SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to __________
Commission file number 0-27343
INFOCAST CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 84-1460887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Richmond Street West, Suite 902, Toronto, Ontario M5H 3W4
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 416-867-1681
--------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if changed since last Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days /X/ Yes / / No
The number of shares outstanding of each of the issuer's classes of common stock
as September 30, 2000:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, $0.001 par value 32,475,986
<PAGE>
INFOCAST CORPORATION
INDEX
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of matters to a vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
InfoCast Corporation
(formerly Virtual Performance Systems Inc.) (a development stage company)
CONSOLIDATED BALANCE SHEETS
(See Basis of presentation - Note 1)
(U.S. dollars, U.S. GAAP)
Unaudited
<TABLE>
<CAPTION>
As of As of
September 30, 2000 March 31, 2000
---------------------------------------------------------------------------------------------------------------
ASSETS
Current
<S> <C> <C>
Cash and cash equivalents 1,518,196 3,637,931
Marketable equity investment [note 3] 438,813 3,900,000
Accounts receivable 510,467 275,283
Prepaid expenses and other 824,277 324,835
------------------------------------------------------------------------------------------------------------------
Total current assets 3,291,753 8,138,049
------------------------------------------------------------------------------------------------------------------
Joint venture investment [note 7] 84,699
Deferred convertible debt issuance costs,net [note 6] 1,271,819 604,583
Capital assets, net 3,782,421 3,152,983
Goodwill, net 26,937,400 4,812,380
Distribution and licensing rights, net [note 4] 2,776,667 2,975,000
Intellectual property, net 71,545,191 14,886,486
Other Assets 52,229
------------------------------------------------------------------------------------------------------------------
109,742,179 34,569,481
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 3,120,033 1,834,930
Deferred Revenue 75,530
Current portion of obligations under capital leases 512,786 479,813
------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,708,349 2,314,743
------------------------------------------------------------------------------------------------------------------
Long-term
Convertible debenture [note 6] 6,960,000 3,500,000
Obligations under capital leases 597,329 802,836
Deferred income taxes 28,356,963 5,656,895
------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 35,914,292 9,959,731
------------------------------------------------------------------------------------------------------------------
Total liabilities 39,622,641 12,274,474
==================================================================================================================
Stockholders' equity
Common stock (100,000,000 authorized and 32,475,986 issued
and outstanding at September 30, 2000 , 24,571,336 at March 31, 2000) 30,976 23,071
Additional paid-in capital 116,906,519 57,933,723
Deferred compensation (1,328,746) (1,677,491)
Warrants 2,964,300 1,007,875
Accumulated other comprehensive loss (539,386) (237,033)
Accumulated development stage deficit (47,914,125) (34,755,138)
------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 70,119,538 22,295,007
------------------------------------------------------------------------------------------------------------------
109,742,179 34,569,481
==================================================================================================================
</TABLE>
3
<PAGE>
InfoCast Corporation
(formerly Virtual Performance Systems Inc.) (a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(U.S. dollars, U.S. GAAP)
Unaudited
<TABLE>
<CAPTION>
Cumulative
Three months Three months Six months Six months from
ended ended ended ended inception to
September 30, September 30, September 30, September 30, September 30,
2000 1999 2000 1999 2000
------------------------------------------------------------------------------------------------------------------------------------
REVENUE
Consulting income 231,455 - 304,080 403,437
Distance learning revenue 7,789 - 7,789 47,501
Hosting income 45,747 - 88,794 140,154
Subscription Revenue 259,011 - 259,011 259,011
Miscellaneous income 8,334 - 29,799 - 192,078
------------------------------------------------------------------------------------------------------------------------------------
552,336 - 689,473 - 1,042,181
------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
<S> <C> <C> <C> <C> <C>
General, administrative and selling,
excluding stock option compensation 3,313,152 2,086,506 5,474,948 4,023,321 13,924,666
Stock option compensation [note 5] 76,107 3,676,901 819,461 9,506,548 16,428,307
Research and development, excluding stock
option compensation 193,577 1,064,689 312,709 1,783,346 5,801,325
Interest and loan fees [note 6] 148,801 - 1,748,410 - 3,685,454
Amortization 3,325,517 1,217,413 4,637,295 1,863,286 8,956,619
Depreciation 229,409 20,946 435,175 29,908 940,377
------------------------------------------------------------------------------------------------------------------------------------
7,286,563 8,066,455 13,427,998 17,206,409 49,736,748
------------------------------------------------------------------------------------------------------------------------------------
Loss from operations before the following (6,734,227) (8,066,455) (12,738,525) (17,206,409) (48,694,567)
Interest income 28,858 35,307 83,186 58,464 219,721
Loss on sale of marketable equity investment (1,803,580) - (1,803,580) (1,803,580)
Equity in loss of joint venture - - - - (164,736)
------------------------------------------------------------------------------------------------------------------------------------
Net loss before income taxes (8,508,949) (8,031,148) (14,458,919) (17,147,945) (50,443,162)
Deferred income taxes (952,432) (347,500) (1,299,932) (534,105) (2,529,037)
------------------------------------------------------------------------------------------------------------------------------------
Net loss for the period (7,556,517) (7,683,648) (13,158,987) (16,613,840) (47,914,125)
Unrealized loss on marketable equity investment
and reclassification adjustment
from sale of marketable equity investment 2,050,917 - (224,083) - (511,583)
Translation adjustment (2,022) 77,217 (78,270) 48,253 (27,803)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss for the period (5,507,622) (7,606,431) (13,461,340) (16,565,587) (48,453,511)
====================================================================================================================================
Weighted average number of shares outstanding 28,419,093 22,599,527 26,505,728 21,305,895 12,686,890
====================================================================================================================================
Basic and diluted loss per share $ (0.27) $ (0.34) $ (0.50) $ (0.78) $ (3.78)
====================================================================================================================================
</TABLE>
4
<PAGE>
InfoCast Corporation
(formerly Virtual Performance Systems Inc.) (a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOW
(U.S. dollars, U.S. GAAP)
Unaudited
<TABLE>
<CAPTION>
Cumulative
Six months ended Six months ended inception to
September 30, September 30, September 30,
2000 1999 2000
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss for the period (13,158,987) (16,613,840) (47,914,125)
Add (deduct) items not affecting cash
Stock option compensation 819,461 9,506,548 16,428,307
Common stock issued for services - 254,149 450,000
Warrants issued for services 202,258 595,083 983,333
Common stock issued to Applied Courseware Technology (A.C.T) Inc. - - 1,337,500
Write-off in-process research & development - 19,000 19,000
Write-off Applied Courseware Technology (A.C.T) Inc. loan - 98,685 98,685
Non-cash interest expense 1,455,933 3,369,415
Equity in loss of joint venture - - 164,736
Deferred income taxes (1,299,932) (534,105) (2,529,037)
Deferred Revenue (813) (813)
Loss on sale of marketable equity investment 1,802,365 1,802,365
Amortization of distribution and licensing rights 198,333 198,333
Amortization 4,637,295 1,863,286 8,956,619
Depreciation 435,175 29,908 940,377
------------------------------------------------------------------------------------------------------------------------------------
(4,908,912) (4,781,286) (15,695,305)
Changes in non-cash working capital balances
Accounts receivable 202,868 (64,181) (13,919)
Prepaid expenses and other (24,407) (302,171) (347,775)
Accounts payable and accrued liabilities (385,136) 630,861 1,203,327
Due from InfoCast [the acquired entity] prior to acquisition - - (25,020)
------------------------------------------------------------------------------------------------------------------------------------
Cash used in operating activities (5,115,587) (4,516,777) (14,878,692)
------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (566,038) (946,500) (2,707,823)
Purchase of other assets 18,079 18,079
Distribution rights - (2,475,000) (2,975,000)
Due from Homebase Work Solutions Ltd. - - (99,529)
Acquisition of Homebase Work Solutions Ltd. - 50,667 50,667
Acquisition cost - i360 inc. (480,865) (480,865)
Investment in joint venture (84,699) - (256,419)
Due from Applied Courseware Technology (A.C.T.) Inc. - - (139,299)
Acquisition of InfoCast Corporation - - 87
------------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (1,113,523) (3,370,833) (6,590,102)
------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in note payable to InfoCast [the acquired entity] - - 250,000
Increase (decrease) in due to related parties - (143,991) (49,004)
Repayment of capital lease obligations (226,955) - (440,763)
Receipt of short-term unsecured loan - - 470,000
Payment of short-term unsecured loan - - (470,000)
Cash advance from InfoCast [the acquired entity] prior to acquisition - - 146,900
Cash advance to i360 [the acquired entity] prior to acquisition (1,131,682) (1,131,682)
Cash proceeds from convertible debentures, net 3,131,494 - 6,356,494
Cash proceeds from sale of marketable equity investment 1,434,739 1,434,739
Cash proceeds from issuance of share capital , net 980,047 10,202,084 16,458,510
------------------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 4,187,643 10,058,093 23,025,194
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash during the period (2,041,467) 2,170,483 1,556,400
Effects of foreign exchange rates change on cash balances (78,270) 38,037 (38,206)
Cash & cash equivalents, beginning of period 3,637,931 3,092,445 -
------------------------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents, end of period 1,518,194 5,300,965 1,518,194
====================================================================================================================================
Supplemental cash flow information
Interest and lending fees paid during the period 292,477 316,039
Capital lease obligation assumed during the period 104,195 1,550,903
Fair value of acquisitions acquired through common stock,
