U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
---------------
to
FORM 10-QSB/A
(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
--------------------------------------------
(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 |X| No| |
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 21,104,996
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, 1999 which are included in the Company's
Annual Report on Form 10-KSB, as amended, previously with the Commission.
<PAGE>
<TABLE>
<CAPTION>
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 242,224 173,319
------------ ------------
874,970 822,286
PROPERTY AND EQUIPMENT, net 749,290 599,582
GOODWILL AND OTHER INTANGIBLES, net 7,353,877 5,036,785
OTHER ASSETS 43,574 69,389
Investment in CyPost KK 200,151
SOFTWARE DEVELOPMENT, net 166,615 139,535
------------ ------------
$ 9,388,477 $ 6,667,577
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 969,420 $ 849,300
Accrued liabilities 297,551 133,937
Loans 3,065,369 875,000
Deferred revenue 680,028 626,143
Purchase of Internet Arena - 240,000
------------ ------------
5,012,368 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 13,844,310 8,814,002
Deficit (9,466,084) (4,908,127)
Currency translation adjustment (23,256) 17,076
------------ ------------
4,376,109 3,943,197
------------ ------------
$ 9,388,477 $ 6,667,577
============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated
financial statement.
<PAGE>
<TABLE>
<CAPTION>
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 1,166,675 452,737 2,117,301 735,115
Amortization and depreciation 847,556 6,837 1,506,648 8,337
------------ ------------ ------------ ------------
2,014,231 459,574 3,623,949 743,452
------------ ------------ ------------ ------------
(1,361,746) (456,099) (2,552,285) (731,860)
NET PROCEEDS FROM INSURANCE RECOVERY 129,544 - 129,544 -
EQUITY IN LOSS OF AFFILIATE (116,803) - (136,321) -
INTEREST EXPENSE
Beneficial conversion feature (1,779,000) (530,000) (1,922,500) (530,000)
Accrued fair value of interest expense (40,167) - (75,951) -
Interest expense (444) - (444) -
------------ ------------ ------------ ------------
NET LOSS (3,168,616) (986,099) (4,557,957) (1,261,860)
DEFICIT, beginning of period (6,297,468) (832,300) (4,908,127) (556,539)
------------ ------------ ------------ ------------
DEFICIT, end of period $(9,466,084) $(1,818,399) $(9,466,084) $(1,818,399)
============ ============ ============ ============
LOSS PER SHARE, basic and diluted $ (0.15) $ (0.06) $ (0.21) $ (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>
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 USED IN OPERATING ACTIVITIES
Net loss $(4,557,957) $(1,261,860)
Add items not affecting cash
Amortization and depreciation 1,506,648 8,337
Net proceeds from insurance recovery (129,544) -
Equity in loss of affiliates 136,321 -
Beneficial conversion feature 1,922,500 530,000
Accrued fair value of interest expense 75,951 -
Interest expense 444 -
------------ ------------
(1,045,637) (723,523)
Change in non-cash operating accounts 573,781 158,428
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (471,856) (565,095)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of capital assets, net (223,985) (21,025)
Purchase of other assets - 15,257
Software development (74,447) (27,671)
Acquisition of Playa Corporation (300,000) (643,029)
Investment in CyPost KK (336,472) -
------------ ------------
NET CASH PROVIDED USED IN
INVESTING ACTIVITIES (934,904) (676,468)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds
Blue Heron Venture Fund, Ltd. 1,175,000 900,000
Pacific Gate Capital Ltd. 80,000 -
CyPost KK 168,062 -
Loan repayment
Playa Corporation creditor (201,204) -
Sale of common stock - 556,000
------------ ------------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES 1,221,858 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
============ ============
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>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. Dollars)
Common Stock Additional Cumulative
------------------- Paid-in Translation
Number Amount Capital Deficit Adjustment Total
---------- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
Accrued fair value of interest expense - - 75,951 - - 75,951
Deferred financing fees - - 95,000 - - 95,000
Return of deferred financing fees - - (95,000) - - (95,000)
Cumulative translation adjustment - - - - (40,332) (40,332)
Net loss - - - (4,557,957) - (4,557,957)
---------- ------- ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2000 (UNAUDITED) 21,138,993 $21,139 $13,844,310 $(9,466,084) $ (23,256) $ 4,376,109
========== ======= ============ ============ ============ ============
</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.
