<PAGE> 1
UNITED STATES
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
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 000-30701
OZ.COM
(Exact name of registrant as specified in its charter)
California 95-4560875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Snorrabraut 54
IS-105 Reykjavik, Iceland
(Address of principal executive offices, including zip code)
011 (354) 535-0000
(Registrant's telephone number, including area code)
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 [_] No [X]
As of June 30, 2000, there were 70,708,448 shares of the registrant's
Common Stock outstanding.
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INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 1999 and 2000 4
Consolidated Statements of Cash Flows (unaudited) for the
three months and six months ended June 30, 1999 and 2000 5
Consolidated Statements of Comprehensive Income (unaudited)
for the six months ended June 30, 1999 and 2000 6
Notes to Consolidated Financial Statements (unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
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
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OZ.COM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 13,603,592 $ 9,122,538
Trade accounts receivable .................................................. 22,456 17,340
Trade accounts receivable from shareholder ................................. 1,391,816 1,484,317
Prepaid expenses and other current assets .................................. 406,232 503,770
------------ ------------
Total current assets ................................................. 15,424,096 11,127,965
Property and equipment, net .................................................... 2,079,531 3,066,957
Other assets ................................................................... 130,510 4,280
------------ ------------
Total assets ......................................................... $ 17,634,137 $ 14,199,202
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable ..................................................... $ 188,305 $ 450,858
Accrued liabilities ........................................................ 505,133 1,262,167
Current portion of deferred revenue ........................................ 171,920 171,920
Current portion of notes payable ........................................... 24,069 23,763
Current portion of capital lease obligations ............................... 3,384 --
------------ ------------
Total current liabilities ............................................ 892,811 1,908,708
Notes payable .................................................................. 505,445 488,950
Deferred revenue ............................................................... 171,920 85,960
------------ ------------
Total liabilities .................................................... $ 1,570,176 $ 2,483,618
------------ ------------
Redeemable preferred stock, $0.01 par value; 10,052,431 shares issued and
outstanding (liquidation value $10,052,431) .................................. 13,068,160 13,068,160
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $0.01 par value:
5,685,218 and 5,473,533 shares issued and
outstanding, respectively, (liquidation value $5,473,533) ............... 5,384,976 5,109,785
Common stock, $0.01 par value:
275,000,000 shares authorized:
68,359,078 and 70,708,448 shares
issued and outstanding, respectively .................................... 683,591 707,084
Additional paid in capital ................................................. 9,880,238 16,685,536
Notes receivable from shareholders ............................................. (200,200) (365,400)
Deferred compensation .......................................................... (376,668) (5,957,097)
Accumulated deficit including other comprehensive
income of $56,886 and $196,273, respectively ................................ (12,376,136) (17,532,484)
------------ ------------
Total shareholders' equity ........................................... 2,995,801 (1,352,576)
------------ ------------
Total liabilities and shareholders' equity .......................... $ 17,634,137 $ 14,199,202
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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OZ.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE ............................................... $ 1,454,282 $ 1,560,931 $ 2,360,310 $ 3,306,833
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of sales ..................................... 966,776 1,329,173 1,712,924 2,302,540
Sales and marketing ............................... 161,499 1,400,800 422,650 2,046,957
General and administrative ........................ 887,736 1,845,302 1,590,964 3,042,845
Research and development .......................... 112,707 547,129 192,304 778,988
------------ ------------ ------------ ------------
Total operating expenses .................... 2,128,718 5,122,404 3,918,842 8,171,330
------------ ------------ ------------ ------------
Operating loss ............................. (674,436) (3,561,473) (1,558,532) (4,864,497)
------------ ------------ ------------ ------------
Interest income ....................................... 21,248 102,292 24,862 216,147
