SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000 - Commission file Number 333-86873
Netword, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-2143430
(State or other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
702 Russell Avenue, Third Floor, Gaitherburg, MD 20877
(Address of principal executive offices) (Zip code)
240/631-1100
(Registrant's telephone number, including area code)
Check whether the issuer (1) 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 ___
The number of outstanding shares of the issuer's common stock, par value $.01
per share, as of May 11, 2000, was 18,596,513.
Transitional Small Business Disclosure Format (check one):
Yes _X_ No ___
<PAGE>
NETWORD, INC.
(A Development Stage Company)
INDEX TO FORM 10-QSB
March 31, 2000
PART I - FINANCIAL INFORMATION PAGE
Item 1. - Balance Sheets as of March 31, 2000 and December 31, 1999............1
Statements of Operations for the Three Months Ended
March 31, 2000 and March 31, 1999....................................2
Statements of Cash Flows for the Three Months Ended
March 31, 2000 and March 31, 1999....................................3
Notes to Financial Statements........................................4
Item 2. - Management's Discussion and Analysis or Plan of Operation............7
PART II - OTHER INFORMATION....................................................9
SIGNATURE.....................................................................11
<PAGE>
NETWORD, INC.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited) (Note)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,489,865 $ 2,742,041
Deposit 250,000 --
Prepaid expenses 771,245 1,125,000
----------- -----------
Total current assets 3,511,110 3,867,041
Property and equipment, net 58,644 72,600
Intangible assets:
Trademark, net 25,488 26,444
Intellectual property, net 8,750 10,000
Deferred offering costs 50,000 50,000
----------- -----------
Total intangible assets 84,238 86,444
----------- -----------
$ 3,653,992 $ 4,026,085
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term liability $ 4,800 $ 4,800
Accounts payable 346,826 358,404
Loans payable 33,027 33,027
----------- -----------
Total current liabilities 384,653 396,231
Long-term liability, net of current portion 14,400 14,400
Convertible note payable 21,203 20,903
Redeemable common stock and common stock warrants 977,500 977,500
Stockholders' equity:
Common stock, $.01 par value;
Authorized - 40,000,000 shares
Issued and outstanding - 17,276,513 shares at
3/31/00 and 16,923,924 shares at 12/31/99 172,765 169,239
Additional paid-in capital 7,454,878 7,017,668
Deficit accumulated in the development stage (5,360,108) (4,558,557)
Subscriptions receivable (11,299) (11,299)
----------- -----------
Total stockholders' equity 2,256,236 2,617,051
----------- -----------
$ 3,653,992 $ 4,026,085
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
1
<PAGE>
NETWORD, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period From
December
Three Months 2, 1996
Ended March 31, (Inception) to
---------------------------- March 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 353 $ 4,212 $ 62,534
General and administrative expenses 832,278 298,978 5,137,646
------------ ------------ ------------
Operating loss (831,925) (294,766) (5,075,112)
Other income (expense):
Interest income 30,374 1,904 141,218
Loss on disposition of property and
equipment -- -- (43,639)
Loss on impairment of assets -- -- (382,575)
------------ ------------ ------------
Net other income (expense) 30,374 1,904 (284,996)
------------ ------------ ------------
Net loss $ (801,551) $ (292,862) $ (5,360,108)
============ ============ ============
Basic and diluted loss per common share $ (.05) $ (.03)
============ ============
Weighted average number of shares
outstanding 17,709,799 10,079,480
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
NETWORD, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period From
December
Three Months 2, 1996
Ended March 31, (Inception) to
---------------------------- March 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $ (801,551) $ (292,862) $(5,360,108)
Adjustments to reconcile net loss to cash
used in operating activities:
Issuance of stock options and warrants
for consulting and legal services -- -- 33,308
Depreciation and amortization 16,161 16,206 294,552
Amortization of prepaid expense 375,000 -- 750,000
Issuance of convertible note payable for
legal services -- -- 20,903
Loss on disposition of property and
equipment -- -- 43,639
Loss on impairment of assets -- -- 382,575
Change in assets and liabilities:
Prepaid expenses (21,245) (561) (21,245)
Accounts payable (11,278) 55,997 461,126
----------- ----------- -----------
Net cash used in operating
activities (442,913) (221,220) (3,395,250)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and
equipment -- -- 10,000
Deposit (250,000) -- (250,000)
Acquisition of property and equipment -- -- (357,165)
Acquisition of trademark -- -- (37,913)
----------- ----------- -----------
Net cash used in
investing activities (250,000) -- (635,078)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term liability -- -- 33,600
Principal payments of long-term liability -- (4,800) (14,400)
Proceeds from loans -- -- 461,054
Redeemable common stock and common
stock warrants -- -- 977,500
Deferred offering costs -- -- (50,000)
Exercise of warrants 440,737 -- 440,737
Issuance of common stock and units, net
of offering and registration costs -- 2,925,000 4,671,702
----------- ----------- -----------
Net cash provided by financing
activities 440,737 2,920,200 6,520,193
----------- ----------- -----------
Net increase (decrease) in cash
(carried forward) $ (252,176) $ 2,698,980 $ 2,489,865
----------- ----------- -----------
</TABLE>
See accompanying notes.
