UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-12139
Intelliquis International, Inc.
(Exact name of Registrant as specified in its charter)
NEVADA 87-0630562
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
352 West 12300 South #300 Draper, Utah 84020
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (801) 990-2600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No
As of November 15, 1999 the number of shares outstanding of the Registrant's
Common Stock was 33,462,420.
Transitional Small Business Disclosure Format - (check one):
[ ] Yes [ X ] No
Intelliquis International Inc. and Subsidiary
(formerly Leesburg Land and Mining, Inc.)
Form 10QSB
For the Quarterly Period Ended September 30, 1999
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements
a) Condensed Balance Sheets
as of September 30, 1999 and December 31, 1998 3
b) Condensed Statements of Operations
for the three and nine months ended September 30,
1999 and 1998 4
c) Condensed Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 5
d) Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 11
Part II. Other Information 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
19
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Intelliquis International, Inc. and Subsidiary
(formerly Leesburg Land and Mining, Inc.)
Condensed Balance Sheets
Assets
September 30, December 31,
1999 1998
(Unaudited) (Audited)
Current assets
Cash $ 45,706 $ 23,074
Accounts receivable (Note 2) 4,448,550 619,966
Inventory (Note 2) 373,539 130,517
Prepaid expenses 17,479 6,838
Deposits 8,799 500
4,894,073 780,895
Property, Plant & Equipment (Note 2) 164,623 54,297
Other assets
Certificate of deposit (Note 2) 42,003 40,351
Intangibles (Note 2) 6,743 8,328
Total Assets $ 5,107,442 $ 883,871
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses 2,852,980 502,973
Short term notes (Note 3) 337,596 104,500
Short term notes - related party (Note 4) 1,000 85,000
3,191,576 692,473
Commitments and Contingencies (Note 8)
Stockholders' Equity
Preferred Stock, 5,000,000 shares authorized,
par value $.001, no shares outstanding - -
Common Stock, 50,000,000 shares authorized,
$.001 par, 39,665,364 and 37,759,233
shares issued and outstanding, respectively
(Note 6) 39,665 37,759
Additional paid in capital 1,342,335 132,241
Retained earnings 693,866 21,398
Treasury Stock (Note 6) (160,000) -
1,915,866 191,398
Total Liabilities and Stockholders' Equity 5,107,442 883,871
Intelliquis International, Inc. and Subsidiary
(formerly Leesburg Land and Mining, Inc.)
Condensed Statements of Operations
For the three and nine months ended
September 30, 1999 and 1998
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
Sales $ 3,047,603 $ 548,316 $ 6,467,014 $ 11,382,961
Cost of Sales 1,558,358 54,779 3,214,038 293,552
Gross Margin 1,489,245 493,537 3,252,976 1,089,409
Expenses:
Sales & Marketing 531,834 136,416 926,830 425,639
General &
Administrative 361,894 117,106 1,100,526 238,234
Total Expenses 893,728 253,522 2,027,356 663,873
Operating Income
(Loss) 595,517 240,015 1,225,620 425,536
Other Income
(Expense) (118,280) - (122,967) (643)
Net Income
(Loss) before
Taxes 477,237 240,015 1,102,653 424,893
Taxes (Note 1) 186,358 - 430,185 -
Net Income
(Note 6) $ 290,879 $ 240,015 $ 672,468 $ 424,893
Net Income
Per Share
(Note 6) $ .009 $ - $ .020 $-
Total average
shares
outstanding 33,462,420 - 33,925,794 -
Intelliquis International, Inc. and Subsidiary
(formerly Leesburg Land and Mining, Inc.)