Interest expense ...................................... 76,496 (30,081) 57,114 (46,122)
Other income (expense) net ............................ (46,228) (512,213) (82,604) (601,263)
------------ ------------ ------------ ------------
Loss before provision for income taxes ..... (622,920) (4,001,475) (1,559,160) (5,295,735)
Income taxes .......................................... -- -- -- --
------------ ------------ ------------ ------------
Net loss ................................... $ (622,920) $ (4,001,475) $ (1,559,160) $ (5,295,735)
============ ============ ============ ============
Loss per share:
Basic ............................................. $ (0.01) $ (0.06) $ (0.02) $ (0.08)
============ ============ ============ ============
Diluted ........................................... $ (0.01) $ (0.06) $ (0.02) $ (0.08)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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OZ.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (622,920) $ (4,001,475) $ (1,559,160) $ (5,295,735)
Adjustments to reconcile net loss to net
cash provided (used) in operating activities:
Depreciation ....................................... 107,387 126,295 166,115 253,998
Noncash charges (credits), net ..................... 79,316 -- 79,316 --
Amortization of deferred compensation .............. 13,756 550,775 26,506 581,071
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable ... (872,320) 204,063 (521,503) (87,384)
(Increase) decrease in prepaid expenses and
other assets ................................... (33,635) (14,818) (55,946) 28,692
Increase (decrease) in trade accounts payable ...... (107,601) (35,152) (213,454) 262,553
Increase (decrease) in accrued liabilities ......... 212,948 391,402 222,453 757,036
Increase (decrease) in deferred revenue ............ (43,458) (42,980) 429,322 (85,960)
------------ ------------ ------------ ------------
Net cash used in operating activities ............. (1,266,527) (2,821,890) (1,426,351) (3,585,729)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment .................... (228,069) (840,100) (425,803) (1,241,426)
------------ ------------ ------------ ------------
Net cash used in investing activities .............. (228,069) (840,100) (425,803) (1,241,426)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayment of bank overdraft ........................... (32,085) -- (383,304) --
Issuance of Series A preferred stock .................. 6,200,000 -- 6,200,000 --
Issuance of common stock .............................. 1,710,000 -- 3,510,000 --
Exercise of employee stock options .................... 7,800 253,200 124,400 414,900
Issuance of notes payable and convertible bonds ....... -- (188,000) -- (188,000)
Payments on notes payable ............................. (6,480) (12,041) (29,589) (16,801)
Payment of capital lease obligation ................... (3,886) -- (7,691) (3,384)
------------ ------------ ------------ ------------
Net cash provided by financing activities .......... 7,875,349 53,159 9,413,816 206,715
------------ ------------ ------------ ------------
Effect of currency exchange rates on cash ................ 57,853 108,464 135,684 139,386
------------ ------------ ------------ ------------
Net increase (decrease) in cash ....................... 6,438,606 (3,500,367) 7,697,346 (4,481,054)
Cash and cash equivalents at beginning of period ......... 1,627,015 12,622,905 368,275 13,603,592
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ............... $ 8,065,621 $ 9,122,538 $ 8,065,621 $ 9,122,538
============ ============ ============ ============
Supplemental cash flow information:
Cash paid for interest ................................ $ 1,132 $ 6,904 $ 16,835 $ 13,067
============ ============ ============ ============
Supplemental schedule of non-cash investing and
financing activities:
Conversion of bonds to common stock ................... $ 1,600,000 $ -- $ 2,500,000 $ --
============ ============ ============ ============
Conversion of common stock to preferred stock ......... $ -- $ -- $ 372,402 $ --
============ ============ ============ ============
Conversion of preferred stock to common stock ......... $ 313,810 62,790 $ -- $ 275,191
============ ============ ============ ============
Common stock issued for employee compensation ........ $ 79,229 - $ 79,229 $ --
============ ============ ============ ============
Common stock issued for notes ......................... $ -- $ -- $ -- $ 188,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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OZ.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ -----------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss ..................................... $ (622,920) $ (4,001,475) $(1,559,160) $ (5,295,735)
Other comprehensive income:
Foreign currency translation adjustment ... 57,853 108,465 135,684 139,387
------------- ------------ ----------- ------------
Comprehensive loss ........................... $ (565,067) $ (3,893,010) $(1,423,476) $ (5,156,348)
============= ============ =========== ============
</TABLE>
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OZ.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS:
The accompanying financial statements are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations.