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 did not incur significant costs in the second quarter
and does not expect to incur significant costs in future quarters in
connection with these terminations.
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. ACQUISITIONS
On May 5, 2000, the Company purchased an additional 230 shares of CyPost KK
for $136,472 (11,500,000 Yen) and transferred 10 of such shares to certain
members of the management of CyPost KK in consideration of their future
efforts to raise additional capital for CyPost KK. The transferred shares
has been recorded as $5,000 of deferred financing fees, resulting in
aggregate deferred financing fees of $95,000. At the same time, certain
members of the management of CyPost KK purchased an additional 170 shares
of stock of CyPost KK for $63,528 (5,357,000 Yen).
On June 29, 2000, these certain members of the management of CyPost KK
returned an aggregate 190 shares of CyPost KK, being all the shares of
CyPost KK previously transferred to them by the Company, to the Company,
Because they did not raise the additional capital for CyPost KK as
originally contemplated, resulting in the Company having a 63% interest in
CyPost KK as of such date. This transaction has been recorded as return
of deferred financing fees of $95,000.
For the six months ended June 30, 2000, the Company recognized a loss of
$136,321, which represents 55% of the net loss reported by CyPost KK for
the three months ended March 31, 2000 and 63% of the net loss reported by
CyPost KK for the three months ended June 30, 2000.
3. 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 651,186
CyPost KK loan to Playa Corporation 168,062
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 are payable on demand. The Company has accrued fair value of
interest of $75,951 for the six months ended June 30, 2000. 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.
On April 27, 2000 Blue Heron Venture Fund, Ltd. renegotiated with the
Company two of the commitment letters that were available as of that date.
With the renegotiation, the March 17, 1999 and July 12, 1999 debt
financing commitment letters were amended to reflect a conversion price of
$0.75. The following table indicates the discount to market on the amended
commitment letters:
<TABLE>
<CAPTION>
COMMITMENT DATE AMOUNT OF COMMITMENT SHARE CONVERSION CLOSING SHARE PRICE CONVERSION PRICE DISCOUNT TO MARKET
--------------- --------------------- ---------------- -------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
April 27, 2000 $ 2,000,000 2,666,667 $ 1.50 $ 0.75 50%
--------------- --------------------- ---------------- -------------------- ----------------- -------------------
April 27, 2000 $ 10,000,000 13,333,333 $ 1.50 $ 0.75 50%
--------------- --------------------- ---------------- -------------------- ----------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
Fair Number
Value of of Beneficial
Common Exercise Intrinsic Common Conversion
Loan Stock Price Value Stock Feature
---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
"2 million" $ 100,000 $ 1.52 $ 1.33 $ 0.19 75,000 $ 14,000
$1,025,000 $ 1.52 $ 1.33 $ 0.19 755,263 $ 143,500
"10 million" $ 50,000 $ 1.50 $ 0.75 $ 0.75 66,667 $ 50,000
Imputed Interest
on new loan advances $ 207,500
Revised Terms $2,000,000 $ 1.50 $ 0.75 $ 0.75 2,666,667 $2,000,000
Original Terms $2,000,000 $ 1.52 $ 1.33 $ 0.19 1,500,000 $ 285,000
Additional Interest
on old loans from
change in conversion
terms $1,715,000
$1,922,000
</TABLE>
The amount of this beneficial conversion feature has been recorded as
interest expense and additional paid-in capital of $1,922,500 for the six
months ended June 30, 2000.
At June 30, 2000, the loan balance was $2,050,000. It is not practicable
to estimate the fair value of the loans at June 30, 2000 because of the
conversion features associated with the loans. In addition, it is not
possible to estimate the present value of the future cash flows with any
reasonable degree of precision.
In May 2000, Playa Corporation borrowed $168,062 (currency translation
value of 18,177,230 Yen at 108.158 on payment date May 5, 2000) 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.
4. 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.
Canada Post seeks relief in the form of preventing the Company from using
trademarks, trade names or brand names and does not seek monetary damages.
Accordingly, the Company does not believe that this litigation will have a
material impact on its future results of operations, financial condition
and liquidity.
