<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
Commission File Number:
YOUNETWORK CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
- -----------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
220 East 23rd Street New York, New York 10010
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 576-2030
--------------
(Registrant's telephone number, including area code)
Check mark whether the issuer: (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.
/ X / Yes / / No
As of November 19, 1999, a total of 41,165,038 shares of the Registrant's Common
Stock, $.001 par value, were issued and outstanding.
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YOUNETWORK CORPORATION
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART 1: FINANCIAL INFORMATION
Item 1 - Financial statements
Balance Sheets - December 31, 1998 and September 30, 1999 (Unaudited) 2-3
Statements of Operations for the Three Months Ended September 30, 1999 and
1998 (Unaudited), the Nine Months Ended September 30, 1999 and 1998
(Unaudited), and for the Period from Inception (January 14, 1998) to
September 30, 1999 (Unaudited) 4
Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited), and for
the Period from Inception (January 14, 1998) to
September 30, 1999 (Unaudited) 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information
</TABLE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1998 1999
---- ----
(Audited) (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 178,068 $ 164,803
Due from stockholder - 23,861
Other current assets 672 37,124
------------ -----------------
Total current assets 178,740 225,788
Property and equipment, net 47,369 158,830
Other assets:
Software development costs 69,425 510,009
Deferred registration costs - 175,740
Prepaid software license - 157,661
Deposits 3,500 182,831
------------ -----------------
Total other assets 72,925 1,026,241
------------ -----------------
$ 299,034 $ 1,410,859
============ =================
</TABLE>
2
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YOUNETWORK CORPORATION
(A Development Stage Company)
Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---- ----
(Audited) (Unaudited)
<S> <C> <C>
Current liabilities:
Deferred revenue $ 175,000 $ 250,035
Current portion of capital lease obligation 14,000 14,789
Due to related party 23,150 -
Accounts payable 9,224 29,136
Other current liabilities 14,729 796
------------ --------------
Total current liabilities 236,103 294,756
Capital lease obligation 25,554 17,957
Commitment
Stockholders' equity:
Common stock:
Class A - par value $.0001 per share,
Authorized - 1,500,000 shares
Issued and outstanding - 1,189 shares
at September 30, 1999 - -
Class B - par value $.0001 per share,
Authorized - 1,500,000 shares
Issued and outstanding - 291 shares
at September 30, 1999 - -
Class C - par value $.0001 per share,
Authorized - 247,000,000 shares,
Issued and outstanding - 33,000,000 shares at
December 31, 1998 and 41,754,452 shares at
September 30, 1999 3,300 4,175
Additional paid-in capital 196,900 2,279,316
Deficit accumulated during the development stage (162,823) (1,185,345)
------------ --------------
Total stockholders' equity 37,377 1,098,146
------------ --------------
$ 299,034 $ 1,410,859
============ ==============
</TABLE>
3
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YOUNETWORK CORPORATION
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Period
From
Inception
(January 14,
Three Months Ended Nine Months Ended 1998) to
September 30, September 30, September 30,
1999 1998 1999 1998 1999
-------------------------- ---------------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 8,819 $ - $ 9,359 $ - $ 9,359
Cost of sales 7,441 - 7,441 - 7,441
------------ ------------ ------------ ------------- ------------
1,378 - 1,918 - 1,918
Expenses:
Compensation 118,843 24,018 210,317 46,742 277,568
Development costs - - - 20,000 20,000
General and administrative 443,756 22,416 667,374 42,019 733,463
Depreciation and amortization 140,482 5,181 154,384 5,600 161,892
Interest income, net of interest
expense (2,612) - (7,635) - (5,660)
------------ ------------ ------------ ------------- ------------
Total expenses 700,469 51,615 1,024,440 114,361 1,187,263
------------ ------------ ------------ ------------- ------------
Net loss during the development stage $ (699,091) $ (51,615) $ (1,022,522) $ (114,361) $ (1,185,345)
============ ============ ============ ============= ============
Net loss per common share, basic and
diluted $(.02) $ (.00) $ (.03) $ (.01) $(.04)
===== ======== ======= ======== ====
Weighted average of common shares
outstanding - basic and diluted 40,753,957 24,090,000 37,095,591 24,090,000 31,088,374
============ ============ ============ ============= ============
</TABLE>
4
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YOUNETWORK CORPORATION
(A Development Stage Company)
Statements of Changes in Stockholders' Equity
For the Period from Inception (January 14, 1998) to
December 31, 1998
and the Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Aditional Accumulated
