U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For
the transition period from ______________to _______________
Commission file number 001-14815
ONVANTAGE, INC.
---------------
(Exact name of small business issuer as specified in its charter)
Nevada 77-0516686
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
333 West Santa Clara Street, Suite 1000, San Jose, California, 95113
--------------------------------------------------------------------
(Address of principal executive offices)
(408) 521-6100
--------------
(Issuer's telephone number)
ZSTAR ENTERPRISES, INC
595 Burrard Street, Suite 3000, Vancouver, B.C. V7X 1L4
Former Fiscal Year: February 29, 2000
-------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of common
equity, $0.001 par value as of November 14, 2000 was 31,761,756 shares.
Transitional Small Business Disclosure Format (Check one): Yes No X
---- ----
<PAGE>
ONVANTAGE, INC.
<TABLE>
INDEX
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION.................................................... 1
Item 1. Condensed Financial Statements (Unaudited)................................. 1
Condensed Balance Sheets as of September 30, 2000 and December 31, 1999.... 1
Condensed Statements of Operations for the Three Months and Nine Months
Ended September 30, 2000 and 1999.......................................... 2
Condensed Statements of Cash Flows for the Three Months and Nine Months
Ended September 30, 2000 and 1999.......................................... 3
Notes to Condensed Financial Statements.................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 6
PART II. OTHER INFORMATION......................................................... 15
Item 2. Changes in Securities...................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........................ 15
Item 6. Exhibits and Reports on Form 8-K........................................... 15
SIGNATURES.......................................................................... 16
EXHIBITS
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................................. $ 796,959 $ 14,800
Prepaid expenses and deposits............................................. 100,815 14,573
------------ -----------
Total current assets................................................. 897,774 29,373
PROPERTY AND EQUIPMENT, net.................................................... 583,117 66,668
OTHER ASSETS................................................................... 101,655 5,143
------------ -----------
Total Assets......................................................... $ 1,582,546 $ 101,184
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable.......................................................... $ 249,969 $ 355,809
Accrued expenses.......................................................... 75,651 9,851
Accrued interest payable.................................................. 105,125 22,819
Related party notes payable............................................... 2,149,413 1,089,413
Capital lease obligations................................................. 15,450 -
------------ -----------
Total current liabilities............................................ 2,595,607 1,477,892
CAPITAL LEASE OBLIGATIONS, LONG TERM........................................... 143,919 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock Series A, $1.00 par value, 5,000,000 shares authorized; none
issued and outstanding.................................................. - -
Common stock, $0.001 par value, 100,000,000 shares authorized; 31,385,000 and
30,899,224 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively......................................... 31,385 30,899
Additional paid-in capital................................................ 3,844,885 504,273
Accumulated deficit during development stage.............................. (5,033,250) (1,911,880)
------------ -----------
Total stockholders' deficit.......................................... (1,156,980) (1,376,708)
------------ -----------
Total liabilities and stockholders' deficit.......................... 1,582,546 101,184
============ ===========
</TABLE>
See notes to condensed financial statements
1
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 25,
THREE MONTHS ENDED NINE MONTHS ENDED 1999) TO
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER
2000 1999 2000 1999 30, 2000
------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Research and Development................... $ 312,172 $ 659,377 $ 645,341 $ 717,905 $ 1,780,887
Selling, general and administrative........ 1,417,890 245,550 2,404,834 345,493 3,158,166
------------- ------------- ------------ ------------ ------------
Total operating expense.............. 1,730,062 904,927 3,050,175 1,063,398 4,939,053
------------- ------------- ------------ ------------ ------------
OPERATING LOSS................................. (1,730,062) (904,927) (3,050,175) (1,063,398) (4,939,053)
Net interest income (expense).................. 12,546 (6,606) (71,195) (7,450) (94,197)
------------- -------------- ------------ ------------ ------------
NET LOSS....................................... $ (1,717,516) $ (911,533) $ (3,121,370) $ (1,070,848) $ (5,033,250)
============= ============= ============ ============ ============
Basic and diluted (loss) per share............. $ (0.06) (0.05) (0.10) (0.08) $ (0.21)
============= ============= ============ ============ ============
Weighted average shares outstanding used to
compute basic and diluted net loss per
share...................................... $ 31,242,717 $ 17,250,980 $ 31,073,157 $ 13,402,720 $ 24,460,096
============= ============= ============ ============ ============
</TABLE>
See notes to condensed financial statements
2
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 25,
1999) TO
NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER
2000 1999 30, 2000
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................................... $ (3,121,370) $ (1,070,848) $ (5,033,250)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 37,626 - 57,181
Stock-based compensation expense................................ - 28,175 29,843
Changes in assets and liabilities:
Prepaid expenses........................................... (86,242) (1,580) (100,815)
Accounts payable........................................... (105,840) 16,002 249,969
Accrued liabilities........................................ 65,800 7,830 75,651
Accrued interest expense................................... 82,306 7,450 105,125
------------- ------------- ------------
Net cash used in operating activities................. (3,127,720) (1,012,971) (4,616,296)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment............................... (365,545) (10,582) (434,090)
Acquisition of other assets....................................... (97,438) (5,000) (120,259)
------------- ------------- ------------
Net cash used in investing activities................. (462,983) (15,582) (554,349)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of note payable........................ 3,316,249 - 3,316,249
Related party borrowings.......................................... 1,234,000 1,057,805 2,821,343
Issuance of common stock for cash................................. 25,538 7,263 32,937
Principal payments on related party borrowings.................... (174,001) - (174,001)
Principal payments on capital lease obligations................... (28,235) - (28,235)
Repurchase of common stock........................................ (689) - (689)
------------- ------------- ------------
Net cash provided by financing activities............. 4,372,862 1,065,068 5,967,604
------------- ------------- ------------
Net increase in cash and cash equivalents.............................. 782,159 36,515 796,959
Cash and cash equivalents at beginning of period....................... 14,800 - -
------------- ------------- ------------
Cash and cash equivalents at end of period............................. $ 796,959 $ 36,515 $ 796,959
============= ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ - $ -
Cash paid of taxes $ - $ - $ -
NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired equipment under capital lease obligations totaling $187,604
during the nine months ended September 30, 2000.