Statements of Cash Flows
For the nine months ended
September 30, 1999 and 1998
(Unaudited)
Nine Months Ended
September 30,
1999 1998
Cash Flows from Operating
Activities:
Net income $ 672,468 424,893
Non Cash Flow Items:
Depreciation & Amortization 23,827 6,831
Increase (decrease) in
Accounts receivable (3,828,584) (887,124)
Inventory (243,022) (16,588)
Prepaid expenses & deposits (18,940) (3,995)
Accounts payable & accrued expenses 2,350,007 334,037
Net Cash Flows used in
Operating Activities (1,044,244)(141,946)
Cash Flows from Financing Activities:
Cash from private placement of stock 1,062,000 -
Stock issued for public relations services 150,000 -
Purchase of treasury stock (160,000) -
Net Cash Flows from
Financing Activities 1,052,000 -
Cash Flows from Investing
Activities:
Purchase of fixed assets (132,568) (26,562)
Purchase of intangibles & other assets (1,652) (40,000)
Proceeds from short-term debt 257,096 153,478
Cash used to pay-off short-term debt (108,000) -
Net Cash Flows used in Investing Activities 14,876 86,916
Net increase (decrease) in cash 22,632 (55,030)
Cash, beginning of year 23,074 52,455
Cash, end of period $ 45,706 ($2,575)
Supplemental Cash Flow Information
Cash Paid for: $ - $ -
Interest $ 12,509 $ 643
Intelliquis International, Inc. and Subsidiary
(formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
September 30, 1999
NOTE 1 - Background and History
Intelliquis International, Inc. (the "Company") (formerly Leesburg Land
and Mining, Inc.) was created on June 21,1983 in the State of Colorado. The
Company was involved in mining activities until approximately 1987, when it
ceased all activities and began disposing of its assets. It has not had any
business activity since that time. The Company changed its name in
December 1998 to its current name.
Also in December 1998, the Company created and later merged with a Nevada
subsidiary. Intelliquis, LLC was created in 1997 as a corporation and later
reorganized as a limited liability company in the State of Utah. Intelliquis
was organized for the purpose of licensing and marketing computer software to
wholesale and private label customers.
Intelliquis International, Inc. acquired all of the outstanding ownership
units of Intelliquis LLC effective December 31, 1998.
The acquisition is accounted for as a "reverse acquisition" where the
parent corporation is taken over by the owners of the subsidiary. All
activity of the financial reports is that of the subsidiary operation.
NOTE 2 - Significant Accounting Policies
Cash and Cash Equivalents The Company considers all short term, highly
liquid investments that are readily convertible to known amounts as cash
equivalents.
Intangible Assets Intangible assets consist of contract design work and
goodwill. Both intangibles are being amortized over 60 months on the straight
line method. Amortization expense was $2,115 for 1998. The Company's
amortization expense for the third quarter of 1999 and 1998 was $529 and
$529, respectively. Amortization expense for the first nine months of 1999
and 1998 was $1,586 and $1,058, respectively.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. In these financial statements, assets, liabilities and earnings
involve extensive reliance on management's estimates. Actual results could
differ from those estimates.
Income Taxes The Company adopted Statement of Financial Standards No.
109 "Accounting for Income Taxes" in the fiscal year ended December 31, 1998
and applied it retroactively.
Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" requires an asset and liability approach for financial accounting
and reporting for income tax purposes. This statement recognizes (a) the
amount of taxes payable or refundable for the current year and (b) deferred
tax liabilities and assets for future tax consequences of events that have
been recognized in the financial statements or tax returns.
The federal income tax provision is $162,472 and $0 for the third quarter
of 1999 and 1998, respectively. The state tax provision is $23,886 and $0 for
the third quarter of 1999 and 1998, respectively. The federal income tax
provision is $375,052 and $0 for the first nine months of 1999 and 1998,
respectively. The state tax provision is Intelliquis International, Inc. and
Subsidiary (formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
September 30, 1999
NOTE 2 - Significant Accounting Policies (continued)
$55,133 and $0 for the first nine months of 1999 and 1998, respectively.
Deferred income taxes result from temporary differences in the recognition
of accounting transactions for tax and financial reporting purposes. There
were no temporary differences at December 31, 1998 and earlier years;
accordingly, no deferred tax liabilities have been recognized for all periods.
The Company has cumulative net operating loss carry forwards of more than
$4,000,000 at December 31, 1998. No effect has been shown in the financial
statements for the net operating loss carry forwards as the likelihood of
future tax benefit from such net operating loss carry forwards is highly
improbable. Accordingly, the potential tax benefits of the net operating loss
carry forwards, estimated based upon current tax rates at December 31, 1998,
have been offset by valuation reserves of the same amount.
The subsidiary operation was a limited liability company (LLC) in 1997
and 1998. LLC's report their earnings on a partnership tax return and no tax
liability accrued at the company level. Taxable income is allocated to its
individual members and tax paid by each member.
Inventory consists of finished goods (assembled and unassembled computer
software) that is valued at lower of cost (FIFO) or market.