stock options and warrant issuance 56,120,422 17,000,000 76,071,004
====================================================================================================================================
</TABLE>
5
<PAGE>
InfoCast Corporation
(formerly Virtual Performance Systems Inc.) (a development stage company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(U.S. dollars, U.S. GAAP)
Unaudited
<TABLE>
<CAPTION>
Common Stock Additional
Common Issued and Paid-in Deferred
Shares outstanding Capital Compensation
# $ $ $
----------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding as of March 31, 2000 24,571,336 23,071 57,933,723 (1,677,491)
Common shares issued upon acquisition of i360 7,583,976 7,584 34,474,859
Stock options and merger warrnts issued upon
acquisition of i360 22,171,662
Common shares issued for cash 320,674 321 999,679
Share issuance costs - cash (19,953)
Issuance of warrants (Note 8) - (696,425)
Intrinsic value of merger warrants issued upon acquisition of i360 209,314 (209,314)
Issuance of convertible debentures with warrants 1,727,600
Warrants issued for consulting services - (214,500)
Adjustments resulting from revaluation of stock options
granted to consultants (681,564) 681,564
Adjustments resulting from repricing of stock options
granted to consultants in previous periods 81,200 (81,200)
Adjustments resulting from revaluation of warrants 59,158
granted to consultants
Granting of stock options 73,599 (73,599)
Cancellation of stock options (63,600) 63,600
Amortization of deferred compensation - 819,461
Net loss for the period -
Unrealized loss on marketable equity investment
and reclassification on sale of marketable
equity investment
-
Translation adjustment -
------------------------------------------------------------------------------------------------------------------------------------
Outstanding as of September 30, 2000 32,475,986 30,976 116,906,519 (1,328,746)
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated other Accumulated Total
Comprehensive development Stockholders'
Warrants loss stage deficit Equity
$ $ $ $
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding as of March 31, 2000 1,007,875 (237,033) (34,755,138) 22,295,007
Common shares issued for acquisition of i360 34,482,443
Stock options and merger warrnts issued upon acquisition
of i360 22,171,662
Common shares issued for cash 1,000,000
Share issuance costs - cash (19,953)
Issuance of warrants (Note 8) 696,425 -
Intrinsic value of merger warrants issued upon
acquisition of i360 -
Issuance of convertible debentures with warrants 1,727,600
Warrants issued for consulting services 1,246,000 1,031,500
Adjustments resulting from revaluation of stock options -
granted to consultants -
Adjustments resulting from repricing of stock options -
granted to consultants in previous periods -
Adjustments resulting from revaluation of warrants 14,000 73,158
granted to consultants -
Granting of stock options -
Cancellation of stock options -
Amortization of deferred compensation 819,461
Net loss for the period (13,158,987) (13,158,987)
Unrealized loss on marketable equity investment and
reclassification on sale of marketable equity
investment
(224,083) (224,083)
Translation adjustment (78,270) (78,270)
------------------------------------------------------------------------------------------------------------------------------------
Outstanding as of September 30, 2000 2,964,300 (539,386) (47,914,125) 70,119,538
====================================================================================================================================
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF INFOCAST CORPORATION FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2000
(U.S. dollars except where otherwise noted, U.S. GAAP)
(Unaudited)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of presentation
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
The Company has incurred losses since its incorporation and has a working
capital deficiency of approximately $416,750 at September 30, 2000. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern through to the end of its current fiscal year.
The ability of the Company to continue as a going concern is dependent on a
number of factors including the Company's ability to receive the remaining $1.5
million of the $2.5 million convertible subordinated debentures discussed in
note 9, arrange additional financing, and generate revenues sufficient to fund
the Company's expenditures. Management is currently negotiating and evaluating
various financing alternatives, including equity and convertible debenture
private placements and public shelf offerings. In addition, management is
actively negotiating distribution agreements that are expected to accelerate the
Company's revenue base for its Contact business. Management anticipates
increased revenue from its Community product subscribers acquired through the
acquisition of i360 inc. (see note below). Management will also evaluate its
development plans and the reduction of the Company's expense levels at the
appropriate times. The outcome of these matters cannot be predicted at this
time.
These consolidated financial statements do not include any adjustments to the
carrying values and classification of assets and liabilities should the Company
be unable to continue as a going concern.
Interim financial statements
These unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information. Accordingly, these unaudited interim
consolidated financial statements do not include all the financial information
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for fair
presentation have been included. The operating results for the six-month period
ended September 30, 2000 may not be indicative of the operating results that
will occur for the year ended March 31, 2001. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended March 31, 2000.
The balance sheet at March 31, 2000 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
Nature of operations
7
<PAGE>
The Company is a development stage technology company that has developed the
infrastructure to enable the Company to host both their own customized and third
party software applications that can be accessed remotely by businesses and
their employees.
The Company's primary operational focus as outlined in its business plan entails
significant investment in developing, deploying and marketing electronic
commerce enabling application solutions.
The aggregate future capital requirements to support this investment are
expected to be substantially funded from external resources including issuing
equity and or debt. There can be no assurance that any financing will be
available on terms acceptable to the Company or at all.
Acquisition of i360 Inc.
On August 15, 2000, i360 merged with and into the Company pursuant to the
definitive Agreement and Plan of Merger (the "Merger Agreement") dated as of May
3, 2000, as amended, providing for the acquisition by the Company of all of the
outstanding shares of common stock of i360. The Merger Agreement provided for a
statutory merger of i360 into the Company. As of August 15, 2000, the holders of
i360's issued and outstanding common stock received 0.30 shares of the Company's
common stock per share of i360 common stock which resulted in an aggregate of
7,583,976 shares of the Company's common stock being issued. In addition, all
outstanding warrants and stock options to purchase shares of i360 common stock
converted into stock options and merger warrants to purchase shares of the
Company's common stock at a 1:0.3 exchange ratio. As a result, an aggregate of
4,416,000 merger warrants of the Company (4,324,500 with an exercise price of
$0.33 per share, 87,375 with an exercise price of $3.18 per share and 4,125 with
an exercise price of $4.00 per share) and 1,127,476 stock options of the Company
with an exercise price of $4.00 per share were issued as of August 15, 2000.
The acquisition has been accounted for by the purchase method whereby the
purchase price is equal to the sum of (i) the fair value of the 7,583,976 common
shares of the Company on the date the revised terms of the acquisition were
announced; (ii) the fair value of the 4,324,500 merger warrants of the Company
with an exercise price of $0.33 per share; (iii) the fair value of the 87,375
merger warrants of the Company with an exercise price of $3.18 per share; (iv)
the fair value of 4,125 merger warrants of the Company with an exercise price of
$4.00 per share; (v) the fair value of the 1,127,476 stock options of the
Company, (vi) the acquisition costs of $1,236,684 recorded by the Company in
respect of the acquisition of i360; less (vii) the portion of the intrinsic
value of the unvested merger warrants of the Company with an exercise of $0.33
per share related to the vesting periods remaining after the August 15, 2000
acquisition date for those merger warrants granted to individuals that are
required to continue providing service to the Company after the acquisition in
consideration for the merger warrants. There was no intrinsic value for the
merger warrants of the Company with an exercise of $3.18 per share and $4.00 per
share or for the stock options as of August 15, 2000. The fair value of common
shares of the Company is assumed to be equal to the average of the closing share
price of the Company's common shares from May 2, 2000 to May 5, 2000. The fair
value of the merger warrants with an exercise price of $0.33 per share is $4.33
per merger warrant, the fair value of the merger warrants with an exercise price
of $3.18 per share is $2.74 per merger warrant and the fair value of the stock
options with an exercise price of $4.00 is $2.46 per stock option using a Black
Scholes valuation model based on a May 3, 2000 assumed grant date, a volatility
factor of 0.873, a risk-free interest rate of 5.95% and an expected life of 2
years. As a result, the total pro-forma purchase price is $57,247,898 and has
been allocated as follows:
$
----------------------------------------------------------------------
Cash 45,419
Account receivable 438,052
Prepaid expenses and other 147,085
Inventory 37,950
Capital assets 444,154
Deposits and other assets 360,308
8
<PAGE>
Completed technology 60,000,000
Goodwill 23,296,238
Accounts payable and accrued liabilities (2,304,515)
Deferred revenue (85,111)
Due to the Company (1,131,682)
Deferred income tax liability (24,000,000)
---------------------------------------------------------------------
Purchase price 57,247,898
====================================================================
The goodwill and completed technology will be amortized over a period of 5
years. The deferred income tax liability was created in respect of the
difference between the accounting and tax basis of the completed technology.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company generates revenue from hosting services, consulting services,
subscription services and the resale of educational course content. Revenue from
hosting services and subscription services are recognized when the services are
delivered, or over the term of the applicable services contract. Consulting
revenue is recognized at the time such consulting services are rendered. Revenue
generated from the resale of educational course content is recognized upon
shipment.
