Nine Months Ended
September 30, September 30,
__________________ _________________
2000 1999 2000 1999
____ ____ ____ ____
(unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 2,396,822 $1,548,322 $7,346,063 $2,249,076
DIRECT COST OF SERVICES 854,823 381,168 2,826,608 812,214
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,096,008 3,891,827 12,993,320 16,508,287
LOSS ON IMPAIRMENT OF ASSETS 647,255 - 647,255 -
DEPRECIATION, AMORTIZATION 1,701,338 959,126 4,806,453 1,571,092
__________ __________ ___________ ___________
OPERATING LOSS (3,902,602) (3,683,799) (13,927,573) (16,642,517)
OTHER INCOME (EXPENSE):
Net interest (expense) income(2,863) 38,206 (607,329) 104,304
Loss on sale of fixed assets - - (614,869) -
__________ __________ ____________ __________
Total other income (expense) (2,863) 38,206 (1,222,198) 104,304
__________ __________ ____________ __________
NET LOSS BEFORE PROVISION FOR
INCOME TAXES (3,905,465) (3,645,593) (15,149,771) (16,538,213)
PROVISION FOR INCOME TAXES - - - -
__________ __________ ____________ ___________
NET LOSS (3,905,465) (3,645,593) (15,149,771) (16,538,213)
PREFERRED STOCK DIVIDENDS (113,307) (353,476) (4,437,857) (956,471)
ACCRETION OF BENEFICIAL
CONVERSION FEATURE OF
PREFERRED STOCK - (599,791) (16,760,489)(12,022,329)
___________ __________ ____________ ___________
NET LOSS AVAILABLE TO
COMMON STOCKHOLDERS $ (4,018,772) $(4,598,860) $(36,348,117)$(29,517,013)
_____________ ___________ ____________ ___________
NET LOSS PER SHARE-BASIC
AND DILUTED $ (.17)$ (0.40) $ (1.80)$ (2.62)
SHARES USED IN COMPUTING
NET LOSS - BASIC AND
DILUTED 23,614,987 11,628,774 20,225,751 11,278,104
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
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<TABLE>
<CAPTION>
INFORUM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
_____________________________________________
Nine Months Ended
September 30,
____________________
2000 1999
____________________
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,149,771) $(16,538,213)
Adjustments to reconcile net loss to net
cash used in operating activities-
Common stock issued for services 2,813,755 9,354,545
Depreciation and amortization 4,806,453 1,571,092
Loss on sale of fixed assets 614,869 -
Imputed interest expense on
convertible debt 641,012 -
Loss on impairment of assets 647,255 -
Changes in operating assets and
liabilities, excluding effects
of purchases of assets (738,346) 458,757
____________ __________
Net cash used in operating activities (6,364,773) (5,153,819)
____________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,921,523) (8,154,382)
Purchase of subsidiaries, net of cash
acquired (2,920,893) (1,237,026)
____________ ___________
Net cash used in investing activities (4,842,416) (9,391,408)
____________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred
stock, net of offering costs 11,898,266 15,156,688
Proceeds from the issuance of common
stock, net of offering costs 184,546 572,000
Proceeds from the conversion of Series A
warrants - 622,170
Reimbursement of deposits on unissued shares - (50,000)
Principal repayments of notes payable (21,123) (4,568)
Principal payments on obligations under
capital leases (590,955) (25,000)
___________ ___________
Net cash provided by financing activities 11,470,734 16,271,290
___________ ___________
NET INCREASE IN CASH 263,545 1,726,063
CASH, beginning of period 1,947,982 512,925
____________ __________
CASH, end of period $ 2,211,527 $ 2,238,988
____________ __________
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 159,157 $ 2,003
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Property and equipment acquired under
capital leases $ 163,400 $ -
Common stock issued for acquisitions $ 1,745,329 $ 3,520,027
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
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INFORUM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
___________________________________________
1. BASIS OF PRESENTATION AND NAME CHANGE:
_____________________________________
Prior to June 30, 1999, the consolidated financial statements were presented
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises."
As of April 26, 2000, pursuant to shareholder approval, SkyLynx
Communications, Inc. changed its name to Inforum Communications, Inc. (the
"Company").