Accordingly, these interim financial statements and notes should be read in
connection with the Company's Registration Statement on Form 10-SB. The results
of operations for the interim periods shown in this report are not necessarily
indicative of results to be expected for other interim periods or for the full
fiscal year. In the opinion of the management, the information contained herein
reflects all adjustments necessary for a fair statement of the interim results
of operations.
The year-end balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
The accompanying consolidated financial statements include accounts of the
Company and its subsidiaries.
2. LOSS PER SHARE
Basic loss per share is computed based upon the weighted average number of
common shares outstanding. Diluted loss per share is computed based upon the
weighted average number of common shares outstanding and any potentially
dilutive securities. Potentially dilutive securities are not included in the
diluted earnings per share calculations if their inclusion would be
anti-dilutive to the basic loss per share calculations. Potentially dilutive
securities not included in the diluted loss per share calculation and
outstanding during the three months and six months ended June 30, 1999, included
preferred shares, convertible bonds, stock options, and stock warrants.
Potentially dilutive securities not included in the diluted loss per share
calculation and outstanding during the three months and six months ended June
30, 200, included preferred shares, stock options, and stock warrants.
The components of basic and diluted loss per share are as follows:
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 2000
------------ -----------
Net loss $(1,559,160) $(5,295,735)
=========== ===========
Weighted average outstanding shares
of common stock 63,983,748 69,694,564
Loss per share:
Basic $ (0.02) $ (0.08)
=========== ===========
Diluted $ (0.02) $ (0.08)
=========== ===========
THREE MONTHS ENDED JUNE 30,
------------------------------
1999 2000
------------ -----------
Net loss $ (622,920) $(4,001,475)
Weighted average outstanding shares
of common stock 65,431,578 70,527,170
Loss per share:
Basic (0.01) (0.06)
Diluted (0.01) (0.06)
7
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3. CONVERTIBLE BONDS
During the six months ended June 30, 1999, holders of $2,500,000 of convertible
bonds exercised their option to convert their bonds into the Company's common
stock. In connection with the conversion the Company issued 3,846,150 shares of
common stock. As the conversion preceded the interest payment date all accrued
interest was reversed in the statement of operations for the six months ended
June 30, 1999, which included $100,000 of interest expense recognized in the
statement of operations for the year ended December 31, 1998.
4. CONVERSION OF SERIES A PREFERRED STOCK INTO COMMON STOCK
During the six months ended June, 2000, holders of 211,685 shares of Series A
preferred stock elected to convert their shares into shares of common stock. In
accordance with the terms of conversion, the shares of preferred stock were
converted into 423,370 shares of common stock.
8
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5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standard (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133, as amended by SFAS No. 137, establishes accounting and reporting standards
for derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because the Company does not
currently hold any derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133, as amended,
will not have a material impact on its consolidated financial position, results
of operations, or cash flows. The Company will be required to adopt SFAS No. 133
in 2001.
6. GEOGRAPHIC, SEGMENT, AND SIGNIFICANT CUSTOMER INFORMATION
During 2000, the Company adopted the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance.
The Company's chief operating decision maker is considered to be the Company's
Chief Executive Officer (CEO). The CEO reviews financial information presented
on a consolidated basis accompanied by disaggregated information about revenues
by geographic region and by product for purposes of making operating decisions
and assessing financial performance. Therefore, the Company operates in a single
operating segment: the design and development of computer software and services.
