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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 31, 2000
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission File Number: 333-86031
PHON-NET.COM, INC.
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(Exact name of Small Business Issuer as specified in its Charter)
FLORIDA 98-0198225
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
750 WEST PENDER STREET, SUITE 600, VANCOUVER, BRITISH COLUMBIA V6C 2T7
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(Address of principal executive offices)
(604) 437-3787
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(Issuer's telephone number)
N/A
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(Former Name, former address and former fiscal year,
if changed since last Report.)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 43,381,441 shares of Common
Stock as of December 1, 2000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PHON-NET.COM, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
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PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000
(Stated in U.S. Dollars)
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PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
2000 2000
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<S> <C> <C>
ASSETS
Current
Cash $ 7,800 $ 154,421
Accounts receivable 29,051 23,927
Prepaid expenses 14,471 2,133
Due from related parties 94,370 178,490
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145,692 358,971
Capital Assets 80,345 89,688
Intangibles 550,116 635,687
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$ 776,153 $ 1,084,346
============ ============
LIABILITIES
Current
Accounts payable and accrued liabilities $ 110,525 $ 143,787
Due to related parties 897 10,691
Notes payable 35,195 36,035
Deferred revenue 906 --
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147,523 190,513
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STOCKHOLDERS' EQUITY
Capital Stock
Authorized:
80,000,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.01
Issued and outstanding:
43,231,441 common shares at October 31, 2000
43,153,941 common shares at July 31, 2000 1,143,895 1,143,817
Additional paid in capital 11,393,569 11,330,697
Deficit (11,895,530) (11,566,154)
Other (13,304) (14,527)
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628,630 893,833
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$ 776,153 $ 1,084,346
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</TABLE>
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PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
INCEPTION
THREE MONTHS ENDED MARCH 19,
OCTOBER 31, 1996 TO
------------------------------- OCTOBER 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ 977 $ 51 $ 449,362
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Expenses
Advertising and promotion 35,253 13,601 724,060
Amortization of intangibles 85,571 85,570 519,121
Amortization of capital assets 18,697 15,799 251,197
Amortization of convertible note discount -- -- 787,382
Bank charges and interest 1,247 3,509 59,370
Contract cancellation -- -- 762,000
Loss on disposal of capital assets 774 -- 774
Office and sundry 15,312 10,915 215,757
Professional fees 28,059 55,890 325,820
Rent and utilities 5,360 7,588 113,745
Software development 5,400 -- 86,711
Software support -- 33,000 132,000
Telephone 13,370 4,692 293,545
Transfer agent and filing fees 5,609 3,000 30,967
Travel 7,396 11,783 191,760
Salaries and benefits 110,025 70,097 7,581,389
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332,073 315,444 12,075,598
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Loss Before The Following 331,096 315,393 11,626,236
Forgiveness of debt -- -- (230,961)
Write-down of investments -- -- 99,028
Interest income (1,720) -- (1,720)
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Net Loss For The Period 329,376 315,393 $ 11,492,583
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Accumulated Deficit, Beginning Of Period 11,566,154 7,025,312
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Accumulated Deficit, End Of Period $ 11,895,530 $ 7,340,705
============ ============
Loss Per Share $ (0.01) $ (0.01)
============ ============
Weighted Average Number Of Shares Outstanding 43,218,524 36,027,430
============ ============
Comprehensive Income
Net loss for the period $ (329,376) $ (315,393)
Foreign currency translation adjustment 1,223 (7,481)
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Total Comprehensive Income (Loss) $ (328,153) $ (322,874)
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</TABLE>
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PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
INCEPTION
THREE MONTHS ENDED MARCH 19,
OCTOBER 31, 1996 TO
------------------------------- OCTOBER 31,
2000 1999 2000
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<S> <C> <C> <C>
Cash Flow From Operating Activities
Loss for the period $ (329,376) $ (315,393) $(11,642,250)
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Adjustments To Reconcile Loss To Net Cash Used By Operating
Activities
Stock issued for other than cash 7,950 -- 7,505,029
Amortization 104,268 134,369 1,679,867
Loss on disposal of capital assets 774 -- 774
Write-down of investments -- -- 99,028
Forgiveness of debt -- -- (230,961)
Change in accounts receivable (5,124) (1,490) (29,051)
Change in due from related parties 84,120 -- (94,370)
Change in prepaid expenses (12,338) (1,831) (14,471)
