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: September 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
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(Exact name of small business issuer as
specified in its charter)
Delaware 98-0178674
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1281 West Georgia Street, Suite 900, Vancouver, BC Canada V6E 3J7
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(Address of principal executive offices)
(604) 904-4422
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(Issuer's telephone number)
Not applicable
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(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: 21,522,964
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 filed with the Commission.
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(U.S. Dollars)
2000 1999
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 135,675 $ 415,779
Accounts receivable 453,587 233,188
Prepaids and deposits 180,843 173,319
------------- ------------
770,105 822,286
PROPERTY AND EQUIPMENT, net 767,346 599,582
GOODWILL AND OTHER INTANGIBLES, net 6,590,431 5,036,785
OTHER ASSETS 76,762 69,389
SOFTWARE DEVELOPMENT, net 153,330 139,535
------------- ------------
$ 8,357,974 $ 6,667,577
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 861,370 $ 849,300
Accrued liabilities 65,056 133,937
Loans 2,963,656 875,000
Deferred revenue 635,391 626,143
Purchase of Internet Arena - 240,000
------------- ------------
4,525,473 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
21,536,993 common stock (1999- 20,246,480) 21,536 20,246
Paid-in capital 14,004,252 8,814,002
Deficit (10,170,031) (4,908,127)
Currency translation adjustment (23,256) 17,076
------------- ------------
3,832,501 3,943,197
------------- ------------
$ 8,357,974 $ 6,667,577
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE THREE MONTHS ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(U.S. Dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUE $ 1,292,162 $ 185,670 $ 3,613,417 $ 197,262
DIRECT COSTS 620,714 49,275 1,870,305 49,275
------------- ------------ ------------- ------------
671,448 136,395 1,743,112 147,987
------------- ------------ ------------- ------------
EXPENSES
Selling, general and administrative 649,046 432,521 2,766,703 1,167,636
Amortization and depreciation 843,746 24,874 2,350,394 33,211
------------- ------------ ------------- ------------
1,492,792 457,395 5,117,097 1,200,847
------------- ------------ ------------- ------------
(821,344) (321,000) (3,373,985) (1,052,860)
GAIN ON DISPOSITION OF ASSETS 55,627 - 185,171 -
EQUITY IN LOSS OF AFFILIATE 125,615 - (150,590) -
INTEREST EXPENSE - (1,378,000) (1,922,500) (1,908,000)
------------- ------------ ------------- ------------
NET LOSS (640,102) (1,699,000) (5,261,904) (2,960,860)
DEFICIT, beginning of period (9,529,929) (1,818,399) (4,908,127) (556,539)
------------- ------------ ------------- ------------
DEFICIT, end of period $(10,170,031) $(3,517,399) $(10,170,031) (3,517,399)
============= ============ ============= ============
LOSS PER SHARE, basic and diluted $ (0.03) $ (0.11) $ (0.25) $ (0.20)
============= ============ ============= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 21,395,319 16,105,177 21,061,557 14,953,226
============= ============ ============= ============
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(U.S. Dollars)
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,261,904) $(2,960,860)
Add items not affecting cash
Amortization 2,350,394 33,211
Equity in loss of affiliate 150,590
Interest expense 1,922,500 1,908,000
------------ ------------
(838,420) (1,019,649)
Change in non-cash operating accounts (152,488) 74,984
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (990,908) (944,665)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets, net (102,003) (55,194)
Acquisition of Hermes Net Solutions, Inc. - (445,112)
Acquisition of Intouch.Internet Inc. - (197,917)
Purchase of other assets - (54,220)
Software Development (87,193) (142,010)
Acquisition of Playa Corporation (300,000) -
------------ ------------
NET CASH PROVIDED FROM (USED IN)
INVESTING ACTIVITIES (489,196) (894,453)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 1,300,000 3,650,000
Loan repayment (100,000) -
Sale of common stock - 556,000
------------ ------------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES 1,200,000 4,206,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (280,104) 2,366,882
CASH, beginning of period 415,779 47,212
------------ ------------
CASH, end of period $ 135,675 $ 2,414,094
============ ============
SUPPLEMENTAL DISCLOSURE:
The Company settled $92,750 of debt by issuing 26,500 shares of common stock.