The Company and the Board of Directors have determined that it is in the best
interest of the Company's shareholders to substantially alter its business
plan going forward, by focusing its future efforts solely on the continued
development of its Internet security business. To that end, the Company has
determined to divest its Internet Service Provider ("ISP") assets, as well as
certain other non-core assets, and to use the expected proceeds from these
sales to fund the ongoing capital requirements of the Internet security
business (see "Liquidity").
The Company anticipates that the sale of its ISP assets will have a material
adverse impact on the Company's revenues for an undetermined period of time.
Currently, the Company obtains all of its revenues from its ISP operations.
While the Company believes that the new business strategy presents an
attractive opportunity, it should be noted that the Company's Internet
security business is still in the development stage and currently generates no
revenues. Further, the Company does not expect that its Internet security
business will generate revenues before the end of the fiscal year.
To date, the Company has taken active steps to divest its ISP assets. The
Company has engaged the services of a broker to assist in the sale of these
assets and is actively engaged in the process of marketing the assets to
potential buyers. However, it should be noted that the Company cannot
completely control the timing of the sale of the ISP assets, and that there
may be resultant delays or lags that prevent the Company from focusing
entirely on the new business strategy until such time as the ISP assets are
sold. Further, any proposed sale of the ISP assets which constitutes a sale
of substantially all of the Company's assets requires prior approval by the
Company's shareholders. The Company and the Board of Directors expect to
present any proposal that would constitute such a sale to the shareholders for
their approval and believe that they would be able to obtain the required
votes for approval. However, there can be no assurance that this will be the
case.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
__________________________________________
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
those rules and regulations. In the opinion of the Company's management,
these unaudited consolidated financial statements contain all adjustments that
are necessary to present fairly the financial position as of September 30,
2000, and the results of operations for the three- and nine-month periods
ended September 30, 2000 and 1999. All such adjustments are of a normal,
recurring nature.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in
the Company's Form 10-KSB.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective for the year ended December 31, 1998. This statement establishes
standards for the reporting and presentation of comprehensive income and its
components in financial statements and thereby reports a measure of all
changes in equity of an enterprise that result from transactions and other
economic events other than transactions with owners. Aside from net loss,
there are no other comprehensive income items for the three- and nine-month
periods ended September 30, 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. This statement was subsequently amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133," which changed the effective
date to fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The Company intends to adopt the new accounting standard in the
first quarter of 2001, but does not expect it to have a material effect on its
financial statements.
In December 1999, the staff of SEC issued its Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition". SAB No. 101 provides guidance on the
measurement and timing of revenue recognition in financial statements of
public companies. The Company will adopt SAB No. 101 in the quarter ended
December 31, 2000 and does not expect this accounting bulletin to have a
material effect on its financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation." FIN No. 44 provides clarification and guidance on
applying Accounting Principles Board ("APB") No. 25. FIN No. 44 generally
provides for prospective application for grants or modifications to existing
stock options or awards made after June 30, 2000. The Company's adoption of
FIN No. 44 did not have a material impact on its financial statements.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Impairment is indicated when the carrying amount of the asset
is greater than amounts recoverable from future undiscounted cash flow.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to current
period presentation.
3. LIQUIDITY:
_________
The Company funds its working capital requirements principally from the
proceeds of private equity financings and from internally generated funds from
its ISP operations. During the nine-month period ended September 30, 2000,
the Company raised $13,366,000 through the sale of its series F convertible
preferred stock. The Company has used the proceeds of this financing to fund
the cash portion of two acquisitions, as well as to fund the Company's
operating deficits.
The Company has incurred operating losses since inception, including the
three- and nine-month periods ended September 30, 2000 and 1999. At November
14, 2000, the Company had approximately $1,100,000 in cash on hand. The
Company anticipates that its current cash on hand plus the cash flow from its
ISP operations will be sufficient to fund existing operations through the
remainder of the fiscal year. However, the Company expects that its cash on
hand will not be sufficient to meet its financial obligations beyond that
time. The Company plans to meet its capital requirements for the execution of
its Internet security business plan initially through the sale of certain non-
core assets and eventually through the sale of its ISP operations. The
Company believes that the expected proceeds from the contemplated dispositions
of assets will be sufficient to fund its capital requirements for the
following fiscal year, though there can be no assurance that this will be the
case. There also can be no assurance that the Company will be able to
consummate the sales of these assets on acceptable terms, in a timely manner,
or at all.
