UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
____________
Commission file number: 0-26975
PREFERENCE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Nevada 88-0417949
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
333 North Ranch Drive, Suite 810
Las Vegas, Nevada 89106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 648-6400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ..X.. No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the numbers of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
At July 31, 2000, there were 28,712,974 shares of the Registrant's
$.001 par value Common Stock outstanding.
Exhibit Index on page 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Preference Technologies, Inc.
(A Development Stage Company)
Balance Sheet
<CAPTION>
Assets
June 30, 2000 December 31, 1999
(unaudited) (audited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 4,892 $ 32,791
Accounts and notes receivable net of allowances 1,129 ----
for doubtful accounts of $0 and $0
Notes receivable - employees, net of allowances 13,484 14,700
for doubtful accounts of $1,600 and nil
Prepaid expenses 72,417 ----
----------- ----------
Total current assets 91,922 47,491
Furniture & equipment, net 859,701 637,276
Other assets 67,756 67,756
----------- ----------
Total assets $ 1,019,379 $ 752,523
=========== ==========
Liabilities and Stockholders' Deficit
Accounts payable & accrued expenses $ 1,186,967 $ 770,912
Deferred revenue 409,352 ----
----------- ----------
Total current liabilities 1,596,319 770,912
Stockholders' deficit
Common Stock @ $.001 par value
Authorized 200,000,000 shares
Issued and outstanding
28,712,974 and 26,413,052 shares, respectively 28,713 26,413
Additional paid-in capital 14,422,463 8,315,941
Deficit accumulated during development stage (15,028,116) (8,360,743)
----------- ----------
Total stockholders' deficit (576,940) (18,389)
----------- ----------
Total liabilities and stockholders' equity $ 1,019,379 $ 752,523
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
<TABLE>
Preference Technologies, Inc.
(A Development Stage Company)
Statement of Operations
<CAPTION>
February 3, For the
For the Three Months 1999 Six months
------------------------------------
Ended Ended (Inception) to Ended
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $0 $5,098 $0 $5,098
Cost of sales 0 0 0 0
------------------------------------------------------------------------
5,098
Gross profit 0 0 5,098
Selling, general and admin. exp 1,557,189 3,325,560 1,943,666 6,692,826
------------------------------------------------------------------------
Loss from operations (1,557,189) (3,320,462) (1,943,666) (6,687,728)
Other income & expense
Misc. income 0 0 0 236
Interest income 9,265 7,595 9,265 20,120
0 81,822
Forgiveness of debt 0 0
0 (1,557,335)
Financing expense 0 0
------------------------------------------------------------------------
Total other income (expense) 9,265 7,595 (1,466,248) 20,356
------------------------------------------------------------------------
Net loss ($1,547,924) ($3,312,867) ($3,409,914) (6,667,372)
========================================================================
Basic loss per share ($0.06) ($0.12) ($0.14) ($0.24)
Diluted loss per share ($0.06) ($0.12) ($0.14) ($0.24)
Weighted - average shares outstanding 25,118,670 28,681,974 25,118,670 27,925,667
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
Preference
Technologies, Inc.
