<PAGE>
UNITED STATES
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 OF 1934
For the transition period from _________________ to _________________
Commission file number 333-72975
---------
Financial Intranet, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0357272
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
116 Radio Circle, Mt. Kisco, New York 10549
-------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (914) 242-4848
--------------
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 l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of September 30, 2000: 46,231,244
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September
ASSETS 2000
-----------
Current assets:
Cash and cash equivalents $ 171,313
Due from officers 207,730
-----------
Total current assets 379,043
Property and equipment, net 245,113
Capitalized software development costs, net 22,937
Capitalized software costs, net 1,846,916
Other assets 48,694
Net assets of discontinued operations 48,211
------------
Total assets $ 2,590,914
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 355,947
Note payable 950,000
Due to officers 76,219
-----------
Total current liabilities 1,382,166
Stockholders' Equity:
Common stock, $.001 par value; 50,000,000
shares authorized, 46,231,244 shares issued
and outstanding 46,231
Additional paid-in capital 11,878,937
Accumulated deficit during the development stage (10,349,665)
Less: Deferred compensation cost (366,755)
------------
Total stockholders' equity 1,208,748
------------
Total liabilities and stockholders' equity $ 2,590,914
===========
See Notes to Condensed Financial Statements.
F-1
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------------- ------------------------
September 30, Dec. 17, 1996 September 30,
------------- (Inception) to ------------------------
2000 1999 Sept. 30, 2000 2000 1999
----------- ---------- -------------- ----------- -----------
Operating costs and expenses:
<S> <C> <C> <C> <C> <C>
Selling, general and administrative $ 1,099,994 $ 601,106 $ 3,540,126 $ 601,060 $ 136,239
Depreciation and amortization 441,834 73,409 598,768 213,203 45,009
Stock compensation 122,253 310,314 1,541,408 40,751 42,939
---------- ---------- ----------- ---------- ---------
Total operating costs and expenses 1,664,081 984,829 5,680,302 855,014 224,187
---------- ---------- ----------- ---------- ---------
Loss from operations (1,664,081) (984,829) (5,680,302) (855,014) (224,187)
Other income (expense):
Interest income 17,283 5,197 29,816 3,288 2,831
Interest expense (985,501) (1,246,225) (2,461,000) (19,200) (9,959)
Other (11,182) - 2,272 3,818 -
----------- ---------- ----------- ---------- ---------
Total other (expense) (979,400) (1,241,028) (2,428,912) (12,094) (7,128)
----------- ---------- ----------- ---------- ---------
Net loss from continuing operations (2,643,481) (2,225,857) (8,109,214) (867,108) (231,315)
----------- ----------- ----------- ---------- ---------
Discontinued operations (1,020,932) (369,851) (2,241,134) (49,980) (122,120)
----------- ----------- ----------- ---------- ---------
Net Loss $(3,664,413) $(2,595,708) $(10,350,345) $ (917,088) $ (353,435)
=========== =========== =========== =========== =========
Basic and diluted net loss per share
Income from continuing operations: $ (0.07) ($0.09) $ (0.02) $ (0.01)
Discontinued operations (0.02) (0.02) (0.00) (0.01)
------------------------------- ----------- ---------
Net income for common shareholders $ (0.09) ($0.11) $ (0.02) $ (0.02)
=============================== =========== ==========
Number of shares used in calculating
basic and diluted net loss per share 41,383,571 22,715,762 44,005,438 22,715,762
</TABLE>
See Notes to Condensed Financial Statements.
