FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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
Commission file number: 0-26109
NETTAXI.COM
(Exact name of registrant as specified in its charter)
Nevada 82-0486102
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1696 Dell Avenue, Campbell, CA 95008
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (408) 879-9880
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:
As of October 31, 2000, the registrant had 43,049,586 shares of common
stock, $.001 par value per share, outstanding.
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NETTAXI.COM
CONTENTS
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, as of September 30, 2000 (unaudited) and
December 31, 1999 3
Condensed Consolidated Statements of Operations, Three and Nine Months Ended
September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Shareholders' Equity (Deficiency),
September 30, 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows, Nine Months Ended
September 30, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
EXHIBIT INDEX 34
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NETTAXI.COM
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
December 31, 1999 2000
(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 987,700 $ 15,487,400
Accounts receivable, net of allowance for doubtful accounts of $83,600 and 1,181,600 1,823,900
$245,900, respectively
Prepaid expenses and other assets 609,200 1,077,700
----------------- ---------------
TOTAL CURRENT ASSETS 2,778,500 18,389,000
Property and equipment, net 1,968,600 1,780,500
Intangibles, net 578,000 425,000
Deferred expenses 706,100 436,000
----------------- ---------------
TOTAL ASSETS $ 6,031,200 $ 21,030,500
================= ===============
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,041,400 $ 1,623,500
Accrued expenses 664,500 579,900
Income taxes payable 125,600 -
----------------- ---------------
TOTAL CURRENT LIABILITIES 4,831,500 2,203,400
LONG-TERM LIABILITIES
Convertible notes payable 3,200,000 -
----------------- ---------------
TOTAL LIABILITIES 8,031,500 2,203,400
Commitments and contingencies
SHAREHOLDERS' (DEFICIENCY) EQUITY
Preferred stock, $.001 par value; 1,000,000 shares authorized; no shares issued
and outstanding
Common stock, $.001 par value; 50,000,000 and 200,000,000 shares
authorized; 23,214,446 and 43,049,586 shares issued and outstanding, respectively 23,200 43,000
Additional paid-in capital 11,804,300 44,060,800
Deferred Compensation (491,400) (577,500)
Accumulated Deficit (13,336,400) (24,699,200)
----------------- ---------------
TOTAL SHAREHOLDERS' (DEFICIENCY) EQUITY (2,000,300) 18,827,100
----------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY $ 6,031,200 $ 21,030,500
================= ===============
<FN>
**The accompanying notes are an integral part of these financial statements
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NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months ended Three Months ended Nine Months ended Nine Months ended
9/30/99 9/30/00 9/30/99 9/30/00
(unaudited) (unaudited) (unaudited) (unaudited)
-------------------- -------------------- ------------------- -------------------
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Net Revenues $ 1,102,500 $ 2,254,000 $ 2,980,900 $ 8,003,800
Operating Expenses:
Cost of operations 1,182,400 1,653,400 1,914,600 5,348,700
Sales and marketing 2,291,700 1,506,600 3,132,700 5,343,600
Research and development 855,500 427,700 1,585,200 1,258,100
General and administrative 748,100 1,026,800 2,756,700 3,715,800
-------------------- -------------------- ------------------- -------------------
Total Operating Expenses 5,077,700 4,614,500 9,389,200 15,666,200
-------------------- -------------------- ------------------- -------------------
Loss From Operations (3,975,200) (2,360,500) (6,408,300) (7,662,400)
Interest Income 28,800 229,500 68,300 476,500
Interest Expense (147,600) (1,200) (299,400) (4,176,100)
-------------------- -------------------- ------------------- -------------------
Loss before income taxes (4,094,000) (2,132,200) (6,639,400) (11,362,000)
Income Tax (Expense) Benefit 4,900 - (96,700) (800)
-------------------- -------------------- ------------------- -------------------
Net Loss $ (4,089,100) $ (2,132,200) $ (6,736,100) $ (11,362,800)
-------------------- -------------------- ------------------- -------------------
Basic and diluted loss per common share $ (0.19) $ (0.05) $ (0.32) $ (0.29)
Weighted average common shares
Outstanding 21,178,333 42,896,030 21,132,778 38,133,760
<FN>
**The accompanying notes are an integral part of these financial statements
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NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIENCY) EQUITY
Common Stock
Additional Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
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Balances, December 31, 1999,
(Audited) 23,214,446 $23,200 $ 11,804,300 $ (491,400) $(13,336,400) $ (2,000,300)
Exchange of convertible notes payable 2,382,472 2,400 3,317,500 3,319,900
and accrued interest
Proceeds from the issuance of common 632,472 600 834,300 834,900
stock
Deemed interest on settlement 3,896,000 3,896,000
agreement
Deferred Compensation 1,175,400 (1,175,400) -
Amortization of deferred compensation 1,089,300 1,089,300
Conversion of trade payables to
common stock 778,982 800 1,557,200 1,558,000
Issuance of common stock for services 611,250 600 910,400 911,000
Proceeds from sale of common stock,
net of costs of $2,409,100 15,416,633 15,400 20,549,700 20,565,100
Issuance of common stock due to the
exercise of stock options 13,331 16,000 16,000
Net loss (11,362,800) (11,362,800)
-------------------------------------- ---------- ------- ------------------- -------------- ------------- -------------
Balances, September 30, 2000
(unaudited) 43,049,586 $43,000 $ 44,060,800 $ (577,500) $(24,699,200) $ 18,827,100
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<FN>
**The accompanying notes are an integral part of these financial statements
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NETTAXI.COM
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Nine Months Ended
September 30, September 30,
1999 2000
------------------------------------------------------------------------ ------------------- -------------------
(UNAUDITED) (UNAUDITED)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,736,100) $ (11,362,800)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization 382,000 898,000
Allowance for doubtful accounts 19,300 162,300
Issuance of common stock for interest on convertible notes - 119,900
Issuance of common stock for services - 730,900
Compensation expense related to options granted 114,900 1,089,300
Interest expense related to settlement agreement - 2,400,000
Interest expense related to warrants granted 171,500 1,655,000
Changes in operating assets and liabilities:
Accounts receivable (904,600) (804,600)
Prepaid expenses and other assets (77,900) (196,500)
Accounts payable 3,009,100 (859,900)
Accrued expenses 811,700 (79,200)
Income taxes payable 100,000 (125,600)
Other current liabilities (14,000) --
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NET CASH USED IN OPERATING ACTIVITIES (3,124,100) (6,373,200)
------------------------------------------------------------------------ ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (40,400) 19,200
Capital expenditures (2,043,900) (556,900)
------------------------------------------------------------------------ ------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (2,084,300) (537,700)
------------------------------------------------------------------------ ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligation under capital lease (5,000) (5,400)
Proceeds from issuance of convertible note payable 5,000,000 -
Net proceeds from issuance of common stock 1,188,100 21,416,000
------------------------------------------------------------------------ ------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,183,100 21,410,600
------------------------------------------------------------------------ ------------------- -------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 974,700 14,499,700
CASH AND CASH EQUIVALENTS, beginning of period 465,800 987,700
------------------------------------------------------------------------ ------------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,440,500 $ 15,487,400
======================================================================== =================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid:
Income taxes $ 1,600 $ 97,400
Interest $ 500 $ -
Noncash Operating and Financing Activities:
Issuance of common stock for accounts payable $ - $ 1,558,000
Issuance of common stock for convertible notes plus accrued interest $ - $ 3,319,900
Issuance of common stock for consulting services $ - $ 911,000
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NETTAXI.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
THE COMPANY
Nettaxi.com is a Nevada Corporation, which was incorporated on October 26,
1995. The Company's principal executive offices are located in Campbell,
California.
CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Nettaxi.com and its wholly-owned subsidiary, Nettaxi Online
Communities, Inc. All Intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Acutal results could
differ from those estimates.
BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements reflect
all adjustments (which include only normal, recurring adjustments), which
are, in the opinion of management, necessary to state fairly the results
for the periods presented. The results for three and nine month periods
ended September 30, 2000 are not necessarily indicative of the results
expected for the full fiscal year or for any future period.
The unaudited historical financial statements included herein have been
prepared in accordance with instructions for Form 10-Q and, therefore, do
not include all information and footnotes necessary for a complete
presentation of the Company's results of operations, financial position and
cash flows. These financial statements should be read in conjunction with
the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's revenues are derived principally from the sale of banner
advertisements and web hosting services. Advertising revenues are
recognized in the period in which the advertisement is delivered, provided
that collection of the resulting receivable is probable. Advertisers are
charged on a per impression or delivery basis up to a maximum as specified
in the contract. To date, the duration of the Company's advertising
commitments has not exceeded one year. When the Company guarantees a
minimum number of impressions or deliveries, revenue is recognized ratably
in proportion to the number of impressions or deliveries recorded to the
minimum number of impressions and deliveries guaranteed. Web hosting
revenues are recognized in the period in which the services are provided.
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Advertising revenue include barter transactions, which are the exchange by
Nettaxi.com of advertising space on Nettaxi.com's web sites for reciprocal
advertising space on other web sites or advertising media. Revenues from
these barter transactions are recorded as advertising revenues at the lower
of the estimated fair value of the advertisements received or delivered and
are recognized when the advertisements are run on Nettaxi.com's web sites.
Barter expenses are recorded when Nettaxi.com's advertisements are run on
the reciprocal web sites, which is typically in the same period as when
advertisements are run on Nettaxi.com's web sites. For the three and nine
months ended September 30, 2000, barter revenues represented 41% and 28% of
net revenues as compared to 0% for both comparable periods in 1999.
In November 1999, the Financial Accounting Standards Board (FASB) issued
Emerging Issues Task Force (EITF) Issue 99-17 "Accounting for Advertising
Barter Transactions". Under EITF 99-17, revenues and expenses should be
recognized from advertising barter transactions at the fair value of the
advertising surrendered or received only when the company has a historical
practice of receiving or paying cash for such transactions. As of September
30, 2000, the Company was in compliance with EITF 99-17.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No
138, requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition of
(i) the changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. In September 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, which amends SFAS No. 133 to be effective
for all fiscal quarters of all fiscal years beginning after September 15,
2000.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material
impact on the Company's results from operations, financial position or cash
flows.
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BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per common share is determined by dividing loss available to
common shareholders by the weighted average number of common shares
outstanding. Diluted per-common-share amounts assume the issuance of common
stock for all potentially dilutive equivalent shares outstanding.
Anti-dilution provisions of SFAS 128 require consistency between diluted
per-common-share amounts and basic per-common-share amounts in loss
periods. For the periods reported, there were no differences between basic
and diluted earnings per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS 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. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES
AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF AND SPEAK ONLY
AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE AMONG THOSE FACTORS THAT IN
SOME CASES HAVE AFFECTED THE COMPANY'S RESULTS AND COULD CAUSE THE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
OVERVIEW
We were incorporated in October 1997 and launched our web site in July
1998. We are a provider of content-rich and commerce-enabled communities that
offer subscribers, or "citizens", a place to build their home pages or
businesses on the Internet.
The Nettaxi.com web site, at http://www.nettaxi.com, is structured as a
virtual "urban" environment, populated by citizens, that is divided into
thematic "communities," and from there into "streets" and "homes." Nettaxi.com
provides access to information on news, sports, entertainment, health, politics,
finances, lifestyle, travel and other areas of interest, and services such as
free e-mail, personal home pages, chat and messages.
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To date, our revenues have been derived principally from the sale of
advertisements and internet connectivity service fees for corporate customers.
We sell a variety of advertising packages to clients, including banner
advertisements, event sponsorships, and targeted and direct response
advertisements. Currently, our advertising revenues are derived principally from
short-term advertising arrangements, averaging one to three months, in which we
guarantee a minimum number of impressions for a fixed fee. Advertising revenues
are recognized ratably in the period in which the advertisement is displayed,
provided that we have no significant remaining obligations and that collection
of the resulting receivable is probable. Payments received from advertisers
prior to displaying their advertisements on the site are recorded as deferred
revenues and are recognized as revenue ratably when the advertisement is
displayed. To the extent minimum guaranteed impression levels are not met, we
defer recognition of the corresponding revenues until guaranteed levels are
achieved. We expect to continue to derive revenue for the foreseeable future
from the sale of advertising space on our web site.
In the third quarter of 1999, we began providing web site hosting and
Internet connectivity services for corporate customers. Our services are
delivered through a state-of-the-art Internet data center located in Southern
California using a high-performance Internet backbone network. Customers pay
monthly fees for the professional services utilized, one-time installation fees,
and connectivity charges. These "hosting" revenues are recognized in the period
the services are provided. Two customers accounted for more than 10% of total
net revenues for the three months period ended September 30, 2000 and one
customer accounted for more than 10% of the total net revenues for the nine
months period ended September 30, 2000. The loss or reduction of revenue from
this customer may have a material impact on total net revenues.
The Company also receives other revenues from premium account membership
subscriptions. Our membership programs offer premium services for a monthly
fee, providing additional services such as unlimited personal e-mail accounts
for family or friends, unlimited Nettaxi Site Builder web pages, themed web page
templates, a personal event calendar, discussion groups, and options to
customize personal homepages with pictures, colors and content.
In May 1999, we completed the merger with Plus Net, Inc., a California
corporation, which has allowed us to provide our users with a web based e-mail
program and a robust meta search engine. Plus Net also has an e-commerce
processing engine that enables the acceptance and processing of online credit
card transactions. We believe this merger also enhanced our electronic commerce
and advertising opportunities. As a result of this merger, we received revenues
from credit card processing fees during the first half of 1999, with minimal
revenues being earned in the third quarter of 1999. The contract through which
these fees have been derived terminated in December 1999 and we anticipate that
revenues of this type will be minimal in the foreseeable future.
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In February 2000, we completed our private placement, which raised
approximately $23 million in exchange for issuance of the Company's common stock
and warrants, to purchase shares of our common, which, if fully exercised by all
investors, will result in an additional $63 million in equity funding to
Nettaxi.com. The acquisition of this new capital will provide Nettaxi.com the
ability to become a more aggressive competitor in the community portal arena.
The Company plans to use the funds raised to increase our ability to develop new
community content and commerce relationships, and enhance each Nettaxi.com
citizen's experience within our communities. This funding will also facilitate
potential acquisitions, mergers, and other strategic partnerships which fit into
the company's overall long-term business strategy.
To date, we have entered into business and technology license arrangements
in order to build our web site community, provide community-specific content,
generate additional traffic, and provide our subscribers with additional
products and services, including e-commerce tools. During the third quarter
ended September 30, 2000, the Company entered into a contract with a third-party
content provider to provide content for the citizens and page viewers. The
Company expects this new content to increase brand awareness to our website.
The Company also entered into a contract to enhance our marketing efforts for
direct marketing to our citizens that may enhance their time spent online with
other products and services for purchase.
We intend to continue to investigate potential acquisitions and to seek
additional relationships with content providers that fall within the scope of
our business strategy, and will serve to increase our subscriber base and
overall site traffic. Acquisitions carry numerous risks and uncertainties and we
cannot guarantee that we will be able to successfully integrate any businesses,
products, technologies or personnel that might be acquired in the future.
RESULTS OF OPERATIONS
Three months ended September 30, 2000 Compared to the Three months ended
September 30, 1999.
