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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _______________ to __________________
Commission file number: 26751
CyPost Corporation
--------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 98-0178674
------------------------------------ ------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1281 West Georgia Street, Suite 900, Vancouver, BC Canada V6E 3J7
--------------------------------------------------------------------------------
(Address of principal executive offices)
(604) 904-4422
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(Issuer's telephone number)
Not applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |_| No|X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 20,246,512
Transitional Small Business Disclosure Format (check one). Yes |_|; No|X|
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto for the period from the Company's
inception through December 31, 1998 which are included in the Company's
registration statement on Form 10-SB previously filed with the Commission.
<PAGE>
CYPOST CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(U.S. Dollars)
2000 1999
------------ ------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 230,877 $ 415,779
Accounts receivable-net of allowance 401,869 233,188
Prepaids and deposits 208,504 173,319
------------ ------------
841,250 822,286
PROPERTY AND EQUIPMENT, net 749,290 599,582
GOODWILL AND OTHER INTANGIBLES, net 7,353,877 5,036,785
OTHER ASSETS 171,679 69,389
SOFTWARE DEVELOPMENT, net 166,615 139,535
------------ ------------
$ 9,282,711 $ 6,667,577
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 969,420 $ 849,300
Accrued liabilities 331,581 133,937
Loans 3,065,369 875,000
Deferred revenue 680,028 626,143
Purchase of Internet Arena - 240,000
------------ ------------
5,046,398 2,724,380
------------ ------------
SHAREHOLDERS' EQUITY
Share capital
Authorized
5,000,000 preferred stock with a par value of $.001
30,000,000 common stock with a par value of $.001
Issued and outstanding
Nil preferred stock
21,138,993 common stock (1999- 20,246,480) 21,139 20,246
Paid-in capital 13,768,359 8,814,002
Deficit (9,529,929) (4,908,127)
Currency translation adjustment (23,256) 17,076
------------ ------------
4,236,313 3,943,197
------------ ------------
$ 9,282,711 $ 6,667,577
============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated
financial statement.
<PAGE>
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CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(U.S. Dollars)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE $ 1,281,695 $ 3,475 $ 2,321,255 $ 11,592
DIRECT COSTS 629,210 - 1,249,591 -
------------ ------------ ------------ ------------
652,485 3,475 1,071,664 11,592
------------ ------------ ------------ ------------
EXPENSES
Selling, general and administrative 1,138,980 452,737 2,117,657 735,115
Amortization and depreciation 847,556 6,837 1,506,648 8,337
------------ ------------ ------------ ------------
1,986,536 459,574 3,624,305 743,452
------------ ------------ ------------ ------------
(1,334,051) (456,099) (2,552,641) (731,860)
GAIN ON DISPOSITION OF ASSETS 129,544 - 129,544 -
EQUITY IN LOSS OF AFFILIATE (170,590) - (276,205) -
INTEREST EXPENSE (1,779,000) (530,000) (1,922,500) (530,000)
------------ ------------ ------------ ------------
NET LOSS (3,154,097) (986,099) (4,621,802) (1,261,860)
DEFICIT, beginning of period (6,375,832) (832,300) (4,908,127) (556,539)
------------ ------------ ------------ ------------
DEFICIT, end of period $(9,529,929) $(1,818,399) $(9,529,929) $(1,818,399)
============ ============ ============ ============
LOSS PER SHARE, basic and diluted $ (0.15) $ (0.06) $ (0.22) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 21,138,993 14,459,390 20,892,842 13,868,456
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
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CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(U.S. Dollars)
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
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Net loss $(4,621,802) $(1,261,860)
Add items not affecting cash
Amortization 1,506,648 8,337
Equity in loss of affiliate 276,205 -
Interest expense 1,922,500 530,000
------------ ------------
(916,449) (723,523)
Change in non-cash operating accounts (54,565) 158,428
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (971,014) (565,095)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets, net (94,441) (21,025)
Purchase of other assets - 15,257
Software development (74,447) (27,671)
Acquisition of a subsidiary (300,000) (643,029)
------------ ------------
NET CASH PROVIDED FROM (USED IN)
INVESTING ACTIVITIES (468,888) (676,468)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 1,255,000 900,000
Sale of common stock - 556,000
------------ ------------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES 1,255,000 1,456,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (184,902) 214,437
CASH, beginning of period 415,779 47,212
------------ ------------
CASH, end of period $ 230,877 $ 261,649
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE:
The Company settled $92,750 of debt by issuing 26,500 shares of common stock.
