SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27213
POPSTAR COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
NEVADA 88-0385920
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
107 EAST 3RD AVENUE
VANCOUVER, BC CANADA V5T 1C7
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (604) 872-6608
--------------------
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.
Yes [X] No [ ]
Number of shares of Common Stock of $0.001 par value outstanding of the issuer
as of June 30, 2000: 21,942,000
Transitional Small Business Disclosure Format (Check one); Yes [ ] No [X]
<PAGE>
POPSTAR COMMUNICATIONS, INC.
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Page
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<S> <C>
PART I. FINANCIAL INFORMATION .......................................................1
Item 1. Financial Statements ........................................................1
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 ..........1
Consolidated Statements of Operations for the Six Months
ended June 30, 2000 and 1999 ................................................2
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2000 and 1999 ................................................3
Notes to Interim Financial Statements .......................................4
Item 2. Plan of Operation ..........................................................11
PART II. OTHER INFORMATION ..........................................................15
Item 1. Legal Proceedings ..........................................................15
Item 2. Changes in Securities ......................................................16
Item 3. Defaults Upon Senior Securities ............................................16
Item 4. Submission of Matters to a Vote of Security Holders ........................16
Item 5. Other Information ..........................................................17
Item 6. Exhibits and Reports on Form 8-K ...........................................17
Signatures ...........................................................................17
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
June 30, 2000, with comparative figures for December 31, 1999
<TABLE>
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June 30, December 31,
2000 1999
---------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,193,269 $ 23,745
Accounts receivable 47,205 -
Note receivable from a company with common controlling
shareholders (note 3) 750,000 1,000,000
Prepaid expenses 21,219 2,739
---------------------------------------------------------------------------------------------------------------
Total current assets 7,011,693 1,026,484
Equipment 129,163 12,124
---------------------------------------------------------------------------------------------------------------
Total assets $ 7,140,856 $ 1,038,608
---------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 229,350 $ 195,569
Payable to companies with common controlling
shareholders (note 4) 132,525 230,227
---------------------------------------------------------------------------------------------------------------
Total current liabilities 361,875 425,796
Shareholders' equity:
Capital stock (note 5):
Authorized: 50,000,000 common voting shares,
par value of $0.001 per share
Issued and outstanding: 21,942,000 common
voting shares 10,141,056 2,654,548
Deficit accumulated in the development stage (3,362,075) (2,041,736)
---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,778,981 612,812
Operations (note 1)
Commitment (note 7)
---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,140,856 $ 1,038,608
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
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POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Consolidated Statements of Operations and Deficit
(Expressed in U.S. Dollars)
<TABLE>
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Period from
incorporation on
Six months Six months December 17,
ended ended 1998 to
June 30, June 30, June 30,
2000 1999 2000
---------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Revenues:
Interest income (note 3) $ 166,681 $ 19,926 $ 228,389
Expenses:
Accounting and audit fees 27,113 9,000 47,347
Amortization 8,629 - 8,629
Bank interest and charges 4,863 1,298 7,438
Commission 8,333 72,917 81,249
Foreign exchange loss (gain) (2,070) 588 (984)
Legal and professional fees 41,156 227,064 337,346
License fee 3,599 - 28,599
Management fee - 1,950 1,950
Office 64,646 10,438 85,998
Rent (note 6(c)) 65,323 10,781 93,899
Salaries and wages 422,845 29,254 516,216
Sales and marketing 9,692 - 42,955
Travel and entertainment 66,657 14,532 105,349
Related party transactions:
License fee (note 6(a)) 306,897 189,247 697,971
Management fees (note 6(b)) - 112,368 366,578
Administrative and office salaries
(note 6(b)) 28,094 25,150 100,446
Sales and marketing fees (note6(b)) - 24,379 100,027
Software development (note 6(b)) 423,176 254,878 826,614
Travel and entertainment (note 6(b)) - 84,293 119,744
---------------------------------------------------------------------------------------------------------------
Total expenses 1,478,953 1,068,137 3,567,371
---------------------------------------------------------------------------------------------------------------
Net loss before income taxes 1,312,272 1,048,211 3,338,982
Income taxes 8,067 - 23,093
---------------------------------------------------------------------------------------------------------------
Net loss 1,320,339 1,048,211 3,362,075
Deficit accumulated during the development
stage, beginning of period 2,041,736 - -
---------------------------------------------------------------------------------------------------------------
Deficit accumulated during the development
stage, end of period $ 3,362,075 $ 1,048,211 $ 3,362,075
---------------------------------------------------------------------------------------------------------------
Basic and diluted loss per weighted
share (note 2(g)) $ 0.06 $ 0.11 $ 0.20
---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding 20,768,250 9,688,767 16,823,722
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
<TABLE>
----------------------------------------------------------------------------------------------------------------
Period from
incorporation on
Six months Six months December 17,
ended ended 1998 to
June 30, June 30, June 30,
2000 1999 2000
----------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,320,339) $ (1,048,211) $ (3,362,075)
Non-cash items and transactions:
Common shares issued in
consideration for
legal services rendered - - 22,500