NET REVENUES. Net Revenues were $2.3 million and $1.1 million for the
three months ended September 30, 2000 and 1999, respectively. Net revenues
increased 104% as the result of both higher advertising and hosting revenues.
Five and four customers each accounted for revenues greater than 10% of total
net revenues for the three months ended September 30, 2000 and 1999,
respectively.
ADVERTISING REVENUES. For the three months ended September 30, 2000 and
1999, advertising revenues were approximately $1.3 million and $0.6 million,
respectively. Advertising revenues increased as the result of advertisers
placing higher number of banner advertisements on our web site due to value
offered (as a result of higher web site traffic to nettaxi.com web pages) to the
advertisers. Also, the average revenue generated per advertiser had more than
doubled year over year.
The Company cannot assure that advertisers will either increase or decrease
their advertising sponsorship at the Company's web site. Additionally, the
Company cannot predict various factors (such as competition or demand) that
could lower the advertising prices currently in effect, or the continuous flow
of web traffic to our web site. The Company does not expect that the prior
growth in advertising revenues is indicative of future results.
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Revenues from reciprocal advertising agreements, or barter transactions,
accounted for approximately 41% total revenues for the three months ended
September 30, 2000. There were no barter revenues for the comparable period of
1999. Barter revenues for the three months ended September 30, 2000 are the
result of the Company's strategy in developing strategic relationships with
other advertisers or service providers for non-cash media advertising.
HOSTING REVENUES. Hosting revenues were approximately $0.9 million and
$0.4 million for the three months ended September 30, 2000 and 1999,
respectively. The 125% increase is the result of the Company providing internet
web hosting and connectivity services for corporate customers beginning in the
third quarter of 1999. Web hosting services are delivered through a
state-of-the-art Internet data center located in Southern California using a
high-performance Internet backbone network. Customers pay monthly fees for the
professional services utilized, one-time installation fees, and monthly
connectivity charges. These "hosting" revenues are recognized in the period the
services are provided. The Company has experienced strong revenue growth in the
internet web hosting for corporate customers, but does not expect this growth to
continue at the current rate, or that the Company will sustain profitability
from this business segment. Additionally, the Company cannot assure that it can
increase the number of corporate customers or maintain the current customer
base. As previously described, two web-hosting customers accounted for more
than 10% of total net revenues for the three months ended September 30, 2000.
COST OF OPERATIONS. Cost of operations were $1.7 million and $1.2 million
for the three months ended September 30, 2000 and 1999, respectively. Cost of
operations increased 40%, primarily the result of additional expenses related to
costs for co-location expenses. In the third quarter of 1999, the Company began
providing Internet connectivity services to corporate customers, which demanded
purchases of additional bandwidth from third party providers. Also, the Company
experienced a significant growth in web traffic to our web sites, which required
the purchase of increased bandwidth to support this increased traffic. Other
items contributing to higher costs were equipment costs and depreciation,
amortization of intangible assets, and expenses for third party content and
development.
Separately, during the three months ended September 30, 2000, the Company also
initiated cost effective measurement tools to limit the use of unauthorized
excessive bandwidth or charging the individual users for the use of additional
bandwidth. These cost measures resulted in substantial cost savings to the
Company during the three months. The Company cannot be assured that these cost
saving measures will continue to result in substantial savings or any savings at
all.
SALES AND MARKETING EXPENSES Sales and Marketing expenses were $1.5 million
and $2.3 million for the three months ended September 30, 2000 and 1999,
respectively. Sales and marketing expenses decreased 34% primarily driven by
the Company's redirected marketing approach for brand awareness to direct
marketing campaigns and cross marketing arrangements or barter transactions
rather than cash intensive mass media marketing campaigns. The Company believes
this new approach will reduce the per-citizen, or customer acquisition cost, and
increase the number of citizens gained in relation to each marketing dollar
spent. The result of this new plan has allowed the Company to rely on fewer
Sales and Marketing personnel, therefore decreasing salaries and related
expenses, and decreased expenditures on promotional print media advertising.
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The Company recorded barter expenses in relation to barter advertising
revenues of $0.9 million for the three months ended September 30, 2000. There
were no barter expenses in 1999. The Company utilizes barter transactions as
an inexpensive advertising media for increasing brand awareness. We expect that
barter transactions will continue as one of the advertising medias for the
Company. There can be no assurance that these increased expenditures will
result in increased visitors to our Web site or additional revenues.
RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were
$0.4 million and $0.9 million for the three months ended September 30, 2000 and
1999, respectively. The 50% decrease was primarily attributable to the lower
utilization of consultants by the Company. The Company expects the current
economic prosperity and high cost of living in Silicon Valley to have a
continuous impact on the ability of the Company to retain and hire additional
technical personnel. This factor alone may offset any cost savings measures
implemented by the Company and result in increases in overall research and
development expenses.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
were $1.0 million and $0.7 million for the three months ended September 30, 2000
and 1999, respectively. General and administrative costs consisted primarily
of salaries and related costs for executives, administrative, and finance
personnel, as well as legal, accounting and other professional service fees.
The 37% increase is attributable to amortization of deferred compensation
expense related to stock, warrants and options granted during the year to
various consultants for the services and increased costs associated with being a
public company.
Separately, during the three months ended September 30, 2000, the Company
initiated cost cutting measures and evaluations to improve the efficiency of
various functions of the Company with the expected reduction of costs. These
measures have currently resulted in cost savings in the area of professional
fees, recruiting fees and other costs. The Company does not expect that these
improvements in efficiency will continue to result in future cost savings or
that these improvements will continue to enhance the efficiency of the
business.
INTEREST EXPENSE. Net interest income for the three months ended September
30, 2000 was $228,300. Net interest expense for the three months ended
September 30, 1999 was $118,800. For the 1999 period, the net interest expense
was primarily the result of the interest on the convertible promissory note that
was issued on March 31, partially offset by interest income. For the 2000
period, the net interest income was the result of higher average cash balance in
the year 2000 compared to 1999 as a result of the completion of a private
placement of common stock raising approximately $23 million in the first quarter
of 2000, partially offset by interest expense.
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INCOME TAXES. At December 31, 1999, we had net operating loss carryforwards
available to reduce future taxable income that aggregate approximately $11.20
million for Federal income tax purposes. These benefits expire through 2019.
Pursuant to a "change in ownership" as defined by the provisions of the Tax
Reform Act of 1986, utilization of our net operating loss carryforwards may be
limited if a cumulative change of ownership of more than 50% occurs over a
three-year period. We have not determined if an ownership change has occurred.
Nine months ended September 30, 2000 Compared to the Nine months ended September
30, 1999.
NET REVENUES. Net Revenues were $8.0 million and $3.0 million for the nine
months ended September 30, 2000 and 1999, respectively. Net revenues increased
169% as the result of both higher advertising and hosting revenues. Five
customers each accounted for revenues greater than 10% of total net revenues for
the nine months ended September 30, 2000. No customer accounted for greater
than 10% of revenues in 1999.
ADVERTISING REVENUES. For the nine months ended September 30, 2000 and
1999, advertising revenues were approximately $5.2 million and $1.2 million,
respectively. Advertising revenues increased 373% as the result of advertisers
placing higher numbers of banner advertisements on our web site due to value
offered (as a result of higher web site traffic to nettaxi.com web pages) to the
advertisers. Also, the average revenue generated per advertiser had more than
doubled for the year over year period.
The Company cannot assure that advertisers will either increase or decrease
their advertising sponsorship at the Company's web site. Additionally, the
Company cannot predict various factors (such as competition or demand) that
could lower the advertising prices currently in effect, or the continuous flow
of web traffic to our web site. The Company does not expect that the prior
growth in advertising revenues is indicative of future results.