As consideration for the purchase of Playa Corporation, the Company issued
785,455 shares of common stock for the value of $2,700,000.
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
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CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. Dollars)
Common Stock Additional Cumulative
------------------- Paid-in Translation
Number Amount Capital Deficit Adjustment Total
---------- ------- ------------ ------------ ------------ ------------
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INCORPORATION DATE, SEPTEMBER 5, 1997
Issued for acquisition of ePost
Innovations, Inc. 3,000,000 $ 3,000 $ (1,000) $ - $ - $ 2,000
Issued on sale of units 600,000 600 19,400 - - 20,000
Net loss - - - (16,878) - (16,878)
------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 3,600,000 3,600 18,400 (16,878) - 5,122
Issued on sale of units 2,400,000 2,400 77,600 - - 80,000
Issued for cash 57,000 57 18,943 - - 19,000
Issued for legal services 22,500 22 7,478 - - 7,500
Issued for acquisition of Communication
Exchange Management, Inc. 6,270,000 6,270 (2,090) - - 4,180
Issued for exercise of warrants 915,000 915 243,085 - - 244,000
Offering expenses - - (20,000) - - (20,000)
Share transfer for services - - 281,000 - - 281,000
Net loss - - - (539,661) - (539,661)
Currency translation adjustment - - - - 33,966 33,966
---------- ------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 13,264,500 13,264 624,416 (556,539) 33,966 115,107
Issued for acquisition of
InTouch.Internet Inc. 9,855 10 28,515 - - 28,525
Issued for acquisition of NetRover Inc.
and NetRover Office Inc. 219,000 219 679,324 - - 679,543
Issued for acquisition of Connect Northwest 147,985 148 659,852 - - 660,000
Issued for acquisition of Internet Arena 20,140 20 59,980 - - 60,000
Issued for loan conversion 4,500,000 4,500 3,995,500 - - 4,000,000
Issued for exercise of warrants 2,085,000 2,085 553,915 - - 556,000
Beneficial conversion feature on loans - - 2,212,500 - - 2,212,500
Cumulative translation adjustment - - - - (16,890) (16,890)
Net loss - - - (4,351,588) - (4,351,588)
---------- ------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 (audited) 20,246,480 20,246 8,814,002 (4,908,127) 17,076 3,943,197
Issued for acquisition of Internet Arena 80,558 81 239,919 - - 240,000
Issued for acquisition of Playa 785,455 785 2,699,215 - - 2,700,000
Issued for services/debt 26,500 27 92,723 - - 92,750
Beneficial conversion feature on loans - - 1,922,500 - - 1,922,500
Cumulative translation adjustment - - - - (40,332) (40,332)
Net loss - - - (4,621,802) - (4,621,802)
---------- ------- ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2000 (UNAUDITED) 21,138,993 $21,139 $13,768,359 $(9,529,929) $ (23,256) $ 4,236,313
========== ======= ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
These financial statements have been prepared on the basis of accounting
principles applicable to a "going concern" which assume that Cypost
Corporation (the "Company") will continue in operation for at least one
year and will be able to realize its assets and discharge its liabilities
in the normal course of operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses of
approximately $9.5 million for the period from inception September 5, 1997
to June 30, 2000, has a working capital deficit at June 30, 2000, and
requires additional financing for its business operations. As of June 30,
2000, the Company has $9,950,000 of funding available which can be drawn
against a promissory note agreement with a lender; however, the lender has
the option, at any time, to withdraw its offer to lend this amount.
Management has discussed restructuring of the Company as a whole, to
evaluate the feasibility of downsizing and to look at the subsidiaries for
profitability. In the discussion management has decided to sell it's
majority interest in CyPost KK.