The Company is positioning itself to add a second operating segment, namely the
delivery of Internet-based services to wireless network operators and Internet
businesses and related services. No revenues from this second operating segment
has been recognized to date. The disaggregated information reviewed on a product
basis by the CEO is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
Revenues:
Development $ 910,824 $1,517,951 $1,789,632 $3,220,873
License 543,458 42,980 570,678 85,960
---------- ---------- ---------- ----------
Total revenues $1,454,282 $1,560,931 $2,360,310 $3,306,833
========== ========== ========== ==========
Revenues attributable to geographic regions are based upon the origination of
the sales. However, all development services related to revenues for the periods
reported below for United States were performed in Europe. Information regarding
the Company's revenues in different geographic regions is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
Revenues:
Europe $ 211,258 $ 129,320 $ 351,938 $ 230,124
United States 1,243,024 1,431,611 2,008,372 3,076,709
---------- ---------- ---------- ----------
Total revenues $1,454,282 $1,560,931 $2,360,310 $3,306,833
========== ========== ========== ==========
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Ericsson was our only significant customer during the three- and
six-month periods ended June 30, 1999 and June 30, 2000. Revenues attributable
to Ericsson comprised 89.5% and 100% of total revenues for the three-month
periods ended June 30, 1999 and June 30, 2000, respectively. Revenues
attributable to Ericsson comprised 82.3% and 99% of total revenues for the
six-month periods ended June 30, 1999 and June 30, 2000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Form 10-QSB contain
forward-looking statements that involve risks and uncertainties. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
"may," "will," "should," "could," "potential," "continues," "predicts" and
similar expressions or the negative of such expressions identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to numerous assumptions, risks and uncertainties and
a number of factors that could cause actual results to differ materially from
those expressed, forecasted or implied in such forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in our registration statement on Form 10-SB and those appearing
elsewhere in this Form 10-QSB. You are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements.
Overview
Since we were incorporated in December 1995, we have devoted
substantially all of our resources to developing our multi-user communications
platform, first in the context of three-dimensional (""3D") online environments,
and since 1997, primarily in the context of wireless telecommunications
networks. In 1998, we began working with Ericsson Telecom AB and/or its
affiliates ("Ericsson") to develop a wireless Internet communications platform
now called "iPulse(TM)" based on this technology. We first recognized
development revenues in November 1998, and generated development revenues of
approximately $3.9 million in fiscal 1999 and $3.2 million for the six months
ended June 30, 2000. We first recognized license revenues in February, 1999, and
generated license revenues of approximately $0.7 million in fiscal 1999 and
$0.09 million for the six months ended June 30, 2000.
We incurred net losses of approximately $5.3 million for the six months
ended June 30, 2000 and $4.8 million, $1.8 million and $2.2 million for the
years ended December 31, 1997, 1998 and 1999, respectively. As of June 30, 2000,
we had an accumulated deficit of approximately $17.5 million. We are currently
operating at a deficit and expect to continue operating at a deficit and to
increase the deficit over at least the next twelve months as we incur increasing
levels of expense to support growth. We believe that our historical operating
results are not indicative of future performance for the following reasons,
among others:
o Our historical revenues have come from development contracts for 3D
environments in earlier years and more recently for the development
of iPulse(TM) under an agreement with Ericsson, but this will change
as we begin licensing iPulse(TM) and selling mPresence(TM) services
directly to customers; and
o We have recently emerged from the development stage and anticipate
substantial increases in the number and size of customer orders and
revenues from operations.
Although we expect substantial growth in both revenues and expenses, we
anticipate that increases in expenses will occur more rapidly than corresponding
increases in revenues. Also, while we are committed, at least in the short term,
to substantial increases in expenses, we cannot be certain that revenues will
increase correspondingly. Like many companies attempting to build an
Internet-based business, we expect over at least the next year and for an
indeterminate period of time thereafter to
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follow a strategy of establishing market share by making expenditures for
marketing and infrastructure development that exceed current revenues.
We generate revenues from development work and licenses. We receive
development revenues under a contract with Ericsson and have agreed to develop
unspecified software applications for Microcell Labs Inc. ("Microcell"), but
have not yet defined any specific development project with Microcell. We
currently receive license revenues primarily from a license of our core
technologies to Ericsson, but we expect that we will soon begin receiving
revenue sharing fees from Ericsson's license of iPulse(TM) to network operators
and eventually from licensing our mPresence(TM) suite of applications directly
to network operators, Internet business and enterprise customers and indirectly
through value-added resellers. We expect in the future to generate revenues from
hosting mPresence(TM) on behalf of network operator and Internet business
customers, as well as from product installation, maintenance and engineering
support services. However, the receipt of these revenues is subject to a number
of factors that we cannot control. Accordingly, we cannot be sure when these
revenues will be recognized or the amount of these revenues, if any.