(A Development Stage Company)
Statement of Cash Flows
<CAPTION>
For the For the Period from
Six months Ended February 3, 1999 (Inception) to
June 30, 2000 June 30, 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,667,372) $(3,409,914)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 160,626 67,420
Increase from common stock issued for services ---- 100,000
Financing expense recognized from issuing
below market warrants ---- 693,000
Compensation expense for issuing below
market options 711,506 343,448
Financing expense recognized for issuing below
market stock options ---- 864,335
Common stock issued for employee settlement 69,219 ----
(Increase) decrease in
Accounts receivable (1,129)
Notes receivable - employee 1,216 (20,600)
Prepaid expenses (72,417) (8,564)
Prepaid Services -- (56,922)
Other assets -- (52,756)
Increase (decrease) in
Accounts payable and accrued expenses 416,055 80,895
Deferred revenue 409,352 ----
----------- -----------
Net cash used in operating activities (4,972,944) (1,399,658)
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (383,051) (227,923)
----------- -----------
Net cash used in investing activities: (383,051) (227,923)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 68,000 292,000
Proceeds from private placement of
common stock 6,060,643 3,200,000
Offering costs (800,547) (300,000)
----------- -----------
Net cash flows provided by financing activities 5,328,096 3,192,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (27,899) 1,564,419
Cash and cash equivalents, beginning of period 32,791
----------- -----------
Cash and cash equivalents, end of the period $ 4,892 $ 1,564,419
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 1 - GENERAL
The accompanying financial statements and footnotes have been condensed and
therefore do not contain all disclosures required by generally accepted
accounting principles. The interim financial data are unaudited; however,
in the opinion of Preference Technologies, Inc. (the "Company"), the
interim data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of results for the interim
period. Results for the interim periods are not necessarily indicative of
those to be expected for the full year.
NOTE 2 - DESCRIPTION OF BUSINESS
Preference Technologies, Inc. (the "Company") was incorporated in Nevada in
February 1999 under its former name StockUp.com, Inc. Effective February
23, 2000, StockUp.com, Inc. officially changed its name to Preference
Technologies, Inc.
The Company is developing second-generation Internet technology(TM)
products that will be licensed to other websites and distributed to
end-users. The Company's products offer the end user increased levels of
customization and interactivity. Websites deploying the technology will
benefit from increased traffic, enhanced user retention, and the ability to
build targeted aggregate marketing profiles of users.
Courtleigh Capital, Inc. ("Courtleigh"), a Kansas corporation and a
publicly traded corporation, was first incorporated under the name ANCR,
Inc. on July 30, 1985 under the laws of the State of Colorado. ANCR, Inc.
became an inactive shell corporation, and on July 23, 1997 changed its name
to CEA Lab, Inc. Furthermore, on October 16, 1995, CEA Lab, Inc.
reincorporated in the State of Kansas and subsequently changed its name to
Courtleigh Capital, Inc. In February 1999, Courtleigh subsequently changed
its name to StockUp.com, Inc. and reincorporated in the State of Nevada.
On December 30, 1998, Marketing Direct Concepts, Inc. ("MDC"), a Nevada
corporation, entered into an Asset Purchase and Escrow Agreement, whereby
it sold assets and liabilities, valued at $368,178, to the Company in
exchange for 18,000,000 shares of Courtleigh's common stock.
Courtleigh had minimal assets and liabilities at the date of the
acquisition and did not have operations prior to the acquisition.
Therefore, no pro forma information is presented.
5
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles that contemplate continuation of
the Company as a going concern. Negative cash flows used in operations
during the six months ended June 30, 2000 and the period from February 3,
1999 (inception) to June 30, 1999 were $4,972,944 and $1,399,658
respectively. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the Company's
development program and its transition to the attainment of profitable
operations is dependent upon the Company achieving a level of sales
adequate to support the Company's cost structure. In addition, realization
of a major portion of the assets in the accompanying balance sheet is
dependent upon the Company's ability to meet its financing requirements and
the success of its plans to sell products. The financial statements do not
include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
In addition to the capital raised as of June 30, 2000 through private
equity offerings, the Company is currently negotiating with certain
investors about raising additional capital through private placement
offerings. Unless the Company raises additional funds, either by debt or
equity issuances, management believes that its current cash on hand will be
insufficient to cover its working capital needs until the Company's sales
volume reaches a sufficient level to cover operating expenses.
The information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis and financial statements and
notes thereto included in Preferences Technologies, Inc.'s Form 10-K.
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising costs for
the three months and six months ended June 30, 2000 were $55,635 and
$437,910, respectively. For the three months ended June 30, 1999 and for
the period from February 3, 1999 (inception) to June 30, 1999 advertising
costs were $100,302 and $114,021, respectively.