The company has also evaluated the streamlining of the operations and the
consolidation of the ISP's. The company completed the first stage of
streamlining of the operations in the consolidation of the Intouch.Internet
Inc. client base into NetRover Inc. for billing, accounting and technical
support. In the Vancouver sector, the downsizing caused some lay-offs by
the company
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern".
While management believes that the actions already taken or planned, as
described above, will mitigate the adverse conditions and events which
raise doubts about the validity of the "going concern" assumption used in
preparing these financial statements, there can be no assurance that these
actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of
assets, the reported amounts of its liabilities, the reported revenues and
expenses, and the balance sheet classifications used.
INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements presented have been prepared
by the Company without audit and, in the opinion of the management, reflect
all adjustments of a normal recurring nature necessary for a fair statement
of (a) the consolidated results of operations for the three months and six
months ended June 30, 2000 and 1999, (b) the consolidated financial
position at June 30, 2000 and (c) the consolidated cash flows for the six
months ended June 30, 2000 and 1999. Interim results are not necessarily
indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 1999 has been
derived from the consolidated financial statements that have been audited
by the Company's independent auditors. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-KSB.
<PAGE>
CONSOLIDATION
The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. The principal subsidiaries, all of which
are wholly owned, include ePost Innovations Inc., NetRover Inc., NetRover
Office Inc., Hermes Net Solutions Inc., InTouch.Internet Inc. and Playa
Corporation.
2. LOANS
Loan balance as of June 30, 2000 consist of the following:
Promissory Note - Blue Heron Venture Fund, Ltd. $2,050,000
Promissory Note - Pacific Gate Capital 80,000
Various lenders of Playa Corporation 819,248
Obligations under capital lease 116,121
----------
Total $3,065,369
----------
During the six months ended June 30, 2000, the Company borrowed an
additional $1,175,000 pursuant to a promissory note agreement with Blue
Heron Venture Fund, Ltd. The loans are unsecured, bear interest at 8% per
annum, and the principal and accrued interest are due on demand. The lender
may elect to convert the loans into shares of common stock of the Company
as follows:
Shares
------------------------
Principal Pre-Split Post-Split
----------- ----------- -----------
$ 2,050,000 1,822,222 2,733,333
At the commitment dates of the promissory note, the conversion prices were
less than the fair values of the common stock, hence a beneficial
conversion feature is attached to these convertible notes. The amount of
this beneficial conversion feature has been recorded as interest expense
and additional paid-in-capital for $1,922,500 for the six months ended June
30, 2000.
At June 30, 2000, the loan balance was $2,050,000. The fair value of the
loan at June 30, 2000 is not practicable to estimate because of the
conversion features associated with the loans; accordingly, it is not
possible to estimate the present value of the future cash flows with any
reasonable degree of precision.
3. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On June 11, 1999, Canada Post Corporation filed a Statement of Claim in the
Federal Court of Canada in which it sought injunctive and unspecified
monetary relief for the allegedly "improper use by the Company of certain
marks and names which contain the component "post". On October 18, 1999,
the Company filed its Defence and Counterclaim. In a motion heard November
24, 1999, Canada Post Corporation challenged certain parts of the
Counterclaim and the Federal Court reserved judgment. There has been no
pre-trial discovery and no trial date has been set.
On May 25, 1999, the Company filed a statement of Claim in the BC Court
seeking a declaration that the public notice of Canada Post Corporation's
adoption and use of CYBERPOSTE and CYBERPOST on November 18, 1998 and
December 9, 1998 respectively, did not affect the Company's use of CYPOST
and ePost as trade-marks and trade-names prior to said dates. The Company
sought summary judgment for such a declaration and on September 14, 1999,
the BC Court rejected summary judgment on the basis that no right of the
Company was being infringed and that a trial of the issues was more
appropriate. The rejection is pending appeal. There has been no pre-trial
discovery (except to the extent that some was done as part of the summary
judgment application) and no trial date has been set.