Common Stock Paid In During the
----------------------------------------------- Development
Shares Amount Capital Stage Total
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of 24,090,000 shares of
common stock on January 22,
1998 for cash (at less than $.01
per share) 24,090,000 $ 2,409 $ (2,209) $ - $ 200
Issuance of 8,910,000 shares of
common stock on December 4,
1998 for cash (at $.02 per share) 8,910,000 891 199,109 - 200,000
Net loss for the period from
inception (January 14, 1998)
to December 31, 1998 - - - (162,823) (162,823)
-------------- ------------ ------------ ------------- ------------
Balances, December 31, 1998 33,000,000 3,300 196,900 (162,823) 37,377
Issuance of 4,630,000 shares
of common stock on
March 22, 1999 for cash
(at $.10 per share) 4,630,000 463 462,537 - 463,000
Exercise of common stock
purchase warrants for no
cash proceeds in accordance
with anti-dilutive provisions
(Notes 9 and 11) 1,479,452 148 (148) - -
Issuance of 2,050,000 shares of
common stock on April 19,
1999 for cash (at $.50 per
share) 2,050,000 205 1,024,795 - 1,025,000
Issuance of 595,000 shares of
common stock on August 19,
1999 for cash (at $1.00 per share) 595,000 59 594,941 - 595,000
Net loss for the nine months ended
September 30, 1999 - - - (1,022,522) (1,022,522)
-------------- ------------ ------------ ------------- ------------
Balances, September 30, 1999 41,754,452 $ 4,175 $ 2,279,025 $ (1,185,345) $ 1,097,855
============== ============ ============ ============= ============
</TABLE>
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YOUNETWORK CORPORATION
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Period
From
Inception
For the Nine For the Nine (January 14,
Months Ended Months Ended 1998) to
September 30, September 30, September 30,
1999 1998 1999
-------------- ------------ --------------
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities $ (1,161,660) $ 89,146 $ (1,095,544)
-------------- ------------ --------------
Cash flows from investing activities:
Purchase of property and equipment (132,142) (9,699) (142,069)
Software development costs (440,584) (59,775) (510,009)
Payment of security deposit (179,331) (5,462) (182,831)
-------------- ------------ --------------
Cash used in investing activities (752,057) (74,936) (834,909)
-------------- ------------ --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,083,000 200 2,283,200
Deferred registration costs (175,740) - (175,740)
Payments of capital lease obligation (6,808) - (12,204)
-------------- ------------ --------------
Net cash provided by financing
activities 1,900,452 200 2,095,256
-------------- ------------ --------------
Net increase (decrease) in cash (13,265) 14,410 164,803
Cash, beginning of period 178,068 - -
-------------- ------------ --------------
Cash, end of period $ 164,803 $ 14,410 $ 164,803
============== ============ ==============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 2,026 $ - $ 4,001
============== ============ ==============
Supplemental Schedule of Non-Cash Investing and Financing Activities
Capital lease obligation incurred for the
acquisition of new equipment $ - $ - $ 44,950
============== ============ ==============
</TABLE>
In March 1999, common stock purchase warrants were exercised and the Company
issued 1,479,452 of Class C common stock for no cash proceeds.
During the nine months ended September 30, 1999, the Company issued 1,189 shares
of Class A common stock and 291 shares of Class B common stock for no cash
proceeds.
6
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YOUNETWORK CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Note 1 - The accompanying financial statements of YouNetwork Corporation (the
"Company") have been prepared in accordance with generally accepted accounting
principles and, in the opinion of management, reflect all adjustments
(consisting of normal recurring adjustments) necessary to fairly present the
Company's financial position at September 30, 1999 and its results of
operations, and cash flows for the interim periods presented. The accounting
policies and other information followed by the Company are contained in the
notes to the Company's annual financial statements and are included in the
Company's registration statement (see Note 2) on Form SB-2 and are incorporated
herein by reference. This quarterly report should be made in conjunction with
such annual report.
Note 2 - During 1999, the Company filed a registration statement under the
Securities Act of 1933 to register 1,000,000 shares each of Class A and Class B
common stock. The first 250,000 Class A shares will be offered at no cost to
each consumer who registers to become a member of the Company's consumer
network. The remaining 750,000 Class A shares will be distributed to members
based upon referring new members to the consumer network. Class B shares will be
offered to consumer network members at $1.00 per share, which may only be paid
with rebates earned by members making purchases on the consumer network.