Change in accounts payable and accrued liabilities (33,262) 11,117 110,525
Change in due to related parties (9,794) (7,513) 897
Change in deferred revenue 906 -- 906
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Total Adjustments 137,500 134,652 9,028,173
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Net Cash Used In Operating Activities (191,876) (180,741) (2,614,077)
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Cash Flow From Investing Activities
Capital assets (11,237) (6,993) (333,427)
Intangibles -- -- (81,404)
Excess of purchase price over net assets of subsidiaries
acquired -- -- (253,278)
Investments -- -- (160,068)
Proceeds on disposal of capital assets 1,109 -- 1,109
Proceeds on sale of investments -- -- 61,040
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Net Cash Used In Investing Activities (10,128) (6,993) (766,028)
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Cash Flow From Financing Activities
Common stock issued 55,000 -- 1,797,803
Convertible notes -- -- 1,337,250
Notes payable (840) 966 266,156
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Net Cash From Financing Activities 54,160 966 3,401,209
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Effect Of Exchange Rate Changes On Cash 1,223 (7,481) (13,304)
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Net Increase (Decrease) In Cash (146,621) (194,249) 7,800
Cash, Beginning Of Period 154,421 203,161 --
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Cash, End Of Period $ 7,800 $ 8,912 $ 7,800
============ ============ ============
</TABLE>
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PHON-NET.COM, INC.
(A Development Stage Company)
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000
(Stated In U.S. Dollars)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements as of October 31, 2000
included herein have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with United States generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
It is suggested that these consolidated financial statements be read in
conjunction with the July 31, 2000 audited consolidated financial
statements and notes thereto.
2. STOCK OPTION PLAN
(i) During the quarter ended October 31, 2000, the Company increased the
number of shares reserved for issuance under its Stock Option Plan
from 3,000,000 shares to 4,000,000 shares.
(ii) During the quarter ended October 31, 2000, the Company's sole director
was granted an incentive stock option under the Company's Stock Option
Plan to purchase up to 1,000,000 shares of its Company's common stocks
at a price of $0.40 per share expiring October 23, 2003.
Had the Company accounted for its options granted in its stock-based
compensation plan, based on the fair value of awards at grant date, in
a manner consistent with the methodology of SFAS 123, the Company's
net loss and loss per common share for the three months ended October
31, 2000 would have increased by $332,738 and $0.01 respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Section and elsewhere in this
report regarding matters that are not historical facts are forward-looking
statements. Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. All statements which address
operating performance, events or developments that management expects or
anticipates to incur in the future, including statements relating to sales and
earnings growth or statements expressing general optimism about future operating
results, are forward-looking statements. The forward-looking statements are
based on management's current views and assumptions regarding future events and
operating performance. Many factors could cause actual results to differ
materially from estimates contained in management's forward-looking statements.
The differences may be caused by a variety of factors, including, but not
limited to, adverse economic conditions, competitive pressures, inadequate
capital, unexpected costs, lower revenues, net income and forecasts, the
possibility of fluctuation and volatility of the Company's operating results and
financial condition, inability to carry out marketing and sales plans and loss
of key executives, among other things.
RESULTS OF OPERATIONS
Three Months Ended October 31, 2000 Compared to Three Months Ended October 31,
1999
For the three months ended October 31, 2000, we generated revenues of
$977, a 1900% increase from revenues of $51 for the corresponding three month
period of 1999. This increase was primarily caused by fluctuations due to
inconsistent sales while we develop more effective and efficient marketing
capabilities.
For the 2000 quarter, we incurred a net loss of $(329,376) or
approximately $(.01) per share, compared to a net loss of $(315,393) or
approximately $(.01) per share for the corresponding quarter in 1999. Our net
loss was primarily attributable to reduced research and development expenses
following completion of development of Direct Connect and our search engine, as
well as efforts to curtail operating expenses. Our primary focus has shifted
from product development to sales and marketing. As a result, we may continue
to experience a reduction in research and development expenses in the near term,
however, costs attributable to marketing activities will likely increase.
Expenses of $332,073 for the quarter ended October 31, 2000 reflect an
increase of 5% over expenses of $315,444 incurred during the quarter ended
October 31, 1999. This increase in expenses results mainly from advertising and
promotional expenditures.