Certificate of Deposit The Company holds a Certificate of Deposit as
partial security for a short term loan at the Company's bank (see Note 3).
The certificate matures on March 10, 2000. Interest is stated at 4.91%.
Fixed Assets
Fixed assets consist of the following:
September 30, December 31,
1999 1998
Computer Equipment & Software $ 142,020 $ 32,886
Office Equipment & Furniture 57,983 34,549
200,003 67,435
Less: Accumulated Depreciation (35,380) (13,138)
$ 164,623 $ 54,297
Computer equipment and software is being depreciated on the straight line
method over three to five years. Office equipment is being depreciated on the
straight line method over five years. Depreciation expense was $8,641 for
1998. For the third quarter the depreciation expense is $11,106 and $2,652
for 1999 and 1998, respectively. For the first nine months the depreciation
expense is $22,242 for 1999 and $5,774 for 1998.
Principles of Consolidation The Company consists of the parent
corporation, Intelliquis International, Inc., and its subsidiary, Intelliquis
LLC. The two companies together report as a consolidated group referred
to here as the "Company". All inter-company accounts and transactions have
been eliminated.
Intelliquis International, Inc. and Subsidiary
(formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
September 30, 1999
NOTE 3 - Short Term Notes
Accounts Receivable
Accounts Receivable are shown net of allowance for returns of $411,446
and $186,660 and allowance for bad debt of $210,000 and $150,000 for the
first nine months ended September 30, 1999 and for fiscal year 1998,
respectively.
The Company has acquired short term borrowing for working capital as
follows:
September 30, December 31,
1999 1998
Note payable to a bank, secured by
$40,000 certificate of deposit, all
assets of the Company and personal
guarantees from certain officers of
the corporation, interest stated at 10%,
due March 10, 2000 $ 79,500 $ 79,500
Line of credit payable to a private lending
institution, secured by inventory and
personal guarantees from certain officers
of the corporation, interest stated at 7%
per month 258,096 -
Note payable to an individual, no
security, interest stated at 25%
payable in January 1999 - 25,000
$ 337,596 $ 104,500
Interest expense for fiscal 1998 was $3,584. The interest expense for the
third quarter of 1999 is $59,154 and $0 for the same quarter in 1998. The
Company incurred interest expense of $68,749 and $643 for the first nine
months of 1999 and 1998, respectively.
NOTE 4 - Short Term Notes - Related Party
The Company has acquired short term financing from two officers of the
corporation. One loan was for $80,000 and was paid during the first quarter
of 1999. The other loan is for $5,000 of which $4,000 was paid during the
second quarter of 1999. This is a demand note with no interest accruing.
NOTE 5 - Economic Dependency
The Company currently uses one major distributor for most of its sales.
That distributor accounted for 39% and 87% of all sales in the third quarter
of 1999 and 1998, respectively. The same distributor accounted for 47% and
95% of sales in the first nine months of 1999 and 1998, respectively. The
Company could recognize significant declines in sales if that distributor or
the Company chooses to alter its current sales relationship.
Intelliquis International, Inc. and Subsidiary
(formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
September 30, 1999
NOTE 6 - Member Contributions/Common Stock Transactions
In 1998, the Company continued to operate as a limited liability company
until December 31, 1998 when Intelliquis International, Inc. acquired 100% of
the membership units in exchange for 32,511,600 shares of common stock.
Before the acquisition, the corporation had 5,247,633 shares outstanding with
no assets and no liabilities. Also, net income per share or total average
shares outstanding are not indicated for the third quarter or first nine
months of 1998 because the company was operating as a limited liability
company during that time.
On April 12, 1999 the Company announced a 3-for-1 stock split payable to
shareholders of record as of the close ofbusiness on April 23, 1999. The
payout date was April 29, 1999 and the execution date was April 30, 1999. All
numbers pertaining to the shares of the company have been reported using the
3-for-1 stock split.
Private Placement During the first quarter of 1999, the Company
concluded a private placement offering of common stock. The amount raised
was $1,062,000 with 1,446,000 shares issued. The Company issued 159,300
shares for commissions of $106,200 related to the private placement. In
addition, the company issued 75,831 shares for attorney fees of $50,554
incurred as a part of the private placement. Also, in the first quarter of 1999,
the Company repurchased 6,202,944 of the company shares for $160,000. During
the second quarter the Company issued 225,000 shares to an investor relations
firm for $150,000 in services.
