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 September 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
incorporation or organization) Identification No.)
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 / /
As of September 30, 2000, there were 6,062,292 shares of the Registrant's
common stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
September 30,
2000
<S> <C>
ASSETS
Current assets:
Cash $ 1,690,176
Accounts receivable, net of allowance for
doubtful accounts of $32,730 28,349
Marketable securities 59,406
Current portion of notes receivable 100,000
Other current assets 18,907
------------
Total current assets 1,896,838
Investment in LaForza Automobiles, Inc. 60,000
Investment in Last Mile Communication Corporation 220,000
Notes receivable 665,000
Property and equipment, at cost net of accumulated
depreciation of $122,249 357,734
Other assets 19,342
------------
$ 3,218,914
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 567,240
Notes payable 50,000
Notes payable and amounts due to related parties 19,800
Current portion of capital lease obligations 70,585
Accrued personnel costs 387,560
Deferred revenues 48,750
Income taxes payable 4,000
------------
Total current liabilities 1,147,935
Long term portion of capital lease obligations 201,785
------------
Total liabilities 1,349,720
Commitments and contingencies
Minority interests in subsidiaries 572,010
Stockholders' equity:
Preferred stock -
Common stock 6,063
Common stock warrants 204,041
Additional paid in capital 7,935,367
Accumulated deficit (6,904,043)
Accumulated other comprehensive income 55,756
------------
Total stockholders' equity 1,297,184
------------
$ 3,218,914
============
</TABLE>
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 nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Technology consulting, user fees and
marketing services $ 64,886 $ 466,033 $ 218,229 $ 1,129,784
Operating expenses 1,413,782 3,051,063 3,975,893 7,356,246
---------------------------------------------------------------------------------------------------------------
Loss from operations (1,348,896) (2,585,030) (3,757,664) (6,226,462)
Other income and expense:
Realized gain on investments sold 54,285 232,449 1,209,107 623,175
Unrealized gain on investments held - - (40,000) -
Interest expense (11,217) (6,870) (64,536) (15,565)
Gain on sale of assets 100,000 - 835,359 -
Other income 24,566 5,390 48,533 16,758
---------------------------------------------------------------------------------------------------------------
Loss before provision for income taxes and minority
interest in loss of subsidiaries (1,181,262) (2,354,061) (1,769,201) (5,602,094)
Provision for income taxes - - 5,902 800
---------------------------------------------------------------------------------------------------------------
Loss before provision for minority interest
in undistributed loss of subsidiaries (1,181,262) (2,354,061) (1,775,103) (5,602,894)
Minority interest in undistributed loss of
subsidiaries 388,910 50,240 911,287 150,354
---------------------------------------------------------------------------------------------------------------
Net loss $ (792,352) $(2,303,821) $ (863,816) $(5,452,540)
===============================================================================================================
Loss per share:
Basic and diluted $ (0.13) $ (0.40) $ (0.14) $ (0.96)
Weighted average common shares outstanding:
Basic and diluted 6,010,069 5,753,700 5,987,545 5,658,034
===============================================================================================================
</TABLE>
See accompanying notes.
4
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1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating activities
Net loss $ (792,352) $(2,303,821) $ (863,816) $(5,452,540)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 32,286 28,503 89,831 85,438
Changes in minority interests in subsidiaries (388,910) (50,240) (911,287) 596
Gain on sale of assets (100,000) - (835,359) -
Realized gain on investments sold (54,285) (232,449) (1,209,107) (623,175)
Reduction of note payable in exchange for services (5,090) - (18,000) -
Stock based employee compensation - - - 1,339,425
Stock based payments for services and technology - - 282,500 98,250
Revenues received in the form of stock - (236,173) - (258,673)
Changes in operating assets and liabilities:
Accounts receivable (3,139) 53,222 39,149 (61,843)
Other assets 10,956 (163,978) (26,007) (225,859)
Accounts payable and accrued liabilities 47,467 815,235 (88,551) 1,139,284
Accrued personnel costs (127,710) 64,013 151,908 114,783
Deferred revenues 48,750 - 48,750 -
Income taxes payable - 800 1,600 4,000
---------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities (1,332,027) (2,024,888) (3,338,389) (3,840,314)
Investing activities
Additions to property and equipment (41,029) (74,348) (51,180) (229,989)
Changes in marketable securities 52,280 1,409,878 1,734,759 1,452,465
Repayments of notes and loans receivable 85,000 - 85,000 330,882
---------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities 96,251 1,335,530 1,768,579 1,553,358
Financing activities
Repayments of capital lease obligations (19,229) (18,617) (55,240) (23,496)
Repayments of notes payable (47,656) - (316,172) (219,269)
Net proceeds from issuance of common stock of Mariah - - - 760,000
Net proceeds from issuance of common stock by CTG - - 25,000 750,764
Net proceeds from issuance of CTG preferred stock
and warrants - - 3,593,525 -
Net proceeds from issuance of preferred stock and
warrants - - - 1,007,913
---------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (66,885) (18,617) 3,247,113 2,275,912
---------------------------------------------------------------------------------------------------------------
Increase in cash (1,302,661) (707,975) 1,677,303 (11,044)
Cash at beginning of period 2,992,837 715,727 12,873 18,796
---------------------------------------------------------------------------------------------------------------
Cash at end of period $ 1,690,176 $ 7,752 $ 1,690,176 $ 7,752
===============================================================================================================
</TABLE>
See accompanying notes.