Revenues from reciprocal advertising agreements, or barter transactions,
accounted for approximately 28% of total revenues for the nine months ended
September 30, 2000. There were no barter revenues for the comparable periods of
1999. Barter revenues increased for the nine months period primarily the result
of the Company's strategy in developing strategic relationships with other
advertisers or service providers for non-cash media advertising.
HOSTING REVENUES. Hosting revenues were approximately $2.7 million and
$0.4 million for the nine months ended September 30, 2000 and 1999,
respectively. The 580% increase is the result of the Company providing internet
web hosting and connectivity services for corporate customers beginning in the
third quarter of 1999. Web hosting services are delivered through a
state-of-the-art Internet data center located in Southern California using a
high-performance Internet backbone network. Customers pay monthly fees for the
professional services utilized, one-time installation fees, and monthly
connectivity charges. These "hosting" revenues are recognized in the period the
services are provided. The Company has experienced strong revenue growth in the
internet web hosting for corporate customers, but does not expect this growth to
continue at the current rate, or that the Company will sustain profitability
from this business segment. Additionally, the Company cannot assure that it can
increase the number of corporate customers or maintain the current customer
base. One web-hosting customer accounted for more than 10% of total net
revenues for the nine months ended September 30, 2000, no one customer had
revenues greater than 10% in the 1999 period.
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TRANSACTION PROCESSING FEES Transaction processing fees were $1.3 million
for the nine months ended September 30, 1999. There were no transaction
processing fees in 2000. Transaction fees consist of revenue derived from
credit card evaluations and from the processing of on-line credit card
transactions. The 1999 revenue is attributable to the merger with Plus Net,
Inc. in 1999. The Company does not expect revenues of this type in any future
periods.
COST OF OPERATIONS Cost of operations were $5.3 million and $1.9 million
for the nine months ended September 30, 2000 and 1999, respectively. Cost of
operations increased 179% primarily as the result of additional expenses related
to costs for co-location expenses. In the third quarter of 1999, the Company
began providing Internet connectivity services to corporate customers, which
demanded purchases of additional bandwidth from third party providers. Also,
during the nine months ended September 30, 2000, the Company experienced a
significant growth in web traffic to our web sites, which required the purchase
of increased bandwidth to support this increased traffic.
Separately, during the three months ended September 30, 2000, the Company also
initiated cost effective measurement tools to limit the use of unauthorized
excessive bandwidth or charging the individual users for the use of additional
bandwidth. These cost measures resulted in substantial cost savings to the
Company during the three months. The Company cannot be assured that these cost
saving measures will continue to result in substantial savings or any savings at
all.
Other items contributing to higher costs were equipment costs and depreciation,
amortization of intangible assets, and expenses for third party content and
development for the nine month period ended September 30, 2000.
SALES AND MARKETING EXPENSES Sales and Marketing expenses were $5.3
million and $3.1 million for the nine months ended September 30, 2000 and 1999,
respectively. The 70% increase is the result of the expansion of online and
print advertising, barter transactions, public relations and other promotional
expenditures as well as increased sales and marketing personnel and related
expenses required to implement our marketing strategy which began in the third
quarter of 1999, partially offset by the savings realized by the redirected
marketing approach for brand awareness implemented in the third quarter of 2000.
The Company recorded barter expenses in relation to barter advertising revenues
of $2.2 million for the nine months ended September 30, 2000, respectively. The
Company utilizes barter transactions as an inexpensive advertising media for
increasing brand awareness. We expect that barter transactions will continue as
one of the advertising medias for the Company. There can be no assurance that
these increased expenditures will result in increased visitors to our Web site
or additional revenues.
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RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were
$1.3 million and $1.6 million for the nine months ended September 30, 2000 and
1999, respectively. The 21% decrease was primarily attributable to the lower
utilization of consultants by the Company and other cost saving measures
implemented by the Company. The Company will continue to implement cost saving
programs but cannot assure that these programs will be effective or that future
cost savings will be realized. Also, the Company expects the current economic
prosperity and high cost of living in Silicon Valley to have a continuous impact
on the ability of the Company to retain and hire additional technical personnel.
This factor alone may offset any cost savings measures implemented by the
Company and result in increases in overall research and development expenses.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
were $3.7 million and $2.8 million for the nine months ended September 30, 2000
and 1999, respectively. General and administrative costs consisted primarily of
salaries and related costs for executives, administrative, and finance
personnel, as well as legal, accounting and other professional service fees.
The 35% increase in general and administrative expenses were attributable to
amortization of deferred compensation expense related to stock, warrants and
options granted during the year to various consultants for the services and
increased costs associated with being a public company. Also, the increase is
the result of legal fees related to the settlement agreement with the holder of
convertible debentures. Separately, during the three months ended September 30,
2000, the Company initiated cost cutting measures and evaluations to improve the
efficiency of various functions of the Company with the expected reduction of
costs. These measures have currently resulted in cost savings in the area of
professional fees, recruiting fees and other costs. The Company does not expect
that these improvements in efficiency will continue to result in future cost
savings or that these improvements will continue to enhance the efficiency of
the business.
INTEREST EXPENSE. Net interest expense was 3.7 million and $0.2 million
for the nine months ended September 30, 2000 and 1999, respectively. For the
1999 period the net interest expense was primarily due to the convertible
promissory note that was issued on March 31, 1999 and to amortization of
deferred interest related to warrants issued in conjunction with the convertible
promissory note, offset by interest income. For the 2000 period, the net
interest expense was primarily the result of net deemed interest expense related
to the convertible debenture issued on March 31, 1999. We recognized deemed
interest expense of approximately $3.9 million in the second quarter of 2000.
This non-cash interest expense resulted from the implied beneficial conversion
feature and the value of warrants issued in connection with the settlement
agreement that we reached with the holder of the convertible debenture.
INCOME TAXES. At December 31, 1999, we had net operating loss carryforwards
available to reduce future taxable income that aggregate approximately $11.20
million for Federal income tax purposes. These benefits expire through 2019.
Pursuant to a "change in ownership" as defined by the provisions of the Tax
Reform Act of 1986, utilization of our net operating loss carryforwards may be
limited if a cumulative change of ownership of more than 50% occurs over a
three-year period. We have not determined if an ownership change has occurred.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and cash equivalents of
approximately $15.5 million, compared to approximately $1.0 million at December
31, 1999.
Net cash used in operating activities equaled approximately $6.4 million
and $3.1 million for the nine-month period ended September 30, 2000 and 1999,
respectively. We had significant negative cash flows from operating activities
for the nine month period ended September 30, 2000 primarily from our net
operating losses, adjusted for non-cash items, and increases in accounts
receivable balances due to the time lag between revenue recognition and the
receipt of payments from advertisers and decreases in accounts payable. These
factors were offset by the significant interest expense related to the
settlement agreement on the conversion of the note payable issued on March 31,
1999.
Net cash used in investing activities was approximately $0.5 million and
$2.1 million for the nine-month periods ended September 30, 2000 and 1999,
respectively. Substantially all of the cash used in investing activities for
both periods was primarily related to the purchase of capital equipment in
connection with the build out of our web site and infrastructure. The Company
expects to continue to purchase capital equipment to meet the needs of the
growth of the Company.
Net cash provided by financing activities was approximately $21.4 million
and $6.2 million for the nine month periods ended September 30, 2000 and 1999,
respectively. Net cash provided by financing activities in 2000 consisted
primarily of net proceeds from the issuance of our common stock. Net cash
provided by financing activities in 1999 consisted of issuance of a convertible
note and to a lesser extent the issuance of common stock.