NOTE 7 - Subsequent Events
The Company entered into an asset acquisition agreement with Direct Media
Communications on July 7, 1999. The asset being acquired is a technology code
- -named global communication module (GCM) which allows for an unlimited number
of users to interact over networks and/or the Internet using a variety of
data types, including audio, live and recorded video, text and html, among
others, and combines these various data types into one data stream. Pursuant
to that agreement the Company is obligated to acquire the assets of Direct
Media for 1.5 million shares of common stock and the payment of $1 million in
cash which the Company is obligated to pay on or before October 7, 1999.
The Company is also obligated to issue up to an additional 12 million shares
to Direct Media based on the future sales of the GCM. The Company made the $1
million payment on October 25, 1999 but has not closed the acquisition and is
now renegotiating to restructure the transaction to acquire or license the GCM
technology.
In October of 1999, the company concluded a private placement offering of
two thousand (2,000) shares of 6% Convertible Series A Preferred Stock at
$1,000 per share and warrants to purchase one hundred thousand (100,000)
shares of Common Stock. The total amount raised was $2,000,000 for the
Preferred Stock and $100 for the warrants.
NOTE 8 - Commitments and Contingencies
On May 6, 1999, On The Planet, Inc. filed a lawsuit in the United States
District Court for the District of Utah against Intelliquis International,
Inc. ("Intelliquis"). The claims purportedly arise out of a Software Rights
Agreement under which Intelliquis granted On The Planet "an exclusive license
for direct sales along with a nonexclusive license for all other sales
including but not limited to retail sales" for certain Y2K fix software
identified therein. On The Planet asserts that Intelliquis violated that
Agreement by engaging in direct sales or giving third parties a license to
engage in direct sales of the Y2K fix software and other related products.
On The Planet asserts claims of copyright infringement, breach of contract
and fraud. In addition to injunctive relief, On Intelliquis International,
Inc. and Subsidiary (formerly Leesburg Land and Mining, Inc.)
Notes to The Financial Statements
September 30, 1999
The Planet is seeking unspecified damages including profits lost through
the direct sales of the Y2K fix software, as well as attorneys' fees and
punitive damages. In response to the lawsuit filed by On The Planet,
Intelliquis has denied the claims filed against it and has filed
counterclaims seeking rescission of the Software Rights Agreement and
asserting breach of contract of that Agreement. Intelliquis has also filed
additional claims against On The Planet and its principal, Ernest Hemple,
arising from conduct that Intelliquis believes constitutes defamation and
interference with contract. If an amicable resolution is not reached in the
near future, Intelliquis intends to vigorously defend the action and
prosecute its counterclaims.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Background
The Company seeks to become a leading republisher, marketer and supporter of
Year 2000, Internet utility, productivity and communication software products
for the computer software retail market. The Company was incorporated as
Leesburg Land and Mining Inc. in Colorado for the purpose of conducting
mining operations. Effective December 31, 1998, the Company acquired all of
the equity of Intelliquis LLC, which then became a wholly owned subsidiary
(the "Subsidiary") of the Company. During this same period the Company
changed its corporate domicile to Nevada and changed its name to Intelliquis
International, Inc. The Subsidiary was founded in August 1997 and organized
in December 1997 as a Utah limited liability company. As a result of the
acquisition of the Subsidiary, the controlling shareholders of the Subsidiary
became controlling shareholders of the Company.
The Company (hereafter "the Company" may be used to include the activities of
its newly acquired Subsidiary) seeks to build a leadership position in the
computer software retail market by licensing fully tested software
applications from independent software developers. In time, the Company
intends to acquire a family of software applications. The Company's main
emphasis lies in PC utilities titles, but the Company intends in the future
to offer a selection of reference, productivity and communication titles both
in the North American and International market. The software products are
being marketed through traditional software distribution channels and the
Internet's World Wide Web. The Company is currently building distribution and
financing capabilities worldwide, with particular emphasis in Southeast Asia.