3. MARKETABLE EQUITY INVESTMENT
As of March 31, 2000, the Company owned 130,000 shares of common stock of
another publicly traded corporation, which was recorded as a marketable equity
investment and classified as "available for sale". During the six-month period
ending September 30, 2000, 100,500 of the shares were sold, which resulted in a
net realized loss of $1,803,580. The carrying value of the balance of 29,500
shares of this marketable equity investment was adjusted to its market value as
of September 30, 2000 of $438,813, which together with the sale of the 100,500
shares resulted in an unrealized loss and reclassification adjustment from the
sale of the marketable equity investment of $224,083 included in comprehensive
loss for the six-month period ending September 30, 2000. As of November 10,
2000, the market value of this short-term investment was approximately $138,000.
4. ACQUIRED DISTRIBUTION AND LICENSING RIGHTS
The Company entered into a distribution agreement with ITC Learning Corporation
("ITC") in March 1999, which provided the Company with the perpetual
non-exclusive right to market, sell and electronically convert all existing and
future ITC products in consideration for $975,000 in respect of electronic
distribution to the first 150,000 licensed purchasers.
Pursuant to an amendment to this agreement, dated June 5, 2000, the Company
agreed, in exchange for an additional 100,000 single user licenses of the ITC
courseware content, to forgo any and all product conversion rights to all
existing and future ITC products related to ITC's industrial training products.
The Company retains duplication rights for the Call Centre suite of products and
PC Skills suite of products.
Also, pursuant to the June 5, 2000 amendment to the distribution agreement of
March 1999, the Company agreed to forego any and all rights into perpetuity,
including but not limited to intellectual property rights, distribution rights
in the ASTAR Workforce Development product referenced in the contract dated June
29, 1999 (pursuant to which a payment of $2,000,000 was made in the fiscal year
ending March 31, 2000) in exchange for an additional 300,300 prepaid single user
license copies of ITC's Call Centre and PC Skills courseware content.
9
<PAGE>
Total payments of $2,975,000 previously made by the Company to ITC now represent
a total of 550,300 units of single user licenses. During the six-month period
ending September 30, 2000, the Company amortized $198,333 (commencing June 1,
2000) of this amount.
5. SHARE CAPITAL
Authorized, issued and outstanding common stock
The Company has 100,000,000 shares of preferred stock authorized at a par value
of $0.001 per share and has 100,000,000 shares of common stock authorized at a
par value of $0.001 per share.
<TABLE>
<CAPTION>
Common stock issued and
outstanding and
additional paid-in-capital
----------------------------------
Shares Amount
# $
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding as of March 31, 2000 24,571,336 38,322,176
Private placement on September 14, 2000 at $3.12 per share 320,674 1,000,000
Acquisition of i360 inc. 7,583,976 34,482,443
Share issuance costs -- (19,953)
------------------------------------------------------------------------------------------------------------------------------------
Outstanding as of September 30, 2000 32,475,986 73,784,666
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Basic and diluted loss per common share
Per share amounts have been computed based on the weighted average number of
common shares outstanding each period. Diluted loss per share is calculated by
adjusting outstanding shares, assuming any dilutive effects of options, warrants
and convertible securities. For all of the periods presented, the effect of
stock options, warrants, and convertible securities were not included, as the
effect would be anti-dilutive. Consequently, there is no difference between the
basic and dilutive net loss per share. The weighted average number of potential
common shares from options, warrants and convertible securities for the six
month period ended September 30, 2000 was approximately 12,900,000 compared to
approximately 4,313,000 for the six month period ended September 30, 1999.
Stock options
1998 Stock Option Plan
Pursuant to the Company's 1998 Stock Option Plan as amended on January 29, 1999,
2,250,000 shares of common stock are eligible for grant. As of September 30,
2000 the Company had 1,900,000 shares of common stock reserved for the exercise
of stock options granted to various individuals involved in the management of
the Company, of which 2,075,000 were originally granted on February 8, 1999 from
which 350,000 were later cancelled during the six months ended September 30,
2000 and 175,000 of which were granted on February 1, 2000. As a result, as of
September 30, 2000, consultants hold 500,000 of the options, while employees and
directors hold 1,400,000 of the options.
The options granted on February 8, 1999 expire three years from the date of
grant, are exercisable at $1.00 per share and were fully vested as of March 31,
2000.
The 175,000 options granted on February 1, 2000 expire two years from the date
of grant, were fully vested on July 12, 2000, are exercisable at $1.00 per share
and were granted to a consultant of the Company. The
10
<PAGE>
deferred compensation attributable to these stock options granted to a
consultant was valued as of July 14, 2000 to the then current fair value of
$2.29 per stock option (based on an expected dividend rate of 0%, an expected
life of one year, a risk-free interest rate of 6.65%, an expected volatility
factor of 1.239 and the July 14, 2000 closing market price of $3.06 per share of
common stock). As a result, as of July 12, 2000 (vesting date), these options
were valued at $400,750, of which $386,273 was previously recognized as a stock
option compensation expense during the year ended March 31, 2000 and of which
$14,477 has been recognized as a stock option compensation expense during the
six months ended September 30, 2000.
1999 Stock Option Plan
Pursuant to the 1999 Stock Option Plan an additional 2,000,000 stock options are
eligible for grant. As of September 30, 2000, all of the eligible stock options
were granted to various employees, officers, consultants and advisors pursuant
to the 1999 Stock Option Plan.
On June 14, 2000, the Board of Directors approved the repricing of 1,605,000
stock options previously granted through to February 29, 2000 with original
exercise prices ranging from $7.00 to $8.625 per share to the new exercise price
of $4.00 per share, which resulted in incremental stock option compensation
expense of $63,800 in respect 110,000 repriced stock options held by consultants
and nil in respect of the 1,495,000 repriced stock options held by employees and
directors as the fair value of the Company's stock closed at $2.66 per share as
of September 30, 2000. The repriced stock options will be accounted for as
variable options until they are exercised, forfeited or expired.
During the six month period ended September 30, 2000, 275,000 vested options
were cancelled. Also during the period, 385,000 options were granted to
employees and directors and 15,000 options were granted to a consultant, with
exercise prices of $4.00 per share.
As at September 30, 2000, 1,130,424 stock options have been vested. The
remaining balance will vest on various dates between and October 2000 and Feb
2003 and expire on various dates between November 2004 and June 2005.
The deferred compensation in respect of the 385,000 stock options granted to
employees during the six month period ended September 30, 2000 was nil because
the exercise price of the options was equal to the market price of the shares of
common stock on the date of grant. The remaining 15,000 stock options granted
during the six month period ended September 30, 2000, have been valued at
$19,725 of which $13,535 has been recognized as a stock option compensation
expense, and of which the balance of $6,190 has been recorded as deferred
compensation in stockholders' equity. Stock option compensation expense of
$32,061 was charged during the six month period ended September 30, 2000 in
respect of the amortization of deferred compensation previously recognized in
respect of 233,333 stock options granted on December 8, 2000.