F-2
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the period from December 17, 1996 (Inception) to September 30, 2000
<TABLE>
<CAPTION>
Accumulated
Deficit
Additional Deferred During the
Paid-in Subscriptions Stock Development
Description Shares Amount Capital Receivable Compensation Stage Total
---------- ------- ----------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 17, 1996 (inception) 3,700,000 $ 3,700 $ 20,900 $ - $ - $ (24,738) $ (138)
December 17, 1996 - issuance of stock
in lieu of services by director of
former company (Wee Wees) 40,000 40 (40) - - - -
December 20, 1996 - issuance of stock
in lieu of $10,000 in consulting fees 240,000 240 9,760 - - - 10,000
Net Loss - - - - - (9,760) (9,760)
---------- ------- ----------- ------------ ------------ ----------- ----------
Balance--December 31, 1996 3,980,000 3,980 30,620 - - (34,498) 102
February 29, 1997--issuance of stock
in lieu of compensation to key
executives 4,250,000 4,250 148,500 - - - 152,750
May 1997 through December 31, 1997--
Private Placement 6,904,228 6,904 877,823 (75,000) - - 809,727
August 4, 1997--issuance of stock in
lieu of $6,500 in promotional fees 100,000 100 6,400 - - - 6,500
September, 1997--issuance of stock to
employees and increase in additional
paid in capital from stock options granted 40,000 40 243,594 - (230,322) - 13,312
November 15, 1997--issuance of stock
per non-dilution provisions of
consulting agreement 315,000 315 (315) - - - -
Net loss - - - - - (817,430) (817,430)
---------- ------- ----------- ------------ ----------- ----------- ----------
Balance--December 31, 1997. 15,589,228 15,589 1,306,622 (75,000) (230,322) (851,928) 164,961
January, 1998--issuance of stock
subscribed in 1997 400,000 400 29,600 75,000 - - 105,000
Jan.-July 1998--issuance of stock per
non-dilution provisions of consulting
agreement 346,742 347 (347) - - - -
May-Dec., 1998--issuance of stock in
lieu of services 309,249 309 96,317 - - - 96,626
June and July, 1998--Promissory notes
converted 1,070,800 1,071 463,930 - - - 465,001
June and October, 1998--Private
placement 1,237,666 1,238 443,262 - - - 444,500
June 11, 1998--issuance of stock in
lieu of fees on June, 1998 private
placement 38,393 38 (38) - - - -
July 17, 1998--issuance of stock to
release security interest in certain
equipment 500,000 500 314,500 - - - 315,000
October 15, 1998--issuance of stock in
lieu of fees on 1997 private
placement 68,970 69 (69) - - - -
October 15, 1998--issuance of stock
resulting from exercise of warrants 1,000,000 1,000 159,000 - - - 160,000
Increase in additional paid-in capital
resulting from stock options and
warrants granted - - 1,266,409 - (832,556) - 433,853
Net loss - - - - - (2,141,978) (2,141,978)
---------- ------- ----------- ------------ ----------- ----------- ----------
Balance--December 31, 1998 20,561,048 20,561 4,079,186 - (1,062,878) (2,993,906) 42,963
F-3
<PAGE>
January 1, 1999--warrants issued in
connection with private placement of
debt - - 148,242 - - - 148,242
January 1, 1999--issuance of warrants
and beneficial conversion features on debt
financing - - 500,000 - - - 500,000
January 7, 1999--issuance of stock in lieu
of fees on December, 1998
private placement 25,000 25 14,725 - - - 14,750
January 21, 1999--issuance of stock to
principals in consideration for
employment services 611,636 611 458,115 - - - 458,726
January 25, 1999--issuance of stock
resulting from exercise of warrants 5,812 6 (6) - - - -
February 8, 1999--warrants issued in
connection with private placement of
debt - - 197,794 - - - 197,794
February 8, 1999--issuance of warrants
and beneficial conversion features on
debt financing - - 600,000 - - - 600,000
February 28, 1999--warrants issued in
connection with private placement of
debt - - 43,720 - - - 43,720
March 3, 1999--issuance of stock to
Founder for exercise of options 879,685 880 166,260 - - - 167,140
March 3, 1999--issuance of stock in lieu
of fees on February, 1999 private
placement 30,000 30 33,870 - - - 33,900
March 10, 1999--issuance of stock as
result of debt conversion 600,000 600 239,400 - - - 240,000
April 27, 1999 - warrants issued for