The Company converted $3,316,249 (net of issuance costs of $433,751) of the
Zstar note payable into 625,000 shares of common stock during the nine months
ended September 30, 2000.
The Company converted $487,360 of related party borrowings into 12,838,977 shares
of common stock during the nine months ended September 30, 1999.
</TABLE>
See notes to condensed financial statements
3
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Onvantage, Inc.,
(the "Company"), have been prepared in conformity with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-QSB and Article 10 of Regulation S-B. Accordingly,
certain information and footnote disclosures normally included in 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 the Company's 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 Company's audited financial statements for the period February 25, 1999
(date of inception) to December 31, 1999, included in the Company's Form
8-K/A-1, dated October 2, 2000 filed with the Securities and Exchange
Commission. The results of operations for any interim period are not necessarily
indicative of the results of operations for any other interim period or for a
full fiscal year.
NOTE 2 - EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing the net
earnings (loss) by the number of weighted average common shares outstanding.
Diluted earnings per share reflects potential dilution from outstanding stock
options and warrants using the treasury stock method and convertible securities
using the if-converted method. Potentially dilutive securities have been
excluded from the diluted earnings per share calculation at September 30, 2000
as the inclusion would be anti-dilutive as follows:
Warrants and options................................... 2,098,000
Convertible securities................................. 376,756
---------
2,474,756
=========
NOTE 3 - 2000 OMNIBUS EQUITY INCENTIVE PLAN
In August 2000, the Company's Board of Directors and its shareholders
approved the 2000 Omnibus Equity Incentive Plan (the "Omnibus Plan"). The
purpose of the Omnibus Plan is to promote the long-term success of the Company
and the creation of stockholder value by (a) encouraging Employees, Directors
and Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Employees, Directors and Consultants with
exceptional qualification and (c) and linking Employees, Directors and
Consultants directly to stockholder interests through increased stock ownership.
The Omnibus Plan seeks to achieve this purpose by providing awards in the form
of Restricted Shares, Stock Units, Options or Stock Appreciation Rights.
The initial maximum number of shares awarded under the Omnibus Plan
shall not exceed five million shares. Annually as of January 1 of each year,
commencing with the year 2001, the aggregate number of shares that may be
awarded under the Plan shall automatically increase by a number equal to the
lesser of (i) 2,000,000 shares, (ii) five percent of the outstanding shares on
such date or (iii) a lesser amount determined by the Board of Directors.
The Omnibus Plan provides that all stock option agreements shall
specify the term and the exercise price which will not be less than 85% and 100%
of the fair market value for non statutory and incentive stock options,
respectively, except for options granted to stockholders that own 10% of the
total combined voting power of all classes of stock of the Company, in which
case the exercise price shall be 110% of the fair market value. Generally, the
maximum exercise term of stock options granted shall not exceed ten years from
the date of grant.
4
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY
Merger
In May 2000, an Agreement of Merger and Plan of Reorganization by and
among Zstar Enterprises, Inc. ("Zstar"), Zstar Subsidiary, Inc., Apex Canadian
Holidays, Ltd., and Onvantage (the "Merger") was executed. The Merger provided
for the exchange of common stock in which all Onvantage shareholders received
stock representing 63.11% (on a diluted basis) of Zstar in exchange for all the
outstanding shares of Onvantage.
In May 2000, Onvantage executed a Convertible Promissory Note Payable
to Zstar ("Zstar Note") that provided for the borrowing of up to $3,750,000 in
connection with the Merger. The Zstar Note and accrued interest of $3,316,249
(net of issuance costs of $433,751) was converted into 625,000 shares of common
stock at the time of the closing of the Merger as provided in the Zstar Note.