5
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1st NET TECHNOLOGIES, INC. and Subsidiaries
Notes to consolidated financial statements
(unaudited)
1. Organization
1st Net Technologies, Inc. ("the Company") is primarily in the Internet
commerce and services business.
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 future
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 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 Communications, Inc.
("Mariah"), SSP Management Corp. ("SSP") and Children's Technology Group, Inc.
("CTG"). These acquisitions have been accounted for in a manner similar to a
pooling-of-interests because the Company and the acquired companies had
shareholders and management in common prior to the acquisition. Intercompany
transactions and balances have been eliminated in consolidation.
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-QSB and Item 310(b) of Regulation SB.
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-KSB reported to the
Securities and Exchange Commission. Operating results for the three and nine
months ended September 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. Certain reclassifications have been made to conform prior
years' data to the current period presentation.
6
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1st NET TECHNOLOGIES, INC.
and Subsidiaries
Notes to consolidated financial statements
(unaudited)
3. Earnings per share
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 income or loss for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income or loss per share is computed by dividing the net income 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
totaling 336,200 and 311,200 were antidilutive for the three and nine months
ended September 30, 2000 and 1999, respectively.
4. Warrants, stock options and employee stock grant
There are 236,200 warrants outstanding to purchase shares of common stock at
$5.00 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.
There are 75,000 warrants outstanding to purchase common stock outstanding
with an exercise price of $3.50 per share. The warrants expire March 31,
2001.
The Company agreed to issue warrants to purchase 525,000 shares of common
stock at $3.00 per share to four employees, subject to the approval of the
Company's Board of Directors. When the issuance of the warrants is approved
by the Board of Directors, they will be immediately vested and will expire
five years from the date of Board approval.
During 1999, the Company announced its intention to issue options to employees
to purchase common stock at an exercise price of $5.00 per share, subject to
the future approval of the Company's Board of Directors. There are 272,000
shares of common stock that would be subject to this future option grant. The
vesting period for the options to be granted will vary based on the terms of
employment of the recipients at the time the options were announced, but in no
event will exceed three years from the time of the announcement of the options
in 1999. None of the options to be granted will be issued to officers or
directors.
In April 1999 pursuant to an employment agreement, the Company issued 150,000
options to purchase common stock at $5.00 per share to a former employee. At
the time the former employee voluntarily terminated his employment with the
Company in November 1999, there were 25,000 options vested. The options will
expire on November 30, 2000 if not exercised on or prior to that date.
7
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1st NET TECHNOLOGIES, INC.
and Subsidiaries
Notes to consolidated financial statements
(unaudited)
In December 1999, the Company announced the issuance of shares of common stock
to employees. In August 2000, the Company's Board of Directors approved the
issuance of 58,592 shares. The shares were distributed in September 2000.
The Company recorded compensation expense of $53,005 during the year ended
December 31, 1999, related to the future issuance of the shares.
5. Technology Purchase Agreement
In January 1999, the Company entered into an agreement to purchase in the
future all of the issued and outstanding stock of Spirit 32 Development
Corporation ("SP32") in exchange for 450,000 shares of 1st Net's common stock.
The acquisition was not consummated and was formally rescinded in February
2000. The rescission agreement released the Company and SP32 from any
liability that may have arisen under the terms of the original agreement for
1st Net to acquire SP32, including funds previously advanced by 1st Net for
the licensing and development of in-process technology.