consulting services - - 148,103 - - - 148,103
April 28, 1999--issuance of stock in
lieu of legal fees 11,111 11 9,989 - - - 10,000
May 9, 1999--issuance of stock upon
conversion of notes 900,000 900 359,100 - - - 360,000
July 20, 1999 - beneficial conversion
feature of debt financing - - 166,667 - - - 166,667
July 20, 1999--warrants issued in
connection with private placement of debt - - 64,148 - - - 64,148
October 5, 1999--issuance of stock as
result of debt conversion 182,315 182 50,684 - - - 50,866
October 8, 1999 - issuance of stock
pursuant to public offering 2,545,455 2,545 298,926 - - - 301,471
October 20, 1999 - issuance of stock in
lieu of fees in connection with
private placement of debt and
public offering 70,910 71 21,984 - - - 22,055
November 5, 1999--issuance of stock in
lieu of legal fees 145,455 146 21,877 - - - 22,023
November 23, 1999--issuance of stock
upon conversion of notes 1,250,000 1,250 120,625 - - - 121,875
December 27, 1999--issuance of stock in
lieu of legal fees 150,000 150 33,768 - - - 33,918
December 31, 1999--issuance of stock
upon conversion of notes 1,862,768 1,863 246,817 - - - 248,680
Amortization of compensatory stock
options - - - - 154,254 - 154,254
Cancellation of debt by shareholder - - 10,000 - - - 10,000
Cancellation of stock options - - (524,521) - 419,616 - (104,905)
Net loss - - - - - (3,692,029) (3,692,029)
---------- -------- ----------- ------------ ----------- ----------- ----------
Balance--December 31, 1999 29,831,195 29,831 7,509,473 - (489,008) (6,685,932) 364,364
F-4
<PAGE>
January 14, 2000 - issuance of stock
in lieu of legal fees 150,000 150 20,850 - - - 21,000
January 14, 2000--issuance of stock
upon conversion of notes 2,020,731 2,021 216,218 - - - 218,239
January 24, 2000--issuance of stock
upon conversion of notes 1,400,000 1,400 124,600 - - - 126,000
February 4, 2000--issuance of stock
upon conversion of notes 1,400,000 1,400 124,600 - - - 126,000
March 2, 2000--issuance of stock
pursuant to consulting contract 10,000 10 9,990 - - - 10,000
March 2, 2000--issuance of stock
upon conversion of notes 1,146,591 1,147 124,978 - - - 126,125
March 13, 2000-- issuance of stock
pursuant to public offering 909,091 909 249,091 - - - 250,000
March 17, 2000--issuance of stock
resulting from exercise of warrants 100,000 100 19,900 - - - 20,000
March 28, 2000-- issuance of stock
pursuant to public offering 5,454,545 5,455 1,494,545 - - - 1,500,000
March 28, 2000-- issuance of stock in
lieu of fees in connection with
public offering 109,091 109 (109) - - - -
March 28, 2000-- issuance of stock in
connection with LNT acquisition 1,350,000 1,350 1,254,150 - - - 1,255,500
March 28, 2000-- issuance of stock in
lieu of fees in connection with LNT
acquisition 100,000 100 92,900 - - - 93,000
March 28, 2000--accrual of fees on
March 28 investment - - (42,000) - - - (42,000)
March 28, 2000--fees paid in connection
with March 28 investment - - (120,000) - - - (120,000)
March 31, 2000--rebooking of debt
by shareholder - - (10,000) - - - (10,000)
March 31, 2000--warrants issued in
connection with LNT acquisition - - 475,000 - - - 475,000
Amortization of compensatory stock options - - - - 81,502 - 81,502
July 26, 2000--issuance of stock for
consulting agreements 2,200,000 2,200 327,800 - - - 330,000
August 3, 2000--issuance of shares
pursuant to consulting agreement 50,000 50 6,950 - - - 7,000
Amortization of compensatory stock options - - - - 40,751 - 40,751
Net Loss - - - - - (3,663,732) (3,663,732)
---------- ------ ----------- ------------ ----------- ----------- ----------
Balance--September 30, 2000 46,231,244 $ 46,231 $11,878,937 $ - $ (366,755) $(10,349,665) $ 1,208,748
========== ====== =========== ============ =========== ============ ==========
</TABLE>
F-5
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
Nine Months Ended December 17, 1996
September 30, (Inception) to
2000 1999 September 30, 2000
----------- ----------- ------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(3,664,412) $(2,595,710) $(10,350,347)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,026,976 186,912 1,496,997
Reserve for bad debts - - 41,200