2000 Stock Option Plan
On June 14, 2000 and August 14, 2000 respectively, the Board of Directors and
the stockholders of the Company approved the 2000 Stock Option Plan under which
an additional 2,000,000 stock options are eligible for grant. As of September
30, 2000, the Company had granted 350,000 stock options to various employees,
officers, consultants and advisors pursuant to the 2000 Stock Option Plan, of
which 329,000 are held by employees and directors and of which 21,000 are held
by consultants. The options are exercisable at $4.00 per share, expire on June
13, 2005 and vest as follows: 116,674 on the date of grant, 116,669 at June 14,
2001 and 116,657 on June 14, 2002.
The 21,000 outstanding stock options granted to consultants and advisors have
been valued at $33,810, based on a weighted average expected dividend rate of
0%, weighted average expected life of 2 years, weighted average risk-free
interest rate 6.56% and a weighted average expected volatility factor of 1.44,
of which $17,688 has been recognized as a stock option compensation expense
during the six month period ended September 30, 2000 and of which the balance is
recorded as deferred compensation. The stock option compensation expense and
deferred compensation in respect of the 329,000 stock options granted to
11
<PAGE>
employees and directors was nil because the exercise price of the options was
greater than the market price of the shares of common stock on the date of
grant.
Other stock options
On June 1, 1999, the directors of the Company approved the grant of 750,000
stock options outside of the 1999 Stock Option Plan to an individual who became
an officer of the Company on September 4, 1999. The stock options were
originally exercisable at a price of $7.00 per share, expire five years from the
date of grant and vest as follows: 250,000 on September 4, 1999 upon the
acceptance by the individual of formal employment with the Company, 250,000 on
September 4, 2000 and 250,000 on September 4, 2001. These outstanding options
have been valued at $2,437,500 of which $1,523,437 and $643,601 has been
recognized as a stock option compensation expense during the year ended March
31, 2000, and the six month period ended September 30, 2000, respectively, and
of which the balance of $270,462 has been recorded as deferred compensation as
of September 30, 2000 in stockholders' equity. On June 14, 2000, the Board of
Directors approved the repricing these stock options to the new exercise price
of $4.00 per share, which resulted in incremental stock option compensation
expense of nil because the fair value of the Company's stock closed at $2.66 per
share as of September 30, 2000. These repriced stock options will be accounted
for as variable options until they are exercised, forfeited or expired.
On October 18, 1999, the directors of the Company approved the grant of 60,000
stock options outside of the 1999 Stock Option Plan to an individual who was to
provide financial and investor relations consulting services to the Company. The
agreement with this individual was terminated in May 2000 resulting in the
cancellation of unvested options to purchase 30,000 shares of common stock
previously granted resulting in a credit to stock holders compensation expense
of $37,763. Also, on June 14, 2000 the remaining 30,000 stock options were
repriced from $8.25 per share to $4.00 per share resulting in incremental stock
option compensation expense of $17,400 during the six month period ended
September 30, 2000. The remaining 30, 2000 stock options are fully vested and
expire two years from the date of grant.
A summary of the Company's stock option activity, including stock options
granted to the former employees and directors of i360 upon the acquisition of
i360, is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of exercise
options price
# $
----------------------------------------
<S> <C> <C>
Outstanding as of March 31, 2000 4,865,000 4.28
----------------------------------------
Repricing of all options with exercise prices
greater than $4.00 to $4.00 4,865,000 2.72
Granted 1,877,477 4.00
Exercised -- --
Cancelled - not vested (30,000) 4.00
Cancelled - vested (643,000) 2.32
----------------------------------------
Outstanding as of September30, 2000 6,069,477 3.15
----------------------------------------
Exercisable as of September 30, 2000 4,287,099 2.67
----------------------------------------
</TABLE>
If the Company had adopted FASB Statement No. 123 ("FASB 123") in respect of
stock options granted to its employees and directors, the Company would have
recorded a higher stock option compensation expense for the six month period
ended September 30, 2000 of $2,417,121 in respect of the amortization of the
estimated value of the Company's stock options to employees over the vesting
periods of the options, which results in a pro-forma net loss of $15,576,108 and
a pro-forma basic and diluted loss per share of $0.59 in respect of the six
month period ended September 30 , 2000.
12
<PAGE>
The Company assumed the following expected dividend rates, expected lives,
risk-free interest rate and expected volatility factors in respect of the
valuation of stock options granted to employees and directors in accordance with
FASB 123:
Weighted
average
-------------
Expected dividend rate 0%
Expected life 2 years
Risk-free interest rate 5.97%
Expected volatility 0.9689
-------------
Other warrants
Pursuant to a letter agreement dated April 7, 2000, the Company will pay $9,000
per month plus expenses, and issued warrants to purchase 200,000 common shares
to a financial advisor in consideration for general corporate, financial
advisory and investor media relations consulting services over the one year term
of the agreement. In addition, the financial advisor will be entitled to a
commission on certain corporate financing transactions in which the advisor is
involved. These warrants have a purchase price of $6.50 and expire April 7,
2005. These warrants have been valued as of September 30, 2000 at $300,000 in
the accounts (based on a volatility factor of 1.440, an expected life of two
years, an expected dividend rate of 0% and a risk-free interest rate of 6.56%)
of which $144,658 has been recorded as general and administrative expenses and
of which the balance of $155,342 has been recorded as deferred compensation.
These warrants will be revalued each interim period until the final April 7,
2001 measurement date.
On June 14, 2000, 200,000 warrants were granted to the Chairman as compensation
for various services, including his role in negotiating the convertible
debenture financing (note 6) and i360 acquisition (note 1). The $384,000 value
of these warrants was allocated as follows: $192,000 to deferred convertible
debt issuance costs and $192,000 to the i360 acquisition costs. Also on June 14,
2000, 300,000 warrants were issued to a shareholder as compensation for various
services, including his role in negotiating the i360 acquisition and investor
relations services. The $576,000 value of these warrants was allocated as
follows: $518,400 to the i360 acquisition costs and $57,600 to general and
administrative expenses. The value of these warrants was determined by a Black
Scholes model based on a volatility factor of 1.268, an expected life of one
year, an expected dividend rate of 0% and a risk-free interest rate of 6.65%.
The i360 acquisition costs of $710,400 recorded in respect of these warrants
plus additional cash i360 acquisition costs of $480,865 has been included in the
i360 purchase price.
In addition to the above noted warrants, the i360 merger warrants (Note 1) and
the Sun warrants (Note 8), the following warrants are outstanding in respect of
services provided to the Company in prior periods.
Exercise price Expiry
Issue date Warrants per share date
# $
---------------------------------------------
June 1, 1999 25,000 7.00 May 31, 2001
October 6, 1999 12,500 8.75 May 31, 2001
January 1, 2000 12,500 7.62 May 31, 2001
June 1, 1999 200,000 7.00 May 31, 2001
June 24, 1999 70,000 7.00 June 23, 2001
February 11, 2000 56,000 5.00 February 10, 2002
---------------------------------------------
376,000
13
<PAGE>
6. CONVERTIBLE DEBENTURES
On April 4, 2000, the Company issued 2,500 units by way of a private placement
at $1,000 per unit and on June 15, 2000 the Company issued an additional 960
units by way of a private placement at $1,000 per unit for total gross proceeds
of $3,460,000. The Company had also issued 3,500 units at $1,000 per unit in
March 2000, which in total results in the $6,960,000 of convertible debt
outstanding as of September 30, 2000. Each unit consists of $1,000 principal of
convertible subordinated debentures and 111.111 warrants. The convertible
debentures bear interest accruing from the date of issue at 7% per annum,
payable semi-annually on September 30 and March 31 and mature on March 31, 2005.
The debentures are convertible at the option of the holders at a conversion
price of $6.00 per share.
The conversion price is subject to adjustment under certain events pursuant to
the agreement. The Company has the right to require the holder to convert all or
a portion of these debentures if (i) at any time after March 31, 2003 the
closing bid price of the Company's common stock exceeds $18.00 for 15
consecutive trading days or (ii) the Company completes a $50 million financing
within one year at a price in excess of $12 per share. Each of the 773,334
warrants are exercisable at $7.50 per share, expire on March 31, 2003 and cannot
be exercised within the first year without also converting the convertible
debentures.
The intrinsic value of the beneficial conversion option of convertible
debentures issued in April and June 2000 has been valued at $1,455,933 and has
been included in interest expense.