In July 2000, Onvantage completed the Merger with Zstar. The
acquisition was accounted for as a recapitalization whereby Onvantage was
deemed to be the "accounting acquirer" under the guidance in Staff Accounting
Bulletin No. 97. At the time of the merger, Zstar was a non-operating shell as
all of its previous operations had been disposed of.
Options and Warrants
During the three months ended September 30, 2000, the Company issued
the following equity instruments:
DESCRIPTION OPTIONS WARRANTS
Balance as of June 30, 2000 861,000 185,000
Issued during quarter 427,000 625,000
------------ -----------
Balance as of September 30, 2000 1,288,000 810,000
============ ===========
NOTE 5 - SUBSEQUENT EVENT
Related Party Notes Payable
In October 2000, the Related Party Note Payable and related accrued
interest of $2,149,413 and $105,125, respectively, was converted into 376,756
shares of common stock.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the periods
ended September 30, 2000 and September 30, 1999. The following discussion should
be read in conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Report on Form 10-QSB and in conjunction with Form 8-K, dated
August 1, 2000, as amended, which includes the period February 25, 1999 (date of
inception) to December 31, 1999. Some of the information in this Report contains
forward-looking statements which involve substantial risks and uncertainties.
These statements can be identified by forward-looking words such as "may,"
"will," "expect," "anticipate," "believe," "estimate" and "continue" or similar
words. Investors should read statements that contain these or similar words
carefully because they (1) discuss our expectations about the Company's future
performance; (2) contain projections of the Company's future operating results
or of the Company's future financial condition; (3) state other
"forward-looking" information. The Company believes it is important to
communicate its expectations to its investors. There may be events in the
future, however, that the Company is not accurately able to predict or over
which it has no control. The risk factors discussed in "Risks and
Uncertainties," later in this Report, as well as any cautionary language in this
Report, provide examples of risks, uncertainties and events that may cause the
Company's actual results to differ materially from the expectations described in
the forward-looking statements. Additional risks will be described from time to
time in the Company's other filings with the SEC. Investors should be aware that
the occurrence of any of the events described in the risk factors and elsewhere
in this Report and in the Company's other periodic SEC filings could have a
material and adverse effect on its business, results of operations and financial
condition.
OVERVIEW
Onvantage is a provider of marketing and technology solutions that
enable companies to deliver branded media and communication services to their
customers. The Onvantage products are being targeted to Fortune 1000 companies
that have established marketing budgets and understand the importance of
branding.
As its first product offering, Onvantage has developed a turnkey,
private-label Internet access solution for (i) business to employee, (ii)
affinity and (iii) consumer programs. The Onvantage solution includes a
microportal (toolbar) that can be customized for each partner and is further
customized by each individual user. Unlike most static microportals, Onvantage
uses a dynamic content delivery system developed by Snippets. Onvantage has
obtained an exclusive license from Snippets for connectivity applications. The
Snippets technology allows each partner to brand the desktop and deliver
constantly changing information regarding its products and services. It also
allows the user to customize their preferences, (stocks, weather, news, auctions
etc...) which translates into a more valuable customer experience.
Onvantage has created an outsourced offering that is a natural product
extension for its customers. A typical Onvantage customer does not have the
technical expertise or resources to develop and host an ISP offering. Onvantage
can provide this service at a lower cost combined with proprietary technology.
Proprietary and customizable software, combined with 24/7 back-office management
and customer service, supports the Onvantage ISP offering.
Onvantage has focused its future development efforts to expand into
areas such as broadband (DSL/Cable), wireless (PDA/Cell Phones) and Satellite
Broadcast Digital TV.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Research and development expenses decreased from $717,905 for the nine
months ended September 30, 1999 to $645,341 for the same period in 2000. The
decrease of 10% was primarily due to a change in focus of development efforts
from the original portal strategy to the current branded ISP solution. We
believe that continued
6
<PAGE>
investment in research and development is critical to attaining our strategic
objectives and maintaining our competitive position in our market and, as a
result, we expect product development expenses to increase or remain consistent
from quarter to quarter.
Selling, general and administrative expenses were $2,404,834 for the
nine months ended September 30, 2000, up significantly from $345,493 for the
same period in 1999. This increase is primarily the result of increased staffing
costs as we built our management team, accounting fees, legal fees, expenses
incurred in connection with public company compliance and our initial business
development effort. We expect selling, general and administrative expenses to
increase or remain consistent in the future as we expand our staff and incur
additional costs related to the anticipated growth of our business, marketing
objectives and our status as a public company.
The operating loss was $3,050,175 for the nine months ended September
30, 2000 compared to an operating loss for the same period in 1999 of
$1,063,398, an increase of approximately 187%. As noted above, the increased
loss was primarily the result of increased selling, general and administrative
expenditures.
Net interest expense was $71,195 for the nine months ending September
30, 2000 as compared with $7,450 for the same period in 1999. Interest expense
represents costs related to certain related party and shareholder notes and
capitalized leases net of interest income associated with earnings on our cash
and cash equivalents.
As a result of the factors described above, for the nine months ended
September 30, 2000, the Company incurred a net loss of $3,121,370, compared to a
net loss of $1,070,848 for the same period in 1999.