Consulting services paid by issuance
of common 10,000 - 722,403
Compensation expense resulting from
stock options granted 457,003 548,434 1,876,158
Interest expense upon conversion of
promissory notes 394,747 - 1,810,711
Changes in operating assets and
liabilities:
Accounts receivable 18,924 5,109 (47,869)
Prepaid expenses 9,274 (17,396) -
Other assets 9,565 (11,075) (23,694)
Accounts payable and accrued
liabilities 8,739 (329,405) 299,947
Accrued interest 31,466 33,560 81,867
Accrued payroll and payroll taxes (27,757) (32,370) (56,191)
Deferred rent (13,201) - -
Accrued interest converted into
common stock 8,239 - 17,785
----------- ----------- -------------
Net cash used in operating activities (1,730,437) (2,211,940) (4,131,033)
----------- ----------- -------------
Cash flows from investing activities:
Purchase of property and equipment (115,641) 52,779 (1,116,367)
Purchase of LNT assets (400,000) - (400,000)
Investment in The Energy Corp. (25,000) - (25,000)
Capitalized software development costs (80,007) - (193,343)
Notes receivable advances - - (41,200)
----------- ----------- -------------
Net cash provided by (used in)
investing activities (620,647) 52,780 (1,775,910)
----------- ----------- -------------
Cash flows from financing activities:
Proceeds from issuance of promissory
notes - 120,000 2,720,000
Proceeds from issuance of demand notes 950,000 500,000 950,000
Payment of financing fees (120,000) - (346,523)
Proceeds from issuance of common stock 1,772,250 1,686,520 2,871,471
Deferred offering/issuance costs - (97,119) (55,991)
Collection of stock subscriptions
receivable - - 70,000
Proceeds from issuance of warrants - - 1,046
Advances from (payment to) officers (170,881) (44,951) (131,510)
Cash acquired at inception - - 102
----------- ----------- -------------
Net cash provided by financing
activities 2,431,369 2,164,449 6,078,595
----------- ----------- -------------
Net increase in cash and cash
equivalents 80,287 5,288 171,655
Cash and cash equivalents--beginning 539,104 201,748 447,736
----------- ----------- -------------
Cash and cash equivalents--ending $ 619,391 $ 207,036 $ 619,391
=========== =========== =============
Supplemental disclosure of cash flow information:
Cash paid during the quarter for
interest $ 4,104 $ 1,204 $ 13,334
=========== =========== =============
</TABLE>
F-6
See Notes to Condensed Financial Statements.
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1--Basis of Interim Financial Statement Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. Financial Intranet, Inc. (the
"Company"), a development stage enterprise, believes that the quarterly
information presented includes all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation in accordance with
generally accepted accounting principles. The accompany condensed financial
statements should be read in conjunction with the Company's Annual Report filed
with the Securities and Exchange Commission on April 13, 2000.
Note 2 - Restructuring
The Company, in August 2000, affected a restructure of it domestic operating
model. In doing so, it eliminated a significant portion of its United States
based operations, including a planned elimination of its primary source of
ongoing telephony and planned video streaming revenue. The Company plans on
generating revenue in the future from operations from its remaining assets in
the United States, primarily its web site, its existing assets in the Peoples
Republic of China through its 100% wholly owned operating subsidiary corporation
there, once all regulatory approvals are obtained, and potential synergistic
acquisitions both in the United States and abroad. The Company specifically
expects to generate revenues from its web site and Chinese subsidiary through
business-to-business Internet and website consulting services, advertising
domestically and internationally from both its website and e-magazine, and
application programs and services for websites and other businesses. The Company
does not expect its Chinese subsidiary to generate revenue until at least the
fourth quarter of 2000 or become profitable until some time in 2001.