3
<PAGE>
NETWORD, INC.
(A Development Stage Company)
Statements of Cash Flows (Concluded)
(Unaudited)
<TABLE>
<CAPTION>
Period From
December
Three Months 2, 1996
Ended March 31, (Inception) to
------------------------- March 31,
2000 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Net increase (decrease) in cash
(brought forward) $ (252,176) $2,698,980 $2,489,865
Cash, beginning of period 2,742,041 59,110 --
---------- ---------- ----------
Cash, end of period $2,489,865 $2,758,090 $2,489,865
========== ========== ==========
Supplemental Schedule of Non-Cash Investing and Financing Activities
Subscriptions receivable $ -- $ -- $ 11,299
========== ========== ==========
Issuance of Class A Units and Class C Units in exchange for:
Intellectual property $ -- $ -- $ 407,575
Net assets acquired -- -- 20,996
---------- ---------- ----------
$ -- $ -- $ 428,571
========== ========== ==========
Conversion of loans to Class A Units $ -- $ -- $ 428,027
========== ========== ==========
Conversion of accounts payable to
warrants $ -- $ -- $ 114,000
========== ========== ==========
Issuance of stock options and warrants
for consulting and legal services $ -- $ -- $ 33,308
========== ========== ==========
Issuance of warrants for future services $ -- $ -- $1,500,000
========== ========== ==========
Issuance of convertible note payable for
legal services $ -- $ -- $ 20,903
========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
NETWORD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
Note 1 - Basis of Presentation
Netword, Inc. (the "Company," "us," "we," or "our") owns and operates an
Internet utility known as the Netword System which we believe offers a
comprehensive solution to problems created by a lack of consumer-friendly
addresses or URL's for Internet resources.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of our
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the full year ended December 31, 2000, These
unaudited financial statements should be read in conjunction with the financial
statements and footnotes thereto included in our Annual Report on Form 10-KSB
for the year ended December 31, 1999.
Note 2 - Deposit
During the quarter ended March 31, 2000 we deposited $250,000 into an
escrow account pursuant to the terms of an agreement for services to be rendered
in connection with our planned national advertising campaign. This agreement
also provides for the grant of 300,000 five year options under our Stock Option
Plan, vested quarterly over the period from March 2, 2000 to March 1, 2001, at
$2.00 per share.
Note 3 - Exercise of Warrants
During the quarter ended March 31, 2000, certain outstanding warrants to
purchase our common stock were exercised, as follows:
Number of Shares Exercise Price Total Received
---------------- -------------- --------------
352,589 $1.25/share $ 440,737
5
<PAGE>
On April 13, 2000 we notified stockholders who acquired warrants to
purchase 1,600,000 shares of our common stock in our Reg S offering that their
warrants were subject to redemption for $.05 per share unless those warrants
were exercised by May 1, 2000. As a result, the following warrants issued in the
Reg S offering were exercised subsequent to March 31, 2000:
Number of Shares Exercise Price Total Received
---------------- -------------- --------------
1,320,000 $1.25/share $ 1,650,000
6
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of Operation
First Quarter 2000 Overview
We are a development stage Internet company and do not currently derive
significant revenues from operations. Revenues recorded by us to date are
incidental and not the result of proactive marketing. Our revenues have stemmed
from persons who recognize the utility of the Netword System and wish to protect
their products, brands and other marks.