<PAGE>
On or about April 13, 2000, Steven Berry, the former CEO of CyPost brought
an action in the civil court of the State of New York, New York County
(Manhattan). The suit alleges claims of conversion, fraud, wrongful
cancellation, breach of contract and breach of fiduciary duty and names
CyPost and Continental Stock Transfer & Trust Company as defendants, and
seeks damages of $3 Million per claim. It also sought injunctive relief via
an Order to Show cause which has been denied by the court. The suit arises
out of the Company's cancellation of stock awarded to Mr. Berry in
contemplation, and upon the condition, of his remaining in the employ of
the Company. Mr. Berry resigned from the Company on January 17, 2000 citing
personal reasons for his departure. The Company believes his claims to be
without merit and intends to contest them vigorously, beginning with an
action filed against Steven Berry by CyPost Corporation and Epost
Innovations Inc.
On September 6, 2000, a motion was decided for the case of Berry vs. CyPost
to be dismissed from the New York jurisdiction and be addressed in the
jurisdiction where both parties reside. The case had already been filed on
June 8, 2000, pending the decision from the New York courts.
On or about April 20, 2000 CyPost Corporation and Epost Innovations Inc.
brought an action in the Supreme Court of British Columbia, Vancouver,
British Columbia against Tia Berry in contest of monies diverted to her
accounts rather than those of Steven Berry, for expenses. A court date has
been requested.
On or about June 8, 2000 CyPost Corporation and Epost Innovations Inc.
brought an action in the Supreme Court of British Columbia, Vancouver,
British Columbia against Steven Berry and Tia Berry, for conspiracy to
divert monies to her accounts rather than those of Steven Berry, for
expenses. Also, that Steven Berry breached his fiduciary duties, was
negligent in his statutory duties and breached his employment contract. A
court date has been requested.
4. SUBSEQUENT EVENTS
SHARE CAPITAL
On August 1, 2000, the Company issued an aggregate 129,500 shares of its
common stock to seven employees in consideration for their providing
certain services to the Company. The value of these services as of June 30,
2000 was $53,351. The value of the shares issued was $76,897. These shares
were issued pursuant to the exemption from registration contained in
Section4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.
On the same date the Company issued 75,000 shares of its common stock to
each of the Company's three directors in consideration for their services
provided to the Company. The value of these services as of June 30, 2000
was $69,106. The value of the shares issued was $133,605. These shares were
issued pursuant to the exemption from registration contained in Section4(2)
of the Securities Act of 1933 for transactions by an issuer not involving a
public offering.
On August 17, 2000, the Company issued an aggregate 43,500 shares of its
common stock for consulting work that was performed on behalf of the
Company by five people . The value of these services as of June 30, 2000
was $25,830. The value of the shares issued was $25830. These shares were
issued pursuant to the exemption from registration contained in Section4(2)
of the Securities Act of 1933 for transactions by an issuer not involving a
public offering.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<PAGE>
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Condensed
Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this quarterly report. Historical results and percentage
relationships among any amounts in these financial statements are not
necessarily indicative of trends in operating results for any future period. The
statements which are not historical facts contained in this quarterly report,
including this Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Notes to these Condensed Consolidated Financial
Statements, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based on
currently available operating, financial and competitive information, and are
subject to various risks and uncertainties. Future events and the Company's
actual results may differ materially from the results reflected in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, dependence on existing and future key strategic and
strategic end-user customers, limited ability to establish new strategic
relationships, ability to sustain and manage growth, variability of quarterly
operating results, the Company's expansion and development of new service lines,
marketing and other business development initiatives, the commencement of new
engagements, competition in the industry, general economic conditions,
dependence on key personnel, the ability to attract, hire and retain personnel
who possess the technical skills and experience necessary to meet the service
requirements of its clients, the potential liability with respect to actions
taken by its existing and past employees, risks associated with international
sales, and other risks described herein, the Company's annual report on Form 10K
and in the Company's other Securities and Exchange Commission filings.