Cash commission and other cash costs of $328,506 paid relating to the debentures
issued in April and June 2000 in addition to the $275,000 paid in March 2000
were recorded as a deferred convertible debenture issuance cost. In addition,
the Company issued agent common stock purchase warrants to purchase 96,111
shares of common stock at $7.50 per share to the agents as a placement fee for
the convertible debentures issued in April and June 2000 in addition to the
97,222 warrants issued to the agent in respect of the March 2000 issuance. Based
on a Black-Scholes valuation, the warrants issued in April and June 2000 have
been valued at $271,666 (based on a weighted average volatility factor of 0.895,
a weighted average expected life of 2 years, an expected dividend rate of 0% and
a weighted average risk-free interest rate of 6.26%) and the warrants issued in
March 2000 were valued at $329,583 and have been recorded as a deferred
convertible debenture issuance cost. In addition, in June 2000, 100,000 warrants
valued at $192,000 were issued to the Chairman as compensation for his role in
negotiating the convertible debenture financing (note 5) and were recorded as a
deferred convertible debt issuance costs. The deferred charges related to these
placements are being amortized on a straight-line basis over the 5-year life of
the debentures.
7. JOINT VENTURE INVESTMENT
Pursuant to a shareholder agreement executed on November 25, 1999 between the
Company, 813040 Alberta Ltd. ("Newco") and Canpet Energy Group Inc. ("Canpet"),
the Company and Canpet agreed to become shareholders of Newco, with each party
initially becoming a 50% owner of Newco. Newco has developed a web-enabled
trading business model for crude oil and natural gas liquids and other products.
As of September 30, 2000, the Company had advanced a total of $249,418
(Cdn.$375,000) to Newco; $3,326 (Cdn.$5,000) for the initial purchase of common
shares and $246,092 (Cdn.$370,000) in the form of shareholder loans which have a
conversion feature attached allowing the Company to convert the advances into
additional shares of Newco.
Since its inception, Newco has issued additional common shares resulting in the
dilution of the Company's ownership in Newco from 50% to 1.19% (27.4% on a fully
diluted basis) as of September 30, 2000.
As a result, commencing April 1, 2000 the Company has accounted for this
investment using the cost method, which resulted in recording the final $84,699
advanced during the six months ended September 30, 2000 at cost. The prior
equity and shareholder loans provided by the Company were reduced to nil during
the year ended March 31, 2000 when the Company was accounting for this
investment using the equity method.
14
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Agreement with Sun Microsystems
On September 14, 2000, the Company entered into an agreement with Sun
Microsystems Inc. ("Sun"), pursuant to which Sun purchased 320,674 shares of the
Company's common stock at $3.12 per share for total proceeds of $1,000,000 and
the Company issued warrants to Sun to purchase 397,957 shares of common stock of
the Company at the exercise price of $3.67 per share.
The warrants are exercisable upon Sun's approval of lease financing credit lines
as follows: (i) 109,029 immediately upon Sun granting a $2 million lease line;
(ii) 109,029 upon Sun extending the lease line to $4 million; (iii) 109,029 upon
Sun extending the lease line to $6 million; and (iv) 70,870 upon Sun extending
the lease line to $7.3 million. As at September 30, 2000, Sun had approved the
initial $2 million lease financing line, resulting in the first 109,029 warrants
being exercisable. The Company has drawn approximately $300,000 on this lease
credit line.
Alternatively to exercising the warrants, Sun may convert the outstanding
warrants into the number of shares of common stock of the Company equal to the
intrinsic value of the converted warrants (the difference between the market
value of the Company's common stock at the time of conversion less the $3.67
warrant exercise price multiplied by the number of converted warrants) divided
by the market value of one share of the Company's common stock at the time of
conversion. The warrants expire on September 14, 2005.
The warrants have been valued in the accounts at $696,425 (based on a volatility
factor of 1.440, an expected life of two years, an expected dividend rate of 0%
and a risk-free interest rate of 6.56%) and have been recorded as deferred
compensation, which will be revealed each reporting period until the approval of
the lease lines by Sun and amortized to income in proportion to the utilization
and draw down of the lease lines by the Company.
Also pursuant to the September 14, 2000 agreement, Sun is obligated to purchase
a further $1 million of the Company's common stock in September 2001 at a price
equal to 85% of the lessor of the market value of the Company's stock on the
date prior to the closing and the average market price of the Company's stock on
the 10 days preceding the closing. Pursuant to the agreement the closing of this
placement is contingent upon (i) the Company meeting or exceeding certain
revenue and pre-tax income targets; (ii) the market value of the Company's
common stock exceeding 1.5 times the price of the initial closing at the time of
the second closing; and (iii) the Company purchasing at least $5 million of
Sun's products or services prior to the closing, including any purchases made
pursuant to the lease line. There is no assurance that these conditions will be
met.
As a condition of the investment of the initial $1 million by Sun, the Company
commits to purchase $20 million worth of Sun products and technologies,
including purchases made pursuant to the lease line, and shall not purchase
products and technologies that are available from Sun from other companies over
the ensuing two year period or over any extended period, if applicable, until
the purchase commitment is met. Should Sun not invest the second $1 million
contemplated above, the Company's obligation shall be reduced to $10 million.
Alleged breach of contract
On or about July 12, 2000, claims were filed against i360 in a Colorado Court
alleging breach of contract by i360 in connection with two alleged contracts
concerning the distribution of i360's service offering. The claim was for an
indeterminate amount of damages. One of the alleged contracts consists of two
letters signed by the claimant and countersigned by the Company, while the
second alleged contract is not in writing. The Company has filed motions
requesting a stay and/or transfer of the action to Arizona, but has not yet
filed a defence to this action. The claimant has contested the transfer of the
claim to Arizona and
15
<PAGE>
during November 2000 a local Colorado magistrate ordered discoveries to begin.
Management believes that the claims are without merit and has valid defences to
the claims and intends to defend them vigorously. In addition, management
believes that the results of this matter will not have a material adverse impact
on the Company, although an unfavourable decision could have a material adverse
affect on the Company's business, financial condition and results of operation.
No provision has been made in the accounts in respect of this claim.
Alleged wrongful dismissal and negligent misrepresentation
In October 2000, a former employee of the Company filed a legal action against
the Company and certain of its directors and officers alleging wrongful
dismissal and negligent misrepresentation. The claimant is seeking wrongful
dismissal damages of Cdn$50,000.00 (approximately US$ 32,500 at November 13,
2000), damages for "loss of opportunity" Cdn$1,000,000.00 (approximately US$
650,000 at November 13, 2000), punitive damages of Cdn$50,000.00 (approximately
US$ 32,500 at November 13, 2000), unspecified "special damages", together with
interest and costs. The Plaintiff's employment was terminated on July 28, 2000
and seeks six months' severance. A statement of defence has not yet been
prepared by the Company. Management believes that it has a valid defence to the
claim and intends to defend it vigorously. In addition, management believes that
the results of this matter will not have a material adverse impact on the
Company, although an unfavorable decision could have a material adverse affect
on the Company's business, financial condition and results of operation. No
provision has been made in the accounts in respect of this claim.
9. SUBSEQUENT EVENTS
On November 7, 2000, the Company entered into a securities purchase agreement
for the sale of $2,500,000 aggregate principal amount of the Company's
convertible subordinated debentures due 2003 and warrants to purchase an
aggregate of 250,000 shares of the Company's common stock at an exercise price
of $2.00 per share to one investor for a purchase price of $2,500,000 (the
"Financing"). The Company closed on the sale of $1,000,000 aggregate principal
amount of such debentures and warrants to purchase 100,000 shares of Common
Stock to such investor on November 7, 2000 and received proceeds of $1,000,000.
The balance of $1,500,000 of gross proceeds ($1,350,000 net proceeds after the
placement agent's commissions) is to be received in two tranches, (i) $750,000
gross proceeds ($645,000 net proceeds) on December 1, 2000 for the sale of
$750,000 aggregate principal amount of such debentures and warrants to purchase
75,000 shares of Common Stock, and (ii) $750,000 gross proceeds ($705,000 net
proceeds) on January 2, 2001 for the balance of such debentures and warrants.
The closing of these two tranches is conditioned on the closing bid price of the
Company's common stock not being below $0.50 for three consecutive days on which
the NASDAQ stock market is open for trading subsequent to November 7, 2000. No
assurance can be made that these additional two tranches will close. The
debentures are convertible into the Company's common stock at a conversion price
equal to the lower of (i) U.S.$1.50 per share of common stock or (ii) 80% of the
average of the three lowest closing bid prices of the Company's common stock for
the 30 days immediately preceding the conversion date, unless at the conversion
date the common stock is not listed and posted for trading on a recognized stock
exchange or quotation system, in which case the conversion price shall be
U.S.$1.50.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1936, as amended, which are intended to be covered by
the safe harbors created thereby. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this report will prove to be
accurate. Factors that could cause actual results to differ from the results
discussed in the forward-looking statements include, but are not limited to,
competition, product acceptance and changing technology. In light of the
significant uncertainties inherent in the forward-looking statements included
16
<PAGE>
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
The consolidated financial statements are the continuing financial statements of
Virtual Performance Systems Inc. ("VPS") (a development stage company), an
Ontario corporation which was incorporated on July 29, 1997. VPS had a 100%
interest in, and subsequently amalgamated with, Cheltenham Technologies
Corporation, an Ontario corporation. VPS had a 100% interest in Cheltenham
Interactive Corporation ("Cheltenham Interactive"), an inactive Ontario
corporation, and Cheltenham Technologies (Bermuda) Corporation ("Cheltenham
Bermuda"), a Barbados corporation, which owns certain intellectual properties.
