U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
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, 1999
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _______________ to __________________
Commission file number____0-26751___________________________________
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.)
260 West Esplanade, Suite 101, N. Vancouver, BC, Canada V7M 3G7
- --------------------------------------------------------------------------------
(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.)
<PAGE>
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |_| No|X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 20,246,512
Transitional Small Business Disclosure Format (check one). Yes |_|; No|X|
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto for the period from the Company's
inception through December 31, 1998 which are included in the Company's
registration statement on Form 10-SB previously filed with the Commission.
<PAGE>
CYPOST CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 2,414,094
Accounts receivable 121,019
Prepaid expenses 49,144
OTHER 97,204
-------------
2,681,461
PROPERTY AND EQUIPMENT, net 148,156
GOODWILL AND OTHER INTANGIBLES 751,208
-------------
$ 3,580,825
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 351,106
Loans
2,650,000
DEFERRED REVENUE 75,283
-------------
3,076,389
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
16,859,355 common stock $ 16,859
Additional paid in capital 3,832,346
Deficit (3,364,269)
CUMULATIVE TRANSLATION ADJUSTMENT 19,500 504,436
------------- -------------
$ 3,580,825
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F - 1
<PAGE>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE THREE MONTHS ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(U.S. Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE $ 185,670 $ - $ 197,068 $ -
DIRECT COSTS 49,275 - 49,275 -
------------- ------------- ------------- -------------
136,395 - 147,793 -
------------- ------------- ------------- -------------
EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 432,521 34,840 1,167,442 153,004
DEVELOPMENT 114,339 - 142,010 -
AMORTIZATION AND DEPRECIATION 13,040 - 19,071 2,852
------------- ------------- ------------- -------------
559,900 34,840 1,328,523 155,856
------------- ------------- ------------- -------------
(423,505) (34,840) (1,180,730) (155,856)
INTEREST EXPENSE 1,378,000 - 1,908,000 -
------------- ------------- ------------- -------------
NET LOSS (1,801,505) (34,840) (3,088,730) (155,856)
DEFICIT, BEGINNING OF PERIOD (1,562,764) (121,016) (275,539) -
------------- ------------- ------------- -------------
DEFICIT, END OF PERIOD $ (3,364,269) $ (155,856) $ (3,364,269) $ (155,856)
============= ============= ============= =============
LOSS PER SHARE, BASIC AND DILUTED $ (0.18) $ (0.01) $ (0.31) $ (0.04)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,957,851 4,156,839 9,957,851 4,156,839
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F - 2
<PAGE>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(U.S. Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
CASH FLOWS FROM
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
NET LOSS $ (1,801,505) $ (34,840) $ (3,088,730) $ (155,856)
Add items not affecting cash
AMORTIZATION 13,040 - 19,071 2,852
INTEREST EXPENSE 1,378,000 - 1,908,000 -
------------- ------------- ------------- -------------
(410,465) (34,840) (1,161,659) (153,004)
------------- ------------- ------------- -------------
CHANGE IN NON-CASH OPERATING ACCOUNTS (68,978) 2,298 69,000 387
------------- ------------- ------------- -------------
(479,443) (32,542) (1,092,659) (152,617)
------------- ------------- ------------- -------------
CASH FLOWS FROM
INVESTING ACTIVITIES
PROCEEDS (PURCHASE) OF CAPITAL ASSETS (34,169) 644 (55,194) (18,360)
Acquisition of Hermes Net
SOLUTIONS, INC. - - (445,112) -
ACQUISITION OF INTOUCH.INTERNET INC. - - (197,917) -
PURCHASE OF OTHER ASSETS (69,477) - (54,220) -
------------- ------------- ------------- -------------
(103,646) 644 (752,443) (18,360)
------------- ------------- ------------- -------------
CASH FLOWS FROM
FINANCING ACTIVITIES
LOAN REPAYMENT (66,841) - - -
LOAN PROCEEDS 2,770,450 - 3,670,450 -
ISSUANCE OF SHARES - 44,000 556,000 185,000
Change in cumulative
TRANSLATION ADJUSTMENT (14,466) (2,162) (14,466) (2,847)
------------- ------------- ------------- -------------
2,689,143 41,838 4,211,984 182,153
------------- ------------- ------------- -------------
INCREASE IN CASH 2,106,054 9,940 2,366,882 11,176
CASH, BEGINNING OF PERIOD 308,040 5,103 47,212 3,867
------------- ------------- ------------- -------------
CASH, END OF PERIOD $ 2,414,094 $ 15,043 $ 2,414,094 $ 15,043
============= ============= ============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURE:
(a) For the nine months ended September 30, 1999, the Company settled
$1,000,000 of loans by issuing 1,500,000 shares of common stock.