As consideration for the purchase of Internet Arena Inc., the Company
Issued 80,558 shares of common stock for the value of $240,000.
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 Company issued 354,500 of common stock to seven its employees and board of
directors for the value of $210,503.
The Company issued 43,500 of common stock to various consultants for services
performed for the value of $25,787.
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 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
Issued for services 354,500 354 210,149 210,503
Issued for services 43,500 43 25,744 25,787
Beneficial conversion feature on loans - - 1,922,500 - - 1,922,500
Cumulative translation adjustment - - - - (40,332) (40,332)
Net loss - - - (5,261,904) - (5,261,904)
---------- ------- ----------- ------------- ------------ ------------
BALANCE, SEPTEMBER 30, 2000 21,536,993 $21,536 $14,004,252 $(10,170,031) $ (23,256) $ 3,832,501
========== ======= =========== ============= ============ ============
</TABLE>
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 $10.2 million for the period from inception September 5, 1997 to
September 30, 2000, has a working capital deficit at September 30, 2000,
and requires additional financing for its business operations. As of September
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.
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.
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 nine months
ended September 30, 2000 and 1999, (b) the consolidated financial
position at September 30, 2000 and (c) the consolidated cash flows for the
nine months ended September 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 September 30, 2000 consist of the following:
Promissory Note - Blue Heron Venture Fund, Ltd. $2,050,000
Promissory Note - Pacific Gate Capital 25,000
Various lenders of Playa Corporation 776,454
Obligations under capital lease 112,202
----------
Total $2,963,656
----------
During the nine months ended September 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 nine months ended September
30, 2000.
At September 30, 2000, the loan balance was $2,050,000. The fair value
of the loan at September 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.
On the basis that historically Blue Heron Venture Fund, Ltd. has waived
interest on their loans to the Company, the Company has taken the position that
interest expense for the period ended September 30, 2000, should not be accrued.
3. 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.
<PAGE>
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 consultant 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.
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.
<PAGE>
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.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
<PAGE>
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.
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 September 30, 2000
Substantially all of the Company's revenue was earned from its ISP
operations during the three months ended September 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 $1,292,162 for the three month ended September 30, 2000 compared to $185,670
for the three months ended September 30, 1999.
Direct costs, which consist primarily of telecommunications charges in
respect of providing Internet connection services to customers, of $620,714,
were incurred for the three months ended September 30, 2000 compared to
$49,275 for the three months ended September 30, 1999.The increase in the
above noted expenses for the three months ended September 30, 2000 compared
to the three months ended September 30, 1999 results from the Company
emerging from the development stage in 1999 and commencing revenue
generating activities.
Selling, general and administrative expenses were $649,046 for the three
months ended September 30, 2000 compared to $432,521 for the three months ended
September 30, 1999. Selling, general and administrative expenses for the three
months ended September 30, 2000 include $53,171 for sales and marketing,
$510,713 for salaries and benefits, $48,033 for general and administrative
expenses and $37,129 for legal and professional fees. The increase in the above
noted expenses for the three months ended September 30, 2000 compared to the
three months ended September 30, 1999 results from the Company emerging from the
development stage in 1999 and commencing revenue generating activities.
On the basis that historically Blue Heron Venture Fund, Ltd. has waived
interest on their loans to the Company, the Company has taken the position that
interest expense for the three months ended September 30, 2000, should not be
accrued.
Net loss of $640,102 for the three months ended September 30, 2000 compared
to a net loss of $1,699,000 for the three months ended September 30, 1999. The
decrease in net loss for the three months ended September 30, 2000 was primarily
a result of a significant decrease in interest expense, partially offset by
increased amortization and depreciation of the assets acquired in the fiscal
year 1999, increased selling, general and administrative expenses from the
consolidation of the subsidiaries and increased direct costs due to the increase
of operations.
<PAGE>
Results of Operations for the Nine Months Ended September 30, 2000
Substantially all of the Company's revenue was earned from its ISP
operations during the nine months ended September 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 $3,613,417 for the nine months ended September 30, 2000 compared to $197,262
for the nine months ended September 30, 1999.