Net costs deemed to be issued on
recapitalization - - (2,517)
Amortization 8,629 - 8,629
Changes in non-cash operating working capital:
Accounts receivable (47,205) - (47,205)
Prepaid expenses (18,480) (393) (21,219)
Accounts payable and
accrued liabilities 33,781 214,210 229,350
----------------------------------------------------------------------------------------------------------------
Total cash flows from
operating activities (1,343,614) (834,394) (3,172,537)
Cash flows from financing activities:
Payable to common controlled companies (97,702) 493,647 132,525
Issuance of capital stock 7,486,508 1,988,732 10,121,073
----------------------------------------------------------------------------------------------------------------
Total cash flows from
financing activities 7,388,806 2,482,379 10,253,598
Cash flows from investing activities:
Note receivable from a company with
common controlling shareholders 250,000 (1,000,000) (750,000)
Purchase of equipment (125,668) - (137,792)
----------------------------------------------------------------------------------------------------------------
Total cash flows from
investing activities 124,332 (1,000,000) (887,792)
----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 6,169,524 647,985 6,193,269
Cash and cash equivalents,
beginning of period 23,745 - -
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 6,193,269 $ 647,985 $ 6,193,269
----------------------------------------------------------------------------------------------------------------
Supplementary information:
Income taxes paid $ 8,067 $ - $ 23,093
Interest expense paid 2,172 - 4,747
----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
Six months ended June 30, 2000
================================================================================
1. Operations:
The Company was incorporated on June 19, 1995 under the laws of the State
of Nevada as Cherokee Leather, Inc. On May 17, 1999, the Company changed
its name to POPstar Communications, Inc. The Company is a provider of
Internet based facsimile transmission technology and is in the process of
field testing its services. As such, it is considered a development stage
company.
On July 20, 1999, the Company acquired all the issued and outstanding
common and preferred shares of POPstar Global Communications Inc.
("POPstar") in exchange for 12,875,000 common shares of the Company with
the management of POPstar continuing to manage operations for the combined
entity. The common shares of the Company issued in exchange for the shares
of POPstar are restricted securities as defined under the United States
Securities Act of 1933, as amended. As the Company had no significant
operations to the date of the acquisition, the transaction was accounted
for as a capital transaction, whereby POPstar was considered to have issued
common shares for consideration equal to the net monetary assets of the
Company. Accordingly, these consolidated financial statements reflect the
assets, liabilities, revenues and expenses of POPstar for all periods prior
to July 20, 1999 consolidated with those of the Company from the date of
the capital transaction.
The Company's financial statements are prepared using generally accepted
accounting principles in the United States applicable to a going concern
which contemplates the realization of assets and liquidation of liabilities
in the normal course of business. At June 30, 2000, the Company does not
have an established source of revenue sufficient to cover its operating
costs and to allow it to generate sufficient cash flows to fund operations
and meet its liabilities as they become due. During the period, the Company
issued shares for cash (note 5(a)) and continued development of certain
licensed software (note 6(a)). Management anticipates that cash will
continue to be available from its shareholders, a company with the common
controlling shareholders (note 3), or from additional security issuances to
third parties to fund operating requirements for the next fiscal year.
There is no guarantee that the licensed software will generate revenues
sufficient to cover its operating costs or that proceeds received from the
issuance of shares or other sources will maintain the Company until that
time.
2. Significant accounting policies:
(a) Basis of presentation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, POPstar, POPstar
Communications Asia Pacific Ltd. ("POPstar Asia"), POPstar
Communications PTE Ltd. and POPstar Communications Canada Corp. All
intercompany balances and transactions have been eliminated.
4
<PAGE>
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements, page 2
(Expressed in U.S. Dollars)
Six months ended June 30, 2000
================================================================================
2. Significant accounting policies (continued):
(a) Basis of presentation (continued):
As the Company has not commenced commercial operations at June 30,
2000, for accounting purposes it is considered to be a development
stage enterprise.
The financial information as at June 30, 2000 and for the six month
periods ended June 30, 2000 and 1999 is unaudited. However, such
financial information reflects all adjustments (consisting solely of
normal recurring adjustments), which are, in the opinion of
management, necessary for a fair presentation of the results of
operations for the periods presented.
(b) Foreign operations:
The functional currency of the Company's wholly-owned subsidiaries
outside of the United States is the United States dollar. Monetary
items of those operations that are originally denominated in foreign
currencies are translated into United States dollars at the rate of
exchange in effect of the balance sheet date and non-monetary items
are translated at historical exchange rates. Revenues and expenses are
translated at the rate of exchange in effect on the dates they occur.
Depreciation or amortization of assets translated at historical
exchange rates are translated at the same exchange rates as the assets
to which they relate.
Exchange gains and losses arising on the translation of monetary items
are included in income for the current period.
(c) Equipment:
Equipment is stated at cost. Depreciation is provided on a
straight-line basis at a rate of 25% per annum.
(d) Software development:
Software development costs are expensed as incurred unless they meet
generally accepted accounting criteria for deferral and amortization.
The Company assesses whether it has met the relevant criteria for
deferral and amortization at each reporting date. No such expenditures
have met these criteria during the period ended June 30, 2000.