The accompanying notes are an integral part of this consolidated financial
statement.
F - 3
<PAGE>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. Dollars)
<TABLE>
<CAPTION>
Additional
COMMON STOCK Paid-in
-------------------------
NUMBER AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
Incorporation date, September 5, 1997
<S> <C> <C> <C> <C> <C>
Issued for acquisition of ePOST Innovations, Inc. 3,000,000 $ 3,000 $ (1,000) $ -- $ 2,000
ISSUED ON SALE OF UNITS 600,000 600 19,400 -- 20,000
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 3,600,000 3,600 18,400 -- 22,000
Issued on sale of units 2,400,000 2,400 77,600 -- 80,000
Issued for cash 57,000 57 18,943 -- 19,000
Issued for legal services 22,500 22 7,478 -- 7,500
Issued for acquisition of
Communication Exchange
Management, Inc. 6,270,000 6,270 (2,090) -- 4,180
Issued for exercise of warrants 915,000 915 243,085 -- 244,000
Offering expenses -- -- (20,000) -- (20,000)
NET LOSS -- -- -- (275,539) (275,539)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 13,264,500 13,264 343,416 (275,539) 81,141
Issued for acquisition of InTouch.Internet Inc. 9,855 10 28,515 -- 28,525
Issued for loan conversion 1,500,000 1,500 998,500 -- 1,000,000
Issued for exercise of warrants 2,085,000 2,085 553,915 -- 556,000
Beneficial conversion feature on loans -- -- 1,908,000 -- 1,908,000
NET LOSS -- -- -- (3,088,730) (3,088,730)
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1999 16,859,355 $ 16,859 $ 3,832,346 $(3,364,269) $ 484,936
=========== =========== =========== =========== ===========
</TABLE>
F - 4
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION
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 before
interest expense of approximately $1.5 million for the period from
inception September 5, 1997 to September 30, 1999, has a working capital
deficiency at September 30,1999, and requires additional financing for its
business operations. As of September 30, 1999, the Company has $2.3
million of funding available which can be drawn against a promissory note
agreement with a lender.
The Company's future capital requirements will depend on numerous factors
including, but not limited to, continued progress in developing its
software products, and market penetration and profitable operations from
its internet connection services. The Company is actively pursuing
alternative financing and has had discussions with various third parties,
although no firm commitments have been obtained. Management is also
pursuing acquisitions of other businesses with existing positive cash
flows. In addition, management is working on attaining cost and efficiency
synergies by consolidating the operations of the businesses acquired.
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 will
mitigate the adverse conditions and events which raise doubts about the
"going concern" assumption used in preparing these financial statements,
there can be no assurance that these actions will be successful.
INTERIM FINANCIAL STATEMENTS
These financial statements do not include certain information and
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. These interim
financial statements are prepared pursuant to regulations of the
Securities and Exchange Commission.
In the opinion of management, these financial statements include all
adjustments which are necessary for fair presentation.
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., Hermes Net Solutions
Inc. and InTouch.Internet Inc.
F - 5
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is U.S. dollars. Balance sheet
accounts of international self-sustaining subsidiaries, principally
Canadian, are translated at the current exchange rate as of the balance
sheet date. Income statement items are translated at average exchange
rates during the period. The resulting translation adjustment is recorded
as a separate component of shareholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FINANCIAL INSTRUMENTS
The Company has, where practicable, estimated the fair value of financial
instruments based on quoted market prices or valuation techniques such as
present value of estimated future cash flows. These fair value amounts may
be significantly affected by the assumptions used, including the discount
rate and estimates of cash flow. Accordingly, the estimates are not
necessarily indicative of the amounts that could be realized in a current
market exchange. Where these estimates approximate carrying value, no
separate disclosure of fair value is shown.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the
straight-line method over a period of five years. Maintenance and repairs
are charged against operations and betterments are capitalized.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share has been computed in accordance with SFAS 128.
