<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 0-27145
1st Net Technologies, Inc.
(exact name of registrant as specified in its charter)
Colorado 33-0756798
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
11423 West Bernardo Court, San Diego, California 92127
(Address of principal executive offices including zip code)
Issuer's Telephone Number, Including Area Code: (858) 675-4449
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
Outstanding at June 30, 2000: 6,003,700 shares
(Title of Class)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash $ 2,992,837 $ 12,873
Accounts receivable, net of
allowance for doubtful accounts of
$33,723 and $22,999 25,210 67,498
Marketable securities 169,966 1,158,366
Current portion of note receivable from
Marketbyte, L.L.C. 100,000 -
Other current assets 30,083 -
----------- -----------
Total current assets 3,318,096 1,238,737
Investment in LaForza Automobiles, Inc. 60,000 100,000
Investment in Last Mile Communication
Corporation 286,251 220,000
Note receivable from Marketbyte, L.L.C. 650,000 -
Property and equipment, at cost net of
accumulated depreciation of $115,714 and
$117,917 340,387 535,283
Proprietary technology, net of accumulated
amortization of $129,997 at June 30, 2000 316,650 279,980
Intangible assets, net of accumulated
amortization of $142,506 and $126,223 89,074 333,666
Goodwill, net of accumulated amortization
of $13,445 and $8,963 121,000 125,482
Other assets 11,742 15,926
----------- -----------
$ 5,193,200 $ 2,849,074
=========== ===========
See accompanying notes.
2
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1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 383,882 $ 394,245
Current portion of capital lease
obligations 72,496 66,095
Accrued personnel costs 497,265 217,647
Income taxes payable 4,000 2,400
----------- -----------
Total current liabilities 957,643 680,387
Long term portion of capital lease
obligations 219,103 246,476
Deferred credits from acquisition of CTG,
net of accumulated amortization of $52,165
and $29,504 611,671 634,332
Long term notes payable 55,090 68,000
Long term notes payable to related parties 67,456 335,972
----------- -----------
Total liabilities 1,910,963 1,965,167
Commitments and contingencies
Minority interests in subsidiaries 1,100,481 65,848
Stockholders' equity:
Preferred stock, $.001 par value,
10,000,000 shares authorized, no shares
issued and outstanding - -
Common stock, $.001 par value, 40,000,000
shares authorized, 6,003,700 shares issued
and outstanding (5,753,000 at December 31,
1999) 6,004 5,754
Additional paid in capital 5,026,696 2,766,629
Accumulated deficit (2,850,944) (1,954,324)
----------- -----------
Total stockholders' equity 2,181,756 818,059
----------- -----------
$ 5,193,200 $ 2,849,074
=========== ===========
See accompanying notes.
3
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1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Technology consulting, user fees
and marketing services $ 48,078 $ 316,912 $ 153,319 $ 580,214
Realized gain on investments sold 14,156 385,470 601,535 393,694
Unrealized gain on investments held - 138,335 - 635,396
----------- ---------- ----------- -----------
Total revenues 62,234 840,717 754,854 1,609,304
Operating expenses:
Unrealized loss on investments held 117,776 - 30,949 -
Other operating expenses 1,206,314 1,266,676 2,417,723 2,004,778
----------- ---------- ----------- -----------
1,324,090 1,266,676 2,448,672 2,004,778
----------- ---------- ----------- -----------
Income (loss) from operations (1,261,856) (425,959) (1,693,818) (395,474)
Other income and expense:
Interest expense (4,614) - (52,329) (2,958)
Gain on sale of assets - - 566,392 -
Loss on disposal of property and
equipment - - (75,067) -
Other income 19,412 2,846 20,239 12,933
----------- ---------- ----------- -----------
Income before provision for income
taxes and minority interest in loss
of subsidiaries (1,247,058) (423,113) (1,234,583) (385,499)
Provision for income taxes 1,600 (3,200) 1,600 -
----------- ---------- ----------- -----------
Income before provision for minority
interest in undistributed loss of
subsidiaries (1,248,658) (419,913) (1,236,183) (385,499)
Minority interest in undistributed
loss of subsidiaries 276,138 37,067 339,563 37,135
----------- ---------- ----------- -----------
Net loss $ (972,520) $ (382,846) $ (896,620) $ (348,364)
=========== ========== =========== ===========
Earnings per share:
Basic and diluted $ (0.16) $ (0.05) $ (0.15) $ (0.06)
=========== ========== =========== ===========
Weighted average common shares
outstanding:
Basic and diluted 6,003,700 7,290,000 5,943,260 6,154,700
=========== ========== =========== ===========
</TABLE>
See accompanying notes.