Direct costs, which primarily consist of telecommunications charges in
respect of providing Internet connection services to customers, of $1,870,305
were incurred for the nine months ended September 30, 2000 compared to $49,275
for the nine months ended September 30, 1999. The increase in the above noted
expenses for the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999 results from the Company emerging from the
development stage in 1999 and commencing revenue generating activities.
Selling, general and administrative expenses were $2,766,703 for the
nine months ended September 30, 2000 compared to $1,167,636 for the nine
months ended September 30, 1999. Selling, general and administrative expenses
for the nine months ended September 30, 2000 include $189,205 for sales and
marketing, $1,360,778 for salaries and benefits, $808,975 for general and
administrative expenses and $407,745 for legal and professional fees. The
increase in the above noted expenses for the nine months ended September 30,
2000 compared to the nine months ended September 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 nine months ended September 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. On the basis that historically
Blue Heron Venture Fund, Ltd. has waived interest on their loans to the
Company, the Company has taken the position that interest expense for the nine
months ended September 30, 2000, should not be accrued.
Net loss of $5,261,904 for the nine months ended September 30, 2000
compared to a net loss of $2,960,860 for the nine months ended September 30,
1999. The increase in net loss for the nine months ended September 30, 2000
was primarily a result of 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, increased
interest expense and increased direct costs due to the increase of
operations.
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 nine months ended September 30, 2000 of $5,261,904 as compared to a
net loss for the nine months ended September 30, 1999 of $2,960,860. For the
nine months ended September 30, 2000, the Company had a working capital
deficit of $3,755,368 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.
<PAGE>
During the nine months ended September 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. If the outstanding principal amount of the loans of $2,050,000 as of
September 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 nine months ended September 30, 2000, the Company borrowed an
aggregate $125,000 from Pacific Gate Capital Ltd., of which amount $25,000 was
outstanding on September 30, 2000. 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 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 September 30, 2000,
the aggregate outstanding principal amount of the loans was $607,291, with an
aggregate monthly payment of $9,703 and $354,439 due immediately. Of the
$354,439 due immediately, approximately $279,031 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 $354,439 is
in the form of a line of credit with respect to which the Company is current in
its obligations.
In May 2000, Playa Corporation borrowed $169,163 (currency translation
value of 18,177,230 at September 30, 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. CyPost KK is a former affiliate of the Company, in which the
Company invested $200,000 on March 17, 2000 at the formation of CyPost KK. This
amount is reflected in the balance sheet at original historical cost, inasmuch
as the operations and duration of the investment were limited in time. On July
3, 2000, the Company sold all of its interest in CyPost KK to one of the other
investors in CyPost KK for $220,000.
<PAGE>
For the nine months ended September 30, 2000 , the Company's net cash
used in operating activities totaled $990,908 compared to $944,665 for the
nine months ended September 30, 1999.
The Company's net cash used in investing activities totaled $489,196 for
the nine months ended September 30, 2000 compared to $894,453 for the nine
months ended September 30, 1999. The majority of the net cash used in
investing activities during the three months ended September 30, 2000 related to
the Company's acquisition of Playa Corporation.
The Company's financing activities during nine months ended September
30, 2000 included an aggregate $1,300,000 of loans provided by Blue Heron
Venture Fund, Ltd. and Pacific Gate Capital compared to the nine months ended
September 30, 1999 of $3,650,000 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 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.
<PAGE>
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 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 provided 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.
<PAGE>
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 Amendment No. 1 on Form 8-K/A on July
24, 2000, Amendment No. 2 on Form 8-K/A on August 28, 2000
and Amendment No. 3 on Form 8-K/A on September 18, 2000,
with the Securities and Exchange Commission, to amend a
Form 8-K originally filed on May 30, 2000.
2. The Company filed Amendment No. 2 on Form 8-K/A on July
24, 2000 and Amendment No. 3 on Form 8-K/A on August 28,
2000 with the Securities and Exchange Commission, to amend
a Form 8-K originally filed on October 15, 1999.
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 20, 2000 BY: /s/ ROBERT SENDOH
-----------------------------
ROBERT SENDOH
CHAIRMAN
<PAGE>