Basic earnings (loss) per share is computed by dividing net income
attributable to common shareholders by the weighted average number of
common shares outstanding during the respective periods. Diluted earnings
(loss) per share is computed similarly, but also gives effect to the
impact that convertible securities, such as warrants, if dilutive, would
have on net earnings (loss) and average common shares outstanding if
converted at the beginning of the year. The effects of potential common
shares such as warrants would be antidilutive in each of the periods
presented in these financial statements.
F - 6
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION (CONTINUED)
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's primary source of revenue is earned from internet connection
services. For contracts which exceed one month, revenue is recognized on a
straight-line basis over the term of the contract as services are
provided. Revenues applicable to future periods are classified as deferred
revenue.
DIRECT COSTS
Direct costs consist of telecommunications charges in respect of providing
internet connection services to customers. These costs are expensed as
incurred.
SELLING AND MARKETING COSTS
Selling and marketing costs are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
Under SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", capitalization of software
development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the
completion of beta testing of a working product. The establishment of
technological feasibility and the ongoing assessment of the recoverability
of these costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated
future gross product revenue, estimated economic life and changes in
software and hardware technology. No software development costs have been
capitalized by the Company to date.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist primarily of customer lists and goodwill related
to acquisitions accounted for under the purchase method of accounting.
Amortization of these purchased intangibles is provided on the
straight-line basis over the respective useful lives of the intangible
assets which is estimated to be three years.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such assets might be impaired.
The Company considers factors such as significant changes in the
regulatory or business climate and projected future cash flows. Impairment
losses are measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
F - 7
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION (CONTINUED)
INCOME TAXES
The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Deferred tax assets and liabilities are
measured using currently enacted tax rates that are expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. A valuation allowance is established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", requires the recognition of all derivatives as either assets
or liabilities and the measurement of those instruments at fair value.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133", issued in
August 1999, postpones for one year the mandatory effective date for
adoption of SFAS No. 133 to January 1, 2001.
The Company does not currently engage in derivative trading or hedging
activities; hence, SFAS No. 133 and SFAS No. 137 will not have a material
impact on its financial position or results of operations.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation under a fair value based method. Alternatively,
stock-based employee compensation can be accounted for under APB No. 25,
"Accounting for Stock Issued to Employees", under which no compensation is
recorded.
The Company has not granted any stock-based compensation for any of the
periods presented in these financial statements.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and
106", revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements
for pension and other postretirement benefits to the extent practicable,
requires additional information on changes in benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer considered useful.
The Company does not offer any pension or other postretirement benefits.
F - 8
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The
implementation of SOP 98-1 does not have a material impact on the
Company's financial position or results of operations.
2. ACQUISITIONS
On June 30, 1999, the Company acquired all the shares of Hermes Net
Solutions, Inc. for cash consideration of Cdn.$770,000 (U.S.$528,000).
Also on June 30, 1999, the Company purchased all the shares of
InTouch.Internet Inc. for Cdn.$428,000 (U.S.$293,000). The consideration
for this purchase included cash of Cdn.$386,000 (U.S.$265,000) and 9,855
shares of common stock valued at Cdn.$42,000 (U.S.$28,000) as stated in
the Share Purchase Agreement.
Both acquisitions have been accounted for by the purchase method of
accounting. In both acquisitions, the net assets acquired included
goodwill and other intangibles which will be amortized on a straight line
basis over its estimated useful life of three years. These financial
statements include the results of operations of the two acquired
businesses for the period from July 1, 1999 to September 30, 1999.
3. SUBSEQUENT EVENTS
ACQUISITION OF NETROVER INC. AND NETROVER OFFICE INC.
On October 4, 1999, the Company purchased all the shares of NetRover Inc.
and NetRover Office Inc. for Cdn.$4 million (U.S.$2.7 million). The
consideration for the purchase included cash of Cdn.$3 million (U.S.$2
million) and 219,000 shares of common stock valued at Cdn.$1 million
(U.S.$680,000) as stated in the Share Purchase Agreement. These purchases
will be accounted for under the purchase method of accounting.
ACQUISITION OF CONNECT NORTHWEST AND INTERNET ARENA
On October 27, 1999, the Company purchased certain assets and liabilities
of the business of Connect Northwest for $1.4 million. The purchase price
was satisfied by a cash payment of $670,000, amount payable of $70,000 and
the issuance of 147,985 shares of common stock valued at $660,000 as
stated in the Asset Purchase Agreement.