4
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1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating activities
Net loss $ (972,520) $ (382,846) $ (896,620) $ (348,364)
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 97,290 14,266 201,287 36,664
Changes in minority interests in
subsidiaries (276,138) 491,919 (323,575) 122,208
Gain on sale of assets - - (566,392) -
Loss on disposal of property and
equipment - - 75,067 -
Compensation expense from common
stock to be issued - - 53,005 -
Reduction of note payable in
exchange for services (6,892) - (12,910) -
Unrealized loss (gain) on
investments held 204,603 138,335 117,776 635,396
Changes in operating assets and
liabilities:
Accounts receivable 14,790 (24,868) 42,288 19,384
Other assets (21,371) 264,121 (25,899) (30,905)
Accounts payable and accrued
liabilities (9,292) 216,885 (10,363) 263,841
Accrued personnel costs 29,348 (21,931) 226,613 30,620
Deferred revenues - - - 212,275
Income taxes payable 1,600 (800) 1,600 3,200
----------- ----------- ----------- -----------
Net cash from operating activities (938,582) 695,081 (1,118,123) 944,319
Investing activities
Additions to property and equipment (25,517) (95,791) (25,517) (304,895)
Changes in marketable securities 340,605 257,758 910,624 (447,463)
Acquisition of SSP Management Corp. - - - (140,241)
Changes in restricted securities - - - (17,000)
Increase to notes and loans receivable - - - (1,324)
Additions to proprietary technology - (127,743) (100,000) (179,850)
----------- ----------- ----------- -----------
Net cash from investing activities 315,088 34,224 785,107 (1,090,773)
Financing activities
Repayments of capital lease obligations (18,050) (161,014) (37,029) (295,236)
Repayments of notes payable (35,000) - (268,516) -
Net proceeds from issuance of
common stock by CTG - - 25,000 -
Net proceeds from issuance of preferred
stock by CTG 3,593,525 - 3,593,525 -
Net proceeds from issuance of common
stock - 202,742 - 202,742
Net proceeds from issuance of
preferred stock - - - 1,009,981
----------- ----------- ----------- -----------
Net cash from financing activities 3,540,475 41,728 3,312,980 917,487
----------- ----------- ----------- -----------
Increase in cash 2,916,981 771,033 2,979,964 771,033
Cash at beginning of period 75,856 17,888 12,873 17,888
----------- ----------- ----------- -----------
Cash at end of period $ 2,992,837 $ 788,921 $ 2,992,837 $ 788,921
=========== =========== =========== ===========
Supplemental disclosures of
cash flow information:
Cash paid (refunded) during the
period for:
Interest $ 6,463 $ - $ 51,082 $ 2,958
=========== =========== =========== ===========
Income taxes $ - $ - $ - $ -
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Organization
1st Net Technologies, Inc. ("the Company" or "1st Net") is primarily in the
Internet commerce and services business.
On August 15, 1998, the Company acquired a controlling interest in Mariah
Communications, Inc. ("Mariah") (formerly, MC32, Inc.). Accordingly, the
accompanying consolidated financial statements of the Company include the
results of operations, financial position and cash flows of Mariah. During
the three months ended March 31, 2000, the Company completed a transaction
initiated in the latter part of 1999 whereby it sold substantially all of
Mariah's non-technology assets (Mariah retained its IP Telephony technology)
and invested $220,000 in cash in exchange for a convertible note receivable.
The note receivable was subsequently converted into 400,000 shares of common
stock of Last Mile Communication Corporation ("Last Mile").
On January 19, 1999, the Company acquired 100% of the outstanding common stock
of SSP Management Corp. ("SSP"), an entity that provides Internet public
relations services. This company was acquired in exchange for 1,000,000 of the
Company's common shares. Accordingly, the accompanying consolidated financial
statements of the Company include the results of operations, financial
position and cash flows of SSP from the date of its acquisition.
On May 1, 1999, the Company acquired a controlling interest in The Children's
Technology Group, Inc. ("CTG"). Accordingly, the accompanying consolidated
financial statements of the Company include the results of operations,
financial position and cash flows of CTG from the date of its acquisition.
This company was acquired in exchange for the exclusive licensing and
marketing rights to the Crayon Crawler Web Browser suite of modules, and
proprietary technology for the Mindwalker.
All three acquired entities had and continue to have shareholders in common
with the Company or the Company's management.
The accompanying financial statements of the Company have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. Realization of a portion of
the assets in the accompanying financial statement is dependent upon continued
profitable operations of the Company, or the realization of sufficient funds
from the sales of investment securities held or upon the Company's ability to
raise funds through future debt or equity offerings. Management believes that
actions presently being taken and current revenues being generated will
provide the opportunity for the Company to continue as a going concern and has
therefore prepared the financial statements accordingly.
2. Basis of presentation
The accompanying consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries, Mariah, SSP and CTG. These
acquisitions have been reported as purchase business combinations and were all
recorded at book value because the acquisitions were not transacted at arm's
length. Intercompany transactions and balances have been eliminated in
consolidation.
6
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The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information or footnote disclosures normally included in
complete financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the statements include all adjustments necessary, which are of a
normal and recurring nature, for the fair presentation of the results of the
interim periods presented.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1999,
included in 1st Net Technologies, Inc.'s Form 10-K reported to the Securities
and Exchange Commission. Operating results for the six months ended June 30,
2000 are not necessarily indicative of the results which may be expected for
any other interim period or for the year ended December 31, 2000. The balance
sheet at December 31, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Certain reclassifications have been made to conform
prior years' data to the current period presentation.
3. Transactions in capital stock and earnings per share
All securities issued by the Company have not been registered under the
Securities Act of 1933, as amended. Unregistered shares may not be sold,
offered for sale, transferred, pledged or hypothecated, in the absence of a
registration statement in effect with respect to the securities under such
act, or an opinion of counsel or other evidence satisfactory to the Company
that such registration is not required, or unless sold pursuant to Rule 144
under such act. The Company's free trading stock is currently involved in
limited trading on the OTC: Pink Sheets under the symbol FNTT. This activity
does not however illustrate an established "market" for the Company's stock as
described in FASB 123 (Accounting for Stock Based Compensation) or for
establishing fair value in the acquisitions involving issuance of the
Company's stock.