On November 16, 2000, the Company entered into a letter of intent with two of
its shareholders to provide the Company with a standby debt facility in the
event that the Company is unable to consummate its planned asset dispositions
in a manner that allows it to continue to meet its financial obligations. The
letter of intent proposes for the parties to enter into an agreement to
provide up to $2,000,000 in unsecured debt financing to the Company for a
period of up to nine months. Other terms and conditions of the proposed
facility are subject to the negotiation and documentation of a final
agreement.
If the Company is unable to obtain sufficient additional capital through the
anticipated disposal of non-core and ISP assets, it may be required to seek
additional capital through either equity or debt financing beyond that
provided by the standby debt facility described above. There can be no
assurance that such equity or debt financing will be available to the Company,
or, if available, on terms or timing acceptable to the Company. Further, any
additional equity financing may be dilutive to our existing shareholders and
any debt financing may involve pledging some or all of our assets and may
contain restrictive covenants with respect to raising future capital and other
financial and operational matters. If the Company is unable to obtain the
necessary additional capital through any of the above-described means, it may
not be able to execute its Internet security business strategy and may be
required to substantially reduce its ISP operations, which could have a
material adverse effect on its financial condition or results of operations.
The Company has been advised by its independent certified public accountants
that, if these matters have not been resolved prior to the completion of their
audit of the Company's financial statements for the year ending December 31,
2000, their auditors' report on those financial statements may be modified as
to the Company's ability to continue as a going concern.
4. PURCHASE OF ASSETS:
__________________
On February 11, 2000, the Company acquired substantially all of the capital
stock of Alternate Access, Inc. The acquisition was accounted for as a
purchase and has been reflected in the Company's consolidated financial
statements from the date of acquisition. The consideration paid for this
transaction consisted of $1.95 million in cash, 480,509 shares of the
Company's common stock with a fair value of $1,531,624, and an additional
203,922 shares that have been escrowed for six months from the purchase date
to secure any obligations of the seller. The escrowed shares have not been
released due to finalization of post closing adjustments. Goodwill and
intangible assets resulting from the purchase are stated net of accumulated
amortization, and amortization is provided using the straight-line method over
three years.
In connection with the acquisition of Alternate Access, Inc., the Company also
obtained the right to acquire up to 30% equity ownership in PDGT.COM, Inc. for
a total purchase price of $1,150,000. On February 11, 2000, the Company
acquired 419 shares of the outstanding capital stock of PDGT.COM for $750,000
for an equity ownership of 21.8%. This investment is accounted for under the
equity method. The remaining 224 shares of the outstanding capital stock will
be purchased by the Company for $400,000 ten days after the date PDGT.COM's
revenues for the preceding month is equal to or exceeds $25,000. If PDGT.COM
does not earn $25,000 in revenues within 12 months of the original purchase
date, the agreement for the remaining 224 shares of capital stock terminates.
As of September 30, 2000, PDGT.COM's revenues for the preceding month did not
equal or exceed $25,000. On November 6, 2000, the Company negotiated a new
agreement and entered into a letter of intent to purchase the remaining 78.2%
ownership interest for $125,000. During the third quarter, the Company
recorded an impairment totaling $350,000 to reduce the initial investment to
its carrying value. Management anticipates a fourth quarter closing.
On February 11, 2000, the Company purchased certain assets of Planetlink
Corporation, Inc. d/b/a/ Inforum Communications. The acquisition was
accounted for as a purchase and has been reflected in the Company's
consolidated financial statements from the date of acquisition. The
consideration paid in this transaction consisted of $237,450 in cash, 67,045
shares of the Company's common stock with a fair value of $213,705, and an
additional 7,449 shares that have been escrowed for one year from the purchase
date to secure any obligations of the seller. Goodwill and intangible assets
resulting from the asset purchase are stated net of accumulated amortization,
and amortization is provided using the straight-line method over three years.
5. PREFERRED STOCK:
_______________
SERIES D
In March 2000, the Company changed the conversion price of the issued and
outstanding shares of Series D convertible stock from a floating rate with a
floor of $3.00 per share to a fixed rate of $1.00 per share. This was
effected by exchanging all of the outstanding shares of Series D convertible
stock for an identical number of shares of Series D-1 convertible preferred
stock. Other than the conversion price, the rights, preferences, and
privileges of the Series D-1 convertible preferred stock are substantially the
same as those of the Series D convertible preferred stock.