Overview
Cypost produces and markets computer privacy protection technologies and
provides Internet connectivity to business and residential customers. From the
Company's inception date until approximately mid-March of 1999, the Company was
considered a development stage enterprise. Since that time, the Company has (i)
discussed five (5) software encryption products under its "Navaho" trademark,
and currently is marketing two (2) products, (ii) expanded into the
Internet Service Provider market and (iii) acquired an Instant Messaging Service
provider during the three-month period ending March 31, 2000.
.
The Company has evaluated streamlining operations and consolidating its
ISP's. The Company completed the first stage of such streamlining by
consolidating the Intouch.Internet Inc. client base into NetRover Inc. for
billing, accounting and technical support.
As part of Management's ongoing review of the Company's operations, 5 of
14 employees in the Vancouver office were terminated during the second quarter
of 2000. The Company does not expect to incur significant costs in the present
or future quarters in connection with these terminations.
Because the Company is in an early stage in its business operations
its revenues are subject to wide variation from quarter to quarter. In addition,
the Company is electing to pursue a strategy of growing through acquisition.
The size and timing of acquisitions, both past acquisitions and possible
future acquisitions, has been and will be affected by a number of factors which
are hard to predict and many of which are beyond the Company's control. Because
of these factors, the results of operations discussed below may not be an
accurate indication of future performance.
Results of Operations for the Three Months Ended June 30, 2000
Substantially all of the Company's revenue was earned from its ISP
operations during the three months ended June 30, 2000. These revenues are
attributable virtually entirely to the operations of the five (5) Internet
service provider companies (Hermes Net Solutions Inc., Intouch.Internet Inc.,
NetRover Inc., Connect Northwest and Internet Arena) which the Company
acquired beginning late in the second quarter of 1999. The Company generated
net sales of $1,281,695 for the three month ended June 30, 2000 compared to
$3,475 for the three months ended June 30, 1999.
Direct costs, which consist primarily of telecommunications charges in
respect of providing Internet connection services to customers, of $629,210,
were incurred for the three months ended June 30, 2000. The Company did not
incur direct costs for the three months ended June 30, 1999 due to the Company
not having acquired any Internet Service Providers until the end of the second
quarter of 1999.
<PAGE>
Selling, general and administrative expenses were $1,138,980 for the
three ended June 30, 2000 compared to $452,737 for the three months ended June
30, 1999.Selling, general and administrative expenses for the current quarter
include $42,602 for sales and marketing, $552,341 for salaries and benefits,
$291,091 for general and administrative expenses and $252,946 for legal and
professional fees. The increase in the above noted expenses for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999
results from the Company emerging from the development stage in 1999 and
commencing revenue generating activities.
Interest expense of $1,779,000 for the three months ended June 30, 2000 is
in respect of the beneficial conversion features on convertible promissory
notes between the Company and Blue Heron Venture Fund, Ltd. A beneficial
conversion feature arises when at the commitment date of the promissory
note(the date of agreement to the terms of the promissory note),the convertible
promissory note is "in-the-money" (the conversion price of the promissory
note is less than the fair value of the common stock into when the promissory
note is convertible). The interest expense is calculated as the difference
between the conversion price and the fair value of the common stock, multiplied
by the number of common stock into which the promissory note is convertible
at the commitment date of the loan. The interest expense is a non-cash
item and results in an interest in paid-in-capital.
Net loss of $3,154,097 for the three months ended June 30, 2000 compared
to a net loss of $986,099 for the three months ended June 30, 1999. The
increase in net loss for the three months ended June 30, 2000 was primarily a
result of increased interest expense, increased selling, general and
administrative expenses from the consolidation of the subsidiaries, increase of
amortization and depreciation of the assets acquired in the fiscal year 1999 and
increased direct costs due to the increase of operations.
Results of Operations for the Six Months Ended June 30, 2000
Substantially all of the Company's revenue was earned from its ISP
operations during the six months ended June 30, 2000. These revenues are
attributable virtually entirely to the operations of the five (5) Internet
service provider companies (Hermes Net Solutions Inc., Intouch.Internet Inc.,
NetRover Inc., Connect Northwest and Internet Arena) which the Company
acquired beginning late in the second quarter of 1999. The Company generated
net sales of $2,321,255 for the six months ended June 30, 2000 compared to
$11,592 for the six months ended June 30, 1999.