(e) Income taxes:
Income taxes are provided for using the asset and liability method of
accounting. A deferred tax asset or liability is recorded for all
temporary differences between the carrying values of assets and
liabilities for financial and tax reporting purposes and of tax loss
carryforwards based on the enacted tax rates in the expected period of
reversal of the difference.
5
<PAGE>
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements, page 3
(Expressed in U.S. Dollars)
Six months ended June 30, 2000
================================================================================
2. Significant accounting policies (continued):
(e) Income taxes (continued):
A valuation allowance is provided to the extent that it is considered
more likely than not that the deferred tax assets arising due to loss
carryforwards or temporary differences will not be realized.
(f) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period.
Assumptions underlying these estimates are limited by the availability
of reliable data and the uncertainty of predictions concerning future
events. Consequently, the estimates and assumptions made do not
necessarily result in a precise determination of reported amounts.
Actual results could differ from those estimates.
(g) Loss per share:
Basic loss per share is computed by dividing losses attributable to
the common shareholders by the weighted average number of common
shares outstanding during the period. Under the capitalization
accounting described in note 1, the shares issued to the former
shareholders of POPstar are considered to have been outstanding for
all periods presented proportionate to their date of issuance. Diluted
loss per share reflects per share amounts that would have resulted if
dilutive securities, such as the common share options, had been
converted to common stock at the later of the beginning of the period
or their date of issuance.
The losses attributable to the common shareholders for the period is
represented by the net loss of $1,320,339. The weighted average number
of common shares outstanding during the period ended June 30, 2000 is
calculated as follows:
<TABLE>
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Weighted
Number number of
of common of shares
shares issued outstanding
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<S> <C> <C>
Shares outstanding, December 31, 1999 19,447,500 19,447,500
Shares cancelled during the period (2,400,000) (2,400,000)
Shares issued during the period 4,894,500 3,720,750
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21,942,000 20,768,250
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</TABLE>
6
<PAGE>
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements, page 4
(Expressed in U.S. Dollars)
Six months ended June 30, 2000
================================================================================
2. Significant accounting policies (continued):
(g) Loss per share (continued):
As at June 30, 2000, there were outstanding options to acquire
4,095,500 common shares of the Company (note 5(b)) which are not
included in the computation of diluted loss per share because to do so
would have been anti-dilutive for the periods presented.
(h) Stock based compensation:
Stock options granted in exchange for employee services rendered have
been accounted for using the intrinsic value based method whereby the
excess, if any, of the quoted market price of the stock at the grant
date over the exercise price is recognized in the period of granting.
The Company has elected to adopt the disclosure only provision of
Statement of Financial Accounting Standards No. 123 ("FAS 123") with
respect to option grants to employees.
Stock based compensation awarded as a result of stock options granted
to non-employees are accounted for using the fair value based method
of accounting. The fair value is determined using the option-pricing
model that takes into account the stock price at the grant date, the
exercise price, the expected life of the option, the volatility of the
underlying stock and the expected dividends on it, and the risk-free
interest rate over the expected life of the option. Any compensation
is recognized over the service period of the stock options being
granted, represented by the vesting period.
Stock issued in exchange for services rendered have been accounted for
based on the estimated fair value of the equity instruments at the
date of issuance.
3. Note receivable from a company with common controlling shareholders:
The note receivable from TGI Technologies Ltd. ("TGI") is unsecured and
bears interest at 8% per annum. Both TGI and the Company have greater than
50% of their respective voting shares owned by the same group of
shareholders. The funds were loaned to TGI on March 30, 1999 from monies
received on the issuance of shares of the Company. The principal and any
outstanding accrued interest are due on the earlier of demand by the
Company or March 30, 2001. During the period, the Company received a
payment of $250,000 of the principal balance and interest income of $32,268
from TGI.
4. Payable to companies with common controlling shareholders:
The payables to companies with common controlling shareholders are
non-interest bearing, unsecured and have no specific terms of repayment.
7
<PAGE>
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements, page 5
(Expressed in U.S. Dollars)
Six months ended June 30, 2000
================================================================================
5. Capital stock:
(a) Common shares:
<TABLE>
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Shares Amount
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1999 19,447,500 $ 2,654,548
Common shares cancelled (2,400,000) -
Common shares issued for cash at $2.00 per share 3,000,000 6,000,000
Common shares issued for cash at $0.833333 per share 1,750,000 1,458,333
Common shares issued on exercise of options for cash
at $0.01 per share 117,500 1,175
Common shares issued on exercise of options for cash
at $1.00 per share 27,000 27,000
------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 21,942,000 $10,141,056
------------------------------------------------------------------------------------------------------
</TABLE>
(b) Options:
(i) Stock-based compensation:
In 1999, the Company adopted a stock option plan (the "Plan")
pursuant to which the Company may grant stock options to
management, employees and contractors. The Plan authorized grants
of options to purchase up to 757,500 shares of authorized but
unissued common stock. During the period, the Company authorized
an additional 1,242,500 common shares under the Plan to be
eligible to be granted as options. Stock options are granted with
an exercise price equal to the stock's market value at the date
of the grant. The stock options have various periods to expiry as
noted in the tables below.