Upon the issuance of Class A shares, the Company will record a charge to
operations for promotions costs for the value of the shares issued based on the
most recent private offering. Upon the issuance of Class B shares, the Company
will record a reduction in the liability for rebates due to members of the
consumer network. A liability for rebates due to members and a corresponding
charge to cost of goods sold are recorded when members make purchases on the
consumer network.
On July 13, 1999, the aforementioned registration statement became
effective.
During the nine months ended September 30, 1999, the company issued 1,189
Class A shares and 291 Class B shares.
Note 3 - In May 1999, the Company received a software license from a supplier
for period of one year. License fees of approximately $270,000 related to the
agreement will be charged to operations over twelve months.
Note 4 - In May 1999, the Company entered into an agreement with a leasing
company to provide the Company with a $600,000 line of credit to finance
computers and other equipment. As of June 30, 1999, the Company has paid
approximately $133,000 for security deposits to the leasing company.
7
<PAGE>
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
To the knowledge of the Company there are no legal proceedings pending
or threatened.
ITEM 2: CHANGES IN SECURITIES
Not Applicable
ITEM 3: DEFAULTS IN SENIOR SECURITIES
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8K
(1) Exhibits:
27.1 Financial Data Schedule
(2) Reports on Form 8-K: None
8
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SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
YOUNETWORK CORPORATION
By: /S/ Don S. Senerath
--------------------------------
Don S. Senerath, CEO
and Principal Financial Officer
Date: November 18, 1999
9
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ITEM 2: PLAN OF OPERATION.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and the notes thereto. Certain statements set forth below constitute
"forward-looking statements." Forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause our actual
results, performance or achievements, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Given these uncertainties, investors
and prospective investors are cautioned not to place undue reliance on
forward-looking statements. We disclaim any obligation to update information
contained in any forward-looking statement.
OVERVIEW.
We are a development stage company, which launched a unique online consumer
network. Our consumer network offers a broad range of consumer products and
services through our website, www. YouNetwork.com. On July 20, 1999, we
commenced offering products or services for sale. Since our inception we have
been primarily engaged in the development of our computer software programs,
negotiating agreements with our vendors, raising capital, and initial planning
and development of the our website and operations. As a result, there has not
been any significant operating revenue generated by utilization of our services
or products through December 31, 1998, and the nine months ended, September 30,
1999. For the period from inception through September 30, 1999, the Company has
incurred cumulative losses of $1,185,345.
During the first half of 1999, our efforts were focused on the preparation
and completion of a registration statement on Form SB-2 filed with the
Securities and Exchange Commission on February 5, 1999. Pursuant to our
registration statement, we registered 2,000,000 shares of our Class A and Class
B common stock. This initial public offering was declared effective by the SEC
on July 13, 1999. We raised no direct proceeds from this offering. One class A
share is offered at no cost to each of the first 250,000 members. The remaining
750,000 class A shares will be offered to our members based on net value, a
proprietary referral tracking technology developed by us. Our class B shares is
offered at the rate of one share for each $1.00 of a member's rebate balance. We
will receive an indirect economic benefit from the sale of our class B shares to
the extent that our obligation to pay rebate dollars to our members is reduced.
YouNetwork intends to raise its membership base through its unique offering
of 1,000,000 Class A shares and 1,000,000 Class B shares, which are currently
offered for sale on our website. The first 250,000 people who register on our
website shall receive one Class A share at no cost. The remaining 750,000 Class
A shares shall be distributed to our new member through net value, which we
define as one point for each five referrals a member refers to our website who
joins YouNetwork. Class B shares are offered and sold based on one rebate dollar
for each Class B share. A rebate dollar is accumulated in a members rebate
balance through the purchase of products and services on our website.
10
<PAGE>
During the nine months ended September 30, 1999, the Company issued 1,189
shares of Class A common stock and 291 shares of Class B common stock for no
cash proceeds.
We have historically financed our operations primarily through the sale of
equity securities.
As of September 30, 1999, our principal commitments consisted of
obligations outstanding under operating and capital leases. Although we have no
material commitments for capital expenditures, we anticipate a substantial
increase in our capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel.
Our capital requirements depend on numerous factors, including, market
acceptance of our services, the amount of resources we devote to investments in
our electronic commerce networks, the resources we devote to marketing and
selling our services and our brand promotions and other factors. We have
experienced a substantial increase in our capital expenditures since our
inception consistent with the growth in our operations and staffing; we
anticipate that this will continue for the foreseeable future particularly
relating to our website and systems infrastructure.