F - 9
<PAGE>
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(U.S. Dollars)
3. SUBSEQUENT EVENTS (CONTINUED)
On November 9, 1999, the Company purchased certain assets and liabilities
of the business of Internet Arena for $600,000. The consideration for the
purchase included cash of $242,000, amount payable of $58,000 and 100,698
shares of common stock valued at $300,000 as stated in the Asset Purchase
Agreement.
These purchases will be accounted for under the purchase method of
accounting.
4. LOANS
During the nine months ended September 30, 1999, the Company borrowed
$3,650,000 pursuant to two promissory note agreements. 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
------------- ------------- -------------
$ 1,000,000 1,000,000 1,500,000
2,650,000 1,766,667 2,650,000
At the commitment dates of the promissory notes, 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 $1,378,000 for the three months ended
September 30, 1999 and $1,908,000 for the nine months ended September 30,
1999.
During the nine months ended September 30, 1999, $1 million of loans were
settled by the issuance of 1,500,000 shares of common stock valued at $1
million.
At September 30, 1999, the loans balance is $2,650,000. The fair value of
the loans at September 30, 1999 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.
5. SHARE CAPITAL
Effective September 24, 1999, the Company effected a three-for-two
subdivision of its shares of common stock. All share and per share amounts
in the accompanying financial statements have been adjusted retroactively
to give effect to this subdivision.
F - 10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General: End of development stage activities and commencement of business
operations
Cypost produces and markets computer privacy protection technologies and
provides Internet conductivity 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)
publicly marketed 4 software encryption products under its "Navajo" trademark,
(ii) acquired two Internet service providers during the nine-month period ending
September 30, 1999, and (iii) acquired two additional ISPs since September 30,
1999.
Because the Company is 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 are unlikely to be an
accurate indication of future performance and should be viewed with considerable
caution.
Results of operations for the nine months ended September 30, 1999 and for the
three months ended September 30, 1999
Substantially all of the Company's revenue to date is accounted for by the
operations during the three months ended September 30, 1999. These revenues are
attributable virtually entirely to the operations of the two Internet service
providers which the Company acquired during the quarter ended June 30, 1999. The
Company generated net sales of approximately $185,670 for the three months ended
September 30 and approximately $197,068 for the nine months ended on that date.
It had no revenues for the corresponding periods of the prior year.
Direct costs of approximately $49,275 were incurred in the quarter ending
September 30, resulting in a gross margin of $136,395 (73%) for the three months
and $147,793 (75%) for the nine months. Losses of $423,505 for the three months
and $1,180,730 for the nine months reflect primarily the effect of a small
revenue base which was insufficient to cover administrative expenses, salaries
and benefits and development expenses. The Company hopes to achieve profitable
operations through a combination of adding additional ISPs through acquisition
and through the addition of value added services in its ISPs, as well as through
the addition of new products in its encryption-related operations.
3
<PAGE>
Liquidity and capital resources
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses
of $423,505 for the three month period ending September 30, 1999 and net losses
of $1,180,730 for the nine month period ending September 30, 1999. These factors
indicate that the Company's continuation as a going concern is dependent upon
its ability to obtain adequate financing.
Although the Company's cash position as of September 30, 1999 had improved
to $2,414,094, as compared to $47,212 as of December 31, 1998 and $308,040 as of
June 30, 1999, the entire improvement in cash position was attributable to loans
made to the Company by Blue Heron Venture Fund, Ltd. These loans were made under
agreements with that lender 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 at prices ranging,
at present, from $1.00 to $4.00 per share. If all loans outstanding as of
September 30, 1999 were converted, the lender would be entitled to an aggregate
of 5 million shares of such Common Stock. The lender is free to withdraw this
line of credit at any time, and since the loans are payable on demand the
Company's ability to continue operations is dependent upon the willingness of
its lender to forebear from demanding payment. The Company believes that its
lender will continue to refrain from demanding payment for the immediately
foreseeable future, but it is under no obligation to do so. Should the Company's
lender demand payment the Company would be required to seek financing from other
sources. It does not believe that bank borrowing would be available to it under
present circumstances, and there can be no assurance that the necessary
financing could be obtained from other sources. Even if the necessary funding
were available, it might be available only on terms which management would not
find acceptable.