Net Loss per Share
------------------
For the periods, the Company adopted SFAS No. 128, "Earnings per Share."
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding.
6
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
Diluted loss per share is computed similar to basic loss per share except
that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common
shares had been issued and if the additional common shares were dilutive.
For the periods from February 3, 1999 (inception) to June 30, 1999, six
months ended June, 30, 2000 and the three months ended June 30, 2000, and
1999 the Company incurred a net loss. Basic and diluted loss per share is
the same.
Stock Split
-----------
On February 23, 2000, the Company effected a two-for-one stock split of its
common stock. All share and per share data have been retroactively restated
to reflect this stock split.
Concentrations of Credit Risk
-----------------------------
The financial instrument which potentially subjects the Company to
concentrations of credit risk is cash. The Company places its cash with
high quality financial institutions, and at times it may exceed the Federal
Deposit Insurance Corporation $100,000 insurance limit. As of June 30,
2000, there were no uninsured portions held at financial institutions.
Revenue Recognition
-------------------
Revenue from the sale of CD's and setup fees are recognized as shipments
occur. Revenues from advertising, internet service providers and "opt-ins"
are recognized per the individual controlling contract, which stipulates
the detail and frequency of the billing procedure. Licensing fees (under
contract) are recognized per the contract, which generates periodic
billing.
NOTE 4 - STOCKHOLDERS EQUITY
In April 2000, an employee exercised 32,000 options into common stock at an
exercise price of $2.125 for a total consideration of $68,000.
In April 2000, the Company issued 9,000 shares of common stock as
settlement of outstanding claims with three former employees. The Company
recorded $69,219 as settlement expense.
In June 2000, the Company issued 21,000 shares of common stock as an
accommodation to the purchasers and under the same terms and conditions of
the June 1999 Private Placement Memorandum at $3.00 per share for total
consideration of $62,950. In connection with the issuance, the Company also
issued 3,000 warrants to purchase common stock at an exercise price of
$5.00.
As of December 31, 1999, the number of shares of common stock outstanding
totaled 26,413,052. As of June 30, 2000, common stock shares outstanding
totaled 28,712,974.
NOTE 5 - UNFULFILLED ORDERS
As of June 30, 2000, the company has sales contracts totaling $273,783 that
have not yet been fulfilled. These contracts are for CD's $254,683, set up
fees $4,100 and for ISP License fees $15,000.
7
<PAGE>
NOTE 6 - SUBSEQUENT EVENTS
The Company entered into a Credit Agreement to provide $1,000,000 for
working capital in July 2000. The Company is in the process of finalizing
the documents, and has received $450,000 to date. It is anticipated that
the $1,000,000 will be repaid from the proceeds of a private placement of
the Company's securities; however, there is no assurance that the Company
will be able to complete a private placement. The Company's inability to
obtain additional financing will severely impact the company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND
FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR SIMILAR LANGUAGE. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. THE CAUTIONARY STATEMENTS MADE IN THIS DOCUMENT SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR
IN THIS DOCUMENT. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS. THE
COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE
SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. IN EVALUATING THE COMPANY'S
BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH BELOW.
Overview
The Company was incorporated in Nevada in February 1999 and is developing
second-generation Internet technology products. The Global Information Gateway
(GIG) is the Company's first product. The GIG aggregates news and other
information customized to the users preference and delivered to the desktop in
real time. The Corporation Information Gateway (CIG) is a branded version of the
GIG. By deploying the CIG, companies create a two-way communication link and
establish a permanent presence on the user's desktop. The CIG provides business
to business (B2B) and business to consumer (B2C) marketing solutions.
From its inception to date, the Company has incurred costs associated with the
development and launch of its products, probable markets, and business. The
Company has established relationships with information providers that increase
8
<PAGE>
the quality and marketability of the Company's products. The Company's products
commenced generating revenues during the second quarter of 2000.