The Company recorded a beneficial conversion feature of $3,510,065 related to
this exchange, which was fully accreted as of March 31, 2000. The total
excess of the fair value of the conversion feature of the Series D-1
convertible preferred stock over that of the Series D convertible preferred
stock was $11,100,000.
SERIES F
In February 2000, the Company sold 15,316 shares of Series F convertible
preferred stock for an aggregate purchase price of $15,316,000 ($1,000 per
share), which includes the issuance of 1,950 shares of Series F convertible
preferred stock associated with the conversion of an aggregate principal
amount of 1,950,000 convertible promissory notes issued by the Company in
November 1999.
The Company's Series F convertible preferred stock has a par value of $0.01
per share. Each share of preferred stock is convertible into 1,000 shares of
the Company's common stock, subject to adjustments. The preferred stock may
be converted at the option of the Series F investor or it will automatically
convert upon the third anniversary of the date of issue. The preferred stock
has a liquidation preference of $1,000 per share.
The Company recorded a beneficial conversion feature of $12,639,145 related to
its Series F convertible preferred stock, which was fully accreted as of
March 31, 2000. The total excess of fair value over the conversion price of
the date of grant was $30,632,000.
On February 11, 2000, the company issued two warrants to H.C. Wainwright,
exercisable to purchase an aggregate of 500,000 shares of the Company's common
stock at the following exercise prices: (i) with respect to 400,000 shares,
an exercise price of $0.01 per share, in connection with their role as
placement agent in the Series F convertible preferred stock financing; and
(ii) with respect to 100,000 shares, an exercise price of $3.00 per share, in
connection with their role as placement agent in the November 1999 convertible
loan transaction.
On March 1, 2000, the Company issued a warrant to purchase 1,000,000 shares of
the Company's common stock at an exercise price of $0.01 per share to one
investor as consideration for such investor having participated as the lead
investor in the Series F convertible preferred stock financing. The fair
value of this warrant, $3,741,756, is reflected as a dividend in the
accompanying unaudited consolidated statements of operations for the nine
months ended September 30, 2000.
6. COMMON STOCK OFFERINGS:
______________________
On January 31, 1999, the Company issued and sold 263,158 units to one investor
at a price of $1.90 per unit, for aggregate consideration of $500,000. Each
unit sold in this offering consisted of one share of the Company's common
stock, one warrant exercisable for three years to purchase one additional
share of common stock at a price of $6.00 per share and one warrant
exercisable for three years to purchase an additional share of common stock at
an exercise price of $8.00 per share. Both warrants associated with the unit
purchase made by the investor in January 31, 1999 were subsequently cancelled
in 2000 and re-issued by the Company as a warrant to purchase 526,316 shares
of common stock of the Company at an exercise price of $4.00, which expires
three years from the date of the initial purchase of the units described
above.
7. SALE OF ASSETS:
______________
On February 8, 2000, the Company sold all of the assets of Inforum
Communications (Sarasota), Inc., a wholly owned subsidiary of the Company, to
LineShark Communications, an affiliate of a major stockholder for $112,156.
The Company also issued 164,300 options to employees of LineShark
Communications in connection with this transaction. The loss on the sale was
approximately $453,000.
On March 7, 2000, the Company entered into a sublease assignment, assumption,
and asset sale agreement with Sky Desk, Inc. an affiliate of a former
employee. The Company sold all of the assets at the premises of the Network
Operating Center in consideration for Sky Desk, Inc. assuming the lease on the
premises and the liabilities for invoices related to those assets sold for
which the Company had not yet paid. The loss on the sale was approximately
$173,000.
On September 5, 2000, the Company entered into a letter of intent to sell
certain assets including accounts receivable, prepaids, property and customer
lists of Interaccess Corporation with an anticipated fourth quarter closing
date. Management believes this property is a non-strategic asset that does
not fit into the geographic region of concentration. During the third
quarter, the Company recorded a loss on impairment totaling $297,255 to record
these assets at fair value less estimated cost to sell. As of September 30,
2000, these assets are classified in the accompanying balance sheet as assets
held for sale. The results of operations for the nine-month period ended
September 30, 2000 for the assets held for sale are as follows:
<TABLE>
<CAPTION>
<S> <C>
Revenues $186,000
Direct Cost of Services 100,000
Selling, General and Administrative Expenses 266,000
Depreciation and Amortization 166,000
Other Expense 9,000
</TABLE>
8. PRO FORMA RESULTS OF OPERATIONS:
_______________________________
The following pro forma condensed consolidated statement of operations for the
nine-month period ended September 30, 2000, includes the results of the
Company and Alternate Access, Inc. as if the acquisition had occurred as of
January 1, 2000.