A significant portion of the Company's revenues includes the receipt of
capital stock in exchange for services. Much of the capital stock received in
this manner is not widely traded. Therefore the determination of its market
value in connection with recording the revenue for the services rendered in
exchange for the capital stock is often subjective and requires the judgment
of management as to the value of such capital stock.
Earnings per share is computed in accordance with SFAS No. 128, Earnings Per
Share. Under the provisions of SFAS No. 128, basic earnings per share is
computed by dividing the net loss for the period by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed by dividing the net loss for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. All of the Company's common stock equivalents were antidilutive for
the three and six months ended June 30, 2000.
7
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4. Warrants, stock options and employee stock grants
There are 236,200 warrants outstanding to purchase shares of common stock at
$5 per share. The warrants expire at the earlier of one year subsequent to
the closing of an underwritten public offering of the Company's common stock
or October 21, 2002.
The Company agreed to issue options to purchase 525,000 shares of common stock
at $3.00 per share to four individuals. Issuance of the options is subject to
the future approval of the Company's Board of Directors.
The Company has issued shares to individuals under the 1999 Stock Incentive
Plan (the "Stock Plan"). The Stock Plan allows for the issuance of up to
1,000,000 shares of the Company's common stock, subject to increase based on
the future issuance of stock. The Stock Plan provides for the grant of
incentive and non-statutory options, stock appreciation rights and the
issuance of common stock to employees and directors. The exercise price of
incentive stock options must equal at least the fair value on the date of
grant and the exercise price of non-statutory stock options and the issuance
price of common stock under the Stock Plan may be no less than 50% of the fair
value on the date of grant or issuance. The options are exercisable for a
period of up to ten years after the date of grant and generally vest over
three years.
At June 30, 2000, the Company had outstanding options to purchase 416,000
shares of common stock with an exercise price of $5.00 per share. The vesting
period for some of the options granted was accelerated over a shorter time
period than the three years provided for by the Stock Plan based on the term
of employment of the recipient. At June 30, 2000, there were 245,167 options
exercisable.
In December 1999, the Company announced the issuance of 46,907 shares of
common stock to employees. In August 2000, the Company's Board of Directors
approved the issuance of the shares. The Company recorded compensation
expense of $53,005 in the three months ended March 31, 2000, related to the
future issuance of the shares.
5. Technology Purchase Agreement
On January 14, 2000, 1st Net and Spirit 32 Development Corporation, a Colorado
corporation ("Spirit 32"), entered into a Technology Purchase and Recission
Agreement (the "Agreement"). Pursuant to the terms of the Agreement, the
Company and Spirit 32 terminated the Stock Acquisition Agreement entered into
by both parties on January 22, 1999. The Agreement released the Company and
Spirit 32 from any liability that may have arisen under the terms of the Stock
Acquisition Agreement, including funds previously advanced to Spirit 32 for
the licensing and development of the technology. As a result of the
Technology Purchase Agreement, the Stock Acquisition Agreement was deemed to
have been rescinded as of January 22, 1999.
The Technology Purchase Agreement provided that Spirit 32 sell all of its
rights, title and interest in the Mariah Internet Protocol Telecomputing
Project, the Mindwalker Series, the Crayon Crawler Browser, the Spirit 32
Voice Mailer and all the tradenames associated with the names "Crayon
Crawler", "Mindwalker" and "Mariah" to the Company. The purchase was closed
on February 14, 2000. At closing, 1st Net delivered 250,000 shares of its
restricted common stock to Spirit 32 together with cash in the amount of
$100,000.
8
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On March 22, 2000, 1st Net sold the technology obtained from Spirit 32 to CTG
in exchange for 250,000 shares of CTG common stock. CTG also issued an
additional 35,000 shares of common stock to 1st Net in order to satisfy all
past unpaid royalties in connection with the technology.
6. Asset sales
During the three months ended March 31, 2000, the Company completed a
transaction initiated during 1999 whereby the Company invested $220,000 cash
in and sold substantially all of the non-technology assets of Mariah to Last
Mile. Mariah retained its IP Telephony technology. The Company received a
10% note receivable that was subsequently converted into 400,000 shares of
Last Mile's common stock. Last Mile's chairman of the Board and Chief
Executive Officer formerly held the same positions at Mariah. Costs
associated with the investment in Last Mile totaling $286,251 are included in
the accompanying balance sheet at June 30, 2000.
On February 23, 2000, SSP sold a newsletter published by the Company along
with certain related assets to Marketbyte, L.L.C. ("Marketbyte") in exchange
for a note receivable totaling $200,000 and 10% of any future consideration
received by Marketbyte in connection with the newsletter through June 2, 2002.
Under the sale agreement, in the event that the consideration received from
Marketbyte by the Company through June 2, 2002 does not equal or exceed
$750,000, Marketbyte will be required to pay the Company the difference
between $750,000 and the consideration previously paid to the Company in
connection with the newsletter. Accordingly, the transaction has been
recorded as a current and long-term note receivable due from Marketbyte
totaling $750,000 in the accompanying balance sheet at June 30, 2000. Also
the Company recorded a gain from the sale of the newsletter less the related
assets sold totaling $566,392 during the three months ended March 31, 2000.