In February 2000, we introduced mPresence(TM), a growing suite of mobile
Internet applications built on top of the iPulse(TM) platform. We continue to
expect to incur significant additional expenses in developing and
commercializing the mPresence(TM) service, including costs relating to operating
our iPulse(TM) network clusters in North America and Europe, as well as sales
and marketing and research and development expenses. We expect to incur these
costs and expenses in advance of generating revenues from this service and
cannot be certain that our business model for the mPresence(TM) service will
result in significant revenues or profitability.
Our future success depends on our ability to increase revenues from
sales of products and services to new and existing network operator customers
and Internet business such as e-commerce sites and Internet communities. If the
market for Internet-based services via wireless telephones fails to develop or
develops more slowly than expected, then our business would be materially and
adversely affected. In addition, because there are a relatively small number of
network operators worldwide, any failure to sell our products to network
operator customers successfully could result in a shortfall in revenues that
could not be readily offset by other revenue sources.
Our business strategy also relies to a significant extent on the
widespread propagation of the iPulse(TM) communications platform through our
relationships with network operators, Internet business and Ericsson, one of the
leading wireless telephone manufacturers. iPulse(TM) is available to network
operators directly from Ericsson or from us. In the event that Ericsson licenses
iPulse(TM) to one of its customers, we are entitled to a net revenue sharing
payment equal to 11.81% of all licensing revenue. We license iPulse(TM) as a
component of our mPresence(TM) services to network operators and Internet
businesses. In the event that we license iPulse(TM) to a network operator or
Internet business, we must pay a royalty to Ericsson.
We expect that our gross profit on revenues derived from sales through
indirect channel partners will be less than the gross profit on revenues from
direct sales. Our success, in particular in international markets, depends in
part on our ability to increase sales of our products and services through
value-added resellers and to expand our indirect distribution channels.
We expect sales in Europe and North America to account for a
significant portion of our revenues in the foreseeable future. Risks inherent in
our international business activities include:
o failure by us and/or third parties to develop localized content and
applications that are used with our products;
o costs of localizing our products for foreign markets;
o difficulties in staffing and managing foreign operations;
o longer accounts receivable collection time;
o political and economic instability;
o fluctuations in foreign currency exchange rates;
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o reduced protection of intellectual property rights in some foreign
countries;
o contractual provisions governed by foreign laws;
o export restrictions on encryption and other technologies;
o potentially adverse tax consequences; and
o the burden of complying with complex and changing regulatory
requirements.
Since early 2000, we have invested substantially in research and development,
marketing, domestic and international sales channels, professional services and
our general and administrative infrastructure. These investments have
significantly increased our operating expenses, contributing to net losses in
each fiscal quarter since our inception. Our limited operating history makes it
difficult to forecast future operating results. Although we believe that our
revenues will increase in the next few quarters, our revenues may not increase
at a rate sufficient to achieve and maintain profitability, if at all. We
anticipate that our operating expenses will increase substantially in absolute
dollars for the foreseeable future as we expand our product development, sales
and marketing, professional services and administrative staff. Even if we were
to achieve profitability in any period, we may not sustain or increase
profitability on a quarterly or annual basis. iPulse(TM) is a trademark of
Ericsson and mPresence(TM) is our trademark.
RESULTS OF OPERATIONS
Development Services Revenues
Development services revenues increased from $0.9 million for the three
months ended June 30, 1999 to $1.5 million for the three months ended June 30,
2000, and increased from $1.8 million for the six months ended June 30, 1999 to
$3.2 million for the six months ended June 30, 2000. The increase in development
services revenues was attributable primarily to the timing of the commencement
of development work for Ericsson. Development started in February 1999 and built
up to optimal capacity by June 30, 1999.
License Revenues
License revenues decreased from $0.5 million for the three months ended
June 30, 1999 to $0.04 million for the three months ended June 30, 2000, and
decreased from $0.6 for the six months ended June 30, 1999 to $0.09 million for
the six months ended June 30, 2000. The decrease in license revenues was
primarily due to the timing of recognition of revenues associated with the
licensing of our core technology to Ericsson in connection with the development
of iPulse(TM). We expect that we will soon begin receiving revenue sharing fees
from Ericsson's license of iPulse(TM) to network operators and beginning in 2001
from licensing our mPresence(TM) suite of applications directly to network
operators and indirectly through value-added resellers.