The Company has historically financed its operations to date through the sale of
its common stock. Since inception through June 30, 2000, the company issued
28,712,974 shares of its common stock. The Company raised $2.9 million, net of
offering costs, from four accredited investors as follows: (i) February 1999
("the February Offering") - issuance of 2,666,664 shares of common stock in
exchange for $900,000; and (ii) issuance of options under Rule 506 of Regulation
D, promulgated under Section 4(2) of the Securities Act of 1933 (the "Securities
Act"), to acquire units comprised of 2,400,000 shares of common stock, and
1,200,000 warrants exercisable at $1.25 per share, and options to acquire
581,672 shares of common stock at an aggregate exercise price of $31,250 in
exchange for $2.3 million cash. The February 1999 Offering was conducted under
Rule 504 of the Securities Act. It provided the necessary seed capital to
commence implementation of the Company's business plan. 2,400,000 of these
shares issued in the February 1999 Offering are currently restricted and subject
to a demand registration rights as of January 1, 2000. The 2,400,000 shares and
the shares underlying the 1,200,000 warrants are subject to reasonable
underwriter trading restrictions in the event of a public offering. The
investors holding these securities are also entitled to anti-dilution rights in
the event the Company issues stock at less than $1.25 per share.
In June 1999, the Company entered into a private placement agreement to offer up
to $12,000,000 worth of shares of common stock (4,000,000 shares). The Company
extended the minimum offering of $600,000 through October 31, 1999, for which
the minimum was timely met. The Company also issued two warrants at an exercise
price of $5 per share for every six shares of common stock to investors that
provide a minimum of $18,000 with a two-year term. The shares underlying these
warrants shall be subject to piggy-back registration rights. Institutional
investors received the same type and number of warrants, except the exercise
price shall be $5 per share. The Company was required to pay to each
broker-dealer warrants to purchase shares equal to 10% of the Company's common
stock sold by such broker-dealer with an exercise price of $7.50. The shares
issued pursuant to the June 1999 private placement are not freely tradable until
the registration of the private placement agreement. The warrants may be
exercised, commencing upon the date the Company closes a public offering of its
stock pursuant to a Registration Statement registering the shares underlying the
warrants and terminating 180 days thereafter. The investment period expired on
December 1, 1999.
At December 31, 1999, a total offering of $1,201,247, net of offering costs, was
completed, pursuant to which 458,334 shares of common stock were issued. In
connection with such offering, the Company granted 113,106 warrants to investors
at December 31, 1999 at an exercise price of $5 per share. The Company further
granted 45,832 warrants to broker-dealers at an exercise price of $7.50 per
share.
On December 5, 1999, the Company entered into another private placement
agreement to offer up to $4,000,000 worth of units to accredited investors with
a minimum offering of $2,000,000. During the six months ended June 30, 2000, the
Company received $2,910,978, net of offering costs, and issued 1,301,600 shares
of common stock and 433,866 warrants. Each unit was comprised of six shares of
the Company's common stock and two warrants at an exercise price of $5 per
9
<PAGE>
share. The warrants may be exercised, commencing upon the date the Company
closes a public offering of its stock pursuant to a Registration Statement
registering the shares underlying the warrants and terminating three years
thereafter. Each warrant shall be callable upon providing the holder 20 days'
written notice in the event the shares have been registered and the closing bid
price of the shares is at a price of $10 per share during 10 consecutive trading
days. The securities comprising the units shall not be detachable unless and
until a Registration Statement is declared effective.