<TABLE>
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Average
Options exercise
outstanding price
----------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance, December 31, 1999 $ 757,500 $ 0.39
Transactions during the period:
Granted 525,500 2.00
Exercised (144,500) 0.19
Expired (43,000) 0.77
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Outstanding and exercisable, June 30, 2000 $ 1,095,500 $ 1.16
----------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements, page 6
(Expressed in U.S. Dollars)
Six months ended June 30, 2000
================================================================================
5. Capital stock (continued):
(b) Options (continued):
(i) Stock-based compensation (continued):
The following table summarizes options outstanding and
exercisable at June 30, 2000:
<TABLE>
-------------------------------------------------------------------------------------------------
Outstanding
---------------------------------
Weighted Number
Exercise average period of shares
prices Number remaining to expiry exercisable
-------------------------------------------------------------------------------------------------
(months)
<S> <C> <C> <C>
$0.01 340,000 21.1 90,000
$1.00 230,000 25.8 60,000
$2.00 525,500 34.0 -
-------------------------------------------------------------------------------------------------
1,095,500 28.3 150,000
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</TABLE>
(ii) Other:
During the six month period ended June 30, 2000, the Company
granted options to three investors to purchase up to an aggregate
of 3,000,000 shares of common stock at an exercise price of $2.00
per share.
6. Related party transactions:
Related party transactions not disclosed elsewhere in these consolidated
financial statements are as follows:
(a) On January 11, 1999, the Company entered into a Licensing Agreement
with TGI, whereby the Company has been granted the exclusive
commercial exploitation rights to certain Internet fax server software
(the "Software"). Under this license, the Company has agreed to pay a
percentage of the net revenues resulting from the commercial
activities of the Software, subject to a specified annual minimum, as
follows:
------------------------------------------------------------------
Calendar Percentage Annual
year of net sales minimum
------------------------------------------------------------------
2000 6% $ 600,000
2001 4% 500,000
2002 2% 500,000
------------------------------------------------------------------
9
<PAGE>
POPSTAR COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements, page 7
(Expressed in U.S. Dollars)
Six months ended June 30, 2000
================================================================================
6. Related party transactions (continued):
The agreement provides that the Company can offset any amounts owing
to TGI against the note receivable disclosed in note 3. During the
period, the Company recorded expenditures of $306,897 in license fees
to TGI, being the annual minimum prorated for the six-month period
ended June 30, 2000.
(b) The Company has also entered into an agreement with TGI, whereby TGI
will provide technical assistance, software development, marketing,
management and other services, as required. The charge is based on
TGI's direct and indirect costs of the services provided plus 15%.
During the period, the Company incurred service fees, including the
15%, under this agreement totalling $451,270.
(c) During the period, POPstar Asia leased office space for its office in
Hong Kong for $2,000 per month from Easewell Management Ltd. pursuant
to a leasing arrangement. A director of Easewell Management Ltd. is a
director of the Company.
During the period, POPstar Asia leased office space for its office in
Beijing, The People's Republic of China for $2,200 per month pursuant
to a leasing arrangement from a director of the Company.
During the period, POPstar Communications Canada Corp. leased office
space for its office in Vancouver, Canada for CDN$4,489 per month from
Tradeglobe Consulting Ltd. pursuant to a leasing arrangement. Two
directors of Tradeglobe Consulting Ltd. are directors of the Company.
7. Commitment:
On August 10, 1999, the Company entered into a non-exclusive, royalty free
Service Agreement with TransNexus, LLC, a company incorporated under the
laws of the State of Georgia. Under the terms of the Agreement, TransNexus,
LLC will provide financial transaction settlement services and billing
information to Internet Service Providers using the Company's technology in
exchange for a percentage of the billings. The charging rates for these
arrangement have been established through negotiation.
8. Subsequent event:
Subsequent to June 30, 2000, the Company entered into an agreement to
acquire, on an exclusive basis, software technology from a third party in
exchange for CDN$35,000, 20,000 common shares of the Company and 12 equal
monthly payments of CDN$2,500.
10
<PAGE>
ITEM 2. PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS:
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements in this filing about our future
results, level of activity, performance, goals or achievements or other future
events constitute forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause actual results or
events to differ materially from those anticipated in our forward-looking
statements.