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.
Item 2. Changes in Securities
4
<PAGE>
On June 30, 1999, the Company issued 6,570 shares of its common stock to
the former owners of InTouch.Internet, Inc. as partial payment for the Company's
acquisition of that company.
These shares were issued under the Section 4(2) exemption for transactions
by an issuer not involving a public offering under the Securities Act of 1933,
as amended (the "Securities Act").
On August 13, 1999, the Company issued 1,500,000 shares of its common
stock to Blue Heron Venture Fund Ltd ("Blue Heron"), as discussed in Item 3.,
pursuant to Regulation S under the Securities Act.
On September 29, 1999, the Company agreed to issue 219,000 shares of its
common stock to the former owners of NetRover, Inc. The shares issued in the Net
Rover transaction were disclosed in the 8-K Report filed by the Company on
October 2, 1999. The shares issued in the Net Rover acquisition were issued
pursuant to the Section 4(2) Securities Act statutory exception for transactions
which do not involve any public offering.
On November 4, the Company issued 3,000,000 shares of its common stock to
Blue Heron in consideration of which Blue Heron cancelled indebtedness owing
from the Company in the aggregate principal amount of $3,000,000 together with
interest accrued. These shares were issued directly to Blue Heron pursuant to
Regulation S under the Securities Act and no underwriting commissions, fees or
discounts were paid in connection therewith.
On October 26, 1999, the Company issued 147,985 shares of its common stock
to the former owners of Connect Northwest Internet Services LLC as
partial payment for the Company's acquisition of that entity. These shares were
issued under the Section 4(2) Securities Act exemption for transactions by an
issuer not involving a public offering.
On November 9, 1999, the Company issued 20,140 shares of its common
stock to the former owners of Internet Arena, Inc. as partial payment for the
Company's acquisition of that entity. These shares were issued under the Section
4(2) Securities Act exemption for transactions by an issuer not involving a
public offering.
Item 3. Defaults Upon Senior Securities
On August 13, 1999 the Company issued One Million shares of its common
stock to Blue Heron Venture Fund Ltd. in exchange for Blue Heron's cancellation
of $1,000,000 of indebtedness (together with interest accrued thereon) owed by
the Company which had been evidenced by one or more demand promissory notes
bearing interest at 8% per annum. Such issuance of stock and the cancellation of
the indebtedness was preceded by a demand for payment in full from Blue Heron
which the Company was not able to meet. The shares were issued directly to Blue
Heron pursuant to the exemption afforded by Regulation S of the Securities Act
and no underwriting commissions, fees or discounts were paid in connection
therewith.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 24, 1999 the Company increased its common share authorization
from 20 Million to 30 Million upon the filing of an Amended and Restated
Certificate of Incorporation with the Delaware Secretary of State. Shareholder
authorization for this was effected through the delivery of written consents on
September 14, 1999 in accordance with the Delaware General Corporation Law. The
Company had previously filed its Form 10-SB to register its common stock with
the Commission on July 16, 1999 and the registration became effective on
September 16, 1999 upon the expiration of the 60 day statutory period for
effectiveness provided for in Section 12(g) of the Securities and Exchange Act
of 1934, as amended. Prior to September 16, 1999, the Company was not a
reporting company within the meaning of the 1934 Act, and thus was not required
to deliver
5
<PAGE>
a proxy or information statement under the term of that Act and associated rules
and regulations.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The Company filed a report on Form 8-K on September 17, 1999 regarding its
3:2 forward stock split.
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: April 14, 2000 By: /s/ Steven Berry
----------------------------
President and Treasurer
By: /s/ Carl Whitehead
----------------------------
Vice President and Secretary
Blue Heron Venture Fund, Ltd. Exhibit 10.1
Nassau, New Providence, The Bahamas
February 9th, 1999
Attention: Mr. Steve Berry
CyPost Corporation
Suite #101
260 West Esplanade
North Vancouver, B.C.
Re: Debt Financing for CyPost Corp.
Dear Steve,
Thank you so very much for the information and overview of CyPost. I am quite
sure that the results of your efforts will be of great benefit to all the
shareholders, including the fund.