There was no provision or benefit for income taxes for any period since
inception due to our operating losses. We have not recognized any benefit from
the future use of loss carryforwards for any period since inception because of
uncertainty surrounding their realization. The amount of net operating losses
that we can utilize may be limited pursuant to tax regulations applicable to
certain circumstances, including in the event that we experience a cumulative
stock ownership change of more than 50% over a three-year period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Research and development expenses decreased from $659,377 for the three
months ended September 30, 1999 to $312,172 for the same period in 2000. The
decrease of 53% was primarily due to fact that the Company had outsourced the
development of the original portal concept, which is a significantly different
approach than the primarily in-house development team creating the current
product offering.
Selling, general and administrative expenses were $1,417,890 for the
three months ended September 30, 2000, up significantly from $245,550 for the
same period in 1999. This increase is primarily the result of increased staffing
costs as we completed our management team, accounting fees, legal fees, expenses
incurred in connection with public company compliance and our initial business
development effort.
The operating loss was $1,730,062 for the three months ended September
30, 2000 compared to an operating loss for the same period in 1999 of $904,927,
an increase of approximately 91%. As noted above, the increased loss was
primarily the result of increased selling, general and administrative
expenditures.
Net interest income was $12,546 for the three months ending September
30, 2000 as compared with net interest expense of $6,606 for the same period in
1999. Interest expense represents costs related to certain related party and
shareholder notes and capitalized leases net of interest income associated with
earnings on our cash and cash equivalents.
As a result of the factors described above, for the three months ended September
30, 2000, the Company incurred a net loss of $1,717,516, compared to a net loss
of $911,533 for the same period in 1999.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception almost entirely
from the sale of equity and debt securities, supplemented with a small equipment
lease. In July 2000, we completed a merger with Zstar Enterprises, Inc. Under
the terms of the merger agreement, Onvantage became a wholly owned subsidiary of
the company, and upon closing, began to operate under the name Onvantage
Technologies, Inc. Immediately after closing, Zstar filed an amendment to its
articles to change its name to Onvantage, Inc. At the closing of the merger, the
Company completed a private placement of stock, which yielded net cash proceeds
of approximately $3,316,000.
In the private placement completed at the closing of the merger and
discussed in our Schedule 14C Definitive Information Statement filed June 27,
2000, the Company made a private offering of 625,000 Units at $6.00 per Unit.
Each Unit was comprised of one share of common stock of the Company and one
purchase warrant ("Purchase Warrant"). Each Purchase Warrant entitled the holder
to acquire one share of common stock in the Company for $6.00 per a period of
two years from the closing of the merger. The holders of the Purchase Warrants
would have been forced to exercise these warrants within 15 days of the
"Performance Milestone", if the Performance Milestone was achieved by the
Company by October 15, 2000. The Performance Milestone was not achieved, and as
a result, these Purchase Warrants have not been exercised and such exercise
cannot be compelled. The Company is uncertain whether such Purchase Warrants
will be exercised in the future.
We have incurred net losses of $5,033,250 from inception to September
30, 2000. We believe that we will continue to incur net losses in the
foreseeable future and that the rate at which we will incur such losses could
increase from current levels.
The net cash used in operating activities of $3,127,720 in the first
nine months of 2000 primarily reflected the net loss for the period of
$3,121,370.
Net cash used in investing activities was $462,983 for the first nine
months of 2000. Net cash used in investing activities primarily consisted of
purchases of computers, furniture and lease deposits.
Net cash provided by financing activities was $4,372,862 for the first
nine months of 2000 and consisted primarily of the Company's private placement
in July 2000 and proceeds from related party notes payable.
The Company believes that its current financial resources will not be
sufficient to fund its operations for the next 12 months. During that period, it
will become necessary for the Company to raise additional funds to meet the
expenditures required for operating its business. The Company currently has no
firm plans or arrangements for securing the needed additional capital to fund
growth for the next 12 months and beyond, however, it is actively pursuing
various options and opportunities. The Company has, however, signed a
non-binding letter of intent for additional financing in the form of a
convertible debenture. The Company believes that this financing will fund
operations for an additional three months while a longer-term arrangement is
secured. If additional funds are raised through the issuance of debt securities,
these securities could have certain rights, preferences, and privileges senior
to holders of Common Stock, and the terms of such debt could impose restrictions
on the Company's operations. The sale of additional equity or debt securities
could result in additional dilution to the Company's shareholders. Additional
financing may not be available at all and, if available, such financing may not
be obtainable on terms favorable to the Company. If the Company is unable to
obtain this additional financing, it may be required to reduce the scope of its
planned development and marketing efforts, which could seriously harm its
business.
The Company's future expenditures and capital requirements will depend
on a number of factors including the development and implementation of next
generation technologies, technological developments on the Internet and the
regulatory and competitive environment for Internet based products and services.
RISKS AND UNCERTAINTIES
Set forth below and elsewhere in this quarterly report and in the other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the forward
looking statements contained in this quarterly report.