The following pro forma condensed consolidated statement of operations for the
nine-month period ended September 30, 1999, includes the results of the
Company and Interaccess Corporation, Simply Internet, Inc., Net Asset, LLC,
CalWeb Internet Services, Inc., Inficad Computing and Design, LLC, and
Alternate Access, Inc. as if the acquisitions had occurred as of January 1,
1999.
The pro forma condensed consolidated statements of operations may not be
comparable to, and may not be indicative of, the Company's post-acquisition
results of operations.
<TABLE>
<CAPTION>
Nine-Month Period Ended
September 30,
2000 1999
__________ ___________
<S> <C> <C>
Revenue $ 7,532,978 $ 3,710,151
Net loss available to common stockholders (36,256,994) (27,272,383)
Net loss per share-basic and diluted (1.79) (2.31)
Shares used in computing net loss per
share-basic and diluted 20,297,652 11,784,688
</TABLE>
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CHANGE OF BUSINESS STRATEGY
The Company and the Board of Directors have determined that it is in the
best interest of the Company's shareholders to substantially alter its
business plan going forward, by focusing its future efforts solely on the
continued development of its Internet security business. To that end, the
Company has determined to divest its Internet Service Provider ("ISP") assets,
as well as certain other non-core assets, and to use the expected proceeds
from these sales to fund the ongoing capital requirements of the Internet
security business (see "Liquidity and Capital Resources"). The decision to
make this change in business strategy was driven primarily by the following
two beliefs:
(i) That current and expected future capital market conditions
surrounding the ISP industry would ultimately prevent the
Company from executing its prior business strategy and from
achieving the necessary scale to become self-sustaining; and
(ii) That the opportunity presented by the Internet security
business provides the Company and its shareholders with a
greater likelihood of achieving a higher rate of return
than the prior business strategy due to current and
anticipated market conditions, and that the Company has a
greater likelihood of executing the new business strategy
successfully.
The Company anticipates that the sale of its ISP assets will have a
material adverse impact on the Company's revenues for an undetermined period
of time. Currently, the Company obtains all of its revenues from its ISP
operations. While the Company believes that the new business strategy
presents an attractive opportunity, it should be noted that the Company's
Internet security business is still in the development stage and currently
generates no revenues. Further, the Company does not expect that its Internet
security business will generate revenues before the end of the fiscal year.
To date, the Company has taken active steps to divest its ISP assets.
The Company has engaged the services of a broker to assist in the sale of
these assets and is actively engaged in the process of marketing the assets to
potential buyers. However, it should be noted that the Company cannot
completely control the timing of the sale of the ISP assets, and that there
may be resultant delays or lags that prevent the Company from focusing
entirely on the new business strategy until such time as the ISP assets are
sold. Further, any proposed sale of the ISP assets which constitutes a sale
of substantially all of the Company's assets requires prior approval by the
Company's shareholders. The Company and the Board of Directors expect to
present any proposal that would constitute such a sale to the shareholders for
their approval and believe that they would be able to obtain the required
votes for approval. However, there can be no assurance that this will be the
case.
RESULTS OF OPERATIONS
For the three and nine-month periods ended September 30, 2000, the
Company's revenues from operations increased to $2,396,822 and $7,346,063,
respectively, from $1,548,322 and $2,249,076, respectively, for the three and
nine-month periods ended September 30, 1999. These increases were primarily
the result of the acquisition of ten ISP's between January 1, 1999 and
February 11, 2000 and the revenue growth experienced by those businesses
during the nine-month period ended September 30, 2000. The Company's revenues
from operations consist primarily of customer revenues received for Internet
access services, equipment set-up and installations, web hosting and design
services and security related services. The Company earns access revenues
primarily from subscriptions from its customers for Internet connection and
access. The subscription fees paid by customers vary among the Company's
ISP's and by the billing plans offered by a particular ISP.