Included in the rescission agreement, SP32 sold all of its rights, title and
interest in technology being developed by both Mariah and CTG. The release
also included trade names in connection with the technology. At the close of
the rescission agreement, 1st Net delivered 250,000 shares of its restricted
common stock to SSP together with cash totaling $100,000. The Company
recorded a charge to operations totaling $382,500 in connection with this
transaction, as the technology being obtained was in-process research and
development at the time of the rescission agreement. In March 2000, 1st Net
sold the rights to certain of the technology obtained from SP32, namely the
Crayon Crawler Browser and the Mindwalker Series, to CTG in exchange for
250,000 shares of CTG common stock.
6. Asset sales
In 1999, Mariah received a note receivable from Last Mile Communications
Corporation ("Last Mile") in exchange for $220,000 cash. The note was
subsequently converted into the restricted shares of Last Mile. Last Mile's
Chief Executive Officer and Chairman of the Board of Directors formerly held
the same position with Mariah. In March 2000, Mariah subsequently sold
substantially all of its operating assets to Last Mile in exchange for Last
Mile's assumption of future expense commitments. Mariah retained the rights
to its IP telephony technology.
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
8
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1st NET TECHNOLOGIES, INC.
and Subsidiaries
Notes to consolidated financial statements
(unaudited)
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 $735,359 in the accompanying statement of operations for
the three months ended March 31, 2000.
In July 2000, SSP agreed to sell its SmallCapDigest.com and
InvestmentOpportunity.com Internet newsletters, including their Web sites,
opt-in databases, and URL's, to Millennium Financial Publishing, LLC
("Millennium"), an unrelated business. The Company will receive consideration
totaling $1,500,000 as follows: 1) $100,000 was paid to SSP at signing; 2)
monthly installments ranging from $15,000 to $20,000 through December 1, 2001
totaling $325,000; 3) $325,000 due on or before January 1, 2002; 4) 25% of all
stock consideration paid to the buyer by its client companies until the total
stock consideration totals $750,000; and 5) cash totaling up to $750,000 to
the extent the stock consideration does not have a total value (as defined)
equal to $750,000. The Company realized a gain from the sale of the
newsletters totaling $100,000 in the third quarter that represented the cash
received to date. The Company will recognize additional gains from the sale
of the newsletters as the proceeds are received on the notes receivable from
the buyer. The Company has chosen to recognize the gain on sale of the
newsletter in accordance with the installment method due to uncertainties in
connection with the receipt of future payments from the buyer.
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 nine months ended September 30, 2000 and 1999, the
Company subleased office space from EI for total rent and utilities expenses
of $48,560, $28,667, $121,311 and $78,794, respectively. The Company also had
borrowings outstanding from EI totaling $19,800 at September 30, 2000. The
Company paid interest on the borrowings to EI totaling $35,000 during the nine
months ended September 30, 2000.
At September 30, 2000, 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 nine months ended September 30, 1999 the Company had
revenues from related parties totaling $192,500 and $312,500, respectively.
9
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1st NET TECHNOLOGIES, INC.
and Subsidiaries
Notes to consolidated financial statements
(unaudited)
8. 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 the
Company and its 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:
1. 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.
2. 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.
3. 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
11
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exchange for a 10% note receivable. The note was subsequently converted into
400,000 shares of 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 third quarter of 2000 declined $401,147 or 86.1% 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 EnvoyMail 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.
Operating expenses
Operating expenses consist of product development, marketing and
administrative expenses. The total of these expenses decreased $1,637,281 or
53.7% from the prior year's level. Significant reductions in the levels of
expenses for both SSP and 1st Net were offset partially by increases in the
total expenses of CTG in comparison to 1999 (CTG was acquired by the Company
May 1, 1999).
Other income and expense
The gains realized by the Company in connection with investments sold in both
2000 and 1999 were due to the sales of securities received previously in lieu
of cash revenue and held for sale. Gains from sales of investments totaled
$54,285 in 2000 compared to $232,449 in 1999. The sales were made in order to
fund shortfalls in other areas of the Company's operations.
Interest expense totaled $11,217 in 2000 compared to $6,870 in 1999. The
interest expense arose primarily in connection with capital lease equipment
financing.
The Company realized a gain from the sale of one of its newsletters totaling
$100,000 in the third quarter. The buyer of the newsletter is committed to
make additional payments in stock and cash totaling $1,400,000. The Company
will recognize additional gains from the sale of the newsletter as the
proceeds are received on the notes receivable from the buyer. The Company has
12
<PAGE>
chosen to recognize the gain on sale of the newsletter in accordance with the
installment method due to the uncertainties involved with the receipt of
future payments from the buyer.