The components of the discontinued operations include:
For the three months For the nine months
ended September 30, 2000 ended September 30, 2000
------------------------ ------------------------
Revenue $ 6,086 $ 77,704
------- ---------
Cost of revenue 28,372 137,485
Sales, general and administrative 27,694 250,941
Depreciation and amortization - 585,141
Other - 125,069
------- ---------
Net loss from
discontinued operations $(49,980) $(1,020,932)
======= =========
The Company removed $57,589 of accounts receivable and $4,166 of accounts
payable related to the discontinued operations for a net adjustment of $53,423
as of September 30, 2000. The Company removed $66,793 of accounts receivable,
$520,311 property, plant and equipment and $20,099 of accounts payable related
to the discontinued operations for a net adjustment of $567,005 as of December
31, 1999.
The Company currently estimates that it has sufficient cash to fund operations
through January 31, 2001. Accordingly, additional financing will be needed in
order to pursue restructuring plans.
Note 3--Note Payable
In January and February 2000, the Company issued unsecured 8% convertible
promissory notes in the principal amounts of $150,000 and $200,000 respectively,
payable on demand. The holder converted these notes in November 2000.
The Company paid, as part of these transactions, fees of $31,500.
In May 2000, the Company issued an unsecured 8% convertible promissory note in
the principal amount of up to $600,000, payable on demand. The holder converted
this note in November 2000.
F-7
<PAGE>
Note 4--Capital Transactions
Public offering
In February 1999, the Company filed a Registration Statement (Form SB-2)
covering the primary offering of Common stock by the Company and the offering of
common stock by certain selling securityholders. Under the registration
statement as declared effective in October 1999, the Company registered
10,909,091 shares of common stock, par value $.001 per share, to be held for
sale. These shares were offered to the public at an offering price of $.275 per
share. Under an alternate prospectus, the selling securityholders registered
7,310,000 shares of common stock underlying the warrants, convertible promissory
notes, stock previously issued and stock that will be issued upon conversion of
certain promissory notes.
On March 12, 2000, the Company sold, pursuant to its Registration Statement,
909,091 shares of common stock to an investor for $250,000.
On March 27, 2000, the Company sold, pursuant to its Registration Statement,
5,454,545 shares of its common stock to two investors for an aggregate of
$1,500,000.
On March 27, 2000, the Company purchased certain assets of Longyin Network
Technology Co., Ltd., a Chinese Internet content provider. The purchase price
was $400,000 plus 1,350,000 shares of common (valued at $0.93 per share) which
was allocated to the assets acquired based on their fair values. The acquired
assets consist of two Internet web sites, an e-mail magazine and consulting
agreements with four key individuals.
Other Transactions
In July 2000, an aggregate of 2,200,000 shares of stock were issued and
5,000,000 warrants granted to certain financial advisors in consideration for
financial considerations, potential commitments and consulting services to be
rendered in the United States and the Peoples Republic in China. An additional
12,273 warrants were issued to a vendor in consideration for placement services.
On August 15, 2000, the Company invested $25,000 for a 1% interest, with a right
of first refusal to match certain dilutive third party investments, in The
Energy Corp., a Florida based intellectual property company with patents related
to the wireless communications industry. The Company expects to leverage its
assets in the Peoples Republic of China as well as its contacts in the United
States to help develop the business and market its products worldwide. The
potential market for The Energy Corp.'s patented products, once production and
distribution has been completed, is initially the huge market of all industrial
workplaces and other areas that require safe wireless communications.
Note 5--Contingencies
Litigation
On July 23, 1998, H & H Acquisition Corp., individually and on behalf of the
Company, commenced an action in federal court in the Southern District of New
York against the Company, the founder and certain officers, among others. The
complaint is an action to recover shares of common stock of the Company
previously sold to an officer/stockholder and unspecified damages. Management
believes that the claims against the Company and certain officers are without
merit, and in fact relate solely to the founder, and is vigorously defending the
action. No provision has been made in these financial statements for any
possible losses arising from this litigation.