On January 29, 1999, VPS acquired the net assets of InfoCast Corporation
(formerly Grant Reserve Corporation) ("InfoCast"), a United States non-operating
company traded on the NASDAQ OTC Bulletin Board which had a 100% interest in
InfoCast Canada Corporation ("InfoCast Canada"). After the acquisition, VPS
continued under the name of InfoCast Corporation. On May 13, 1999, InfoCast
Canada acquired a 100% interest in Homebase Worksolutions Ltd. ("Homebase").
VPS, Cheltenham Interactive and Cheltenham Bermuda were amalgamated into
InfoCast Canada on March 31, 2000. On August 15, 2000, InfoCast acquired a 100%
interest in i360 inc. ("i360") at which time i360 merged with InfoCast and
became a division of InfoCast. InfoCast, InfoCast Canada, Homebase and i360 are
collectively referred to as the "Company". The Company is a development stage
technology company that has developed the infrastructure to enable the Company
to host both their own customized and third party software applications that can
be accessed remotely by businesses and their employees.
The following discussion should be read in conjunction with the Company's
unaudited historical interim financial statements and notes thereto included
elsewhere in this quarterly report.
Overview
We are an emerging company that has developed the infrastructure to enable us to
host both our own customized and third party software applications that can be
accessed remotely by businesses and their employees. This infrastructure
consists of computer hardware purchased from third parties; software
applications; and communication connections over private and public networks,
including the Internet. We are now entering the commercialization phase and plan
to provide our customers with access to our infrastructure and hosted
applications on a per use basis. Companies providing such services have recently
come to be known as application service providers or "ASPs."
We have incurred operating losses since our inception in July 1997. We have had
limited sales of our products and services on a commercial basis. We have
sustained ourselves through the sale of our common stock, convertible debt and
warrants to purchase common stock in a series of private placements, and through
shareholder loans. We believe that our existing cash, expected limited cash
collections from sales of products and services as well the net proceeds of
approximately $2,340,000 received and expected to be received in the future from
the sale of $2,500,000 aggregate principal amount of the Company's convertible
subordinated debentures and warrants to purchase 250,000 shares of the Company's
common stock (see Liquidity and Capital Resources" elsewhere on this report), of
which $1 million has already been received, will be sufficient to fund our cash
requirements to January 31, 2001, but in the event the second and the third
tranches of such debenture financing do not close, our assumptions change or
prove to be inaccurate (due to unanticipated expenses, delays, problems,
difficulties or otherwise), we will need additional financing proceeds prior to
January 31, 2001. We are dependent on the proceeds of additional financings to
implement our business plan and to finance our working capital requirements. We
may determine, depending upon the opportunities available to us, to seek
additional debt or equity financing to fund the additional costs of implementing
our business plan and for working capital requirements. To the extent that we
incur indebtedness or issue debt securities, we will be subject to risks
associated with incurring substantial indebtedness, including the risks that
interest rates may fluctuate and cash flow may be insufficient to pay principal
and interest on any such indebtedness. We have no current arrangements with
respect to, or sources of, additional financing. There can be no assurance that
additional financing will be available to us on commercially reasonable terms or
at all. If we are unable to obtain additional financing by January 2001, or
sooner if required, our ability to meet our current obligations and current
plans to develop our business will be materially adversely affected.
17
<PAGE>
Results of Operations
Six months ended September 30, 2000 vs. six months ended September 30, 1999
Revenue increased from zero for the six months ended September 30, 1999 to
$689,473 for the six months ended September 30, 2000 as we began to earn hosting
revenues and hosting related consulting services during the period ended
September 30, 2000. Also, included in the revenue for the six month period ended
September 30, 2000 is $259,011 for subscription services and portal development
services from our newly acquired Community Division (formerly i360 inc.).
Subscription revenues were included from August 15, 2000 (date of acquisition)
to September 30, 2000.
Consulting revenue increased from zero for the six months ended September, 1999
to $304,080 for the six months ended September 30, 2000 as the Company performed
some ASP hosting related consulting services.
Distance Learning revenue increased from zero for the six months ended
September, 1999 to $7,789 for the six months ended September 30, 2000 as the
Company started delivering courses through online and electronic media.
Hosting revenue increased from zero for the six months ended September, 1999 to
$88,794 for the six months ended September 30, 2000 as the Company started to
generate hosting related services.
Subscription services revenue increased from zero for the six months ended
September, 1999 to $259,011 for the six months ended September 30, 2000 through
our newly acquired Community division performing Internet Service Provider
("ISP") related services. Subscription revenues were included from August 15,
2000 (date of acquisition of i360) to September 30, 2000.
Miscellaneous revenue increased from zero for the six months ended September 30,
1999 to $29,799 for the six months ended September 30, 2000. This increase is
primarily due to revenue received from a customer related to contract management
and some portal development services.
Interest income increased from $58,464 for the six months ended September 30,
1999 to $83,186 for the six months ended September 30, 2000. The proceeds
received from the private placements in 1999 and 2000 were invested in short
term deposits which generated interest income for us during the six months ended
September 30, 2000, consistent with our investment policy.
General, administrative and selling expenses increased from $4,023,321 for the
six months ended September 30, 1999 to $5,474,948 for the six months ended
September 30, 2000. The Company recorded approximately $849,000 as expenses
directly related to revenue in the six-month period ended September 30, 2000
compared to nil for the same period ended September 30, 1999. There was a
reduction in consulting expenses from approximately $1,596,000 (19 consultants)
for the six months ended September 30, 1999 to $360,594 (8 consultants) for the
six months ended September 30, 2000. The Company incurred expenses of
approximately $284,000 related to compensation paid to HomeBase Work Solutions
officers for the six months ended September 30, 1999 with no comparative expense
in the six-month period ending September 30, 2000. Excluding the recently
acquired (August 15, 2000) Community division, the Company had nine more
employees involved in general, administrative and selling functions in the six
month period ended September 30, 2000 than for the same period ended September
30, 1999, resulting in approximately $780,000 increase in expenses. An increase
of approximately $1,068,000 in the six months period ended September 30, 2000
over the same period last year was due to the addition of the newly acquired
Community division effective August 15, 2000.
Stock option compensation expense decreased from $9,506,548 for the six months
ended September 30, 1999 to $819,461 for the six months ended September 30,
2000. This decrease is mainly due to a lower number of unvested stock options
outstanding during the six months ended September 30, 2000 compared to the same
period last year and the large intrinsic value resulting from stock options
granted under the Company's 1998 stock option plan that was amortized to income
during the six-month period ended September 30, 1999.
18
<PAGE>
Research and development expenses decreased from $1,783,346 for the six months
ended September 30, 1999 to $312,709 for the six months ended September 30,
2000. The Company incurred expenses of approximately $715,000 in the six-month
period ended September 30, 1999 from the write off of advances made to Applied
Courseware Technology Inc. ("ACT") which had been used to fund development
expenses related to the electronic conversion of courseware. In addition,
approximately $500,000 R&D expenses was incurred by HomeBase for the six month
period ended September 30, 1999 compared to nil in the six month period ended
September 30, 2000.
Interest and loan fees increased from zero for the six months ended September
30, 1999 to $1,748,410 for the six months ended September 30, 2000. The
convertible subordinated debentures that were issued in April, 2000 and in June,
2000 have a conversion feature that was in-the-money and exercisable at the
dates of issuance resulting in the intrinsic value of the feature of $1,455,933
being charged to interest expense at the time the debentures were issued. The
balance relates to interest recorded on capital leases and convertible debt.
Amortization expenses increased from $1,863,286 for the six months ended
September 30, 1999 to $4,637,295 for the six months ended September 30, 2000.
The variance is due to the amortization period (6 months in the six month period
ended September 30, 2000 compared to 4.5 months in the same period ended
September 30, 1999) of the acquired intellectual property and goodwill resulting
from the acquisition of HomeBase Work Solutions on May 13, 1999. In addition, in
the six month period ended September 30, 2000, we amortized approximately
$2,099,000 of the completed technology and goodwill acquired through the
acquisition of i360 inc. on August 15, 2000.