Further to our discussions this week I wish to offer the following terms with
regards to the one million dollar U.S. funding:
1) CyPost will provide the lender with a promissory demand note
2) the note will bear interest at 8% payable on demand
3) CyPost will agree to the lender's demands to waive presentment of payment
4) the debt may be converted into equity, (at $1.00 U.S.) to 1,000,000 common
shares of CyPost Corporation upon demand of the lender. In doing so the
lender waives any interest owed on said notes
5) CyPost will provide a copy of a board resolution acknowledging the
promissory note and the conditions set forth
If these terms are agreeable to you then please sign below and return the
original to me. Upon receipt of this signed letter you may at any time, in
writing or by verbal request draw up to U.S. $1,000,000.00 from the Blue Heron
Venture Fund.
Signed,
Kelly Shane Montalban
Monet Management
Blue Heron Venture Fund
Steve Berry
CEO
CyPost Corporation
Blue Heron Venture Fund, Ltd. Exhibit 10.2
Nassau, New Providence, The Bahamas
March 17th, 1999
Attention: Mr. Steve Berry
CyPost Corporation
Suite #101
260 West Esplanade
North Vancouver, B.C.
Canada V7M3G7
Re: Debt Financing for CyPost Corp.
Dear Steve,
Having reviewed the material you provided and considering the direction you wish
to pursue, I have decided to agree to your request. I realize that this is
important to the company and that you needed an answer immediately. Therefore I
will agree to increase your funding for CyPost Corporation to a total of
$6,000,000.00.
Under the following terms the Blue Heron Venture Fund will offer an additional
five million dollars U.S. in funding:
1) CyPost will provide the lender with a promissory demand note
2) the note will bear interest at 8% payable on demand
3) CyPost will agree to the lender's demands to waive presentment of payment
4) the debt may be converted into equity at the following prices:
A) U.S. $3,000,000.00 @ $1.50 to 2,000,000 CyPost Common shares
B) U.S. $2,000,000.00 @ $2.00 to 1,000,000 CyPost Common shares for a
total of 5,000,000 common shares of CyPost Corporation upon demand
of the lender. In doing so the lender waives any interest owed on
said notes
5) CyPost will provide a copy of a board resolution acknowledging the
promissory note and the conditions set forth
If these terms are agreeable to you then please sign below and return the
original to me. Upon receipt of this signed letter you may at any time, in
writing or by verbal request draw upon an additional U.S. $5,000,000.00 from the
Blue Heron Venture Fund in amounts you deem necessary.
Signed,
Kelly Shane Montalban
Monet Management
Blue Heron Venture Fund
Steve Berry
CEO
CyPost Corporation
<PAGE>
Blue Heron Venture Fund, Ltd.
Nassau, New Providence, The Bahamas
July 12th, 1999
Attention: Mr. Steve Berry
CyPost Corporation
Suite #101
260 West Esplanade
North Vancouver, B.C.
Canada V7M3G7
Re: Debt Financing for CyPost Corp.
Dear Steve,
I realize that this is an important period of development for the company. I'm
sure you would agree that the risks are even greater for the fund at this stage.
Yet I am pleased to see that you continue to move forward in a timely an
aggressive manner. I believe we would be wrong not to proceed with additional
funding for CyPost Corporation. Your corporate developments are on track and you
have shown me new view to the companies future
Under the following terms the Blue Heron Venture Fund will offer an additional
ten million dollars U.S. in funding for a total of 16 million dollars:
1) CyPost will provide the lender with a promissory demand note
2) the note will bear interest at 8% payable on demand
3) CyPost will agree to the lender's demands to waive presentment of payment
4) the debt may be converted into equity at the following prices: U.S.
$10,000,000.00@ $4.00 to 2,500,000 CyPost Common shares upon demand of the
lender. In doing so the lender waives any interest owed on said notes
5) CyPost will provide a copy of a board resolution acknowledging the
promissory note and the conditions set forth
6) the Blue Heron Venture Fund may withdraw from this commitment at any time,
having loan some or none of the ten million U.S. dollars
If these terms are agreeable to you then please sign below and return the
original to me. Upon receipt of this signed letter you may at any time, in
writing or by verbal request draw upon an additional U.S. $10,000,000.00 from
the Blue Heron Venture Fund in amounts you deem necessary.
Signed,
Kelly Shane Montalban
Monet Management
Blue Heron Venture Fund
Steve Berry
CEO
CyPost Corporation
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