In some cases, you can identify forward-looking statements by our use of words
such as "may," "will," "should," "could," "expect," "plan," "intend,"
"anticipate," believe," "estimate," "predict," "potential," " or "continue" or
the negative or other variations of these words, or other comparable words or
phrases. The Company intends that such forward-looking statements be subject to
the safe harbors created by these statutes. The forward-looking statements
included herein are based on current beliefs and expectations that involve a
number of risks and uncertainties. Accordingly, to the extent that this
Quarterly Report contains forward-looking statements regarding the financial
condition, operating results, business prospects or any other aspect of the
Company, please be advised that the Company's actual financial condition,
operating results and business performance may differ materially from that
projected or estimated by the Company in forward-looking statements. The
differences may be caused by a variety of factors, including but not limited to
uncertain market acceptance of our products, adverse economic conditions,
intense competition, including intensification of price competition and entry of
new competitors and products, adverse federal, state and local government
regulation, inadequate capital, unexpected costs and operating deficits,
increases in general and administrative costs, lower sales and revenues than
forecast, loss of customers, customer returns of products sold to them by the
Company, termination of contracts, loss of supplies, technological obsolescence
of the Company's products, technical problems with the Company's products, price
increases for supplies and components, inability to raise prices, failure to
obtain new customers, litigation and administrative proceedings involving the
Company, the possible acquisition of new businesses that result in operating
losses or that do not perform as anticipated, resulting in unanticipated losses,
the possible fluctuation and volatility of the Company's operating results,
financial condition and stock price, inability of the Company to continue as a
going concern, losses incurred in litigating and settling cases, adverse
publicity and news coverage, inability to carry out marketing and sales plans,
loss or retirement of key executives, changes in interest rates, inflationary
factors and other specific risks that may be alluded to in this Quarterly Report
or in other reports issued by the Company. In addition, the business and
operations of the Company are subject to substantial risks that increase the
uncertainty inherent in the forward-looking statements. The inclusion of
forward-looking statements in this Quarterly Report should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. Forward-looking statements are based on
management's beliefs, expectations and projections on the date they are made.
The Company assumes no obligation to update forward-looking statements if
management's beliefs, expectations or projections or other circumstances should
change. Investors should not place undue reliance on forward-looking statements.
GENERAL OVERVIEW
POPstar Communications, Inc. (the "Company" or "POPstar") is a development stage
Internet Technology company in the process of developing Internet based
facsimile transmission technology. The Company is currently in the process of
field-testing its technology and intends to market its service to Internet
Service Providers ("ISPs") around the world. POPstar's technology will equip
ISPs with the ability to provide Internet based facsimile transmission services
to their end-users. POPstar's software is provided free of charge to ISPs in
return for a share of revenue generated from the use of its software.
The Company was originally incorporated under the laws of the State of Nevada on
June 19, 1995 as Cherokee Leather, Inc. Between 1995 to 1999, the Company was
inactive. The Company acquired all of the outstanding common stock of POPstar
Global Communications Inc., a British Virgin Island Company ("POPstar-BVI") on
11
<PAGE>
July 20, 1999. In conjunction with the acquisition, the Company adopted the
business plan of POPstar-BVI and changed its name to POPstar Communications,
Inc. POPstar is a provider of Internet-based facsimile transmission technology
which will allow ISPs in various parts of the world to cooperate in the
transport and delivery of documents, using the Internet instead of conventional
long distance telephone networks ("LD"). POPstar's technology will allow ISPs to
offer to their end-users, the ability to transmit and receive documents from a
personal computer to or from any conventional facsimile ("Fax") machine located
throughout the world using the Internet as opposed to LD networks. Management
believes that the Company's technology will offer end-users several significant
advantages over conventional Fax machine and computer Fax modem transmission of
Faxes over LD networks, in that POPstar's technology allows end-users to
transmit Faxes through the use of a simple browser interface (such as Microsoft
Explorer or Netscape Navigator) without the need or costs for conventional
telephone lines or additional hardware. The Company believes that these features
will offer competitive advantages for businesses which use personal computers
connected to the Internet via local area networks ("LANs"), as well as the
growing number of small office /home office users connected to the Internet via
cable or digital subscriber line access (known as "Broadband" connections) and
for business travelers desiring to transmit Fax documents while traveling
throughout the world.
PLAN OF OPERATION
The Company is implementing the market launch of the POPstar Global Partnership
Program. The Company is introducing services beginning with fax over the
Internet, into the North American, Asian Pacific and Western European markets
initially. Over the past year, the Company has focused primarily on services
dealing specifically with Fax-over-Internet Protocol ("FoIP"). The Company has
tested the product to ensure that it is user-friendly and that it meets the
customer's needs, i.e. what an ISP's needs for their customer base. Due to the
Enroute software, we can offer prices that, in most cases, are less than or
equal to our competitors. The field-testing we have completed has given us
invaluable information that has been used to improve the next generation of the
Enroute software.
As previously reported, throughout the fiscal period ended December 31, 1999,
the Company focused its efforts on the development of its Enroute Version 2.3
software product. The development of the Company's Enroute Version 2.3 software
product was completed at the end of January 2000. The Enroute Version 2.3
product takes advantage of POPstar's distributed fax server technology to
deliver fax traffic across the public Internet to users around the globe. The
server runs on Solaris UNIX platform; the clients are Web-based; and the file
conversion utilities that convert documents to image (TIFF) format runs on NT
operating systems. The Enroute Version 2.3 product development supports both
single and double byte characters, making it suitable for use also in the Asian
language markets. Other Enroute Version 2.3 developments provide secure
compatibility with the IP Open Settlement Protocol standards. The Open
Settlement Protocol allows for call clearing and settlement between independent
partners.
We delayed the commercial launch of Enroute Version 2.3 which was originally
scheduled for March to July 1, 2000. The Company has earned no revenue from its
Enroute Version 2.3 software. The delay was due to technical reasons and, in
particular, the integration between TransNexus and the Mind billing system.