We incurred net losses of approximately $11.4 million and $6.7 million for
the nine months ended September 30, 2000, and 1999, respectively. At September
30, 2000, we had an accumulated deficit of approximately $24.7 million. The net
losses and accumulated deficit resulted from the significant operational,
infrastructure and other costs incurred in the development and marketing of our
services and the fact that revenues failed to keep pace with such costs. As a
result of our expansion plans and our expectation that our operating expenses,
especially in the areas of sales and marketing, will continue to increase
significantly, we expect to incur additional losses from operations for the
foreseeable future. To the extent that increases in our operating expenses
precede or are not subsequently followed by commensurate increases in revenues,
or that we are unable to adjust operating expense levels accordingly, our
business, results of operations and financial condition would be materially and
adversely affected. There can be no assurance that we will ever achieve or
sustain profitability or that our operating losses will not increase in the
future.
The Company does not have any long-term commitments that currently require
a specified capital budget other than normal operations. We currently believe
that we have sufficient cash to fund our operations through December 2001. After
that time, we will be required to seek additional capital to sustain our
operations, fund expansion of our business, to develop new or enhanced services
or products, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. We expect to generate a portion of the
necessary cash flow through advertising and hosting revenues, but will also need
to obtain capital through other sources such as equity or debt financing. We
cannot assure you that we will be able to achieve and sustain positive cash flow
or profitability or that we will have other sources available to provide the
financial resources necessary to continue our operations. If we are
unsuccessful in generating resources from one or more of the anticipated sources
and are unable to replace any shortfall with resources from another source, we
may be able to extend the period for which available resources would be adequate
by deferring the creation or satisfaction of various commitments, deferring the
expansion or introduction of various services, and otherwise scaling back
operations. If we were unable to generate the required resources, our ability
to meet our obligations and to continue our operations would be adversely
affected.
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IMPACT OF THE YEAR 2000
In our previous filings with the Securities and Exchange Commission, we
have discussed the nature and progress of our plans to deal with potential Year
2000 problems. These problems arise from the fact that many currently installed
computer systems and software products were coded to accept or recognize only
two digit entries in the date code field. These systems may recognize a date
using "00" as the year 1900 rather than the year 2000. As a result, computer
systems and/or software used by many companies and governmental agencies needed
to be upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities. Prior to
December 31, 1999, we completed our assessment of all material information
technology and non-information technology systems at our headquarters, as well
as our review of Year 2000 compliance by our key vendors, distributors and
suppliers. To date, we have experienced no significant disruptions in mission
critical information technology and non-information technology systems and we
believe those systems successfully responded to the Year 2000 date changes. We
are not aware of any material problems resulting from Year 2000 issues, either
with our own internal systems or the products and services of third parties. We
will continue to monitor our mission critical computer applications and those of
our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Our business, financial condition or results of operations
could be materially and adversely affected by any of the following risks.
WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED LOSSES SINCE INCEPTION, AND
EXPECT LOSSES FOR THE FORESEEABLE FUTURE
We were incorporated in October 1997. Accordingly, we have only a limited
operating history upon which you can evaluate our business and prospects. Since
our inception, we have incurred net losses, resulting primarily from costs
related to developing our web site, attracting users to our web site and
establishing the Nettaxi.com brand. At September 30, 2000, we had an accumulated
deficit of $24,699,200. Losses have continued to grow faster than our revenues
during our limited operating history. This trend is reflective of our continued
investments in technology and sales and marketing efforts to grow the business.
Because of our plans to continue to invest heavily in marketing and promotion,
to hire additional employees, and to enhance our web site and operating
infrastructure, we expect to incur significant net losses for the foreseeable
future. If our revenue growth is slower than we anticipate or our operating
expenses exceed our expectations, our losses will be significantly greater. We
may never achieve profitability. If we do achieve profitability, we may be
unable to sustain or increase profitability on a quarterly or annual basis.
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WE REQUIRE FURTHER CAPITAL TO PURSUE OUR BUSINESS OBJECTIVES
We currently believe that we have sufficient cash to fund our operations
through December 2001. After that time, we will be required to seek additional
capital to sustain our operations. We expect to generate a portion of the
necessary cash flow through advertising and hosting revenues, but will also need
to obtain capital through other sources such as equity or debt financing. We
are currently negotiating with prospective investors, however to date, no
agreements for additional financing have been consummated. We cannot assure you
that we will be able to achieve and sustain positive cash flow or profitability
or that we will have other sources available to provide the financial resources
necessary to continue our operations. Given our limited resources and our
history of losses from operations, we will also need to raise additional funds
in order to fund expansion of our business, to develop new or enhanced services
or products, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. No assurances can be given, however, that
we will be able to obtain such additional resources. If we are unsuccessful in
generating anticipated resources from one or more of the anticipated sources,
and unable to replace the shortfall with resources from another source, we may
be able to extend the period for which available resources would be adequate by
deferring the creation or satisfaction of various commitments, deferring the
introduction of various services or entry into various markets, and otherwise
scaling back operations. If we are unable to generate the required resources,
our ability to meet our obligations and to continue our operations would be
adversely affected.
OUR NEED TO RAISE ADDITIONAL CAPITAL MAY CAUSE OUR STOCKHOLDERS TO EXPERIENCE
SIGNIFICANT DILUTION IN THE FUTURE
It is likely that we will need to raise additional funds in the future in
order to pursue our business objectives. If additional funds are raised through
the issuance of equity or convertible debt securities, the percentage ownership
of our stockholders will be reduced, stockholders may experience additional
dilution and such securities may have rights, preferences and privileges senior
to those of our common stock. This may make an investment in our common stock
less attractive to other investors, thereby weakening the trading market for our
common stock.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES FREQUENTLY ENCOUNTERED BY EARLY
STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS
Due to our limited operating history, we are subject to many of the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets, such as e-commerce. Among other things, we are faced
with the need to establish our credibility with customers, advertising, content
providers, and companies offering e-commerce products and services, and such
parties are often understandably reluctant to do business with companies that
have not had an opportunity to establish a track record of performance and
accountability. For example, our ability to enter into exclusive relationships
to provide content over the Internet will be dependent on our ability to
demonstrate that we can handle high volumes of traffic through our site.
Similarly, early stage companies must devote substantial time and resources to
recruiting qualified senior management and employees at all levels, and must
also make significant investments to establish brand recognition. If we are
unable to overcome some of these obstacles, we may be unable to achieve our
business goals and raise sufficient capital to expand our business.
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OUR REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH AND WE
CANNOT ACCURATELY PREDICT OUR FUTURE REVENUES
We had revenues of $8,003,800 and $2,980,900 for the nine months ended
September 30, 2000 and 1999, respectively. While our growth rate has been
strong, it is unlikely that revenue will continue to grow at this rate in the
future and our performance during these periods should not be taken as being
indicative of future trends. Accurate predictions regarding our revenues in
the future are difficult and should be considered in light of our limited
operating history and rapid changes in the ever evolving Internet market. For
example, our ability to generate revenues in the future is dependent in part on
the success of our capital-raising efforts and the investments that we intend to
make in sales and marketing, infrastructure, and content development. Our
revenues for the foreseeable future will remain primarily dependent on the
number of customers that we are able to attract to our web site, and secondarily
on sponsorship and advertising revenues. We cannot forecast with any degree of
certainty the number of visitors to our web site, the number of visitors who
will become customers, or the amount of sponsorship and advertising revenues.
Similarly, we cannot provide any guarantees regarding the revenues that will be
generated from e-commerce products and services that we intend to make available
on our site.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THEREBY INCREASING
THE VOLATILITY OF OUR STOCK PRICE
In addition to the uncertainties regarding the rate of growth of our future
revenues, we anticipate that our operating results will fluctuate significantly
from quarter to quarter. These fluctuations may be due to seasonal and cyclical
patterns that may emerge in Internet e-commerce and advertising spending. For
example, we believe that the use of our web site will be somewhat lower during
periods of the year if the patterns that currently effect traditional media,
such as television and radio where advertising sales are lower during the first
and third calendar quarters because of the summer vacation period and post
winter holiday season slowdown, develop in the Internet industry. It is likely
that similar seasonal patterns will develop in the Internet industry and thus
result in decreasing revenues for us during periods of the year. Quarterly
results may also vary for some of the same reasons and because it is difficult
to predict the long-term revenue growth of our business. If investments in
marketing and content development are delayed, we may experience corresponding
delays in anticipated revenues from such investments, thereby leading to uneven
quarterly results. Because of these factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of investors
in future periods, then our stock price may decline.