For the three and nine-month periods ended September 30, 2000, the cost
of revenues increased to $854,823 and $2,826,608, respectively, from $381,168
and $812,214, respectively, for the three and nine-month periods ended
September 30, 1999. Cost of revenues consists primarily of data transport and
backhaul charges paid to various telecommunications providers in order to
provide Internet services to customers.
For the three and nine-month periods ended September 30, 2000, selling,
general and administrative expenses decreased to $3,096,008 and $12,993,320,
respectively, from $3,891,827 and $16,508,287, respectively, for the three and
nine-month periods ended September 30, 1999. Included in the selling,
general, and administrative expenses for the nine-month period ended September
30, 2000, are non-cash charges of $2,813,755, resulting from the vesting of
stock options granted to certain officers of the Company, from the issuance of
stock options and common stock warrants to the Company's consultants and
professional services vendors and from the issuance of common stock warrants
to the Company's placement agent in connection with the Series F convertible
preferred stock financing. For the nine-month period ended September 30,
1999, selling, general and administrative expenses included non-cash charges
of $9,354,545, related to grants of common stock to certain officers and
directors of the Company and to the vesting of stock options granted to
certain officers of the Company. The Company's primary ongoing operating
costs include employee salaries and benefits, non-capital equipment costs,
office rents and utilities, customer service and technical support costs and
the sales and marketing costs associated with acquiring new customers,
including employee and consultant bonuses, sales commissions and advertising.
The increases incurred in these costs for the three and nine-month periods
ended September 30, 2000 were primarily the result of the costs associated
with the acquisition of two ISP's during the nine-month period, the ongoing
operating costs associated with the existing customer base of the Company's
ISP operations, the costs associated with the growth of the Company's customer
and revenue base and the costs associated with providing additional services
to existing and new customers.
For the three-month period ended September 30, 2000, the Company recorded
a loss on impairment of assets of $647,255. Included in this loss was an
impairment of $350,000 in the Company's investment in PDGT.COM to reduce that
asset to its carrying value and an impairment of $297,255 in the assets of
Interaccess Corporation to record those assets at their fair value less the
expected cost to sell them.
For the three and nine-month periods ended September 30, 2000,
depreciation and amortization increased to $1,701,338 and $4,806,453,
respectively, from $959,126 and $1,571,092, respectively, for the three and
nine-month periods ended September 30, 1999. This increase was primarily the
result of depreciation of fixed assets and amortization of goodwill associated
with the Company's acquired ISP operations.
For the three-month period ended September 30, 2000, other expenses
included an expense of $2,836 as compared to a gain of $38,206 for the three-
month period ended September 30, 1999. For the nine-month period ended
September 30, 2000, other expenses were $1,222,198 as compared to a gain of
$104,304 for the nine-month period ended September 30, 1999. Included in other
expenses for the nine-month period ended September 30, 2000 are interest
expense of $607,329 and a loss on the sale of fixed assets of $614,869, of
which $452,911 was a non-cash charge associated with the cancellation and re-
issuance of stock options to three former employees who are officers or
directors of an entity that acquired certain fixed assets from the Company.
The Company's activities for the three and nine-month periods ended
September 30, 2000 resulted in a net loss of $3,905,465 and $15,149,771,
respectively, as compared to a net loss of $3,645,593 and $16,538,213,
respectively, for the three and nine-month periods ended September 30, 1999.
For the nine-month period ended September 30, 2000, the net cash used by
the Company in operating activities was $6,364,773. Net cash used in
investing activities by the Company for the period was $4,842,416, of which
$2,920,893 was related to the Company's acquisition of the capital stock of
Alternate Access, Inc., the acquisition of the assets of Planetlink
Corporation, Inc. d/b/a Inforum Communications and the acquisition of 21.8% of
the equity ownership of PDGT.COM. Net cash provided by the Company's
financing activities for the period was $11,470,734, resulting primarily from
the sale and issuance of the Company's Series F convertible preferred stock.
These activities resulted in a net increase in the Company's cash position of
$263,545.
INCOME TAXES
The Company has concluded that there exists substantial doubt as to the
recoverability of its deferred tax assets. As a result, the Company has
recorded a full valuation allowance against those deferred tax assets. The
Company's view as to the ultimate recoverability of its deferred tax assets
may change in the near term based principally upon the successful execution of
its business plan.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its working capital requirements principally from the
proceeds of private equity financings and from internally generated funds from
its ISP operations. During the nine-month period ended September 30, 2000,
the Company raised $13,366,000 through the sale of its Series F convertible
preferred stock. The Company has used the proceeds of this financing to fund
the cash portion of two acquisitions, as well as to fund the Company's
operating deficits.