These problems have now been resolved. As of May 1, 2000, POPstar is connected
to the TransNexus commercial site and this site is able to generate call records
for each of the POPstar enrolled sites. In turn, we have completed the
development and integration with the Mind and Optigold billing systems and
TransNexus call records are being converted into invoices.
In April, we also completed development to allow for the automatic sign in and
registration process of end users at sites equipped with either Mind or Optigold
billing systems. End users can access the POPstar partner websites and register
for either free demo service or pay-for-use service. Mind billing systems
support both credit and prepaid debit card services. Also, we completed a data
migration solution to customize call records to match the needs of partners with
billing systems other than Mind or Optigold. Turnkey solutions are now offered
to all partiesPOPstar can now offer commercial services.
Management believes that the current business plan is now being aggressively
implemented under the fax services banner. However, looking ahead, the focus
must shift from fax to unified messaging and integrated voice services. The new
plan along with the results and performance of the fax introduction will be
needed to promote share value and to
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support new rounds of financing that may be necessary if revenues do not support
operations or have yet to be realized.
Management anticipates that research and development expenditure for the fiscal
year ending December 31, 2000 will be approximately $1,000,000, of which
$423,176 was incurred during the six-month period ended June 30, 2000.
The current research and development focus will be as follows:
- Version 2.4 of Enroute in the short term.
- Version 3.0 of Enroute in the long term.
The Enroute Version 2.4 development will focus on needed enhancements to Version
2.3, which will include the development of a new gatekeeper to replace the least
cost routing daemon used in Version 2.3, the implementation of a secure socket
("SSL") program throughout the server to provide security features, a change in
user authorization procedures, a real-time call record reporting gateway to
established Internet billing systems and a secure e-mail to fax service.
Management had anticipated that the Enroute Version 2.4 product would be
released before the end of the second quarter of 2000, adding e-commerce
functionality to the Company's product.
The development continues on Version 2.4 and its release originally scheduled
for the beginning of July has been delayed. The development team experienced a
technical difficulty in the implementation of security procedures and the secure
sockets layer ("SSL"). No new date has been set for the release of Version 2.4.
The development of the Enroute Version 3.0 Internet Protocol unified messaging
services ("UMS") product will continue throughout 2000. The first prototype of
Version 3.0 of Enroute is built and alpha testing is to start in the third
quarter of 2000. Field testing of the UMS beta version is scheduled to begin at
the end of October. Management expects the prototype to support the storage and
retrieval of voice, fax and e-mail messages in and from one mailbox, access to
and from the mailbox via the telephone network and the Internet. POPstar
products are Web-based so that all messages are accessible to authorized users
from any place in the world with Internet access.
The Version 3.0 Internet Protocol unified messaging product is being developed
to run across all platforms and operating systems. Management anticipates this
development to include a series of applications to run on UNIX, NT, Linux and
other operating systems and platforms without having to make operating system
specific changes to the applications. The development targets the carrier and
backbone markets: the product will be designed to scale to meet the needs of the
target carriers. The cross-platform development is supported by an in-house
developed library of universal messaging objects (UMO) written in C++ computing
language. The UMO is being developed to allow the Company to adapt quickly to
the rapid changes taking place in the rapidly growing Internet market. The UMO
is designed to allow all applications to be written just once for UNIX, NT and
Linux compatibility.
The first major release of the new series will be Version 3.1, which is
scheduled for the end of the fourth quarter in 2000. The Company anticipates
this release to provide commercial grade unified messaging services to PSTN and
Desktop users. The Version 3.1 product will take advantage of the outgoing
services provided through the Version 2.4 product.
On June 26, 2000 an agreement was entered into between POPstar and Exodus
Communications, Inc. As a major US backbone carrier, the Exodus Network is one
of the largest IP networks in the world, with a peak Internet exchange rate of
over 10.3 gigabits per second. Comprising the Exodus Network is a global
backbone, high performance network architecture and industry leading public and
private interconnect arrangements. The Company will co-locate POPstar's own
ucanfax gateway (which enables users who are not associated with any of
POPstar's partnering ISPs to utilize POPstar's services) at the Exodus site in
Seattle, WA. By co-locating, the Company increases network stability and
bandwidth availability. In addition, the Exodus site provides the secure 7 x 24
location needed for commercial traffic and the high-speed backbone to carry this
traffic.
Management expects the capital purchases scheduled for the fiscal year ending
December 31, 2000 to be approximately $1,000,000, split between hardware and
software at $750,000 and office furniture and equipment at $250,000. The
hardware is needed
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primarily to support POPstar's own global gateways in Los Angeles, Seattle and
Vancouver and secondarily to help seed the market in other countries.
Management expects the number of employees to grow over the course of the fiscal
period ending December 31, 2000. On June 30, 2000, the Company employed 25
people. Management anticipates that the number of employees will almost double
to 45 employees by year-end. We will staff global offices in the UK, Canada, US,
Hong Kong, China and Singapore. Management expects major growth in customer
sales and support services on a 7 days a week, 24 hours a day basis.