Other income totaling $24,566 was primarily the result of interest income
earned on new investment funding raised in May 2000 by CTG.
RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
Revenues
The Company's revenues from technology consulting, user fees and marketing
services during the nine months ended September 30, 2000 declined $911,555 or
80.7% 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.
Operating expenses
Operating expenses consist of product development, marketing and
administrative expenses. The total of these expenses decreased $3,380,353 or
46.0% from the prior year's level. Included in operating expenses in the nine
months ended September 30, 1999 were charges totaling $1,658,587 related to
the issuance of common stock and warrants to employees and to an outsider. In
2000 the Company recognized charges to operations totaling $382,500 for the
purchase of in-process technology with $100,000 cash and 250,000 shares of
common stock. The rest of the difference between 2000 and 1999 of $2,104,266
related to substantial costs incurred in connection with some of the Company's
software being developed in 1999. These decreases also included decreases in
the operating costs of 1st Net. These decreases were partially offset by
increases due to the inclusion of the expenses of CTG during the nine months
ended September 30, 2000. The Company did not acquire CTG until the second
quarter of 1999.
Other income and expense
The gain realized by the Company in connection with investments sold in 2000
totaling $1,209,107 was due to the sales of securities received previously in
lieu of cash revenue and held for sale. The sales were made in order to fund
shortfalls in other areas of the Company's operations. During 1999, the
Company recognized gains totaling $623,175 from the sale of its stock
holdings.
The Company recognized a further write-down to the cost basis of its holdings
in the common stock of LaForza Automobiles, Inc. ("LaForza") during the first
quarter of 2000 totaling $40,000. The write-down was precipitated by a
further decline in the value of the restricted stock of LaForza that
13
<PAGE>
management deemed likely to be of a permanent nature. Accordingly, the cost
basis of the Company's LaForza holdings have been permanently adjusted to
reflect their new value and will not be written up in the event of a future
recovery in their value.
Interest expense increased $48,971 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.
The gain on sale of $835,359 during 2000 was from the sale of the Company's
newsletters to outside parties.
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 September 30, 2000, we
expended significant effort and committed substantial resources toward our
continued development of CTG's Crayon Crawler and 1st Net's EnvoyMail 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 payments in connection with the
note receivable of $50,000 are due in January and June 2001.
In July 2000 SSP sold its remaining (2) newsletters SmallCapDigest.com and
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 monthly installments ranging from $15,000 to
$20,000 through December 2001 with a $325,000 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 $114,570 from
the sale of 42,356 shares of CTG during January 2000.
At September 30, 2000, the Company had cash and net working capital of
$1,690,176 and $748,903, respectively. CTG's portion of this cash totaled
$1,625,637 at June 30, 2000 and 1st Net owns 59.8% of the outstanding common
stock of CTG as of September 30, 2000.
14
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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.
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 further, and you may lose all or part of
your investment. We have a history of losses and absent the realized gains on
securities held and sold and the sale of assets during 2000, we would have
suffered a significantly greater loss than the $863,816 incurred year to date.
Also, because we expect our operating expenses to increase in the future, we
may never be profitable. We have an accumulated deficit of $6,904,043 at
September 30, 2000. We incurred net losses of $5,238,406 and $652,884 for the
years ended December 31, 1999 and 1998, respectively and will 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 EnvoyMail 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 EnvoyMail 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.
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We only recently began focusing on the EnvoyMail 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
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 EnvoyMail 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 EnvoyMail 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.
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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 EnvoyMail 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.
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
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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.
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.
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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,
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
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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.
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.
In the past, equity securities held by the Company amounted to more than 40%
of our total assets. Accordingly, it was possible that could 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
The Securities and Exchange Commission (the "Commission") had been
investigating the business affairs of our wholly-owned subsidiary, SSP
Management, Inc. ("SSP"). By letter dated October 31, 2000, the Commission
advised SSP that the investigation had terminated and that, at this time, no
further enforcement recommendation is anticipated.
We are 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) On September 21, 2000, the Company issued 58,592 unregistered shares of
its common stock to employees in connection with services rendered during
the year ended December 31, 1999. The exemption claimed for this
transaction is Section 4(2) under the Securities Act of 1933 in that the
offering was limited to employees under a compensatory arrangement.
(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 September 30, 2000.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
September 30, 2000.
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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: November 9, 2000 By: /s/ James H. Watson, Jr.
-----------------------------------------
James H. Watson, Jr., Principal Executive
Officer and Principal Accounting Officer
of the Registrant
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