The December 5, 1999 offering also included distribution of warrants to
broker-dealers in the amount of 20% of the aggregate proceeds raised by each
broker, divided by 3.75 at an exercise price of $5 per share. At June 30, 2000,
a total of 178,600 warrants had been issued to brokers. In the event the Company
registers its securities, the Company shall register the shares and the shares
underlying the warrants, subject to a trading lock-up, as follows: (i) upon the
effective date of the Registration Statement ("the Effective Date"), 33.33% of
such securities shall be free trading; (ii) 45 days after the Effective Date,
33.33% of such securities shall be free-trading, and (iii) 90 days after the
Effective Date, 33.33% of such securities shall be free-trading. In the event
the Company has not filed a Registration Statement registering the shares and
the shares underlying the warrants prior to July 1, 2000, then a majority of the
holders of the units issued shall have the right to demand that the Company
immediately register all such securities. In the event of such a demand, then
upon the first of each month after such demand during which the Registration
Statement is not effective, commencing no earlier then October 1, 2000, the
number of warrants issued hereunder shall be increased, on a pro-rata basis, to
the holders of the units, by an amount equal to 2% of the warrants issued. As of
August 11, 2000 no demand has been made.
On December 3, 1999, the Company entered into a subscription agreement to offer
units at a price of $9 per unit. For investors investing at least $1,000,000,
the price per unit was decreased to $7.50 per unit. Each unit was comprised of
six shares of the Company's common stock and two warrants. There was no minimum
or maximum total investment related to this agreement. The Company was required
pay to each broker-dealer warrants to purchase shares equal to 10% of the
Company's total units issued. All warrants shall have an exercise price of $5
per share. In the event the Company has not filed a Registration Statement on or
prior to September 1, 2000, the investor shall have the right to demand
registration of the shares and the warrant shares, and the number of warrants
issued shall be increased by 5% of the original number of warrants issued,
commencing September 1, 2000 and upon the first of each month thereafter, until
the shares and warrants are registered. In the event the Company, during the
six-month period of time following the date of the agreement, sells shares at
less than $3 per share (or $2.50 per share in the event an investor is providing
$1,000,000), then the Company is required to issue additional securities to the
investor in an amount such that the investor would receive, in the aggregate,
the same securities as if he had participated in the reduced price offering.
As of March 31, 2000, a total offering of $3,435,577, net of offering costs, was
completed, and 1,436,314 shares of common stock were issued. In connection with
the offering, a total of 47,878 and 478,780 warrants were issued to brokers and
investors, respectively.
The Company has incurred significant net losses and negative cash flows from
operations since our inception. At June 30, 2000, we had an accumulated deficit
10
<PAGE>
of $15,028,116. These losses have been funded primarily through the issuance of
our equity securities. We intend to continue to invest heavily in marketing and
brand development, content enhancements, and technology and infrastructure
development. As a result, we believe that we will continue to incur net losses
and negative cash flows from operations for the foreseeable future.
For the three months ended June 30, 2000 and for the six months period ended
June 30, 2000, the Company's selling, general and administrative expenses were
$3,325,560 and $6,692,826, respectively. For the three months ended June 30,
1999 and from February 3, 1999 (inception) to June 30, 1999, the Company's
selling, general and administrative expenses were $1,557,189 and $1,943,666,
respectively. The Company earned $7,595 in interest income for the three months
ended June 30, 2000 and $20,120 for the six months ended June 30, 2000. For the
comparable periods of 1999 the Company earned $9,265 and $9,265, respectively.
The net loss for the three months and six months ended June 30, 2000 totaled
$3,312,867 and $6,667,372, respectively. The net loss for the three months ended
June 30, 1999 and for the period from February 3, 1999 (inception) to June 30,
1999 totaled $1,547,924 and $3,409,914, respectively.
We incurred cumulative deferred compensation, which represents the difference
between the exercise price of stock options granted and the fair market value of
the underlying common stock at the date of grant. The difference is recorded and
amortized over the vesting period of the applicable options. Options granted
through December 1999 typically vest over 15 months, although a portion of those
options vested immediately. Options granted after December 1999 generally vest
over 36 months. Of the total deferred compensation amount, approximately
$209,664 and $343,448 was expensed during the three months ended June 30, 2000
and 1999. For the six months ended June 30, 2000 approximately $711,506 was
expensed and $343,448, respectively for the period from (inception) February 3,
1999 to June 30, 1999.