The breakdown of new hires is as follows:
Administration: We hired 1 new staff member in mid-May to assist the Corporate
Secretary and Treasurer in the handling of the Company's administrative
responsibilities.
Sales and Marketing: We hired 5 new sales staff at the beginning of June 2000 -
3 new employees in the Vancouver office, 1 new employee in Singapore and 1 new
employee in Shanghai. Management anticipates further additions over the ensuing
months.
On May 31, 2000, POPstar Communications Pte. Ltd. ("POPstar Singapore") was
incorporated in Singapore as a private company under the Companies Act, Cap. 50.
POPstar Singapore is a wholly owned subsidiary. On May 22, 2000, just prior to
POPstar Singapore's incorporation, the Company entered into a lease agreement
for office space.
On July 31, 2000, the Company, through its wholly owned subsidiary POPstar-BVI,
acquired from Belcarra Messaging Corp. an exclusive right to use and exploit
certain intellectual property relating to Internet messaging. Briefly, the
intellectual property includes:
o the IMAP mail server software, which is based on Carnegie Mellon
University's "Cyrus" IMAP server as modified by Belcarra , can be easily
implemented into a corresponding server having capacities exceeding 100,000
users using standard computer platforms;
o Mail Transfer Agent software technology ("EXIM" MTA as modified by Fireplug
Computers Inc.) providing scalability of messaging systems (carrying all
message types, including fax, voice and other unified messaging) over a
range of thousands of users to many millions of users and over thousands of
domains;
o Open LDAP, an LDAP directory tool, incorporated into the MTA software
above; and
o certain administrative software incorporating Open LDAP, and as developed
by Ted Powell.
There are a number of reasons why the Company made the decision to acquire the
intellectual property. It has always been POPstar's own plan that similar server
and mail transfer agent technology be developed. Management believes that the
acquisition of the intellectual property will reduce the estimated development
costs and elapsed time to market.
More importantly, the intellectual property is crucial to POPstar's ability to
offer Unified Messaging Services ("UMS") on an economical basis to its IP
Partners, including "carrier class" system users. Secondly, it gives POPstar
price and performance advantages in UMS that it could not attain using `brand
name' mail servers available from SUN Microsystems (SIMS) or from Software.com,
for example.
Liquidity
As at June 30, 2000, the Company's cash and short-term deposits amounted to
$6,193,269. During the six month period ended June 30, 2000, the Company raised
$7,486,508 from the issuance of capital stock, incurred an additional deficit of
$1,320,339 in developing its services and purchased $125,668 of capital assets.
The Company's cash position less known commitments and contingencies as of June
30, 2000 is expected to be adequate to fund the Company's on-going operations
during the year ending December 31, 2000. Accordingly, the Company does not
anticipate the need to raise additional funds during the next six months.
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If the Company does not begin to generate revenues soon, liquidity will be
reduced as amounts are expended for continuing research and development
expansion of sales and marketing activities and development of its
administrative functions. Additionally, the Company's liquidity will also be
reduced as amounts are used for purchases of capital assets. In addition, the
Company continues to incur operating losses and will continue to need additional
working capital to fund its operations, research and development, and marketing
efforts for the 2001 fiscal year. As a result, the Company will be required to
raise additional capital to finance its operations for the 2001 fiscal year and
beyond. The Company intends to raise such additional funding through the sale of
equity or convertible debt securities. We may not be able to raise additional
capital when needed. If we are able to raise capital, it may not be available on
terms commercially favorable to us. The sale of equity or convertible debt
securities may result in additional material dilution to the Company's
stockholders.
If the Company chooses to speed up its current growth by acquiring additional
unified messaging companies, then significant additional capital in addition to
the amounts detailed above will be required to meet these objectives. In that
case, the Company will be required to additional funding though the sale of
equity or convertible debt securities. We may not be able to raise sufficient
capital necessary for the continuation of our acquisition strategy when needed,
or on terms commercially favorable to us.
Capital Expenditures
On January 11, 1999, POPstar-BVI entered into the Licensing Agreement with TGI
under which POPstar-BVI is obliged to pay TGI, until the fourth quarter, 2002, a
portion of all net sales generated from the use of TGI's software. For the year
2000, POPstar-BVI is obliged to pay TGI 6% of net sales, or a minimum of
$600,000. For the year 2001, POPstar-BVI is obliged to pay TGI 4% of net sales
of a minimum of $500,000. For the year 2002, POPstar-BVI is obliged to pay TGI
2% of net sales or a minimum of $500,000. POPstar-BVI is not obliged to pay any
additional licensing fees following the end of the year 2002. The Agreement
provides that any amounts outstanding for more than 30 days shall be subject to
interest at the rate of 1% per month (or an aggregate of 12% per annum). At
present, the Company expects to make its minimum royalty payment of $600,000 to
TGI for the year 2000.
In addition to the Licensing Agreement with TGI, POPstar-BVI also entered into a
Services Agreement on January 11, 1999 with TGI under which TGI has agreed to
provide POPstar-BVI with technical assistance, software development, marketing,
management, and other services related to the enhancements and use of TGI's
Internet Fax technology. All fees for services provided by TGI to POPstar-BVI
under the Services Agreement are to be billed to POPstar-BVI on the basis of
TGI's direct and indirect costs of the services provided plus 15%.