7. Related party transactions and significant sales
Entrepreneur Investments, L.L.C. ("EI") is one of the largest percentage
shareholders in the Company. The sole shareholder of EI serves as the
Company's Chief Executive Officer. The Company has officers and directors in
common with various other entities in related and unrelated businesses.
During the three and six months ended June 30, 2000 and 1999, the Company
subleased office space from EI for total rent expenses of $36,900, $69,961,
$24,081 and $44,458, respectively. The Company also had borrowings
outstanding from EI totaling $59,800 and $284,800 at June 30, 2000 and
December 31, 1999, respectively. The Company paid interest on the borrowings
to EI totaling $35,000 during the six months ended June 30, 2000.
At June 30, 2000 and December 31, 1999, SSP had certain holdings of corporate
securities that were obtained in connection with past services provided by the
Company. SSP has agreed to pay a former independent contractor of the Company
a commission of 8% of the proceeds realized by SSP from the future sale of
these securities.
During the three and six months ended June 30, 1999 the Company had revenues
from related parties totaling $40,000 and $120,000, respectively. There were
no accounts receivable from related parties at June 30, 2000 or December 31,
1999.
9
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8. Contingencies
The Company is currently under investigation of the United States Securities
and Exchange Commission for potential violations of securities laws. The
outcome of this investigation is indeterminable; however, no reserve has been
established for loss contingencies due to this investigation in the
accompanying financial statements.
The Company is currently involved in disputes with several former employees
concerning compensation and termination decisions. Although the outcome of
these disputes is indeterminable, management is confident that these matters
will be settled favorably. No reserves have been established in connection
with these disputes in the accompanying financial statements.
9. Sale of CTG preferred stock
On May 19, 2000, CTG sold 2,000,000 shares of Series A convertible preferred
stock at a cost of $2.00 per share to an unrelated investor. The preferred
shares are convertible into an equal number of shares of common stock and
automatically convert upon the earlier of a firmly underwritten public
offering of the Company's common stock with total proceeds of at least
$5,000,000 or the date at which the public price per common share is equal to
or greater than $4.00 (as adjusted). The Series A preferred stock contains no
provisions for mandatory dividends except as declared at the discretion of the
Board of Directors. The Series A preferred shares have voting rights in
proportion to the number of common shares into which they are convertible and
carry a liquidation preference of $2.00 per share plus any declared but unpaid
dividends.
The preferred shares included unregistered warrants to purchase an additional
1,000,000 shares of common stock at $4.00 per share. The warrants expire on
the earlier of May 19, 2003 or one year after the closing of a firmly
underwritten public offering of not less than $5,000,000. The proceeds of the
preferred stock and warrant sale totaled $3,593,525, net of offering costs and
commissions.
10
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ITEM II: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion may contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. We undertake no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date hereof.
OVERVIEW
1st Net Technologies, Inc. (the "Company" or "1st Net") derives its revenue
from services provided to the Internet and multi-media industries. Also, 1st
Net and the Company's majority owned subsidiary CTG have developed certain
proprietary technologies that management feels will in the future increase our
overall capability to generate revenue and add value for our shareholders.
In the past, the Company provided corporate awareness programs for publicly
traded companies looking to gain exposure via the Internet. The Company has
recently decided to discontinue pursuing this line of business and focus
instead primarily on the development of the previously mentioned technologies
and provision of services.
Many of 1st Net's services are billed on an hourly rate based upon a project
specification document developed in association with the client. Fees for
other services vary, based on the type of service and client.
The Company maintains three subsidiary corporations:
In January 1999, we acquired a 100% interest in SSP Management Corp., a
Colorado corporation, from a private company that is considered a related
party. Through our acquisition of that company, we built several
investment-oriented Internet Web sites and on-line newsletter publications.
In December 1999, we made a strategic decision to divest ourselves of those
types of clients and services and, where applicable, sell our
information-based assets to companies whose long-term business objective is to
participate in that business. Accordingly, we completed the sale of some of
our online newsletters to other unrelated companies in February and August
2000.
In May 1999, we acquired a controlling interest in The Children's Technology
Group, Inc. ("CTG") (formerly Tummybusters, Inc.), a Nevada corporation. CTG
is the company responsible for deploying our Crayon Crawler Kid's Safe Web
Browser and community. The business model of CTG is to build a safe and
enjoyable Internet community for children on-line.
In August 1998, we acquired a controlling interest in Mariah Communications,
Inc. ("Mariah"), a Colorado corporation. This company was responsible for
pursuing research and development into the business of Internet Protocol (IP)
Telephony. During the first quarter of 2000, the Company completed a
transaction initiated in 1999 whereby it invested $220,000 cash and tendered
substantially all of the non-technology assets of Mariah in exchange for a 10%
note receivable. The note was subsequently converted into 400,000 shares of
11
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common stock of Last Mile Communications, Inc. Mariah retains the rights to
its IP Telephony technology. The remaining assets of Mariah consist mainly of
the Last Mile's common stock acquired in this transaction.
Our historical financial information contained in this report is that of 1st
Net Technologies, Inc. and its subsidiary corporations on a consolidated
basis.