Note 6 - Subsequent Events
In October 2000, the Company issued an unsecured 8% convertible promissory note
in the principal amount of $190,000, payable on demand. The holder converted
this note in November 2000.
F-8
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. - Management's Discussion and Analysis or Plan of Operations
THE FOLLOWING ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED ELSEWHERE IN
THE FORM 10-QSB.
Financial Intranet, Inc. is an emerging New York based international media and
communications company that currently holds a 100% ownership interest in a
Chinese Internet content provider.
Results of operations
Revenue
The Company's principal source of revenue historically was from the resale of
telephone and data communications, which operations were discontinued commencing
in July 2000. Accordingly, the revenue for the three months ended September 30,
2000, which was $6,086, as compared with $24,600 in the same period of the prior
year, was eliminated in accounting for the results of discontinued operations.
The Company does not expect to report significant revenue from these sources in
the future; it does expect to derive revenue from its web site and Chinese and
subsidiary.
Cost of revenue
The Company's cost of revenue consists primarily of telephone communications
lines and Internet access costs required to support and deliver our
communications services. Cost of revenues for the three months ended September
30, 2000 was $28,372 compared with $37,517 in the prior year, although in
accounting for discontinued operations such costs were eliminated. We expect
such cost of revenues to be substantially lower over the next quarter as future
revenues anticipated from usage volume are eliminated. Cost of revenue will
consist of those expenses necessary to support the website and for managing
investments in subsidiaries.
Selling, general and administrative expenses
General and administrative expenses consist primarily of:
(a) promotional, advertising and public relations costs
(b) employee compensation and related expenses (including payroll taxes and
benefits) for executive, administrative and operations personnel
(c) licensing, legal and other professional fees
(d) travel and entertainment
(e) facility and office-related costs such as rent, insurance, maintenance
and telephone.
These costs increased from $601,106 in 1999 to $1,099,994 in 2000 after taking
into consideration certain costs eliminated due to the discontinuing of certain
operations of the Company. Management expects general and administrative
expenses to decrease in the near future as a recent
2
<PAGE>
restructuring eliminated a portion of the overhead. As domestic business is
increased, such expenses other than consulting fees may again increase to
support future growth.
Stock compensation expenses
Other expenses charged to operations consist of non-cash costs of the issuance
of common stock, warrants, and stock options. These expenses decreased from
$310,314 in 1999 to $122,253 in 2000. The restructuring of the Company should
have no material effect on stock compensation expenses in the near future.
Depreciation and amortization
Depreciation and amortization consists primarily of depreciation of computer
equipment, amortization of software development costs, exclusive of a write down
of assets due to the discontinuance of certain of the Company's domestic
operations. Amortization of software costs and software development costs was
$441,834 and $73,409. Depreciation and amortization expenses may decrease going
forward as assets related to discontinued operations have been written off.
Other income and expense
Other income consists principally of interest from loans, notes receivable and
short-term investments. Interest expense decreased to $985,501 for the nine
months ended September 30, 2000 from $1,246,225 for the nine months ended
September 30, 1999. Interest expense consists of interest accrued on loans and
convertible notes payable. Interest income or expense is not expected to be
affected by the discontinuance of certain of the Company's operations.
Income taxes
No provision for federal and state income taxes has been recorded as the Company
incurred net operating losses in the third quarter of 1999 and 2000. The net
operating losses will be available to offset any future taxable income. Given
the Company's limited operating history, losses incurred to date and the
difficulty in accurately forecasting future results, management does not believe
that the realization of the potential future benefits of these carryforwards
meets the criteria for recognition of a deferred tax asset required by generally
accepted accounting principles. Accordingly, a full 100% valuation allowance has
been provided.
Liquidity and capital resources
Cash and cash equivalents were $171,313 and $91,368 at September 30, 2000 and
December 31, 1999, respectively.
The Company had negative working capital of $1,003,123 at September 30, 2000.