Cost of Revenues - Development Services
Cost of revenues - development services consists of compensation and
independent consultant costs for personnel engaged in our development services
operations and related overhead. Cost of revenues-development services remained
constant at $0.96 million for the three months ended June 30, 1999 and the three
months ended June 30, 2000, and increased from $1.7 million for the six months
ended June 30, 1999 to $1.9 million for the six months ended June 30, 2000. As a
percentage of development services revenues, cost of revenues-development
services revenues for the three months ended June 30, 1999 and 2000 was 106.1%
and 63.6%, respectively. Cost of revenues-development services as a percentage
of the related revenues for the six months ended June 30, 1999 and 2000 was
95.7% and 60.2%, respectively. The increase in margins reflects a higher mix of
development services performed on a time and materials basis during the
three-and six-month periods ended June 30, 2000. Gross profit on development
services revenues is impacted by the mix of company personnel and independent
consultants assigned to projects. The gross profit we achieve is also impacted
by the contractual terms of the development assignments we undertake, and the
gross profit on fixed price contracts typically is more susceptible to
fluctuation than contracts performed on a time-and-materials basis. We
anticipate that the cost of revenues-development services will increase slightly
in absolute dollars but decrease as a percentage of revenues as we continue to
invest in the growth of our consulting services and licensing operations.
12
<PAGE> 13
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation and
related costs for sales and marketing personnel, sales commissions, marketing
programs, public relations, promotional materials, travel expenses and trade
show exhibit expenses. Sales and marketing expenses increased from $0.2 million,
or 11.1% of total revenues, for the three months ended June 30, 1999, to $1.4
million, or 89.7% of total revenues, for the three months ended June 30, 2000.
Sales and marketing expenses increased from $0.4 million, or 17.9% of total
revenues, for the six months ended June 30, 1999, to $2.1 million, or 61.9% of
total revenues, for the six months ended June 30, 2000. These increases resulted
from the addition of personnel in our sales and marketing organizations,
reflecting our increased selling effort to develop market awareness of our
products and services. We anticipate that sales and marketing expenses will
increase in absolute dollars as we increase our investment in these areas.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related expenses, accounting, legal and administrative expenses, professional
service fees, stock-based compensation and other general corporate expenses.
General and administrative expenses, excluding stock-based compensation,
increased from $0.8 million, or 60.0% of total revenues, for the three months
ended June 30, 1999, to $1.2 million, or 82.9% of total revenues, for the three
months ended June 30, 2000. General and administrative expenses, excluding stock
based compensation, increased from $1.5 million, or 66.3% of total revenues, for
the six months ended June 30, 1999, to $2.4 million, or 74.4% of total revenues,
for the six months ended June 30, 2000. These increases were due primarily to
the addition of personnel performing general and administrative functions,
additional expenses in connection with our filing of our registration statement
on Form 10-SB and our resulting operation as a public company and, to a lesser
extent, legal expenses associated with increased product licensing and patent
activity.
Research and Development Expenses
Research and development expenses consist primarily of compensation and
related costs for research and development personnel. Research and development
expenses increased from $0.1 million, or 7.8% of total revenues, for the three
months ended June 30, 1999, to $0.5 million, or 35.0% of total revenues, for the
three months ended June 30, 2000. Research and development expenses increased
from $0.2 million, or 8.1% of total revenues, for the six months ended June 30,
1999, to $0.8 million, or 23.6% of total revenues, for the six months ended June
30, 2000. These increases were attributable primarily to the addition of
personnel in our research and development organization associated with product
development. Until recently, almost all of our research and development
personnel have been dedicated to development service projects, primarily the
co-development of iPulse(TM) with Ericsson. In the six months ended June 30,
2000 we have nearly doubled the number of research and development personnel and
we have initiated the development of mPresence(TM) products. We expect to
continue to make substantial investments in research and development and
anticipate that research expenses will continue to increase in absolute dollars.
In particular, we anticipate that research and development expenses will
increase significantly due to product development efforts for the mPresence(TM)
service and the addition of research and development personnel.