8
<PAGE>
DEVELOPMENT STAGE COMPANY.
Onvantage is a development stage company and has recently begun to
implement its business plan. The likelihood of success of Onvantage must be
considered in light of the expenses, complications and delays frequently
encountered in connection with the establishment and expansion of new business
and the competitive environment in which Onvantage will operate. Onvantage's
long-term viability, profitability and growth will depend upon successful
commercialization of existing products, and the development and
commercialization of new products relative to its business plan. As a
development-stage company, Onvantage has no relevant operating history upon
which an evaluation of its performance can be made. Such performance must be
considered in light of the risks, expenses and difficulties frequently
encountered in establishing new products and markets in the evolving, highly
competitive Internet industry.
THE COMPANY MAY NOT ACHIEVE FUTURE PROFITABILITY DUE TO CONTINUED OPERATING
LOSSES AND NEGATIVE CASH FLOWS.
The Company has incurred substantial general and administrative, and
development costs to create, introduce and enhance the Company's product
offerings. The Company expects operating losses and negative cash flows to
continue for the foreseeable future as it continues to incur significant
expenses. As a result, the Company will need to generate significant revenues to
achieve profitability. Even if the Company does become profitable, it cannot
assure you that it can sustain or increase profitability on a quarterly or
annual basis. If revenues grow more slowly than the Company anticipates, or if
operating expenses exceed its expectations or cannot be adjusted in response to
slower revenue growth, the Company's business will be materially adversely
affected. Please see "Liquidity and Capital Resources."
The Company may need to raise additional funds in order to fund more
aggressive brand name promotions or more rapid expansion, to develop new or
enhanced services and products, to respond to competitive pressures or to
acquire complementary businesses, technologies or services. Additional financing
may not be available on terms favorable to the Company, if at all. If adequate
funds are not available or not available on acceptable terms, the Company may be
unable to fund its expansion, successfully promote its brand name, take
advantage of unanticipated acquisition opportunities, develop or enhance
services and products or respond to competitive pressures. Any such inability
could have a material adverse effect on the Company's business. Further, even if
the Company can achieve such financing, it may have a significant dilutive
effect to existing shareholders.
THE COMPANY CANNOT ASSURE YOU THAT ITS INTERNET PRODUCTS WILL ACHIEVE
MARKET ACCEPTANCE.
The Company's future profitability will rely upon the use of the
microportal and related services including transaction supported products on the
Internet (e.g. direct or indirect purchasing of goods and services). The
Company's ability to obtain market acceptance for its Internet products will
depend, in part, on the following factors:
o The Company's ability to attract users of the affinity branded
Microportal technology;
o The Company's ability to increase awareness of the Onvantage brand;
o The Company's ability to strengthen user loyalty;
o The Company's ability to offer compelling and interesting content;
o The Company's ability to maintain current strategic relationships,
and develop new strategic relationships;
o The Company's ability to attract a large number of advertisers from
a variety of industries that wish to be associated with Onvantage
content;
o The Company's ability to respond effectively to competitive
pressures;
9
<PAGE>
o The Company's ability to develop and upgrade technology;
o The Company's ability to attract, retain and motivate qualified
personnel;
o The Company's ability to anticipate and adapt to the changing
Internet market.
If our Internet-based products and/or services are not received
favorably, it may negatively affect the use of our other products or cause new
customers to choose a competitive service over ours.
IF THE COMPANY DOES NOT SUCCESSFULLY DEVELOP NEW AND ENHANCED SERVICES AND
PRODUCTS, ITS REVENUES COULD DECREASE.
The Company will not be financially successful if it is unable to meet
the increasingly sophisticated needs of its customers through timely
developments and new and enhanced versions of its services and products. The
Company's planned development and enhancement efforts have inherent risks. The
Company may experience financial or technical difficulties that could prevent it
from introducing new or enhanced services or transaction support products.
Furthermore, these new or enhanced services and products may contain problems
that are discovered after the products are introduced. The Company may need to
significantly modify the design of these products to correct problems. The
Company's business could be materially adversely affected if the Company
experiences difficulties in introducing new or enhanced services and products or
if these services or products are not received favorably by its customers.
Finally, development and enhancement of its services and products will require
significant additional expenses and could strain the Company's management,
financial and operational resources. The lack of market acceptance of the
Company's services or products or its inability to generate satisfactory
revenues from such development or enhancements to offset their costs could have
a material adverse effect on the business.
IF THE COMPANY CANNOT MAINTAIN THE INTEGRITY AND RELIABILITY OF ITS PROPRIETARY
DATABASE, THE COMPANY MAY NOT BE SUCCESSFUL.
The Company cannot assure you that the information in its database will
be comprehensive, accurate or timely, particularly as the Company grows. The
Company's success is highly dependent on its customers' confidence in the
comprehensiveness, accuracy and timeliness of its proprietary database of
transactions and the software used to access its database. The Company expects
the task of establishing and maintaining such comprehensiveness, accuracy and
timeliness during the growth of its business to require substantial effort and
expense.