Net cash used in operating activities was $1,730,437 for the nine months ended
September 30, 2000. Cash used in operating activities was primarily attributable
3
<PAGE>
to a net loss of $3,664,412. This was partially offset by non-cash items such as
depreciation and amortization of $1,026,976, interest expense on conversion of
promissory notes into equity of $394,747 and stock compensation costs of
$457,003. Net cash used in operating activities for the nine months ended
September 30, 1999 was $2,211,940, which was principally due to the net loss of
$2,595,710 offset primarily by a non-cash compensation expense resulting from
stock options granted of $548,434. Based on the discontinuance of certain
operations of the Company, it is anticipated that net cash used on operating
activities on a go forward basis will decrease in the short term. As part of the
accounting for discontinued operations, accounts receivable were written down by
$57,589 and accounts payable by $4,166 for amounts related to the discontinued
operations, for a net charge (recognized in the second quarter) of $53,423.
Net cash used for investing activities of $620,647 for the nine months ended
September 30, 2000 was primarily attributable to the purchase of the LNT assets
and an investment in The Energy Corp., a Florida based intellectual property
company with patents related to the wireless communications industry.. Net cash
provided by investing activities of $52,780 for the nine months ended September
30, 1999 was principally due to reduction in costs of capital equipment
acquired.
Net cash provided by financing activities for the nine months ended September
30, 2000 was $2,431,369 and consisted primarily of proceeds from the issuance of
common stock and demand notes. Net cash provided by financing activities for the
nine months ended September 30, 1999 was $2,164,449, and consisted primarily of
proceeds from the issuance of common stock, less related financing fees and
repayments to an officer.
The Company has satisfied its cash requirements to date primarily through public
and private placements of common stock, warrants, debentures convertible into
shares of common stock and the issuance of common stock in lieu of payment for
services. Also, officers have loaned the Company funds as needed to provide
working capital.
We believe that the $1,750,000 proceeds received this year from the offering
under the SB-2, cash on hand and anticipated revenues will be sufficient to meet
anticipated short term cash requirements only through the end of January, 2001
and we do not expect to generate positive cash flow from operations until at
least 2001. Unless we generate significant revenue or obtain financing in the
near future, our operations in the development stage raise substantial doubt
about our ability to continue as a going concern. There can be no assurance that
additional capital beyond the amounts currently forecasted will not be required,
nor that any such required additional capital will be available on reasonable
terms, if at all, at such time as required by the Company.
The Company, in August 2000, affected a restructure of it domestic operating
model. In doing so, it eliminated a significant portion of its United States
based operations, including a planned elimination of its primary source of
ongoing telephony and planned video streaming revenue. The Company plans on
generating revenue in the future from operations from its remaining assets in
the United States, primarily its web site, its existing assets in the Peoples
Republic of China through its 100% wholly owned operating subsidiary corporation
there, once all regulatory approvals are obtained, and potential synergistic
acquisitions both in the United States and abroad. The Company specifically
expects to generate revenues from its web site and Chinese subsidiary through
business-to-business Internet and website consulting services, advertising
domestically and internationally from both its website and e-magazine, and
application programs and services for websites and other businesses. The Company
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does not expect its Chinese subsidiary to generate revenue until at least the
fourth quarter of 2000 or become profitable until some time in 2001.
Forward-looking statements in this report may prove to be materially inaccurate.
In addition to historical information, this report contains forward-looking
information that involves risks and uncertainties. The words "may", "will",
"expect", "anticipate", "continue", "estimate", "project", "intend" and similar
expressions are intended to identify forward-looking statements. Actual results
may differ materially from those included within the forward-looking statements
as a result of factors, including the risks described above and factors
described elsewhere in this report.
Subsequent Events
In October 2000, the Company issued an unsecured 8% convertible promissory note
in the principal amount of $190,000, payable on demand. The holder converted
this note in November 2000.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Change in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
Form 8-K on file indicating a change in the registrant's
certifying accountants as of February 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Financial Intranet, Inc.
------------------------
(Registrant)
Date: November 20, 2000 /s/ Michael Sheppard
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Michael Sheppard
President
Date: November 20, 2000 /s/ Corey Rinker
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Corey Rinker
Vice President
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