Direct costs, which primarily consist of telecommunications charges in
respect of providing Internet connection services to customers, of $1,249,591
were incurred for the six months ended June 30, 2000. The Company did not incur
direct costs for the six months ended June 30, 1999 due to the Company not
having acquired any Internet Service Providers until the end of the second
quarter of 1999.
Selling, general and administrative expenses were $2,117,657 for the six
months ended June 30, 2000 compared to $735,115 for the six months ended June
30, 1999. Selling, general and administrative expenses for the six months ended
June 30, 2000 include $136,034 for sales and marketing, $972,522 for salaries
and benefits, $612,655 for general and administrative expenses and $396,446
for legal and professional fees. The increase in the above noted expenses for
the six months ended June 30, 2000 compared to the six months ended June 30,
1999 results from the Company emerging from the development stage in 1999 and
commencing revenue generating activities.
Interest expense of $1,922,500 for the six months ended June 30, 2000 is
in respect of the beneficial conversion features on convertible promissory
notes between the Company and Blue Heron Venture Fund, Ltd. A beneficial
conversion feature arises when at the commitment date of the promissory
note(the date of agreement to the terms of the promissory note),the convertible
promissory note is "in-the-money" (the conversion price of the promissory
note is less than the fair value of the common stock into when the promissory
note is convertible). The interest expense is calculated as the difference
between the conversion price and the fair value of the common stock, multiplied
by the number of common stock into which the promissory note is convertible
at the commitment date of the loan. The interest expense is a non-cash
item and result in an interest in paid-in-capital.
Net loss of $4,621,802 for the six months ended June 30, 2000 compared to
a net loss of $1,261,860 for the six months ended June 30, 1999. The increase
in net loss for the six months ended June 30, 2000 was primarily a result of
increased interest expense, increased selling, general and administrative
expenses from the consolidation of the subsidiaries, increase of amortization
and depreciation of the assets acquired in the fiscal year 1999 and increased
direct costs due to the increase of operations.
<PAGE>
Liquidity and Capital Resources
The accompanying financial statements have been prepared on a going
concern basis, which assumes that the Company will continue in operation for at
least one year and will be able to realize its assets and discharge its
liabilities in the normal course of business. The Company incurred net loss
for the six months ended June 30, 2000 of $4,621,802 as compared to a net loss
for the six months ended June 30, 1999 of $1,261,860. For the six months ended
June 30, 2000, the Company had a working capital deficit of $4,205,148 which
is mainly due to the loans due to Blue Heron Venture Fund, Ltd. These factors
indicate that the Company's continuation as a going concern is dependent
upon its ability to obtain adequate financing.
During the six months ended June 30, 2000, the Company borrowed
$1,175,000 from Blue Heron Venture Fund, LtdThese loans were made under
agreements with Blue Heron Venture Fund, Ltd. under which the Company may
draw up to $16 million in unsecured loans. These loans bear interest at 8%
per annum and are payable on demand. They are convertible into common stock
of the Company. If the outstanding principal amount of the loans of $2,050,000
as of June 30, 2000 were converted, Blue Heron Venture Fund, Ltd. would be
entitled to an aggregate 2,733,333 shares of the Company's common stock. Blue
Heron Venture Fund, Ltd. is free to withdraw this credit facility at any
time, and since the loans are payable on demand the Company's ability to
continue operations is dependent upon the willingness of Blue Heron Venture
Fund, Ltd. to forebear from demanding payment. The Company believes that Blue
Heron Venture Fund, Ltd. will continue not to demand payment of the
loans for the immediately foreseeable future, but it is under no
obligation to do so. Should Blue Heron Venture Fund, Ltd. demand payment,
the Company would be required to obtain financing from other sources to
satisfy its obligations or would be in default under the loans. The Company
does not believe that bank borrowings are available under present
circumstances, and there can be no assurance that any financing could be
obtained from other sources. Even if funding were available, it might be
available only on terms which would not be favorable to the Company or which
management would not find acceptable.