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SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
As of September 30, 2000, 16,484,904 shares of our common stock were
immediately eligible for sale in the public market without restriction or
further restriction under the Securities Act of 1933, unless purchased by or
issued to any "affiliate" of ours, as that term is defined in Rule 144
promulgated under that Act. Additionally, we have filed a registration
statement on Form S-8 (File No. 333-32678) to register 6,300,000 of the shares
of common stock issuable upon exercise of options granted or to be granted
under our 1998 and 1999 stock option plans. As a result, shares issued upon
exercise of stock options, including options for 1,170,704 shares that were
exercisable as of April 30, 2000, are eligible for resale in the public market
without restriction. Additionally, we intend to file a registration statement on
Form S-8 to register the additional 5,600,000 shares of common stock under our
1999 Stock Option Plan, as amended. We have also filed a registration statement
on Form S-1 (File No. 333-36826), declared effective by the Securities and
Exchange Commission on September 12, 2000 registering 32,730,849 shares issued
and issuable pursuant to recent private placement transactions. Additionally, we
have filed a registration statement on Form S-1 (File No. 333-38538), declared
effective by the Securities and Exchange Commission on September 21, 2000,
registering 4,219,692 shares of common stock issued and issuable pursuant to
recent private placement transactions. As of September 30, 2000 approximately
21 million shares of common stock were eligible for sale under Rule 144. If our
stockholders sell substantial amounts of our common stock under Rule 144 or
pursuant to the aforementioned registration statements, the market price of
our common stock could be adversely affected and our ability to raise
additional capital at that time through the sale of our securities could be
impaired.
FUTURE EXERCISE OF WARRANTS OR ISSUANCES OF SECURITIES MAY SIGNIFICANTLY DILUTE
YOUR HOLDINGS
There are currently warrants to purchase 2,200,000 shares of our common
stock outstanding and exercisable over the next five years at an exercise price
per share of $1.50, subject to adjustment. There are also warrants to purchase
269,692 shares of common stock outstanding and exercisable over the next four
and a half years at a price of $4.38, subject to adjustment. The shares
underlying all of these warrants have been registered pursuant to our
registration statement on Form S-1 (File No. 333-38538). Additionally, pursuant
to our registration statement on Form S-1 (File No. 333-36826) we registered
shares underlying warrants to purchase 15,567,133 shares of common stock issued
having an exercise price per share of $4.00, warrants to purchase 436,351 shares
of common stock having an exercise price of $2.76 and warrants to purchase
50,000 shares of common stock having an exercise price of $12.38. Additionally,
pursuant to our registration statement on Form S-1 (File No. 333-30074), we
registered warrants to purchase 125,000 shares of common stock having an
exercise price of $8.00 per share. If the holders of our outstanding warrants
and other convertible securities were to exercise their rights, purchasers of
our common stock could experience substantial dilution of their investment.
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OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT
SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE
We plan to pursue aggressive marketing campaigns online and in traditional
media to promote the Nettaxi.com brand and attract an increasing number of
visitors to our web site. We believe that maintaining and strengthening the
Nettaxi.com brand will be critical to the success of our business. This
investment in increased marketing carries with it significant risks, including
the following:
- Our advertisements may not properly convey the Nettaxi.com brand
image, or may even detract from our image. Advertising in print and
broadcast media is expensive and is often typically difficult to modify
quickly in order to take into account feedback that may indicate that we
have failed to convey the optimal message. If our advertisements fail to
positively promote our brand and image, the damage to our business may be
long-lasting and costly to repair.
- Even if we succeed in creating the right messages for our
promotional campaigns, these advertisements may fail to attract new visitors to
our web site at levels commensurate with their costs. We may fail to choose
the optimal mix of television, radio, print and other media to cost
effectively deliver our message. Moreover, if these efforts are unsuccessful, we
will face difficult and costly choices in deciding whether and how to
redirect our marketing dollars.
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT
SPONSORSHIP AND ADVERTISING REVENUES
To date, we have relied principally on outside advertising agencies to
develop sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal sales organization. Our internal sales team
currently has nine members. We will need to substantially increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected by our inability to attract sponsorship and
advertising revenues.
WE RELY HEAVILY ON THIRD PARTIES FOR DEVELOPMENT OF SOFTWARE AND CONTENT AND FOR
ESSENTIAL BUSINESS OPERATIONS AND MAY BE ADVERSELY AFFECTED BY OUR FAILURE TO
MAINTAIN SATISFACTORY RELATIONSHIPS WITH SUCH PARTIES
We depend on third parties for important aspects of our business,
including Internet access, the development of software for new web site
features, content, and telecommunications.
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We have limited control over these third parties, and we are not their only
client. We may not be able to maintain satisfactory relationships with any of
them on acceptable commercial terms, and there is no guarantee that we will be
able to renew these agreements at all. Further, we cannot be sure that the
quality of products and services that they provide may remain at the levels
needed to enable us to conduct our business effectively.
WE ARE HEAVILY RELIANT ON THIRD PARTIES TO HOUSE AND SERVICE OUR WEB SITE AND
ARE VULNERABLE TO POSSIBLE DAMAGE TO OUR OPERATING SYSTEMS
We maintain substantially all of our computer systems at our Campbell,
California site and the Santa Clara, California site of Exodus Communications.
We are heavily reliant on the ability of Exodus to house and service our web
site. This system's continuing and uninterrupted performance is critical to our
success. Growth in the number of users accessing our web site may strain its
capacity, and we rely on Exodus to upgrade our system's capacity in the face of
this growth. Exodus also provides our connection to the Internet. Sustained or
repeated system failures or interruptions of our web site connection services
would reduce the attractiveness of our web site to customers and advertisers,
and could therefore have a material and adverse effect on our business due to
loss of membership and advertising revenues.
In 1999 and 1998, we experienced several interruptions and degradations of
service as a result of our third party service provider's inability to deliver
the contractual bandwidth required to handle our traffic volume. These
interruptions result in decreased web usage volume and therefore impact our
ability to serve advertising impressions for our customers. These interruptions
can materially impact our revenues. We estimate that during 1998 we lost
approximately $35,000 in revenue because of this, and during 1999 we lost an
additional $35,000 in revenues.
In addition, our operations are dependent in part on our ability to protect
our operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins or other similar events.
Furthermore, our servers are vulnerable to computer viruses, break-ins and
similar disruptive problems. The occurrence of any of these events could result
in interruptions, delays or cessations in service to our users and result in a
decrease in the number of visitors to our site. Our insurance policies
may not adequately compensate us for any losses that may occur due to any
failures or interruptions in our systems.
WE PLAN TO GROW RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT
Our business plan contemplates a period of significant expansion. In order
to execute our business plan, we must grow significantly. This growth
will strain our personnel, management systems and resources. To manage our
growth, we must implement operational and financial systems and controls and
recruit, train and manage new employees. These individuals have had little
experience working with our management team. We cannot be sure that we will
be able to integrate new executives and other employees into our organization
effectively. In addition, there will be significant administrative burdens
placed on our management team as a result of our status as a public company. If
we do not manage growth effectively, we will not be able to achieve our
financial and business goals.
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WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Robert A. Rositano, Jr., our Chief Executive Officer, and Dean Rositano, our
Chief Operating Officer. The loss of the services of any of our executive
officers could materially and adversely affect our business due to their
experience with our business plan and the disruption in the conduct of our
day-to-day operations. Additionally, we believe we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future.