On May 26, 1999, we entered into a master lease agreement with Leasing
Technologies, Inc., in which we leased computers, servers and other hardware.
The term of the agreement shall commence on the installation date of such
equipment for a term of 36 months.
In March, April and August of 1999, we sold 7,275,000 shares of our class C
common stock resulting in proceeds of $2,083,00. Proceeds from the private
placement are being used for salaries and fees, network expansion, equipment
upgrades, and development costs in connection with our proprietary software,
tracking.
In March of 1999, we issued warrants to a consultant to purchase 100,000
shares of class C common stock in consideration of certain services to be
rendered in the form of graphic design of our website. The rights represented by
this warrant are exercisable at any time commencing on March 31, 1999, and
expiring on March 1, 2000, at an exercise price of $2.00 per share provided,
however, that if the warrant is exercised after our first underwriting public
offer of our common stock, the exercise price shall be the lesser of $2.00 or
50% of the offering price for which our common stock is sold in our first
underwritten public offering, subject to adjustment in accordance with its
anti-dilution provision. After the expiration of the exercise period, the
consultant will have no right to purchase any shares of the common stock
underlying this warrant.
In May of 1999, we issued warrants to purchase a maximum of 144,000 shares
to a leasing company in partial consideration for entering into an equipment
leasing agreement for
11
<PAGE>
$600,000 line of credit to finance computers and other equipment. The warrants
are exercisable during the five-year period commencing May 23, 1999, at the
exercise price of $.50 per share. The shares of common stock underlying the
warrants contain piggyback registration rights.
In August of 1999, we granted approximately 80,000 stock options
("Options") under our 1999 Stock Option Plan to several employees and one
professional in consideration of services rendered. The Options do not vest
until December 31, 1999, and are exercisable at a, at a price of $0.35 per
share.
We believe that our current cash will be sufficient to meet our anticipated
needs for working capital, capital expenditures and business expansion for the
next 6 months. After 6 months, if cash generated from operations is insufficient
to satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities or to obtain a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all.
PRODUCT RESEARCH AND DEVELOPMENT.
International Computing, LLC, formerly known as Digital Pulp Technologies,
LLC, provides software and system integration consultation services in
connection with our efforts to build out our website and to develop our
proprietary tracking technology. For the period from inception through December
31, 1998, we paid International Computing $89,425 for such consulting services.
In March 1999, we entered into an oral agreement with International Computing to
continue to provide software and systems integration consultation services to
us, which will be paid $50,000 per month for such services through completion of
the proprietary software development.
Since its inception, YouNetwork has been primarily engaged in the
development of its computer software program, negotiating agreements with its
vendors and raising capital. As a consequence, there has not been any materiall
operating revenues generated by the utilization of our services and/or products
since inception. Management believes that by offering competitively priced
products, purchase incentives in the form of rebates and equity participation to
members, they can develop an on-line sales channel with low customer acquisition
costs.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessing to organize and properly address certain fields containing a
two-digit year is commonly referred to as the Year 2000 problem. As the year
2000 approaches, computer systems may be unable to accurately process certain
date-based information.
12
<PAGE>
We have implemented a Year 2000 program to ensure that our computer systems
and applications will function properly beyond 1999. We have identified vendor
and business partner software with which we electronically interact, or from
which we purchase supplies, and have requested Year 2000 compliance
certifications. We have received verbal assurances from those vendors and
business partners that they and their respective suppliers are Year 2000
compliant. Although we believe all of our systems are and will be Year 2000
compliant, there can be no assurances that all of our vendors' and business
partners' systems will be Year 2000 compliant. Our cost to comply with the Year
2000 initiative is not expected to be material.
In June of 1999, we began converting our computer system to be Year
2000 compliant. As of November 12, 1999, we spent approximately $50,000 on our
Year 2000 compliance efforts. This figure includes all labor and expenses.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 164,803
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 225,788
<PP&E> 187,019
<DEPRECIATION> 28,189
<TOTAL-ASSETS> 1,410,859
<CURRENT-LIABILITIES> 294,756
<BONDS> 0
0
0
<COMMON> 4,175
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,410,859
<SALES> 9,359
<TOTAL-REVENUES> 9,359
<CGS> 7,441
<TOTAL-COSTS> 1,024,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,022,522)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,022,522)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,022,522)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