SEASONAL AND CYCLICAL PATTERNS MAY AFFECT THE BUSINESS.
The Company believes that advertising sales in traditional media, such
as television and radio, generally are lower in the first and third calendar
quarters of each year. If the Internet market makes the transition from an
emerging to a more developed market, seasonal and cyclical patterns may develop
in the future. As a result, if the industry follows the same seasonal patterns
as those in traditional media, the Company may experience lower advertising
revenues in the first and third calendar quarter of each year. Seasonal and
cyclical patterns in Internet advertising may also affect revenues.
THE MARKET FOR INTERNET ADVERTISING IS STILL DEVELOPING, AND A LACK OF
ADVERTISING REVENUE COULD MATERIALLY ADVERSELY AFFECT THE COMPANY'S BUSINESS.
The Company expects to derive a significant portion of revenues from
sponsorships and advertising as demand and market acceptance for Internet
advertising solutions continues to develop. There are currently no widely
accepted standards for the measurement of the effectiveness of Internet
advertising, and the industry may need to develop standard measurements to
support and promote Internet advertising as a significant advertising medium. If
these standards do not develop, existing advertisers may not continue their
levels of Internet advertising. Furthermore, advertisers that have traditionally
relied upon other advertising media may be reluctant to advertise on the
Internet. Future business would be adversely affected if the market for Internet
advertising fails to develop or develops more slowly than expected. Different
pricing models are used to sell advertising on the Internet and it is difficult
to predict which, if any, of the models will emerge as the industry standard.
This makes it difficult to project future advertising rates and revenues.
Advertising revenues could be adversely affected if the Company is unable to
adapt to new forms of Internet advertising. Moreover, software programs that
limit or prevent advertising
10
<PAGE>
from being delivered to an Internet user's computer are available. Widespread
adoption of this software could adversely affect the commercial viability of
Internet advertising.
IF THE COMPANY IS NOT ABLE TO SUCCESSFULLY DEVELOP ITS INTERNET WEBSITE BRAND
NAME, IT COULD MATERIALLY ADVERSELY AFFECT ITS BUSINESS.
The Company believes that establishing and maintaining its brand name
is critical to attracting and expanding its target Internet audience. The
importance of developing the Company's brand name will increase due to the
growing number of Internet services. In order to build its brand name, the
Company must succeed in its marketing efforts, provide high-quality services and
products and increase the number of visitors to its Web site. If its marketing
efforts are not successful or if the Company cannot increase awareness of its
brand name, the Company will not be able to attract and retain partners,
customers and/or users and its business would be materially adversely affected.
INTENSE COMPETITION MAY RENDER THE COMPANY'S SERVICES AND PRODUCTS UNCOMPETITIVE
OR OBSOLETE.
The market for the Company's Internet-related products and services and
transaction supported products is competitive. The Company cannot assure you
that its competitors will not develop services or products that are equal or
superior to the Company's or that achieve greater market acceptance. The Company
anticipates that the number of direct and indirect competitors will increase in
the future and could result in price reductions, reduced margins, greater
operating losses or loss of market share, any of which would materially
adversely affect its business.
IF THE COMPANY DOES NOT EFFECTIVELY MANAGE ITS GROWTH, IT COULD HAVE A MATERIAL
ADVERSE EFFECT ON ITS BUSINESS.
Should the Company experience significant growth, it will place a
strain on the Company's management systems and resources. The Company will need
to improve its operational and financial systems and managerial controls and
procedures. The Company will also need to continue to expand, train and manage
its workforce. The Company expects that its workforce will continue to increase
for the foreseeable future. The Company will have to maintain close coordination
among its technical, accounting, finance, marketing, sales and research
departments. If the Company fails to effectively manage its growth and address
the above concerns, it could have a material adverse effect on its business.
Based on a small available labor pool, attracting qualified employees in the
Company's geographical area and industry segment is difficult, and should the
Company fail to effectively hire new personnel, it could have a material adverse
effect on its business.
IF THE COMPANY ACQUIRES OTHER COMPANIES BY ISSUING EQUITY SECURITIES, YOU MAY
EXPERIENCE DILUTION OF YOUR EQUITY INTEREST.
The Company may acquire other companies by issuing equity securities.
As a result, you may experience dilution of your ownership interest and the
newly issued securities may have rights superior to those of the common stock.
INCREASED USAGE COULD STRAIN THE COMPANY'S SYSTEMS AND CAUSE SYSTEMS TO
MALFUNCTION, WHICH COULD MATERIALLY ADVERSELY AFFECT ITS BUSINESS.
The performance of the Company's microportal, Internet service and its
supporting infrastructure is critical to its reputation, its ability to attract
customers and market acceptance of its products and services. The Company's
11
<PAGE>
ability to provide uninterrupted, secure online services depends on its ability
to protect its facilities and equipment against damage from fire, earthquakes,
power loss, water damage, telecommunications failures, vandalism, computer
viruses, hacker attacks and other malicious acts, and similar unexpected
material adverse events. Customers may become dissatisfied if a system failure
interrupts the Company's ability to provide services. The Company's insurance
policies may not adequately compensate the Company for any losses that may occur
due to system failures or interruptions.