13
<PAGE> 14
We expect general and administrative expenses to increase in absolute dollars as
we add personnel and incur additional expenses related to the anticipated growth
of our business, the management of our international operations and our
operation as a public company.
Stock-Based Compensation Expenses
Stock-based compensation expenses totaled $0.01 million and $0.55
million for the three months ended June 30, 1999 and 2000, respectively, and
totaled $0.03 million and $0.58 million for the six months ended June 30, 1999
and 2000, respectively. Some stock options granted and restricted stock sold
during the fiscal years ended December 31, 1998 and December 31, 1999 and the
six months ended June 30, 2000 have been deemed to be compensatory. Total
deferred stock-based compensation associated with these equity arrangements
amounted to $6.7 million related to stock options granted and restricted stock
issued from February 1996 through April 2000. The amortization of deferred
stock-based compensation for these equity arrangements was $0.01 million and
$0.55 million for the three months ended June 30, 1999 and 2000, respectively,
and $0.03 million and $0.58 million for the six months ended June 30, 1999 and
2000, respectively. We expect amortization in the remainder of fiscal year 2000
of approximately $1.0 million, and $2.0 million, $1.6 million and $1.1 million
in the fiscal years ending December 31, 2001, 2002 and 2003, respectively,
relating to the amortization of the deferred stock-based compensation associated
with stock options granted and restricted stock issued from February 1996
through April 2000.
Interest Income (Expense), net
Interest income, net decreased from a net gain of $97,744 for the three
months ended June 30, 1999 to a net gain of $72,211 for the three months ended
June 30, 2000. Interest income, net increased from a net gain of $81,976 for the
six months ended June 30, 1999 to a net gain of $170,025 for the six months
ended June 30, 2000. The increase is primarily the result of an increase in cash
holdings as a result of capital investments by Ericsson during the second and
fourth quarters of 1999 in the aggregate amount of $13,068,160.
Other Income (Expense), net
Other expense, net increased from $46,228 for the three months ended
June 30, 1999 to $512,213 for the three months ended June 30, 2000. Other
expense, net increased from $82,604 for the six months ended June 30, 1999 to
$601,263 for the six months ended June 30, 2000.
Income Taxes
At December 31, 1998 and 1999 we had deferred tax assets of $3.7
million and $4.5 million, respectively. Due to the uncertain nature of the
ultimate realization, we have recorded a valuation allowance against deferred
tax assets. At December 31, 1999 we had net operating loss carryforwards of
approximately $11.8 million, $5.6 million and $0.1 million for federal, state
and Icelandic income tax purposes, respectively. These carryforwards will expire
from year 2001 through 2013.
Liquidity and Capital Resources
Our primary liquidity needs are for working capital, capital
expenditures, acquisitions and investments, and, to a lesser extent, debt
service. Our primary sources of liquidity are cash flows from operations and
issuances of stock.
Net cash used by operating activities was $3.6 million for the six
months ended June 30, 2000. The net cash used by operating activities for the
six months ended June 30, 2000 was attributable primarily to an increase in
accounts receivable and increases in accounts payable and in accrued liabilities
of $.09 million, $0.3 million and $0.8 million, respectively, and by the net
loss of $5.3 million.
To date, we have had no material write-offs of accounts receivable and
we have not recorded any allowance for doubtful accounts.
Net cash used for investing activities was $1.2 million for the six
months ended June 30, 2000, primarily reflecting net purchases of property and
equipment.
14
<PAGE> 15
Net cash provided by financing activities was $0.2 million for the six
months ended June 30, 2000, primarily reflecting the net proceeds from sales of
common stock to employees through the exercise of stock options and restricted
stock.
As of June 30, 2000, our principal commitments consisted of obligations
outstanding under operating leases and capitalized lease obligations. Although
we have no material commitments for capital expenditures, we expect to increase
capital expenditures and lease commitments consistent with our anticipated
growth in operations, infrastructure and personnel. We also may increase our
capital expenditures as we expand into additional international markets.
We believe that our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next nine months. We do not
believe that cash generated from operations will be sufficient to satisfy our
liquidity requirements, and we intend to seek to sell additional equity or debt
securities. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the terms of any debt could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities could result in additional dilution to our shareholders, and
additional financing may not be available in amounts or on terms acceptable to
us, if at all. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned product development and marketing
efforts, which could harm our business, financial condition and operating
results.