As of June 30, 2000, the Company had current assets of $91,922, and $859,701 in
furniture, equipment and other assets of $67,756, resulting in total assets of
$1,019,379. The Company's current liabilities were $1,596,319.
Results of Operations
The Company is a development stage company and generated operating revenues
totaling $5,098 for the three months ended June 30, 2000 and $0 for the period
from February 3, 1999 (inception) to June 30, 1999. While the Company continues
to focus its efforts on developing quality products, it is moving forward with
its sales and marketing efforts to establish a large consumer base for these
products. Revenues have initiated and are expected to grow. While there is no
assurance, the Company anticipates that by continuing to develop quality
products and establishing a consumer base, it will be in a position to generate
greater revenues in the future.
On June 29, 2000, the Company entered into two licensing agreements for the use
of its product for one year. The initiation date is July 1, 2000. The annual
value is $400,000, which was received as of June 30, 2000 and is currently
booked as deferred revenue. In addition, as of June 30, 2000, the Company, has
sales contracts totaling $273,783 that have not been fulfilled.
11
<PAGE>
Operating Expenses
------------------
Selling, General and Administrative Expenses
--------------------------------------------
For the three months ended June 30, 2000 and for the comparable period in 1999,
the Company incurred $3,325,560 and $1,557,189, respectively, in operating
expenses. For the six months ended June 30, 2000 and for the period from
inception (February 3, 1999) through June 30, 1999, operating expenses were
$6,692,826 and $1,943,666, respectively. These expenses were primarily for sales
and marketing expenses, product development and general administrative costs.
The increase is due to the increased activity in sales, continuing product
development and increased general business activity. The Company expects its
absolute dollar expenses to decline from current levels for the remainder of the
year.
Other Income
------------
Miscellaneous Income and Interest Income totaled $20,356 and $7,595 for the
three months and six months ended June 30, 2000, respectively. Investment income
in future periods may fluctuate as a result of fluctuations in average cash
balances maintained by the Company and changes in the market rates of its
investments.
Financing Expense
-----------------
For the three months ended June 30, 2000 and June 30, 1999, there was no finance
expense incurred. For the six months ended June 30, 2000 and for the period from
February 3, 1999 (inception) to June 30, 1999, finance expense was $0 and
$1,557,335, respectively. Financing expense consists primarily of cost
associated with the issuance of below market options and warrants.
Depreciation and Amortization
-----------------------------
For the three months ended June 30, 2000 and for the comparable period in 1999,
depreciation and amortization expenses were $94,532 and $40,682, respectively.
For the six months ended June 30, 2000 and the period from February 3, 1999
(inception) to June 30, 1999, depreciation and amortization expenses were
$160,626 and $67,420, respectively.
Stock-Based Compensation Expense
--------------------------------
For the three months ended June 30, 2000, $209,664 of compensation expense was
recorded. For the six months ended June 30, 2000, $711,506 of compensation
expense was recorded. The unamortized balance is being amortized over the
vesting period for the individual options, which is typically 15 months for
options issued earlier than December 1999 and 36 months for options issued since
that date. For the three months and six months ended June 30, 1999 compensation
expense of $343,448 and $343,448 were recorded, respectively.
12
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Liquidity and Capital Resources
-------------------------------
The Company has generated revenues totaling $5,098 for the three months and six
months ended June 30, 2000. The Company anticipates that it will continue to
incur net losses and negative cash flows from operations for the foreseeable
future. The rate at which these losses will be incurred are anticipated to
decline from current levels. The Company's source of capital from February 3,
1999 (inception) to June 30, 2000 has been investment capital provided by third
parties. Further, the Company anticipates it will require additional capital
contributions to fund its operations during the year 2000. In December 1999, the
Company commenced two private offerings of its securities.
During the three months ended June 30, 2000, the company received proceeds of
$130,950 from the sales of 53,000 shares of capital stock through the exercise
of employee stock options and as an accommodation to the purchasers and under
the same terms and conditions of the June 1999 Private Placement Memorandum. For
the six months ended June 30, 2000, total capital raised was $5,328,096 (net of
offering costs) for the issuance of 2,299,912 shares.