During the six months ended June 30, 2000, the Company borrowed an
aggregate $80,000 from Pacific Gate Capital LtdThese loans bear interest at 8%
per annum and are payable on demand. Since the loans are payable on demand
the Company's ability to continue operations is dependent upon the
willingness of Pacific Gate Capital Ltd. to forebear from demanding payment.
The Company believes that Pacific Gate Capital Ltd. will continue not to
demand payment of the loans for the immediately foreseeable future,
but it is under no obligation to do so. Should Pacific Gate Capital demand
payment, the Company would be required to obtain financing from other
sources to satisfy its obligations or would be in default under the loans. The
Company does not believe that bank borrowings are available under present
circumstances, and there can be no assurance that any financing could be
obtained from other sources. Even if funding were available, it might be
available only on terms which would not be favorable to the Company or which
management would not find acceptable.
In connection with the acquisition of Playa Corporation, the Company
assumed certain loans payable by Playa Corporation. As of June 30, 2000, the
aggregate outstanding principal amount of the loans was $646,431, with an
aggregate monthly payment of $9,703 and $361,278 due immediately. Of the
$361,278 due immediately, approximately $285,220 was owed to Sagin Venture
Capital. This loan is payable on demand. Since the loan is payable on demand
the Company's ability to continue operations is dependent upon the
willingness of Sagin Venture Capital to forebear from demanding payment. The
Company believes that Sagin Venture Capital will continue not to demand
payment of the loan for the immediately foreseeable future, but it is
under no obligation to do so. Should Sagin Venture Capital demand payment,
the Company would be required to obtain financing from other sources to
satisfy its obligations or would be in default under the loan. The Company does
not believe that bank borrowings are available under present
circumstances, and there can be no assurance that any financing could be
obtained from other sources. Even if funding were available, it might be
available only on terms which would not be favorable to the Company or which
management would not find acceptable. The balance of the $361,278 is in the
form of a line of credit with respect to which the Company is current in its
obligations.
<PAGE>
In May 2000, Playa Corporation borrowed $172,817 from CyPost KK to satisfy
a loan payable to a Playa Corporation creditor. The loan from CyPost KK bears
interest at 5.5% per annum, the first installment is due January 5, 2001, and is
payable over 60 months. CyPost KK is an affiliate of the Company, in which the
Company invested at the formation of CyPost KK in March 2000. Subsequent to the
end of the second quarter, the Company sold its interest in CyPost KK to one of
the other investors in CyPost KK.
For the six months ended June 30, 2000 , the Company's net cash used in
operating activities totaled $971,014 compared to $565,095 for the six months
ended June 30, 1999.
The Company's net cash used in investing activities totaled $468,888 for
the six months ended June 30, 2000 compared to $676,468 for the six months
ended June 30, 1999. The majority of the net cash used in investing activities
during the three months ended June 30, 2000 related to the Company's acquisition
of Playa Corporation.
The Company's financing activities during six months ended June 30, 2000
included $1,255,000 of loans provided by Blue Heron Venture Fund, Ltd. and
Pacific Gate Capital compared to the six months ended June 30, 1999 of $900,000
of loans provided by Blue Heron Venture Fund, Ltd. and $556,000 which was
provided through the exercise of warrants to purchase an aggregate 2,085,000 of
the Company's common stock by certain individuals.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 11, 1999, Canada Post Corporation filed a Statement of Claim in
the Federal Court of Canada in which it sought injunctive and unspecified
monetary relief for the allegedly "improper use by the Company of certain marks
and names which contain the component "post". On October 18, 1999, the Company
filed its Defence and Counterclaim. In a motion heard November 24, 1999, Canada
Post Corporation challenged certain parts of the Counterclaim and the Federal
Court reserved judgment. There has been no pre-trial discovery and no trial date
has been set.