On April 4, 2000, Steven Berry ("Berry"), the former Chief Executive
Officer of the Company, commenced an action in the Supreme Court of the
State of New York, County of New York, (Index No. 601448/2000), against the
Company and Continental Stock Transfer Company ("Continental") (the "New
York Action"). In the New York Action, Berry claimed damages for alleged
conversion, fraud, breach of contract and breach of fiduciary duty all
arising from the alleged wrongful Stop Transfer Order which the Company
placed relating to 75,000 shares of the Company's common stock registered
in Berry's name and the Company's cancellation of a further 600,000 shares
(the "Contingent Shares"). The complaint in the New York Action claims
damages in excess of $3 million with the precise amount to be determined at
trial.
Pursuant to Berry's contract of employment with the Company, the Company
issued 600,000 Contingent Shares to Berry upon condition that he would
remain in the Company's employ as its Chief Executive Officer for at least
two years. Berry commenced his employment with the Company on January 4,
1999 and resigned his employment with the Company on January 17, 2000.
Following Berry's resignation the Company issued a Stop Transfer Order to
Continental with respect to the 75,000 shares and cancelled the 600,000
Contingent Shares which had been issued to Berry.
On May 19, 2000 CyPost and EPost Innovations Inc. commenced suit in the
Supreme Court of British Columbia, Vancouver Registry (Action #S002798),
against Berry and his wife, Tia Berry (the "BC Action"). In the BC Action,
the Company seeks an order directing Berry to return the 600,000 Contingent
Shares to the Company for cancellation or an order entitling the Company to
cancel the same on the basis that Berry did not fulfill the employment
conditions which were the condition precedent to his becoming the
beneficial owner of the Contingent Shares.
In the BC Action, the Company also claims at least $800,000 from Berry on
account of breach of fiduciary duty, negligence, breach of statutory duties
and breach of contract arising from Berry's failure to properly carry out
his employment responsibilities. In the BC Action, the Company also claims
$34,013 from Berry and Tia Berry on account of conspiracy to defraud and
injure the Company and EPost Innovations Inc. by causing certain personal
expenses to be paid by the Company rather than by Berry and Tia Berry
personally. The Company also claims punitive and exemplary damages from
Berry and Tia Berry in the BC Action.
On May 25, 2000, the Company moved in the New York Action for an order
dismissing the action against the Company for lack of jurisdiction or, in
the alternative, on the basis of forum non conviens. On September 5, 2000,
the court dismissed the New York Action on forum non conviens grounds,
subject to the Company making certain stipulations in the New York Action.
Those stipulations have been made and the appeal period in the New York
Action has expired without Berry or any other party appealing the September
5, 2000 order.
The pleadings have been closed in the BC Action and the parties are now
waiting for the British Columbia Supreme Court Registry to assign a trial
date, which will likely be sometime in the fall of 2001 or early 2002.
The issues raised by Berry and the Company in the New York Action will be
litigated in the BC Action together with the further issues raised by the
Company in the BC Action. The Company feels that Berry's claims in the New
York Action were without merit and that the Company will be successful in
obtaining an order declaring that Berry's 600,000 Contingent Shares be
cancelled and further entitling the Company to substantial damages. The
Company will vigorously pursue its position in all respects.
A loss by the Company of the claim for monetary damages would have a
material adverse effect on the Company's future results of operations,
financial condition and liquidity; however, the Company does not expect to
lose this action and believes additionally that it would be able to
negotiate reasonable payment terms should it lose this suit.
5. SUBSEQUENT EVENTS
SHARE CAPITAL
On August 1, 2000, the Company issued an aggregate 129,500 shares of its
common stock to seven employees at the closing price of $0.5938 per share
on July 17, 2000 in consideration for their providing certain services to
the Company from June 16, 2000 through July 15, 2000. These services at
June 30, 2000, $53,351, and for the quarter ended September 30, 2000,
$23,546, aggregated $76,897.
On the same date, the Company issued 75,000 shares of its common stock to
each of the Company's three directors at the closing price of $0.5938 on
July 17, 2000 in consideration for their providing certain services to the
Company from June 16 through July 15, 2000. These services at June 30,
2000, $69,106, and for the quarter ended September 30, 2000, $64,499,
aggregated $133,605.
On August 17, 2000, the Company issued an aggregate 43,500 shares of its
common stock to five people at the closing price of $0.5938 per share on
July 25, 2000 in consideration for their providing consulting work to the
Company from April 1, 2000 through June 30, 2000. These services at June
30, 2000, $25,787, were equal the value of the shares issued.