Capital expenditures have generally been comprised of purchases of computer
hardware and software as well as leasehold improvements related to leased
facilities and are expected to remain constant in future periods.
The Company currently has commitments, including those under operating lease
agreements. The Company has experienced a substantial increase in its capital
expenditures and operating lease arrangements since its inception, which is
consistent with increased staffing, and does not anticipate that this will
continue to grow in the future. Additionally, the Company will continue to
evaluate possible acquisitions of or investments in businesses, products, and
technologies that are complementary to those of the Company, which may require
the use of cash. Management believes existing cash and investments will not be
sufficient to meet the Company's operating requirements for the next twelve
months; however, the Company may sell additional equity or debt securities or
obtain credit facilities to further enhance its liquidity position. The sale of
additional securities could result in additional dilution to the Company's
shareholders.
13
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various actions and proceedings incident to its normal
business operations. The Company believes that the outcome of such litigation
and proceedings, individually and in the aggregate, will not have a material
adverse effect on the business or financial condition of the Company.
Item 2. Changes in Securities
During the three months ended June 30, 2000, the Company received funds
($130,950) for shares sold from our offering of June 30, 1999 (21,000 shares)
and sold 32,000 shares from the exercise of employee stock options. The Company
also issued 9,000 shares in a former employee settlement dispute. For the six
months ended June 30, 2000, the Company received $5,328,096 (net of offering
costs) for the issuance of 2,299,912 shares of common stock.
As of December 31, 1999, the number of shares of common stock outstanding
totaled 26,413,052. As of the March 31, 2000, common stock shares outstanding
totaled 28,650,964. As of June 30, 2000 the number of outstanding shares of
common stock totaled 28,712,974.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
On June 21, 2000, the annual stockholders meeting was held. Two items were
presented to the shareholders for consideration: (1) The election of a Board of
Directors to serve until the annual stockholders meeting of 2001; and (2) The
Ratification of the appointment of Singer, Lewak, Greenbaum & Goldstein LLP, the
Independent Auditors, through 12/31/00.
The votes were as follows:
Director Candidate For Against Abstain
------------------ --- ------- -------
Robert Forbuss 16,399,619 0 0
William Louden 16,399,619 0 0
Leo Verheul 16,399,619 0 0
Michael Calderone 16,399,219 400 0
Auditors 16,378,415 0 21,204
--------
Item 5. Other Information
On July 17, 2000, Leo Verheul, Chief Information Officer and a Director of the
Company passed away. On July 1, 2000, Paul Yeager, Chief Financial Officer,
resigned to pursue other interests. The Company continues to diligently search
for replacements for these two positions.
As of August 1, 2000, Mr. E. J. Conner, Jr. was named interim Chief Financial
Officer. Mr. Conner brings over 20 years of financial experience to the Company.
Mr. Conner has served as Vice-President Operations & Chief Financial Officer of
Porta-Kamp Construction, Inc., Houston, TX and Vice President of L. C. M.
Management Company, Barker, TX, a company specializing in financial consulting
services. He has held numerous financial positions in the oil and gas industry
and served on the Board of Directors of two manufacturing companies.
14
<PAGE>
Item 6.
(A) Exhibits
27. Financial Data Schedule
(B) During the three months ended June 30, 2000, no Form 8-K reports were
filed.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Signature Title Date
--------- ----- ----
/s/ Michael Calderone
________________________ Director August 29, 2000
Michael Calderone Chief Executive Officer
(Principal Executive Officer)
/s/ E. J. Conner, Jr.
________________________ Chief Financial Officer August 29, 2000
E. J. Conner, Jr. (Principal Accounting/Financial
Officer)
15
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INDEX TO EXHIBITS
--------------------------------------------------------------------------------
Exhibit
No. Description Page
--- ----------- ----
27 Financial Data Schedule 17
16