RESULTS OF OPERATIONS - SECOND QUARTER OF 2000 COMPARED TO SECOND QUARTER OF
1999
Revenues
The Company's revenues from technology consulting, user fees and marketing
services during the second quarter of 2000 declined $268,834 or 84.8% from the
same quarter during the prior year. The decrease in revenues is consistent
with the Company's previously announced plan to refocus its business away from
online corporate awareness programs for publicly traded companies, a line of
business that generated significant revenues in the past. The Company's new
major focus for future revenue growth includes 1st Net's Envoy Mail and CTG's
community based web browsers. These products have not yet generated
sufficient revenues to offset the declines from the discontinued business
focus of prior years.
The gain realized by the Company in connection with investments sold in 1999
was due primarily to the sale of one of the Company's major stock holdings.
The sale was made in order to fund shortfalls in other areas of the Company's
operations. The Company realized gains from the sale of one of its major
holdings in the second quarter of 2000 totaling $14,156.
The Company recognized gains on investments held for future resale during the
first quarter of 1999 totaling $138,335.
Operating expenses
The amount of unrecognized loss on investments held totaled $117,776 during
the second quarter of 2000. The Company experienced broad declines in the
market valuation of its remaining stock holdings during this period.
Operating expenses consist of product development, marketing and
administrative expenses. The total of these expenses decreased $60,362 or
4.8% from the prior year's level. Significant reductions in the levels of
expenses for both SSP and 1st Net were offset by substantial increases in the
total expenses of CTG in comparison to 1999 (CTG was acquired by the Company
May 1, 1999).
Across 1st Net, SSP and CTG, salaries and compensation were up $107,291 and
amortization of intangible assets increased $80,809. These increases were
offset by decreases in professional fees of $155,665 and decreases in
licensing fees of $71,787.
Other income and expense
Interest expense totaled $4,614 in 2000. Other income totaling $19,412 was
primarily the result of interest income earned on new investment funding
raised in May 2000 by CTG.
12
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RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
Revenues
The Company's revenues from technology consulting, user fees and marketing
services during the six months ended June 30, 2000 declined $426,895 or 73.6%
from the same period during the prior year. The decrease in revenues is
consistent with the Company's previously announced plan to refocus its
business away from lines of business that generated significant revenues in
the past. The Company's new major focus for future revenue growth has not yet
generated sufficient revenues to offset the declines from the discontinued
business focus of prior years.
The gain realized by the Company in connection with investments sold in 2000
totaling $601,535 was due primarily to the sale of one of the Company's major
stock holdings. The sale was made in order to fund shortfalls in other areas
of the Company's operations. During 1999, the Company recognized gains
totaling $393,694 primarily from the sale of one its major stock holdings.
The investment generating the gain in 2000 was a different stock holding from
the stock holding that generated the gain in the same period in 1999.
The Company recognized gains on investments held for future resale during the
first six months of 1999 totaling $635,396 due to the strong public market for
small capitalization stocks which comprise nearly all the Company's holdings.
Operating expenses
The amount of unrecognized loss on investments held totaled $30,949 during the
first six months of 2000. During the second quarter of 2000, the Company
experienced broad declines in the market valuation of its remaining stock
holdings, offsetting gains of $86,827 recognized during the first quarter of
2000.
Operating expenses consist of product development, marketing and
administrative expenses. The total of these expenses increased $412,945 or
20.6% from the prior year's level. The increase was due primarily to the
inclusion of the expenses of CTG during the six months ended June 30, 2000.
The Company did not acquire CTG until the second quarter of 1999. This
increase was offset partially by the decrease in operating expenses in 1st
Net.
Across 1st Net, SSP and CTG, salaries and compensation were up $275,641
(including amounts from the issuance of stock to employees totaling $53,005),
commissions for SSP were up $92,432, software development for CTG was up
$122,549, consulting expenses increased $45,700 and amortization of intangible
assets increased $178,000. The SSP commissions expense were recognized in
connection with future payments due to a former independent contractor upon
the sale of SSP's remaining securities holdings. These increases were
partially offset by decreases in professional fees of $222,235 and decreases
in licensing fees of $71,787.
Other income and expense
Interest expense increased $49,371 in 2000 from the same period in 1999. The
increase was due primarily to interest paid totaling $35,000 on borrowings
outstanding to EI during 2000.
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The gain on sale of $566,392 during 2000 was from the sale of the
OTCjournal.com newsletter in exchange for minimum proceeds from royalties and
notes receivable totaling $750,000 through June 2002.
The Company recognized a loss on disposal of property and equipment totaling
$75,067 in connection with the retirement of certain obsolete equipment.
LIQUIDITY AND CAPITAL RESOURCES
Our greatest need for cash is payment of salaries and benefits to our
employees and fees to our outside consultants. Through June 30, 2000, we
expended significant effort and committed substantial resources toward our
continued development of CTG's Crayon Crawler and 1st Net's Envoy Mail product
lines. Management believes that these investments will begin showing a return
to the Company in the future in the form of increased revenues. However, we
are unable to predict with any degree of certainty the future results of our
operations, and accordingly, make no assurance as to future cash flows from
these products.
During the first quarter of 2000, SSP concluded a sale of its newsletter
OTCjournal.com for a $200,000 note receivable and 10% of the gross noncash
compensation the buyer realizes from the operation of OTCjournal.com through
June 2002. In the event that the Company does not realize a minimum of
$750,000 from the sale of OTCjournal.com through June 2002, the buyer is
required to pay the Company $750,000 less all proceeds previously received in
connection with OTCjournal.com. The first two payment in connection with the
note receivable of $50,000 are due in January and June 2001.