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 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 the 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 10-KSB, as amended, and 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" brand, 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 did not incur significant costs in the second quarter and
does not expect to incur significant costs in 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 $1,166,675 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 $512,342 for salaries and benefits, $358,785 for general and
administrative expenses, $252,946 for legal and professional fees and $42,602
for sales and marketing. 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 primarily from the Company emerging from the development stage in 1999,
commencing revenue generating activities and consolidating its subsidiaries.
Interest expense includes $1,779,000 for the three months ended June 30,
2000, 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 increase in paid-in capital. The Company has accrued fair value of
interest of $40,167 for the three months ended June 30, 2000.
Net loss of $3,168,616 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, increased amortization and
depreciation of the assets acquired in the fiscal year 1999 and increased direct
costs due to the commencement of revenue generating activities.
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 consist primarily 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 $2,117,301 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 $904,772 for salaries and benefits, $680,049 for general
and administrative expenses, $396,446 for legal and professional fees and
$136,034 for sales and marketing. 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 primarily from the Company emerging from the development stage in
1999, commencing revenue generating activities, and consolidating its
subsidiaries.
Interest expense includes $1,922,500 for the six months ended June 30,
2000, 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 increase in paid-in capital. The Company has accrued fair value of
interest of $75,951 for the six months ended June 30, 2000.
Net loss of $4,557,957 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, increased amortization
and depreciation of the assets acquired in the fiscal year 1999 and increased
direct costs due to the commencement of revenue generating activities.
<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 $4,557,957 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 $4,137,398, which
is primarily 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, Ltd. These 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. On April 27, 2000
Blue Heron Venture Fund, Ltd. renegotiated with the Company two of the
commitment letters that were available as of that date. With the renegotiation,
the March 17, 1999 and July 12, 1999 debt financing commitment letters were
amended to reflect a conversion price of $0.75. 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 forbear from demanding payment. The Company
believes that Blue Heron Venture Fund, Ltd. will continue to forbear 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 Ltd. These 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 forbear from demanding payment. The Company
believes that Pacific Gate Capital Ltd. will continue to forbear 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 $651,186, with an
aggregate monthly payment of $9,703 and $366,033 due immediately. Of the
$366,033 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 forbear from demanding payment. The Company believes
that Sagin Venture Capital will continue to forbear 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 $366,033 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 $168,062 (currency translation
value of 18,177,230 Yen at 108.158 on payment date May 5, 2000) 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.
In connection with the Company causing CyPost KK, a Japan company, to be
formed, on March 17, 2000, the Company purchased 400 shares of CyPost KK,
representing 100% of the then issued and outstanding shares, for $200,000
(20,000,000 Yen), and transferred 180 of such shares, or 45% of the then issued
and outstanding shares, to certain members of the management of CyPost KK in
consideration of their future efforts to raise additional capital for CyPost KK.
On May 5, 2000, the Company purchased an additional 230 shares of CyPost KK for
$136,472 (11,500,000 Yen) and transferred 10 of such shares to these certain
members of the management of CyPost KK in consideration of their future efforts
to raise additional capital for CyPost KK. At the same time, these certain
members of the management of CyPost KK purchased an additional 170 shares of
stock of CyPost KK for $63,528 (5,357,000 Yen). As a result of the acquisition
of a net additional 220 shares of CyPost KK, the Company maintained its 55%
interest in CyPost KK. On May 22, 2000, Access Media International, a company
which is not affiliated with the Company, purchased 200 shares of CyPost KK for
$100,000, resulting in a reduction of the Company's interest in CyPost KK to
44%.
On June 29, 2000, these certain members of the management of CyPost KK
returned an aggregate 190 shares of CyPost KK, being all the shares of CyPost KK
previously transferred to them by the Company, to the Company, because they did
not raise the additional capital for CyPost KK as originally contemplated,
resulting in the Company having a 63% interest in CyPost KK as of such date. On
July 3, 2000, the Company sold all of its interest in CyPost KK to Access Media
International for $220,000.
For the six months ended June 30, 2000, the Company recognized a loss of
$136,321, which represents 55% of the net loss reported by CyPost KK for the
three months ended March 31, 2000 and 63% of the net loss reported by CyPost KK
for the three months ended June 30, 2000.