Year 2000 Readiness Disclosure
With the changeover to the year 2000, we did not experience any
disruption to our operations, which could have arisen as a result of the issues
associated with the limitations of the programming code in many existing
computer systems, whereby the computer systems may not properly recognize or
process date-sensitive information. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. There can
be no assurance that there will not be future complications arising from Year
2000 issues.
Our program for addressing Year 2000 concerns included an assessment
and evaluation of internal systems, which resulted in testing and remediation
efforts for Year 2000 compliance. In addition, we evaluated our customers,
vendors and service providers to determine the extent to which we were
vulnerable to any failure by these third-party providers and to ascertain their
readiness for the Year 2000.
The total estimated cost of assessing Year 2000 issues is difficult to
determine with accuracy, but total costs did not have a material adverse impact
on our operating results or financial condition. Although we believe that it has
successfully addressed any significant disruption from Year 2000, it will
continue to monitor all critical systems for the appearance of delayed
complications or disruptions, as well as continue to monitor its suppliers and
customers.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NOT APPLICABLE.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - NOT APPLICABLE.
During the six months ended June 30, 2000, we issued and sold 963,000
shares of common stock upon exercise of options previously granted under our
1995 Stock Option Plan. These sales were made in reliance on Rule 701 under the
Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 3, 2000 the Company held its annual meeting of shareholders. At
the annual meeting, the Company's shareholders approved the following matters by
the following votes:
1. Election of the following directors of the Company
<TABLE>
<CAPTION>
Broker
Nominees For Against Abstentions Nonvotes
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lars Boman 30,648,468 1,101,179
Guojon Mar Guojonsson 30,648,468 1,101,179
Stig-Arne Larsson 30,648,468 1,101,179
Skuli Mogensen 30,648,468 1,101,179
Jeff Pulver 30,648,468 1,101,179
</TABLE>
2. Amendment to the Company's Bylaws to increase the number of authorized
directors to a range between four and seven.
For Against Abstentions Broker Nonvotes
-----------------------------------------------------------------------
30,709,368 1,040,279
3. Amendment to the Company's Amended and Restated Articles of Incorporation to
increase the number of authorized shares of Common Stock from 100,000,000 to
275,000,000, to designate a par value for the Common Stock and Series A
Preferred stock, and to effect a 2-for-1 stock split of the outstanding
shares of Common Stock and correspondingly reduce the Common Stock's per
share liquidation preference.
For Against Abstentions Broker Nonvotes
-----------------------------------------------------------------------
30,659,368 1,090,279
4. Approval of the Company's 2000 Employee Stock Purchase Plan.
For Against Abstentions Broker Nonvotes
-----------------------------------------------------------------------
30,659,368 1,090,279
5. Amendment to the Company's 1995 Stock Option Plan to increase the number of
shares authorized for grant under the plan to 9,000,000 (on a pre-stock split
basis).
For Against Abstentions Broker Nonvotes
-----------------------------------------------------------------------
30,659,368 1,090,279
6. Ratification of appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year ending June 30, 2000.
For Against Abstentions Broker Nonvotes
-----------------------------------------------------------------------
30,659,368 1,090,279
After being properly announced at the May 3, 2000 meeting, the annual
meeting of the Company's shareholders was adjourned and continued on May 22,
2000. At the continuation of the annual meeting, the Company's shareholders
approved the following matter by the following vote:
7. Amendment to the Company's Amended and Restated Articles of Incorporation to
approve the automatic conversion of the Series A Preferred stock upon the
closing of an initial public offering on a non-U.S. exchange.
Class of Stock For Against Abstentions Broker Nonvotes
--------------------------------------------------------------------------------
Common 26,837,000 1,090,279
Series A Preferred 13,402,431
16
<PAGE> 17
ITEM 5. OTHER INFORMATION --- NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
[SIGNATURE PAGE FOLLOWS]
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 thereunto duly authorized.
OZ.COM
By: /s/ ROBERT G. QUINN
---------------------------
Robert G. Quinn
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 18, 2000
17