OUR PROJECTED E-COMMERCE SERVICES MAY NOT BE LAUNCHED ON A TIMELY BASIS AND MAY
NOT GENERATE THE ANTICIPATED LEVEL OF REVENUES
Our strategic growth plan calls for development and implementation of
e-commerce tools for our citizens. The availability of many of these tools is
dependent on our ability to enter into satisfactory contractual relationships
with parties offering e-commerce related products and services which can be
made available to our subscribers, as well as relationships with parties
seeking to make online sales to our subscribers and other visitors to our
site. To date, our revenues from e-commerce services have not been material,
and we have yet to launch a number of the services that we hope to provide to
our citizens and visitors to our site. We may not be able to commence those
services on a timely basis, and there is no assurance that the services will
generate the anticipated amount of revenues.
INTENSE COMPETITION FROM OTHER INTERNET-BASED BUSINESSES MAY REDUCE OUR MARGINS
AND MARKET SHARE AND CAUSE OUR STOCK PRICE TO DECLINE
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software.
Competition could result in price reductions for our products and services,
reduced margins or loss of market share. Consolidation within the online
commerce industry may also increase competition.
We currently or potentially compete with a number of other companies
including a number of large online communities and services that have expertise
in developing online commerce, and a number of other small services, including
those that serve specialty markets. Many of our potential competitors have
longer operating histories, larger customer bases, greater brand recognition in
other business and Internet markets and significantly greater financial,
marketing, technical and other resources than us.
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WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES
We intend to establish numerous strategic relationships with popular web
sites to increase the number of visitors to our web site. There is intense
competition for placements on these sites, and we may not be able to enter into
these relationships on commercially reasonable terms or at all. Even if we enter
into relationships with other web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships and expand our existing ones could have a material and adverse
effect on our business due to our inability to increase the number of users of
our site.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE
To be successful, we must adapt to rapidly changing Internet technologies
and continually enhance the features and services provided on our web site. We
could incur substantial, unanticipated costs if we need to modify our web site,
software and infrastructure to incorporate new technologies demanded by our
audience. We may use new technologies ineffectively or we may fail to adapt our
web site, transaction-processing systems and network infrastructure to user
requirements or emerging industry standards. If we fail to keep pace with the
technological demands of our web-savvy audience for new services, products and
enhancements, our users may not use our web site and instead use those of our
competitors.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
PROPRIETARY RIGHTS
Our Nettaxi.com brand and our web address, www.nettaxi.com, are critical to
our success. We have filed a trademark application for "Nettaxi", among other
trademark applications. We cannot guarantee that any of these trademark
applications will be granted. In addition, we may not be able to prevent third
parties from acquiring web addresses that are confusingly similar to our
addresses, which could harm our business. Also, while we have entered into
confidentiality agreements with our employees, contractors and suppliers in
order to safeguard our trade secrets and other proprietary information, there
can be no assurance that technology will not be misappropriated or that others
may lawfully develop similar technologies.
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD PARTY SYSTEMS ARE NOT YEAR 2000-COMPLIANT
We have not devised a Year 2000 contingency plan. Although we did not
experience any Year 2000-related problems on January 1, 2000, and have not
experienced any such problems to date, the failure of our internal systems, or
any material third party systems, to be Year 2000-compliant could have a
material and adverse effect on our business, results of operations and financial
condition if the compliance problems significantly impair access to and use of
our web site.
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In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions has
been a successful strategy used by other Internet companies. We do not have any
present understanding relating to any such acquisition or investment. If we were
to buy a content, service or technology company, the amount of time and level of
resources required to successfully integrate their business operation could be
substantial. The challenges in assimilating their people and organizational
structure, and in encountering potential unforeseen technical issues in
integrating their content, service or technology into ours, could cause
significant delays in executing other key areas of our business plan. This
could include delays in integrating other content, services or technology into
our communities, or moving forward on other business development relationships,
as management and employees, both of which are time constrained, may be
distracted. In addition, the key personnel of the acquired company may decide
not to work for us, which could result in the loss of key technical or business
knowledge to us. Furthermore, in making an acquisition, we may have to incur
debt or issue equity securities to finance the acquisition, the issuance of
which could be dilutive to our existing shareholders.
WE ARE VULNERABLE TO ADDITIONAL TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE
COMMERCE TRANSACTIONS
We do not expect to collect sales or other similar taxes in respect of
transactions engaged in by customers on our web site. However, various states
or foreign countries may seek to impose sales tax obligations on us and other
e-commerce and direct marketing companies. A number of proposals have been made
at the federal, state and local levels that would impose additional taxes on the
sale of goods and services through the Internet. These proposals, if adopted,
could substantially impair the growth of e-commerce and cause purchasing through
our web site to be less attractive to customers as compared to traditional
retail purchasing. Further, states have attempted to impose sales taxes on
catalog sales from businesses such as ours. A successful assertion by one or
more states that we should have collected or be collecting sales taxes on the
sale of products could have a material and adverse effect on our business due to
the imposition of fines or penalties or the requirement that we pay for the
uncollected taxes.
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WE MAY NOT BE ABLE TO TAKE FULL ADVANTAGE OF POTENTIAL TAX BENEFITS FROM OUR NET
OPERATING LOSS CARRYFORWARDS
At December 31, 1999 we had net operating loss carryforwards available to
reduce future taxable income that aggregated approximately $11,200,000
for Federal income tax purposes. These benefits expire through 2019. Pursuant
to a "change in ownership" as defined by the provisions of the Tax Reform
Act of 1986, utilization of our net operating loss carryforwards may be
limited, if a cumulative change of ownership of more than 50% occurs within a
three-year period. We have not determined if an ownership change has occurred.
If it has, we may not be able to take full advantage of potential tax
benefits from our net operating loss carryforwards.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business is highly dependant
on the growth of the internet industry and would be adversely affected if web
usage and e-commerce does not continue to grow. Internet usage may be inhibited
for a number of reasons, including inadequate Internet infrastructure,
security concerns, inconsistent quality of service, the unavailability of
cost-effective, high-speed service, the imposition of transactional taxes,
or the limitation of third party service provider's ability and willingness
to invest in new or updated equipment to handle traffic volume.
If web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. We are highly dependant on third party service providers. Any
interruption experienced by these service providers may have a material impact
on our business due to our inability to serve our advertising customers or end
users. In addition, web sites, including ours, have experienced a variety of
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, web usage, including usage of our web site,
could grow slowly or decline. This may have a material impact on future
revenues.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH
IS UNCERTAIN
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Internet as an effective medium of commerce by
consumers. Rapid growth in the use of the Internet and commercial online
services is a recent phenomenon. Demand for recently introduced services and
products over the Internet and online services is subject to a high level of
uncertainty. The development of the Internet and online services as a viable
commercial marketplace is subject to a number of factors. For example,
e-commerce is at an early stage and buyers may be unwilling to shift their
purchasing from traditional vendors to online vendors, there may be insufficient
availability of telecommunication services or changes in telecommunication
services could result in slower response times and adverse publicity and
consumer concerns about the security of commerce transactions on the Internet
could discourage its acceptance and growth.
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ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Also,
technological developments could slow the growth of sponsorships and advertising
on the Internet. For example, widespread use of filter software programs that
limit access to advertising on our web site from the Internet user's browser
could reduce advertising on the Internet. Our business, financial condition and
operating results would be adversely affected if the market for Internet
advertising fails to further develop due to the loss of anticipated revenues.