The Company's cash position during the six months ended June 30, 2000
decreased to $230,877, compared to $415,779 as of December 31, 1999, primarily
attributable to the purchase of Playa Corporation and the investment in CyPost
KK.
The Company's net cash used in operating activities totaled $471,856 during
the six months ended June 30, 2000, compared to $565,095 during the six months
ended June 30, 1999.
The Company's net cash used in investing activities totaled $934,904 during
the six months ended June 30, 2000, compared to $676,468 during 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.
Software development costs during the six months ended June 30, 2000
totaled $74,447.
The Company's financing activities during the six months ended June 30,
2000 included an aggregate $1,423,062 of loans provided by Blue Heron Venture
Fund, Ltd., CyPost KK and Pacific Gate Capital Ltd., 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 shares 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 April 4, 2000, Steven Berry ("Berry"), the former Chief Executive
Officer of the Company, commenced an action in the Supreme Court of the State of
New York, County of New York, (Index No. 601448/2000), against the Company and
Continental Stock Transfer Company ("Continental") (the "New York Action"). In
the New York Action, Berry claimed damages for alleged conversion, fraud, breach
of contract and breach of fiduciary duty all arising from the alleged wrongful
Stop Transfer Order which the Company placed relating to 75,000 shares of the
Company's common stock registered in Berry's name and the Company's cancellation
of a further 600,000 shares (the "Contingent Shares"). The complaint in the New
York Action claims damages in excess of $3 million with the precise amount to be
determined at trial.
Pursuant to Berry's contract of employment with the Company, the Company
issued 600,000 Contingent Shares to Berry upon condition that he would remain in
the Company's employ as its Chief Executive Officer for at least two years.
Berry commenced his employment with the Company on January 4, 1999 and resigned
his employment with the Company on January 17, 2000. Following Berry's
resignation the Company issued a Stop Transfer Order to Continental with respect
to the 75,000 shares and cancelled the 600,000 Contingent Shares which had been
issued to Berry.
On May 19, 2000 CyPost and EPost Innovations Inc. commenced suit in the
Supreme Court of British Columbia, Vancouver Registry (Action #S002798), against
Berry and his wife, Tia Berry (the "BC Action"). In the BC Action, the Company
seeks an order directing Berry to return the 600,000 Contingent Shares to the
Company for cancellation or an order entitling the Company to cancel the same on
the basis that Berry did not fulfill the employment conditions which were the
condition precedent to his becoming the beneficial owner of the Contingent
Shares.
In the BC Action, the Company also claims at least $800,000 from Berry on
account of breach of fiduciary duty, negligence, breach of statutory duties and
breach of contract arising from Berry's failure to properly carry out his
employment responsibilities. In the BC Action, the Company also claims $34,013
from Berry and Tia Berry on account of conspiracy to defraud and injure the
Company and EPost Innovations Inc. by causing certain personal expenses to be
paid by the Company rather than by Berry and Tia Berry personally. The Company
also claims punitive and exemplary damages from Berry and Tia Berry in the BC
Action.
On May 25, 2000, the Company moved in the New York Action for an order
dismissing the action against the Company for lack of jurisdiction or, in the
alternative, on the basis of forum non conviens. On September 5, 2000, the
court dismissed the New York Action on forum non conviens grounds, subject to
the Company making certain stipulations in the New York Action. Those
stipulations have been made and the appeal period in the New York Action has
expired without Berry or any other party appealing the September 5, 2000 order.
The pleadings have been closed in the BC Action and the parties are now
waiting for the British Columbia Supreme Court Registry to assign a trial date,
which will likely be sometime in the fall of 2001 or early 2002.
The issues raised by Berry and the Company in the New York Action will be
litigated in the BC Action together with the further issues raised by the
Company in the BC Action. The Company feels that Berry's claims in the New York
Action were without merit and that the Company will be successful in obtaining
and order declaring that Berry's 600,000 Contingent Shares be cancelled and
further entitling the Company to substantial damages. The Company will
vigorously pursue its position in all respects.
Item 2. Changes 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 from June 16, 2000 through July 15, 2000. 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 providing
certain services to the Company from June 16, 2000 through July 15, 2000. 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 to five people for their providing consulting work to the Company
from April 1, 2000 through June 30, 2000. 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: DECEMBER 19, 2000 BY: /S/ ROBERT SENDOH
-----------------------------
ROBERT SENDOH
CHAIRMAN
<PAGE>