In August 2000 SSP sold its newsletter InvestmentOpportunity.com to an
unrelated third party. Consideration for the newsletter is: 1) cash totaling
$100,000 paid in August 2000; 2) a $650,000 note receivable payable in fifteen
monthly installments of $20,000 beginning in October 2000 through December
2001 with a $350,000 balloon payment due January 2002; and 3) $750,000 payable
in stocks received in connection with the operation of the newsletter.
In May 2000, CTG sold 2,000,000 shares of preferred stock and warrants to
purchase common stock to an unrelated investor for net proceeds totaling
$3,593,525. Additionally, 1st Net realized proceeds totaling $84,712 from the
sale of 42,356 shares of CTG during January 2000.
At June 30, 2000, the Company had cash and net working capital of $2,992,837
and $2,360,453, respectively. CTG's portion of this cash totaled $2,785,550
at June 30, 2000 and 1st Net owns 59.8% of the outstanding common stock of CTG
as of June 30, 2000.
On a going forward basis, 1st Net and its 100% owned subsidiary SSP continue
to maintain several holdings of restricted and marketable securities. It is
impossible however to ascertain the actual value that will be eventually
realized by the Company when these securities are sold.
Management believes that proceeds from the sale of investments held in
addition to cash payments to be received from the transactions described
above, will be sufficient to make up projected shortfalls from the results of
its operations through the next twelve months.
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RISKS AND UNCERTAINTIES
The risks and uncertainties described below are those that we currently deem
to be material and that we believe are specific to our company and our
industry. If any of these or other risks actually occurs, the trading price
of our common stock could decline, and you may lose all or part of your
investment. We have a history of losses and absent the realized and
unrealized gains on securities held and sold and the sale of assets during the
first quarter of 2000, we would have suffered a significantly greater loss
than the $896,620 incurred year to date. Also, because we expect our
operating expenses to increase in the future, we may not be profitable again.
We have an accumulated deficit of $2,850,944 at June 30, 2000. We incurred
net losses of $1,525,313 and $286,076 for the years ended December 31, 1999
and 1998, respectively and will probably have a significant net loss for the
year ended December 31, 2000. We expect to continue to incur significant net
losses until we are able to generate sufficient revenues from 1st Net's Envoy
Mail product and/or CTG's community based web browser-related products and
services. While we are unable to predict accurately our future operating
expenses, we currently expect these expenses to increase substantially, as we,
among other things:
* expand our selling and marketing activities;
* increase our development efforts to upgrade existing and develop new
products and technologies;
* upgrade our operational and financial systems, procedures and controls; and
* hire additional necessary personnel.
We will need to significantly increase our revenues to achieve and maintain
profitability. If we fail to generate significant revenues from software
licensing of 1st Net's Envoy Mail or from subscription fees to CTG's community
based browsers and related sales of merchandise and advertising revenues, we
will continue to experience losses indefinitely. We may not be able to
achieve or maintain profitability. We also may fail to accurately estimate
and assess our increased operating expenses as we grow. If our operating
expenses exceed our expectations, our financial performance will be adversely
affected, which could cause the price of our common stock to decline. We are
an early-stage company with an unproven business model, which makes it
difficult to evaluate our current business and future prospects. We have only
a limited operating history upon which to base an evaluation of our current
business and future prospects.
We only recently began focusing on the Envoy Mail product. Also, CTG is still
in the early stages of procuring distribution agreements for its community web
browsers. As a result, the revenue and income potential of our business and
our market are unproven. Because of our limited operating history and because
the markets for the Company's products are relatively new and rapidly
evolving, we have limited insight into trends that may emerge and affect our
business. We may make errors in predicting and reacting to relevant business
trends, which could harm our business.
You should consider an investment in our stock in light of the risks,
uncertainties and difficulties frequently encountered by early-stage companies
in new and rapidly evolving markets such as ours. We may not be able to
successfully address any or all of these risks. Failure to adequately do so
could cause our business, results of operations and financial condition to
suffer. Our future financial performance also will depend, in part, on our
ability to diversify our offerings by successfully developing, introducing and
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gaining customer acceptance of new products and enhanced versions of existing
products. We cannot assure you, however, that we will be successful in
achieving market acceptance of any new products that we develop or of enhanced
versions of existing products. Any failure or delay in diversifying our
existing offerings could harm our business, results of operations and
financial condition.
The market for CTG's community based browsers is emerging and if we are not
successful in promoting the benefits to children of our products, our growth
may be limited. In addition, there may be a time-limited opportunity to
achieve and maintain a significant share of the market for children safe
Internet communities due to the emerging nature of this market and the
substantial resources available to our existing and potential competitors.
We currently sell our products both indirectly and directly. We intend to
primarily market 1st Net's Envoy Mail product directly with a sales force
built internally. Due to the new nature of the product, its market potential
is uncertain. Also, if 1st Net is not able to attract and retain effective
members of its sales force, its prospects for realizing profits from the
licensing of Envoy Mail will be diminished.
For CTG's community based Web browsers, we intend to rely on distribution
agreements with large consumer product companies that will include our web
browser with their product. We will custom brand the software according to
the specifications of our distribution partners. We will depend heavily on
our distribution partners to get our software in the hands of the targeted
consumer market. We will need to enter into new relationships to increase our
current and future market share and revenue. We cannot assure you that we
will be able to enter into new relationships, or that any new relationships
will be available on commercially reasonable terms. If we are unable to enter
into new relationships, we would not have a viable and cost effective channel
to reach our target market and our operating results could suffer. Our
reliance on our distribution partners could result in reduced revenue growth
because we have little control over them. None of these parties is obligated
to continue distributing our products.