ANY PROBLEMS WITH THE INTEGRITY OF THE INTERNET'S INFRASTRUCTURE OR WITH THIRD
PARTY SERVICE PROVIDERS COULD HAVE A MATERIALLY ADVERSE EFFECT ON ITS BUSINESS.
The Company's customers will also depend on Internet service providers,
online service providers and other Web site operators. The Company's ability to
provide uninterrupted, secure online services depends on the ability of these
third party service providers to protect their facilities and equipment against
damage from fire, earthquakes, power loss, water damage, telecommunications
failures, vandalism, computer viruses, hacker attacks and other malicious acts,
and similar unexpected material adverse events. Each of them has experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to the Company's systems.
Moreover, the Internet infrastructure may not be able to support continued
growth in its use. Any of these problems could materially adversely affect the
Company's business.
IF THE COMPANY DOES NOT ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS, IT COULD HARM
ITS BUSINESS OR COMPETITIVE POSITION.
It may be difficult to protect the Company's proprietary rights. The
Company regards its database and the software used, as well as its various
trademarks and copyrights, as proprietary. Despite precautions, it may be
possible for unauthorized parties to copy the Company's services or otherwise
obtain and use information that the Company regards as proprietary. Existing
trade secrets and copyright laws provide only limited protection. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to the same extent as the laws of the U.S. The steps the Company takes
may not be adequate to deter misappropriation of proprietary information. The
Company also may not be able to detect unauthorized use and take appropriate
steps to enforce its intellectual property rights.
VARIOUS PARTIES MAY ACCUSE THE COMPANY OF INFRINGING ON THEIR INTELLECTUAL
PROPERTY RIGHTS, AND ANY RELATED LITIGATION COULD HARM THE COMPANY'S BUSINESS
REGARDLESS OF ITS MERIT.
Third parties may assert claims against the Company alleging
infringement, misappropriations or other violations of proprietary rights,
whether or not such claims have merit. Such claims can be time consuming and
expensive to defend and could require the Company to cease the use and sale of
allegedly infringing services and products, incur significant litigation costs
and expenses, develop or acquire non-infringing technology or obtain licenses to
the alleged infringing technology. The Company may not be able to develop or
acquire alternative technologies or obtain such licenses on commercially
acceptable terms.
THE COMPANY COULD BE HELD LIABLE FOR PROVIDING INACCURATE OR INCOMPLETE
INFORMATION, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS BUSINESS.
If the Company's services or products yield inaccurate or incomplete
information, which has a material adverse impact on a customer, the customer
might bring a claim for damages against the Company, even if the Company is not
responsible for such failure. The limitations of liability set forth in customer
contracts may not be enforceable and may not otherwise protect the Company from
liability for damages. The successful assertion of one or more large claims
against the Company that exceed available insurance coverage's or changes in the
Company's insurance policies, such as premium increases or the imposition of
large deductibles or co-insurance requirements could materially adversely affect
the Company's business.
12
<PAGE>
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, IT COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S BUSINESS.
The Internet is relatively new and rapidly evolving. The Company's
business would be materially adversely affected if Internet usage does not
continue to grow.
THE COMPANY MAY NOT BE ABLE TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGES RELATING
TO THE INTERNET AND INTERNET PRODUCTS.
To be successful, the Company must adapt to the rapid technological
changes effecting the Internet and Internet products by continually enhancing
its products and services and introducing and integrating new products and
services to capitalize on the technological advances in the Internet. This
process is costly and the Company cannot assure you that it will be able to
successfully integrate its services and products with the Internet's
technological advances. The Company could incur substantial costs if the Company
needs to modify its services or infrastructure in order to adapt to these
changes. If the Company incurred significant costs without adequate results or
the Company was unable to adapt to rapid technological changes, it could have a
material adverse effect on its business.
ADOPTION OF NEW LAWS AND GOVERNMENT REGULATIONS RELATING TO THE INTERNET COULD
HARM THE COMPANY'S BUSINESS.
The Company's business could be materially adversely affected by the
adoption or modification of laws or regulations relating to the Internet. Laws
and regulations directly applicable to Internet communications and commerce are
becoming more prevalent. Such legislation could dampen the growth in use of the
Internet generally and decrease the acceptance of the Internet as a
communications and commercial medium. The governments of states or foreign
countries might attempt to regulate the Company's transmissions or levy sales or
other taxes relating to its activities. The laws governing the Internet,
however, remain largely unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing laws
such as those governing intellectual property, privacy, libel and taxation apply
to the Internet and Internet commerce. In addition, the growth and development
of the market for Internet commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on companies conducting
business over the Internet.
INTERNET SECURITY CONCERNS COULD HINDER INTERNET COMMERCE AND MATERIALLY
ADVERSELY AFFECT THE COMPANY'S BUSINESS.