At November 14, 2000, the Company had approximately $1,100,000 in cash on
hand. The Company anticipates that its current cash on hand plus the cash
flow from its ISP operations will be sufficient to fund existing operations
through the remainder of the fiscal year. However, the Company expects that
its cash on hand will not be sufficient to meet its financial obligations
beyond that time. The Company plans to meet its capital requirements for the
execution of its Internet security business plan initially through the sale of
certain non-core assets and eventually through the sale of its ISP operations.
The Company believes that the expected proceeds from the contemplated
dispositions of assets will be sufficient to fund its capital requirements for
the following fiscal year, though there can be no assurance that this will be
the case. There also can be no assurance that the Company will be able to
consummate the sales of these assets on acceptable terms, in a timely manner,
or at all.
On November 16, 2000, the Company entered into a letter of intent with
two of its shareholders to provide the Company with a standby debt facility in
the event that the Company is unable to consummate its planned asset
dispositions in a manner that allows it to continue to meet its financial
obligations. The letter of intent proposes for the parties to enter into an
agreement to provide up to $2,000,000 in unsecured debt financing to the
Company for a period of up to nine months. Other terms and conditions of the
proposed facility are subject to the negotiation and documentation of a final
agreement.
If the Company is unable to obtain sufficient additional capital through
the anticipated disposal of non-core and ISP assets, it may be required to
seek additional capital through either equity or debt financing beyond that
provided by the standby debt facility described above. There can be no
assurance that such equity or debt financing will be available to the Company,
or, if available, on terms or timing acceptable to the Company. Further, any
additional equity financing may be dilutive to our existing shareholders and
any debt financing may involve pledging some or all of our assets and may
contain restrictive covenants with respect to raising future capital and other
financial and operational matters. If the Company is unable to obtain the
necessary additional capital through any of the above-described means, it may
not be able to execute its Internet security business strategy and may be
required to substantially reduce its ISP operations, which could have a
material adverse effect on its financial condition or results of operations.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective for the year ended December 31, 1998. This statement establishes
standards for the reporting and presentation of comprehensive income and its
components in financial statements and thereby reports a measure of all
changes in equity of an enterprise that result from transactions and other
economic events other than transactions with owners. Aside from net loss,
there are no other comprehensive income items for the three- and nine-month
periods ended September 30, 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement was subsequently amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," which changed the
effective date to fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company intends to adopt the new accounting standard
in the first quarter of 2001, but does not expect it to have a material effect
on its financial statements.
In December 1999, the staff of the SEC issued its Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 provides
guidance on the measurement and timing of revenue recognition in financial
statements of public companies. The Company will adopt SAB No. 101 in the
quarter ended December 31, 2000 and does not expect it to have a material
effect on its financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretations ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." FIN No. 44 provides clarification and guidance
on applying Accounting Principles Board ("APB") No. 25. FIN No. 44 generally
provides for prospective application for grants or modifications to existing
stock options or awards made after June 30, 2000. The Company's adoption of
FIN No. 44 did not have a material impact on its financial statements.
YEAR 2000 ISSUES
Many existing computer systems and applications currently use two-digit
date fields to designate a particular year. Date sensitive systems and
applications may recognize the year 2000 as 1900 or not at all. The inability
to recognize or properly treat the year 2000 issue may cause computer systems
and applications to incorrectly process critical information and operational
information. During 1999, the Company undertook an effort to identify and
correct any potential year 2000 issues that may have existed with its
information systems, suppliers and facilities. As of the date of this report,
the year 2000 issue has not materially affected the Company's business. The
Company intends to continue to monitor the impact of the year 2000 issue on
its business throughout the year ended December 31, 2000. There can be no
assurance that the year 2000 issue will not adversely affect the Company's
business, financial condition or result of operations in future periods.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None other than as previously disclosed.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
None.
REPORTS ON FORM 8-K:
None.
<PAGE>
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act,
the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORUM COMMUNICATIONS, INC.
Dated: November 20, 2000 By: /s/ Jeffery A. Mathias
______________________________
Jeffery A. Mathias, President
Dated: November 20, 2000 By: /s/ James Maurer
______________________________
James Maurer, Chief Financial Officer