We face increasing competition from better-established companies that may have
significantly greater resources, which could prevent us from increasing
revenue or achieving profitability. The market for our products is intensely
competitive and is likely to become even more so in the future. Increased
competition could result in pricing pressures, reduced sales, reduced margins
or the failure of either Envoy Mail or our community based browsers to achieve
or maintain more widespread market acceptance, any of which would have a
material adverse effect on our business, results of operations and financial
condition.
Many of our current and potential competitors could enjoy substantial
competitive advantages, such as:
* greater corporate name recognition and larger marketing budgets and
resources;
* established marketing relationships and access to larger customer bases; and
* substantially greater financial, technical and other resources.
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As a result, they may be able to respond more quickly and effectively than we
can to new or changing opportunities, technologies, standards or customer
requirements. Also, such competitors may be able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, make more
attractive offers to potential employees, distribution partners, advertisers
and content providers and may be able to respond more quickly to new or
emerging technologies and changes in Web user requirements. Further, there
can be no assurance that they will not develop services that are equal or
superior to ours or that they achieve greater market acceptance than our
product and service offerings. For all of the foregoing reasons, we may not
be able to compete successfully against our current and future competitors.
Our future success will depend in part upon the ability of our senior
management to manage growth effectively. This will require us to hire and
train additional personnel to manage our expanding operations. In addition, we
will be required to continue to improve our operational, financial and
management controls and our reporting systems and procedures. If we fail to
successfully manage our growth, we will be unable to execute our business
plan. If we acquire any companies or technologies in the future, they could
prove difficult to integrate, disrupt our business, dilute stockholder value
and adversely affect our operating results. We may acquire or make
investments in complementary companies, services and technologies in the
future. As a result, if we fail to properly evaluate and execute acquisitions
or investments, our business and prospects may be seriously harmed.
We are dependent on our employees and management, and the loss of any key
member of this team may prevent us from implementing our business plan in a
timely manner. Our success depends largely upon the continued services of our
executive officers and other key management and development personnel. We are
also substantially dependent on the continued service of our existing
engineering personnel and our outside development partners because of the
complexity of our products and technologies. We do not have employment
agreements with a majority of our executive officers, key management or
development personnel and, therefore, they could terminate their employment
with us at any time without penalty. We do not maintain key person life
insurance policies on any of our employees. The loss of one or more of our
key employees could seriously harm our business, results of operations and
financial condition. We cannot assure you that in such an event we would be
able to recruit personnel to replace these individuals in a timely manner, or
at all, on acceptable terms.
Our success and ability to compete are dependent to a significant degree on
our proprietary technology. We rely primarily on state and federal copyright,
trade secret and trademark common law to protect our proprietary technology.
We have several unregistered trademarks, various unregistered copyrights and
certain licenses of technology with third parties. We have no patents or
other registered intellectual property, other than certain trademarks. The
source code for our proprietary software is protected as a trade secret but
not as a formally copyrighted work. At present, some of our trademarks or
copyrights are not registered with the United States government; therefore, we
do not enjoy the same degree of protection that we might otherwise have if
they were already registered (as registration puts others on notice that
particular copyrights and trademarks are in use and protected). The Company
intends to eventually register all of its proprietary names and marks. The
loss of any of our unregistered trademarks or copyrights (particularly source
codes) could have a material adverse effect on our business.
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It is our policy to enter into confidentiality and non-competition agreements
with our associates and generally to control access to and distribution of our
proprietary technology. Notwithstanding the precautions taken by us to
protect our intellectual property rights, it is possible that third parties
may copy or otherwise obtain and use our proprietary technology without
authorization or otherwise infringe on our proprietary rights. It is also
possible that third parties may independently develop technologies similar to
those of our own. Policing unauthorized use of our intellectual property
rights may be difficult, particularly because it is difficult to control the
ultimate destination or security of information transmitted over the Internet.
In addition, the laws of foreign countries may afford inadequate protection of
intellectual property rights.
We may need to engage in litigation in order to enforce our intellectual
property rights in the future or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial
costs and diversion of management and other resources, either of which could
have a material adverse effect on our business, operating results and
financial condition. We also use certain third-party technology, such as MS
Agent (TM) software from Microsoft, and data and content from third parties.
In these license agreements, the licensors have generally agreed to defend,
indemnify and hold us harmless with respect to any claim by a third party that
the licensed software or content infringes any person's proprietary rights.
There can be no assurance that the outcome of any litigation between such
licensors and a third party or between us and a third party will not lead to
royalty obligations for which we are not indemnified or for which such
indemnification is insufficient, or that we will be able to obtain any
additional license on commercially reasonable terms, if at all.
In the future, we may seek to license additional technology or content in
order to enhance our current features or to introduce new services, such as
certain of the community features we may introduce. There can be no assurance
that any such licenses will be available on commercially reasonable terms, if
at all. The loss of or inability to obtain or maintain any of these
technology licenses could result in delays in introduction of new services
until equivalent technology, if available, is identified, licensed and
integrated, which could have a material adverse effect on our business,
results of operations and financial condition.