The Company may be required to expend significant capital and other
resources to protect against security breaches on its Web site, internal and ISP
systems or to alleviate problems caused by such breaches. If any compromise of
the Company's security were to occur, it could damage its reputation and expose
the Company to a risk of loss, litigation and possible liability. A significant
barrier to online commerce and communications is the need for secure
transmission of confidential information over public networks. Concerns over the
security of transactions conducted on the Internet and other online services, as
well as user's desires for privacy, may also inhibit the growth of the Internet
and other online services, especially as a means of conducting commercial
transactions. The Company's services may involve the storage and transmission of
proprietary information, such as credit card numbers and other confidential
information. The Company cannot assure you that its security measures will
prevent security breaches or that its failure to prevent such security breaches
will not have a material adverse effect on its business. Credit card companies
and others are in the process of developing anti-theft and anti-fraud
protections, and the Company is continually monitoring this problem. However, at
the present time, the real or perceived risk of theft and fraud could have a
material adverse effect on the Company. The Company cannot assure you that
advances in computer capabilities, new discoveries in the field of cryptography
or other events or developments will not result in a compromise or breach of the
algorithms used to protect customer transaction data. A party who is able to
circumvent the Company's security measures could misappropriate confidential
information or cause interruptions in its operations.
13
<PAGE>
THE COMPANY MAY BE SUBJECT TO LEGAL LIABILITY FOR DISPLAYING OR DISTRIBUTING
INFORMATION ON THE INTERNET.
Because content on its Web site is distributed to others, the Company may
be subject to claims for defamation, negligence or copyright or trademark
infringement or claims based on other theories. These types of claims have been
brought, sometimes successfully, against Internet services in the past. The
Company could also be subject to claims based upon the content that is
accessible from its Web site through links to other web sites or information on
its Web site supplied by third parties. The Company's insurance may not
adequately protect against these types of claims. Even to the extent such claims
do not result in liability, the Company could incur significant costs in
investigating and defending against such claims. The Company's potential
liability for information carried on or disseminated through its Web site could
require the Company to implement measures to reduce its exposure to such
liability, which may require the expenditure of substantial resources and limit
the attractiveness of the Company's service to users.
THE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE COULD CAUSE THE COMPANY'S STOCK
PRICE TO DECLINE.
The market price of the Company's common stock could decline as a
result of sales of a large number of shares of its common stock in the market or
the perception that such sales could occur. Such sales also might make it more
difficult for the Company to sell equity securities in the future at a price
that the Company would deem appropriate.
THE LIQUIDITY OF THE COMPANY'S STOCK IS UNCERTAIN, AND IT COULD BE DIFFICULT TO
SELL YOUR SHARES.
The Company cannot predict if an active trading market in its common
stock will develop or how liquid that market might become.
THE MARKET PRICE OF THE COMPANY'S STOCK MAY BE MATERIALLY ADVERSELY AFFECTED BY
MARKET VOLATILITY.
The market prices of the securities of Internet-related companies have
been especially volatile and have experienced extreme volume fluctuations.
Volatility in the market price of the Company's stock could lead to claims
against the Company. If the Company were the object of such litigation, it could
result in substantial costs and a diversion of the Company's management's
attention and resources. The trading price of the Company's common stock could
be subject to wide fluctuations in response to a number of factors, including:
o The Company's quarterly results of operations;
o Changes in earnings estimates by analysts and whether the Company's
earnings meet or exceed such estimates;
o Announcements of technological innovations by the Company's
competitors;
o Additions or departures of key personnel;
o Other matters discussed elsewhere in this quarterly report and the
Company's other filings with the SEC; and
o Other events or factors, which may be beyond the Company's control.
THE COMPANY'S CONTROLLING STOCKHOLDERS MAY NOT NECESSARILY VOTE IN THE SAME
MANNER AS OTHER STOCKHOLDERS.
A small number of stockholders who each hold a significant number of
shares, if acting in concert, will be able to exercise control over all matters
requiring approval by the Company's stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in
control of the Company.
NOTE: In addition to the above risks, businesses are often subject to risks not
foreseen or fully appreciated by management. In reviewing this Filing, potential
investors should keep in mind other possible risks that could be important.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Previously reported in a Schedule 14C filed June 27, 2000, Form 10QSB
filed July 4, 2000, and Form 8-K filed August 1, 2000, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Previously reported in a Schedule 14C filed June 27, 2000, Form 10QSB
filed July 4, 2000, and Form 8-K filed August 1, 2000, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
*Exhibit 10.1 - Snippets.com License Agreement
Exhibit 27 - Financial Data Schedule
REPORTS ON FORM 8-K
Form 8K was filed on August 1, 2000 announcing a change in
control of the Company, acquisition and disposition of assets,
change in certifying accountant, and change in fiscal year.
-----------
* Confidential treatment requested.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
ONVANTAGE, INC.
/S/ MARK E. LEMMA
---------------------------------
Date: November 14, 2000 Mark E. Lemma
CFO and Vice President of Finance
(Principal Financial Officer and
Chief Accounting Officer)