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Due from related parties at October 31, 2000 consists of (i) $87,870
due from our President, Chief Executive Officer and sole director, repayable at
$13,200 per month, including interest at the rate of 8% per annum, with any
unpaid balance payable in full on March 31, 2001; and (ii) $6,500 due from an
employee, repayable January 31, 2001, together with interest at 8% per annum.
LIQUIDITY, CAPITAL RESOURCES AND PLAN OF OPERATIONS
As of July 31, 2000 and 1999, our auditors indicated in their audit
report that our net loss and working capital deficit raised substantial doubt
that we would be able to continue as a going concern.
Our operations through fiscal 1999 were related to the interactive real
estate and professional listing service conceived by our subsidiary, and not to
our current products and services. Our historic business and results of
operations should not be viewed as indicative of future operations. While little
or no revenues are currently being generated from contracts relating to our
interactive real estate and professional listing service, the viability of the
service has been established and we are not discontinuing its operation.
However, we are currently focusing our marketing efforts on the launch of Direct
Connect, and we may not devote substantial resources to our listing service
until after the launch of Direct Connect is complete.
Our business model includes our establishing marketing agreements and
strategic alliances with companies who have access to large databases of
business directories. We believe that this strategy will enable us to reach our
target customer-web site operators and advertisers. In so doing, we will use the
database resources of a third party, without the time and expense of developing
and maintaining that resource. In furtherance of implementing our business
model, we entered into distribution agreements with various third parties
designed to generate revenues through third-party marketing of our products.
However, during the fiscal year ended July 31, 2000,, we terminated most of our
licensing and distribution agreements due to the inability of the third parties
to successfully market our products. Our marketing licenses for Australia and
New Zealand have not been terminated and we are discussing license and
distribution arrangements with additional parties to replace the agreements that
have been terminated. In order to be successful, we will have to develop
marketing arrangements that enable us to successfully distribute Direct Connect,
through a combination of third party marketing and the efforts of our in-house
direct sales force.
To date, we have funded our cash requirements from limited revenues
from operations and from the sale of shares of our common stock. As of October
31, 2000, we had cash reserves of approximately $7,800, and a working capital
deficit of $1,831. While we anticipated that revenues from Direct Connect
license fees would commence in mid-2000, we have not yet generated Direct
Connect license fee revenues, and termination of
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several of our license and distribution agreements will likely further delay our
ability to generate meaningful revenues. We will likely be required to borrow
additional funds and/or sell additional debt or equity securities in order to
fund our operating expenses pending our generation of revenues from operations.
It is also possible that our proprietary Direct Connect software will
be of sufficient value to a third party to warrant an offer to acquire it. We
will consider all proposals designed to enhance shareholder values. Until such
time as we generate meaningful revenues, we will require additional funds in
order to fund our operations, including our payment of rent at our Vancouver
offices, and the salaries of our executive officers. If we are unable to
generate sufficient revenues from operations, we will be required continue sales
of our securities, and we may be required to borrow funds, in order to sustain
our operations. We will continue to seek out strategic partners whose access to
our target customer base can increase our sales and profitability. We are
engaged in active discussions with several lenders to secure interim funding;
however, these discussions have not yet resulted in our receipt of financing. We
may not be able to secure financing on acceptable terms.
YEAR 2000 ISSUE
The year 2000 issue relates to whether computer systems will properly
recognize and process information relating to dates in and after the year 2000.
These systems could fail or produce erroneous results if they cannot process
dates beyond the year 1999 and are not corrected. We have reviewed all software
and hardware used internally by us and have determined that they are year 2000
compliant and as of the date of this Report, we have not experienced any
disruptions of or failures in our day-to-day operations as a result of the
transition to calendar year 2000. Moreover, we were not required to expend
material sums in order to assure that our systems are year 2000 compliant. We
have also confirmed that the computer systems of third parties with whom we have
material relationships were not materially impacted by the year 2000 issue.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-B
The following exhibits are filed as part of this report:
EXHIBIT NUMBER DESCRIPTION
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27.1 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the period covered by
this Report.
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SIGNATURE
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 as duly authorized officers of the Registrant.
Phon-Net.com, Inc.
By: /s/ BRIAN COLLINS
----------------------------------------
Brian Collins, President and Director
(Principal Executive, Financial and
Accounting Officer)
DATED: December 15, 2000
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