Because we license some data and content from third parties, our exposure to
copyright infringement actions may increase because we must rely upon such
third parties for information as to the origin and ownership of such licensed
content. We generally obtain representations as to the origins and ownership
of such licensed content and generally obtain indemnification to cover any
breach of any such representations. However, there can be no assurance that
such representations will be accurate or that such indemnification will be
sufficient to provide adequate compensation for any breach of such
representations. There can be no assurance that infringement or other claims
will not be asserted or prosecuted against us in the future, whether resulting
from our internally developed intellectual property or licenses or content
from third parties. Any future assertions or prosecutions could materially
adversely affect our business, results of operations and financial condition.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel or
require us to introduce new content or trademarks, develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on acceptable terms,
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if at all. In the event of a successful claim of infringement and our failure
or inability to introduce new content or trademarks, develop non-infringing
technology or license the infringed or similar technology on a timely basis,
our business, results of operations and financial condition could be
materially adversely affected.
The laws and regulations applicable to the Internet and our services are
evolving and unclear and could damage our business. There are currently few
laws or regulations directly applicable to access to, or commerce on, the
Internet. Due to the increasing popularity and use of the Internet, it is
possible that laws and regulations may be adopted, covering issues such as
user privacy, defamation, pricing, taxation, content regulation, quality of
products and services, and intellectual property ownership and infringement.
Such legislation could expose us to substantial liability, as well as dampen
the growth in use of the Internet, decrease the acceptance of the Internet as
a communications and commercial medium, or require us to incur significant
expenses in complying with any new regulations.
The European Union has recently adopted privacy and copyright directives that
may impose additional burdens and costs on international operations. In
addition, several telecommunications carriers, including America's Carriers'
Telecommunications Association, are seeking to have telecommunications over
the Internet regulated by the Federal Communications Commission ("FCC"), in
the same manner as other telecommunications services. Because the growing
popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet usage have
begun to experience interruptions in phone services, local telephone carriers,
such as Pacific Bell, have petitioned the FCC to regulate the Internet and to
impose access fees. Increased regulation or the imposition of access fees
could substantially increase the costs of communicating on the Internet,
potentially decreasing the demand for our service.
A number of proposals have been made at the federal, state and local level
that would impose additional taxes on the sale of goods and services through
the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce and could adversely affect us. Also, the United
States Congress ("Congress") recently enacted the Digital Millennium Copyright
Act, which is intended to reduce the liability of online service providers for
listing or linking to third-party Web sites that include materials that
infringe copyrights.
We are aware of this legislation, but cannot currently predict the effect, if
any, that this legislation will have on our business. There can be no
assurance that this legislation will have significant additional costs on our
business or subject us to additional liabilities. Moreover, the applicability
to the Internet of existing laws governing issues such as property ownership,
copyright, defamation, obscenity and personal privacy is uncertain. We may be
subject to claims that our services violate such laws. Any new legislation or
regulation in the United States or abroad or the application of existing laws
and regulations to the Internet could damage our business and cause the price
of our common stock to decline. Due to the global nature of the Internet, it
is possible that the governments of other states and foreign countries might
attempt to regulate its transmissions or prosecute us for violations of their
laws. We might unintentionally violate such laws. Such laws may be modified,
or new laws may be enacted, in the future. Any such development could damage
our business.
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The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the Securities and
Exchange Commission (the "Commission"), the NASD, various stock exchanges, and
other regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. As a matter of public policy,
regulatory bodies are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
customers participating in those markets. Our failure to comply with any of
these laws, rules or regulations could result in censure, fine, the issuance
of cease-and-desist orders, any of which could have a material adverse effect
on our business, financial condition and operating results.
The Securities and Exchange Commission has informed us that it has commenced
an investigation with respect to SSP's past business activities. The outcome
of this investigation is uncertain at the present time.
Because the equity securities that we currently hold amount to more than 40%
of our total assets, we may be deemed to be an "Investment Company" and
required to register under the Investment Company Act of 1940 (the "Act"). We
view this situation to be an anomaly, however, and we do not intend to be
engaged in the business of investing, reinvesting owning, holding or trading
in securities. We intend to rectify this situation within the next twelve
months so that the amount of our equity securities will not exceed 40% of our
assets. In the event that we are unsuccessful (or in the event that this
situation occurs more than once in any three year period), it is likely that
we would be forced to register under the Act which would significantly
increase out regulatory burdens and professional fees.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 2000, we were not a party to any material pending legal
proceedings, and we are not aware of any material threatened legal proceedings
to which we would be a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No events occurred during the quarter covered by this Quarterly Report that
would require response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three
months ended June 30, 2000
ITEM 5. OTHER INFORMATION
No events occurred during the quarter covered by this Quarterly Report that
would require response to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(27) Financial Data Schedule (see below).
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed during the quarter ended June
30, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunder duly authorized.
1ST NET TECHNOLOGIES, INC.
Dated: August 24, 2000 By: /s/ James H. Watson, Jr.
James H. Watson, Jr., Principal
Executive Officer and Principal
Accounting Officer of the Registrant
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ James H. Watson, Jr. Chairman, Chief Executive August 24, 2000
James H. Watson, Jr. Officer and Director
/s/ Clifford J. Smith President and Director August 24, 2000
Clifford J. Smith
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EXHIBIT METHOD OF FILING
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27. FINANCIAL DATA SCHEDULE Filed herewith electronically