During the quarter, we continued to enter into and pursue various agreements
with other Internet businesses. Agreements with InfoSpace.com, Inc. and eBay,
Inc were signed during the quarter. InfoSpace.com produces co-branded pages when
certain Networds, including all 5-digit U.S. zip codes, are entered in Netword
Slots or Netword-enabled browsers. Our agreement with eBay is a referral
agreement under which we are entitled to revenues based on our directing
Internet traffic to eBay. During the quarter, we also completed a new version of
our software agent that was integrated with Net2Phone, Inc.'s software product
which became available at www.net2phone.com in May 2000.
During the quarter we began an effort expected to result in a national
advertising campaign (the "Campaign") scheduled to commence in the third
quarter.
Results of Operations for Q-1 2000
Compensation costs increased to $176,500 versus $97,808 for the same period last
year because we hired additional marketing, sales, business development and
software engineering personnel. The additional personnel were hired to enhance
the Netword System and implement the Campaign.
Enhancement of the Netword System includes software development efforts to meet
the needs of new affiliates, including Net2Phone and InfoSpace.com. Pending
affiliations have and will create additional technology requirements for us.
Marketing costs increased to $497,850 versus $76,218 for the same period last
year primarily because of $375,000 of amortization attributable to the Net2Phone
warrant initiated in the 4th quarter of 1999 and payments to InfoSpace initiated
in the 1st quarter of 2000. In subsequent quarters we expect to increase our
marketing and sales expenditures to support the Campaign that is currently being
developed. In addition to direct advertising costs associated with the Campaign,
we expect to incur additional administrative costs for the management of the
Campaign and anticipate that we will require additional sales and customer
support personnel to handle our anticipated growth.
We have incurred and will continue to incur additional expenses related to our
public
7
<PAGE>
status, including accounting and audit fees, SEC filing fees, transfer agent
costs, legal fees and investor relations.
Equipment costs are not expected to increase significantly until later in the
current fiscal year, when we expect we will need to establish additional
clusters of computers in North America and/or abroad to meet the expected growth
in usage of the Netword System following implementation of the Campaign.
Liquidity and Capital Resources
Our $2,489,865 cash balance at March 31, 2000 was increased during April 2000 by
the $1,650,000 proceeds from the exercise of the Reg S Warrants. Based upon our
current operations it is unlikely that additional funds will be required during
the next twelve months. Our ability to increase funds for the Campaign will be
dependent upon additional funding from revenues and/or external sources,
including the sale of equity.
Forward Looking Statements
Some of the statements in this 10-QSB that are not historical facts are
forward-looking statements. Forward-looking statements can be identified by the
use of words such as estimates, projects, anticipates, expects, intends,
believes or the negative thereof or other variations thereon or by discussions
of strategy that involve risks and uncertainties. We caution you that all the
forward-looking statements contained in this 10-QSB are only estimates and
predictions. Our actual results could differ materially from those anticipated
in the forward-looking statements due to risks, uncertainties or actual events
differing from the assumptions underlying these statements. The risks,
uncertainties and assumptions include, but are not limited to, those discussed
in this 10-QSB.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No new litigation and no new developments with regard to
previously existing litigation.
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
On March 24, 2000 the U.S. Patent Office issued a Notice of
Allowance to us for a second patent on the Netword System. The
new patent includes a centralized mechanism to store and
instantaneously resolve Networds for any Internet resource, and
client software to make Networds accessible from all leading
browsers,
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
3.1(1) Certificate of Incorporation of Netword, Inc.
3.2(1) Bylaws of Netword, Inc.
4.1(1) Stock option plan of Netword, Inc.
4.2(1) Form of award letter for optionees
10.1(1) Contract regarding assignment of trademarks and trade
names "Netword" and "Netword, Inc."
10.2(1) Internet Data Center Services Agreement between Netword,
Inc. and
9
<PAGE>
Exodus Communications, Inc.
10.3(1) Agreement dated September 29, 1999 between Netword, Inc.
and Net2Phone, Inc.
10.4(1) Agreement dated as of November 12, 1999 between Netword,
Inc. and Nettaxi Online Communities, Inc.
(1) Filed as an Exhibit to Netword's registration statement on Form SB-1
(Commission File No. 333-86873) and incorporated herein by reference.
b) Reports on Form 8-K:
None
10
<PAGE>
S I G N A T U R E
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.
Dated: May 11, 2000
Netword, Inc.
(Registrant)
By: /s/ Murray M. Rubin
Name: Murray M. Rubin
Title: Treasurer and Chief Financial Officer
(Principal Financial Officer and Officer Duly
Authorized to Sign on behalf of Registrant)
11