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF E-COMMERCE AND WEB
ADVERTISING AND SUBJECT US TO LIABILITY
The need to securely transmit confidential information, such as credit card
and other personal information, over the Internet has been a significant barrier
to e-commerce and communications over the Internet. Any well-publicized
compromise of security could deter more people from using the Internet or from
using it to conduct transactions that involve transmitting confidential
information, such as purchases of goods or services. Furthermore, decreased
traffic and e-commerce sales as a result of general security concerns could
cause advertisers to reduce their amount of online spending. To the
extent that our activities or the activities of third party contractors
involve the storage and transmission of proprietary information, such as
credit card numbers, security breaches could disrupt our business, damage our
reputation and expose us to a risk of loss or litigation and possible
liability. We could be liable for claims based on unauthorized purchases
with credit card information, impersonation or other similar fraud claims.
Claims could also be based on other misuses of personal information, such as for
unauthorized marketing purposes. We may need to spend a great deal of money
and use other resources to protect against the threat of security breaches or
to alleviate problems caused by security breaches.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEB SITE
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or based on other theories relating to the information we
publish on our web site. These types of claims have been brought, sometimes
successfully, against Internet companies as well as print publications in the
past. Based on links we provide to other web sites, we could also be subjected
to claims based upon online content we do not control that is accessible from
our web site. Claims may also be based on statements made and actions taken as a
result of participation in our chat rooms or as a result of materials posted by
members on bulletin boards at our web site. We also offer e-mail services, which
may subject us to potential risks, such as liabilities or claims
resulting from unsolicited e-mail, lost or misdirected messages, illegal
or fraudulent use of e-mail, or interruptions or delays in e-mail
service. These claims could result in substantial costs and a diversion of
our management's attention and resources.
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Efforts to regulate or eliminate the use of mechanisms which automatically
collect information on users of our web site may interfere with our ability to
target our marketing efforts and tailor our web site offerings to the tastes of
our users.
Web sites typically place a tracking program on a user's hard drive without
the user's knowledge or consent. These programs automatically collect data on
anyone visiting a web site. Web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from users'
Internet activity. Most currently available web browsers allow users to elect to
remove these mechanisms at any time or to prevent such information from being
stored on their hard drive. In addition, some commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of these
tracking mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could have a material and adverse effect on our
business, results of operations and financial condition due to increased costs
of doing business. Laws and regulations directly applicable to Internet
communications, commerce and advertising are becoming more prevalent. The law
governing the Internet, however, remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws governing intellectual property, copyright, privacy,
obscenity, libel and taxation apply to the Internet. In addition, the growth and
development of e-commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad. We also may be subject
to future regulation not specifically related to the Internet, including laws
affecting direct marketers.
WE COULD INCUR MONETARY DAMAGES FROM LITIGATION ARISING OUT OF OUR BUSINESS
ACTIVITIES
On July 9, 1999, we were named as one of several defendants in a lawsuit
filed by four disaffected shareholders in Simply Interactive, Inc. The lawsuit
arises out of a series of events relating to certain assets our operating
company, Nettaxi Online Communities, purchased from SSN Properties in October
1997. The complaint alleges that we owed, and either intentionally or
negligently breached, fiduciary duties to the plaintiffs. The suit also claims
that we either intentionally or negligently interfered with the plaintiffs'
contract or prospective advantage. While our officers and directors believe
that the suit is without merit, we cannot provide you with any assurances that
we will prevail in this dispute. If the plaintiffs successfully prosecute any
of their claims against us, the resulting monetary damages and reduction in our
working capital could significantly harm our business. For more information
please see the section of this prospectus called "Legal Proceedings".
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ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION OF US DIFFICULT
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. In addition, our
articles of incorporation provide that our board of directors may issue
preferred stock in one or more series. Our board of directors can fix the
price, rights, preferences, privileges and restrictions of the preferred stock
without any further vote or action by our stockholders. If our board of
directors issues preferred stock, potential acquirers may not make acquisition
bids for us, our stock price may fall and the voting rights of existing
stockholders may diminish as a result.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET
COMPANIES
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last two years
and have reflected valuations substantially above historical levels. During
the same period, these companies' stocks have also been highly volatile and
have recorded lows well below historical highs. We cannot assure you that our
stock will trade at the same levels of other Internet stocks or that Internet
stocks in general will sustain their current market prices.
Factors that could cause such volatility may include, among other things
actual or anticipated fluctuations in our quarterly operating results,
announcements of technological innovations, conditions or trends in the
Internet industry, and changes in the market valuations of other Internet
companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We could be exposed to market risk related to any and all of our debt
obligations for financing working capital and capital equipment requirements in
the future. Historically we have financed such requirements from the issuance
of both preferred and common stock. In addition, we have augmented our equity
financing activities via the issuance of convertible debt financing. We
continue to consider financing alternatives, which may include the incurrence of
long-term indebtedness. Actual capital requirements may vary based upon the
timing and success of the expansion of our operations. We believe that based on
the terms and maturities of any future debt obligations that the market risk
would be minimal. We currently do not have any material market rate risks.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Please refer to our previous disclosures in our Annual report on Form 10-K
for the year ended December 31, 1999 and our Form 8-K filed on May 8, 2000 for
a description of certain matters.
From time to time, we are involved in legal proceedings incidental to our
business. We believe that these pending actions, individually and in the
aggregate, will not have a material adverse effect on our financial condition,
and that adequate provision has been made for the resolution of such actions and
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(1) From January to September, 2000 the Company under its 1999 Stock
Option Plan issued options to purchase up to 3,417,200 shares of common stock to
members of its board of directors who were not employees of the Company, 3
current and former officers, and 39 current and former employees and 7
consultants with exercise prices ranging from $0.46 to $2.44 per share, which
was not less than the fair market value of the shares on the date of grant.
Shares cancelled as a result of unexercised expired options were 327,200 shares.
The issuances were made in reliance on Section 4(2) of the Securities Act of
1933 and was made without general solicitation or advertising. The purchasers
were sophisticated investors with access to all relevant information necessary
to evaluate the investments, and who represented to the Company that the shares
were being acquired for investment.
(2) In February 2000 we issued 175,000 shares of common stock to
Sinclair Davis Trading Corp. in exchange for consulting services. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and was made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate these investments,
and who represented to the Company that the shares were being acquired for
investment.
(3) In February 2000 we issued 15,416,633 shares of common stock and
warrants to purchase up to 15,416,633 shares of common stock in exchange for
approximately $23 million. The issuances were made in reliance on Section 4(2)
of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
(4) In February 2000 we issued 6,250 shares of common stock to PPC
Racing pursuant to a letter of intent agreement. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
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(5) In March and April, 2000 we issued 778,982 shares of common stock
and warrants to purchase up to 389,491 shares of common stock to consultants in
exchange for the conversion of approximately $1.6 million in debt owed to the
consultants. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
(6) In July 2000 we issued 100,000 shares of common stock to
Newport Capital Consultants, Inc. in exchange for consulting services. The
issuance was made in reliance on Section 4(2) of the Securities Act of
1933 and/or Regulation D promulgated under the Securities Act of 1933 and was
made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to the Company that the shares
were being acquired for investment.
(7) In August 2000 we issued 80,000 shares of common stock to
James D. Stubler in exchange for consulting services. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation
D promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
(8) In August 2000 we issued 250,000 shares of common stock to
Robert Shatles in exchange for consulting services. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation
D promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K were filed during the quarter ended
September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETTAXI.COM
Date: November 14, 2000 By: /s/ Dean Rositano
---------------------
Dean Rositano,
President and Interim Chief Financial
Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description of Exhibit
--------------- ------------------------
10.57 Co-Branded agreement dated November 5, 1999 by and between Solutions
Media, Inc. and the Company.
10.58 Web Content Distribution agreement dated January 1, 2000 by and between
White Sand Communications and the Company.
10.59 Web Content Distribution agreement dated January 1, 2000 by and between
Whitehorn Ventures and the Company.
27.1 Financial Data Schedule
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