Depreciation expenses increased from $29,908 for the six months ended September
30, 1999 to $435,175 for the six months ended September 30, 2000. The increase
is due to the increase in depreciable asset base for the six-month period ended
September 30, 2000 compared to the six-month period ended September 30, 1999.
Loss on sale of marketable equity investment was $1,803,580 for the six-month
period ended September 30, 2000 compared to nil for the same period last year
due to the sale of 100,500 common shares of a publicly traded company.
Unrealized loss on marketable equity investment and reclassification adjustment
from sale of marketable equity investment of $224,083 in the six months ended
September 30, 2000 was due to the writedown of the remaining 29,500 common
shares of the publicly traded company, held as short term investment, to its
market value of $438,813 as at September 30, 2000 and the reclassification of
previous unrealized losses recorded in the comprehensive loss to realized loss
charged to income in respect the sale of 100,500 shares of the marketable equity
investment.
Liquidity and Capital Resources
Inception to September 30, 2000
At September 30, 2000, we had cash and cash equivalents of $1,518,196 and a
negative working capital of $416,750. We have started generating limited
revenues.
In February 2000 we issued 500,000 shares of Common Stock in a private placement
for which we received 150,000 shares of restricted Common Stock of another
publicly traded company as consideration, of which we retained 130,000 shares
after commissions. During the six month period ended September 30, 2000, the
restriction on all 130,000 shares was lifted, of which we sold 100,500 shares
during the same period for proceeds of $1,446,802. At September 30, 2000, the
19
<PAGE>
balance of 29,500 shares had a market value of $438,813 and is included in the
above working capital. At November 10, 2000, the market value of this marketable
equity investment was approximately $138,000.
Prior to March 31, 2000, we raised cash proceeds of $14,221,231, net of share
issue costs, from a series of private placements of the Company's common stock.
Prior to March 31, 2000, we raised cash proceeds of $3,225,000, net of
commissions, from issuance of convertible subordinated debentures. In April
2000, we issued an additional 2,500 units of convertible subordinated debentures
at $1,000 per unit for proceeds of $2,325,000, net of commissions. In June 2000,
we issued additional 960 units of convertible subordinated debentures at $1,000
per unit for proceeds of $808,600 net of commissions. The proceeds from these
issues are included in our cash position as at September 30, 2000.
On September 14, 2000, the Company entered into an agreement with Sun
Microsystems Inc. ("Sun"), in which Sun purchased 320,674 shares of the
Company's common stock at $3.12 per share for total proceeds of $1,000,000 on
September 14, 2000 (the proceeds from this issue are included in our cash
position as at September 30, 2000) and in which the Company issued warrants to
purchase 397,957 common shares at the exercise price of $3.67 per share to Sun.
As at September 30, 2000, these warrants were valued at $696,428 (based on a
volatility factor of 1.440, an expected life of two years, an expected dividend
rate of 0% and a risk-free interest rate of 6.56%), which has been recorded as
deferred compensation. These warrants are exercisable proportionately, at
various times triggered by Sun's approval of various lease financing credit
lines (to be applied to the purchase of Sun's products by the Company), up to an
aggregate master lease financing line of $7.3million. To date, Sun has approved
$2.0million lease financing line, resulting in 109,029 warrants of the 397,957
warrants issued exercisable immediately at $3.67 per share. Also pursuant to the
September 14, 2000 agreement, Sun is obligated to purchase a further $1 million
of the Company's common stock in September 2001 at a price equal to 85% of the
lessor of the market value of the Company's stock on the date prior to the
closing and the average market price of the Company's stock for the 10 days
preceding the closing. Pursuant to the agreement, the closing of this placement
is contingent upon (i) the Company meeting or exceeding certain revenue and
pre-tax income targets; (ii) the market value of the Company's common stock
exceeding 1.5 times the price of initial closing, at the time of the second
closing; and (iii) the Company purchasing at least $5 million of Sun's products
or services prior to the closing, including any purchases made pursuant to the
lease line. There is no assurance that these conditions will be met. As a
condition of the investment of the initial $1 million by Sun, the Company
commits to purchase $20 million worth of Sun products and technologies,
including purchases made pursuant to the lease line, and shall not purchase
products and technologies that are available from Sun from other companies over
the ensuing two year period or over any extended period, if applicable, until
the purchase commitment is met. Should Sun not invest the second $1 million
contemplated above, the Company's obligation shall be reduced to $10 million.
From our inception through to September 30, 2000, we have used approximately
$15,695,000 for operating activities before changes in non-cash working capital
balances mainly as a result of general, administrative and selling and research
and development expenditures, net of revenues. We used a further $2,700,000 for
the purchase of capital assets, $2,975,000 on the purchase of distribution
rights, $481,000 on the acquisition costs of i360 and $256,000 in a joint
venture.
On November 7, 2000, the Company entered into a securities purchase agreement
for the sale of $2,500,000 aggregate principal amount of the Company's
convertible subordinated debentures due 2003 and warrants to purchase an
aggregate of 250,000 shares of the Company's common stock at an exercise price
of $2.00 per share to one investor for a purchase price of $2,500,000 (the
"Financing"). The Company closed on the sale of $1,000,000 aggregate principal
amount of such debentures and warrants to purchase 100,000 shares of Common
Stock to such investor on November 7, 2000 and received proceeds of $1,000,000.
The balance of $1,500,000 of gross proceeds ($1,350,000 net proceeds after the
placement agent's commissions) is to be received in two tranches, (i) $750,000
gross proceeds ($645,000 net proceeds) on December 1, 2000 for the sale of
$750,000 aggregate principal amount of such debentures and warrants to purchase
75,000 shares of Common Stock, and (ii) $750,000 gross proceeds ($705,000 net
proceeds) on January 2, 2001 for the balance of such debentures and warrants.
The closing of these two tranches is conditioned on the closing bid price of the
Company's common stock not being below $0.50 for three
20
<PAGE>
consecutive days on which the NASDAQ stock market is open for trading subsequent
to November 7, 2000. No assurance can be made that these additional two tranches
will close. The debentures are convertible into the Company's Common Stock at a
conversion price equal to the lower of (i) U.S.$1.50 per share of common stock
or (ii) 80% of the average of the three lowest closing bid prices of the
Company's common stock for the 30 days immediately preceding the conversion
date, unless at the conversion date the common stock is not listed and posted
for trading on a recognized stock exchange or quotation system, in which case
the conversion price shall be U.S.$1.50.
We expect to use our existing cash and cash equivalents for working capital and
general corporate requirements and to deploy our hosting products and services
and to deploy and enhance our Contact, e-Learning and Community (formerly i360
Inc.) applications products and services. We believe that our existing cash,
expected limited cash collections from sales of products and services as well
the proceeds received and expected to be received in the future from the
debenture Financing, will be sufficient to fund our cash requirements to January
31, 2001, but in the event the second and the third tranches of the financing do
not close, our assumptions change or prove to be inaccurate (due to
unanticipated expenses, delays problems, difficulties or otherwise), we will
need additional financing proceeds prior to January 31, 2001. We are dependent
on the proceeds of additional financings to implement our business plan and to
finance our working capital requirements. We may determine, depending upon the
opportunities available to us, to seek additional debt or equity financing to
fund the additional costs of implementing our business plan and for working
capital requirements. To the extent that we incur indebtedness or issue debt
securities, we will be subject to risks associated with incurring substantial
indebtedness, including the risks that interest rates may fluctuate and cash
flow may be insufficient to pay principal and interest on any such indebtedness.
We have no current arrangements with respect to, or sources of, additional
financing. There can be no assurance that additional financing will be available
to us on commercially reasonable terms or at all. If we are unable to obtain
additional financing by January 2001, or sooner if required, our ability to meet
our current obligations and current plans to develop our business will be
materially adversely affected.
We have experienced approximately six months of delays in securing anticipated
sales channels for the Company's Contact and e-Learning solution products.
Additionally, the Community division's subscriber base has grown at a slower
rate than anticipated. Anticipating the signing of distribution agreements and
the anticipated increased rate of our Community product subscribers, we have
delayed the reduction of expenses, mostly personnel related, which personnel
will be required on the execution of these agreements and as a result of the
increased subscribers. We believe that the distribution agreements will be
concluded and that the community subscriber base will continue to increase
although no assurances can be made that such agreements will be concluded or
that the subscriber base will increase.