As described in "Plan of Operation" section of the quarterly report for the
period ended March 31, 2000, the Company expects to incur approximately
$1,000,000 of capital expenditures in Year 2000 in connection with the expansion
of its business.
Year 2000 Issue Disclosure
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information-using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 Issue that may affect the Company, including
those related to customers, suppliers, contractors or other third parties, have
been fully resolved.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business. The
Company is not currently
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involved in any such litigation which it believes could have a materially
adverse effect on its financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 2000, POPstar sold the following
unregistered securities:
On April 19, 2000, the Company received subscriptions and issued 90,000 shares
of common stock of the Company at a price of $0.01 per share as a result of the
exercise of options under the Company's stock option plan by employees,
contractors and consultants of the Company. The employees, contractors and
consultants paid an aggregate exercise price of $900.
On June 30, 2000, the Company received subscriptions and issued 27,500 shares of
common stock of the Company at a price of $0.01 per share as a result of the
exercise of options under the Company's stock option plan by employees,
contractors and consultants of the Company. The employees, contractors and
consultants paid an aggregate exercise price of $275.
On June 30, 2000, the Company received subscriptions and issued 27,000 shares of
common stock of the Company at a price of $1.00 per share as a result of the
exercise of options under the Company's stock option plan by an employee of the
Company. The employee paid an aggregate exercise price of $27,000.
The Company relied on the exemption from registration provided by Rule 701 under
the Securities Act of 1933 in connection with the issuance of underlying shares.
The Company is able to rely on the exemption provided by Rule 701 in connection
with the issuance of the underlying shares as it initially granted the options
to employees, directors, contractors and consultants pursuant to Rule 701, prior
to registering its common shares under Section 12(g) of the Securities Exchange
Act of 1934.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on
June 19, 2000 at 10:30 a.m., local time, at Resort Semiahmoo, Victoria Room,
9565 Semiahmoo Parkway, Blaine, WA 98230-9326. The Annual Meeting was held for
the purpose of (a) electing four members of the Board of Directors to serve for
the ensuing year and until their successors are elected, (b) to consider and
vote on the Company's 1999 Stock Option Plan; and (c) to consider and vote on an
amendment to the Company's 1999 Stock Option Plan to increase the number of
shares of Common Stock reserved for issuance from 757,500 to 2,000,000 shares;
and (e) transacting such other business as may properly come before the Annual
Meeting.
The corporation received proxies and ballots for shareholders holding 18,413,333
shares (a majority of the shares represented at the meeting) voting in respect
of the three proposals. The three matters below were voted upon and approved:
Proposal No. 1 - Election of Directors:
The following persons were duly elected to the Board by the stockholders for a
one year term and until their successors are elected and qualified:
Nomination Votes For Votes Withheld
---------- --------- --------------
Thompson Chu 18,413,333 Zero
Dr. William Lo 18,383,333 30,000
John McDermott 18,408,333 5,000
Rickie Tang 18,378,333 35,000
After the results were read, the Corporate Secretary mentioned that certain
shareholders had withheld their votes for a particular nominee because they were
not familiar with the nominee. It was not to be viewed as a vote against those
nominees.
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Proposal No. 2 - Approval of the Corporation's 1999 Stock Option Plan:
Votes For Votes Withheld
--------- --------------
18,413,333 Zero
Proposal No. 3 - Approval of an Increase in the Shares Authorized for Issuance
under the 1999 Stock Plan, as Amended:
Votes For Votes Withheld
--------- --------------
Amended 1999 Stock Option Plan 18,413,333 Zero
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
Number Description
------- -----------
10.1 Lease agreement dated May 22, 2000 between the registrant
and Pacific Focus Pte. Ltd.
10.2 Lease agreement dated July 1, 2000 between the registrant
and Easewell Management Limited.
10.3 Lease agreement dated July 1, 2000 between the registrant
and Thompson Chu.
10.4 Master Services Agreement dated July 7, 2000 between the
registrant and Exodus Communications, Inc.
10.5 Purchase Agreement of Intellectual Property dated July 31,
2000 between the registrant and Belcarra Messaging Corp.
27.1 Financial Data Schedule
(B) REPORTS ON FROM 8-K
The Company did not file any Reports on Form 8-K during the three months
ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POPSTAR COMMUNICATIONS, INC.
/s/ John McDermott
--------------------------------------
John McDermott
President
Dated: August 14, 2000
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Lease agreement dated May 22, 2000 between the registrant
and Pacific Focus Pte. Ltd.
10.2 Lease agreement dated July 1, 2000 between the registrant
and Easewell Management Limited.
10.3 Lease agreement dated July 1, 2000 between the registrant
and Mr. Thompson Chu.
10.4 Master Services Agreement dated July 7, 2000 between the
registrant and Exodus Communications, Inc.
10.5 Purchase Agreement for Intellectual Property dated July 31,
2000 between the registrant and Belcarra Messaging Corp.
27.1 Financial Data Schedule