On May 25, 1999, the Company filed a statement of Claim in the BC Court
seeking a declaration that the public notice of Canada Post Corporation's
adoption and use of CYBERPOSTE and CYBERPOST on November 18, 1998 and December
9, 1998 respectively, did not affect the Company's use of CYPOST and ePost as
trade-marks and trade-names prior to said dates. The Company sought summary
judgment for such a declaration and on September 14, 1999, the BC Court rejected
summary judgment on the basis that no right of the Company was being infringed
and that a trial of the issues was more appropriate. The rejection is pending
appeal. There has been no pre-trial discovery (except to the extent that some
was done as part of the summary judgment application) and no trial date has been
set.
On or about April 13, 2000, Steven Berry, the former CEO of CyPost brought
an action in the civil court of the State of New York, New York County
(Manhattan). The suit alleges claims of conversion, fraud, wrongful
cancellation, breach of contract and breach of fiduciary duty and names CyPost
and Continental Stock Transfer & Trust Company as defendants, and seeks damages
of $3 Million per claim. It also sought injunctive relief via an Order to Show
cause which has been denied by the court. The suit arises out of the Company's
cancellation of stock awarded to Mr. Berry in contemplation, and upon the
condition, of his remaining in the employ of the Company. Mr. Berry resigned
from the Company on January 17, 2000 citing personal reasons for his departure.
The Company believes his claims to be without merit and intends to contest them
vigorously, beginning with an action filed against Steven Berry by CyPost
Corporation and Epost Innovations Inc.
On September 6, 2000, a motion was decided for the case of Berry vs.
CyPost to be dismissed from the New York jurisdiction and be addressed in the
jurisdiction where both parties reside. The case had already been filed on June
8, 2000, pending the decision from the New York courts.
<PAGE>
On or about April 20, 2000 CyPost Corporation and Epost Innovations Inc.
brought an action in the Supreme Court of British Columbia, Vancouver, British
Columbia against Tia Berry in contest of monies diverted to her accounts rather
than those of Steven Berry, for expenses. A court date has been requested.
On or about June 8, 2000 CyPost Corporation and Epost Innovations Inc.
brought an action in the Supreme Court of British Columbia, Vancouver, British
Columbia against Steven Berry and Tia Berry, for conspiracy to divert monies to
her accounts rather than those of Steven Berry, for expenses. Also, that Steven
Berry breached his fiduciary duties, was negligent in his statutory duties and
breached his employment contract. A court date has been requested.
Item 2. Change in Securities
On June 8, 2000, the Company issued 771,426 shares of its common stock to
the owners of Playa Corporation as partial payment of the purchase price
$3,000,000 in connection with the Company's acquisition of that company. These
shares were issued pursuant to the exemption from registration contained in
Section4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.
On August 1, 2000, the Company issued an aggregate 129,500 shares of its
common stock to seven employees in consideration for their providing certain
services to the Company. The value of the shares issued was $76,897. These
shares were issued pursuant to the exemption from registration contained in
Section4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.
On the same date the Company issued 75,000 shares of its common stock to
each of the Company's three directors in consideration for their services
provided to the Company. The value of the shares issued was $133,605These
shares were issued pursuant to the exemption from registration contained in
Section4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.
On August 17, 2000, the Company issued an aggregate 43,500 shares of its
common stock for consulting work that was performed on behalf of the Company by
five people . The value of the shares issued was $25830. These shares were
issued pursuant to the exemption from registration contained in Section4(2) of
the Securities Act of 1933 for transactions by an issuer not involving a
public offering.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 . . . . . . . . . .Financial Data Schedule
b) Reports on Form 8-K
1. The Company filed a Form 8-K with the Securities and
Exchange Commission on May 30, 2000, in connection with the
acquisition of all of the outstanding capital stock of Playa
Corporation.
2. The Company filed Amendment No. 1 on Form 8-K/A with the
Securities and Exchange Commission on June 6, 2000, to amend
a Form 8-K originally filed on October 15, 1999.
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYPOST CORPORATION
-----------------------------
(REGISTRANT)
DATE: NOVEMBER 13, 2000 BY: /S/ ROBERT SENDOH
-----------------------------
ROBERT SENDOH
CHAIRMAN
<PAGE>