In the event that additional financings are not completed and expected revenues
and cash flows are not achieved, the Company intends to curtail its development
plans and reduce expense levels significantly at the appropriate time.
Inflation has not been a major factor in our business. There can be no
assurances that this will continue.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to immaterial levels of market risks with respect to
changes in foreign currency exchange rates and interest rates. Market risk is
the potential loss arising from adverse changes in market rates and prices, such
as foreign currency exchange and interest rates. To the extent that the Company
consummates financings outside of Canada, the Company receives proceeds in
currency other than the Canadian dollar. Most of the Company's operating
expenses are incurred in Canadian dollars. Thus, the Company's results of
operations will tend to be adversely affected if there is a strong Canadian
dollar. The Company does not enter into derivatives or other financial
21
<PAGE>
instruments for trading or speculative purposes, nor does it enter into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates.
The Company currently holds 29,500 shares of common stock of another publicly
traded corporation. The market value of these shares is subject to fluctuation
on the stock market on which these shares trade and which may adversely affect
the potential proceeds when these shares are sold.
The Company issued convertible subordinated debentures in March, April and June
and November 2000, in the amount of $7.96 million, which pay interest at a fixed
rate of 7%. The Company is exposed to changes in interest rates as it affects
the value of the debt and the Company's relative cost of capital.
While the Company seeks to place its cash and cash equivalents with high
credit-quality financial institutions, the Company is still exposed to credit
risk for uninsured amounts held by such institutions.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement on Financial
Accounting Standards (SFAS) No.133, Accounting for Derivatives Instruments and
Hedging Activities in 1998. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company must adopt SFAS No. 133 in 2001.
The Company does not believe the adoption of SFAS No. 133 will have a material
effect on the financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC views in applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued SAB 101 to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 31, 1999. The Company is required to adopt
SAB 101 by March 31, 2001. Management has not yet determined the impact that SAB
No. 101 will have on the financial position or results of operations of the
Company.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
In April 2000, i360 inc., an entity acquired by the Company in August 2000,
received a demand from Mr. and Mrs. Joseph Lemoine. Mr. and Mrs. Lemoine are the
principals of an entity called Hope International Outreach. They have alleged
that i360 breached two distinct contracts with them. One of the contracts is
alleged to consist of two letters, dated September and October 1999,
respectively, signed by the Lemoines and countersigned by i360 relating to a
potential business arrangement whereby i360 would provide certain Internet
services for Hope International in return for Hope International providing
potential customers for the Internet services. The second alleged contract is
not in writing but allegedly relates to a potential business arrangement whereby
i360 would provide certain Internet services to establish on-line e-commerce
website for Hope International in return for certain payments from Hope
International. In June 2000, i360 inc. filed a declaratory action against Hope
International Outreach, Inc. d/b/a Hope International, in the Tucson, Arizona
United States District Court seeking to have the court rule that no enforceable
contracts existed. The lawsuit was served on Hope International Outreach's
registered agent, Joseph Lemoine, Jr., on September 19, 2000. Hope International
has filed a motion to transfer and consolidate this Tucson action with the
Colorado action described below. InfoCast expects to file its Response in
opposition to such motion on or before November 20, 2000. No other deadlines
have been set by the court.
22
<PAGE>
On or about July 12, 2000, Hope International Outreach and Joseph and Diane
Lemoine, individually, filed a lawsuit against i360 Inc. in Colorado State court
with respect to the above-described alleged contract breaches. Such suit claims
an unspecified amount of damages. On September 14, 2000, the Company's Colorado
counsel removed the lawsuit to United States District Court for the District of
Colorado on the basis of diversity. InfoCast has filed motions with the United
States District Court for the District of Colorado requesting a stay and/or
transfer of the Colorado action to Arizona. InfoCast has not yet filed an Answer
in this action, but on or about November 7, 2000, a local magistrate ordered
discovery to begin. InfoCast's Rule 26 disclosures (disclosures to identify,
among other things, relevant witnesses) were filed on November 14, 2000. All
written discovery must be served by February 28, 2001. Hope International
Outreach must designate experts by February 28, 2001 and InfoCast must
counter-designate by March 16, 2001. All discoveries, including expert
discovery, must be completed by April 30, 2001. May 20, 2001 has been set as the
date for dispositive motions to be filed. A date for oral argument, if any, has
not been set. The Company believes that it has valid defenses to the claims
advanced by the Lemoines and Hope International Outreach. The Company intends to
vigorously defend the action. An unfavorable decision could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
On October 30, 2000, Kristin Charlton, a former employee filed a legal action
against the Company's subsidiary, InfoCast Canada Corporation, and its directors
in the Ontario, Canada Superior Court of Justice, alleging wrongful
dismissal/negligent misrepresentation. The Plaintiff is seeking wrongful
dismissal damages of Cdn$50,000.00 (approximately US$ 32,500 at November 13,
2000), damages for "loss of opportunity" Cdn$1,000,000.00 (approximately US$
650,000 at November 13, 2000), punitive damages of Cdn$50,000.00 (approximately
US$ 32,500 at November 13, 2000), unspecified "special damages", together with
interest and costs. The Statement of Claim having recently been served, a
Statement of Defence has not yet been prepared. The Company believes it has
valid defenses to the claims advanced by Ms. Charlton. The Company intends to
vigorously defend the action. An unfavorable decision could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
The Company is not currently involved in any other material legal proceedings.
From time to time, however, the Company may be subject to claims and lawsuits
arising in the normal course of business.
Item 2. Changes in Securities and Use of Proceeds
Sale of Unregistered Securities
The following unregistered securities were issued by the Company during the
quarter ended September 30, 2000:
<TABLE>
<CAPTION>
Number of Shares Offering/
Date of Description of Sold/Issued/Subject Exercise
Sale/Issuance Securities Issued To Options or Warrants Price Per Share Notes
----------------- -------------------- --------------------- --------------- -----
<S> <C> <C> <C>
July 2000 Common Shares 95,000 Exchange of InfoCast Canada
exchangeable Shares into InfoCast
shares
August 2000 Common Shares 517,000 Exchange of InfoCast Canada
exchangeable Shares into InfoCast
shares
August 2000 Options 1,127,476 $4.00 Granted to i360 employees in
exchange for i360 options (i360
inc. acquisition)
August 2000 Warrants 4,328,625 $0.33 Issued to i360 employees in
Warrants 87,375 $3.18 exchange for i360 options (i360
Warrants 4,125 $4.00 inc. acquisition)
August 2000 Common Shares 7,583,976 Exchange of i360 Inc.
Shares for InfoCast shares
(acquisition of i360 inc.)
September 2000 Common Shares 40,800 Exchange of InfoCast Canada
exchangeable Shares into InfoCast
shares
September 2000 Common Shares 320,674 $3.12 Private placement -Sun Microsystems
September 2000 Warrants 397,957 $3.67 Issue to Sun Microsystems for Lease
Line credit facility.
</TABLE>
23
<PAGE>
The issuance of these securities is claimed to be exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of these securities.
Item 4. Submission of matters to a Vote of Security Holders
During the quarter ended September 30, 2000, the following actions were taken by
stockholders at a special meeting of stockholders held on August 14, 2000:
<TABLE>
<CAPTION>
Action Taken No. of shares No. of shares No. of shares Date of
Approving Action against Action Abstained Approval
Taken taken
----------- --------------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
1. Approving the merger
of i360 inc. with and
Into the Company 11,647,751 27,400 2,920 Aug 14, 2000
2. Approving the 2000
Stock Option Plan 11,578,965 70,175 28,931 Aug 14, 2000
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Warrant to purchase 397,957 shares of Common Stock dated
September 14, 2000 to Sun Microsystems Inc.
4.2 Warrant to purchase 100,000 shares of Common Stock dated
November 7, 2000 to CALP II LP.
10.1 Stock Purchase Agreement dated September 14, 2000 between
the Company and Sun Microsystems Inc.
10.2 Registration Rights Agreement dated September 14, 2000
between the Company and Sun Microsystems Inc.
10.3 Lease Line with Sun Microsystems Inc.
10.4 Securities Purchase Agreement dated November 7, 2000 by
and between the Company and CALP II LP.
10.5 Debenture dated November 7, 2000 to CALP II LP.
27.1 Financial Data Schedule
(b) Reports on Form 8-K: None
24
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended,the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
InfoCast Corporation
Date: November 16, 2000 By: /s/Herve Seguin
----------------------------
Herve Seguin
Chief Financial Officer
(Duly Authorized Officer
and Principal
Financial Officer)
25