Liquidity and Capital Resources
Net cash used in operating activities was $1,044,243 and $141,945 for the
nine months ended September 30, 1999 and 1998, respectively. The increase
in cash used in operating activities is primarily attributable to the
increase in sales on account. The increases in inventory and accounts
payable is due to purchases of ISA cards. The Company's operating cash flows
have been insufficient to satisfy growing cash needs without the help of a
private placement offering of $1,062,000 (1,446,000 shares) during the first
quarter of 1999. Also, the Company concluded a second private placement in
October of 1999 of $2,000,000 (2,000 shares of 6% Series A Preferred Stock
and a warrant to purchase 100,000 shares of Common Stock).
Liquidity is a significant concern for the Company until it can generate
adequate cash flows from operations, which are primarily dependent on the
development, marketing and distribution of the Company's products. Management
believes that continued financing from private investors through the issuance
of Common Stock must be obtained in order to meet the Company's expected
growth and capital needs for the coming year. With the additional infusion
of capital and the existing receivables, the Company is planning to build
additional inventory, hire additional staff, meet its budgeted marketing
efforts and acquire other products or businesses. There are no assurances,
however, that the Company will be successful in its efforts to obtain
additional equity financing.
Accounts receivable has increased dramatically due to the growth in sales on
account. Although the Company does not anticipate any problems related to
accounts receivable
11
collections, it is currently taking measures to assure collection on all
amounts outstanding. In addition, the Company continues to record an
allowance for possible returns. Also, accounts payable had increased
significantly due to the significant purchase of ISA cards.
The Company eventually will also need to obtain additional credit facilities
for working capital purposes. No assurance can be given, however that such
credit facilities will be available to the Company when or on the terms useful
to the Company.
Results of Operations
Three Months Ended September 30, 1999 and 1998
The Company derives revenue from the sale of software products, which it
licences from developers and resells. The Company sells its products in North
America primarily through retailers and distributors. The Company's
international sales represented less than 6% and 1% of sales during the
third quarter of 1999 and 1998, respectively.
The Company's sales increased $2,499,287 from $548,316 for the third
quarter of 1998 to $3,047,603 for the same period in 1999. The Company's
increase in sales and increases in other items from operations are due
primarily to the increasing sales of the IntelliFix 2000, Web-Site Traffic
Builder and Total Fax products. The Company expects sales to continue to
increase for the rest of the fiscal year due to the growing demand for its
year 2000 software products.
Cost of sales includes cost of goods sold, royalties paid to developers and
the costs for maintaining technical support. The cost of sales totaled
$1,558,358 for the three months ended September 30, 1999 and constituted 51%
of total sales as compared to $54,779 and 10% of total sales for the same
period in 1998. The change in the percent of sales is due to an increase in
royalty fees and cost of production for the titles being produced during the
third quarter of 1999. The bulk of this increase is associated with the
Company's increased sales of ISA cards which has increased cost of goods sold
as a percentage because the cost of production and royalties are
significantly higher for the cards than other products. The Company
anticipates that cost of sales as a percentage of sales should be
approximately 50% for the next quarter due to anticipated sales of ISA cards.
The total sales and marketing for the third quarter of 1999 amounted to
$531,834 while the same period in 1998 amounted to $136,416. The Company
participated in a variety of marketing promotions during the third quarter of
1999. In addition, the Company hired more sales people to meet the increasing
demand for the year 2000 products. Sales and marketing expense as a
percentage of sales were 17% and 25% for the three months ended September 30,
1999 and 1998, respectively. The Company expects sales and marketing expense
to approach 15% for the next quarter as its marketing in preparation for the
year 2000 will begin to wind down.
General and administrative expenses totaled $361,894 and $117,106 for the
three months ended September 30, 1999 and 1998, respectively. The increase in
costs can be attributed to the continued growth of the Company. The growth
of the Company has made it necessary to hire more employees and to lease
additional office and warehouse space. General and administrative costs have
decreased as a percentage of sales to 12% from 21% for the three months ended
September 30, 1999 and 1998, respectively. The Company anticipates general
and administrative expenses as a percentage of sales to decrease to 10% the
next quarter due economies of scale that have been achieved.
For the rest of 1999, the Company expects to continue to grow by realizing
overseas growth in its current product lines and the increased demand for the
year 2000 products. The Company has a sales/fulfillment center in Ireland to
handle sales in Europe and a similar center in Malaysia to handle sales in
the Far East. International sales are expected to be approximately 30% of
total volume for 1999. The Company is expected to experience additional
growth in its sales of its IntelliFix 2000 product and ISA Cards as the year
2000 approaches and the Y2K problem becomes more prominent. In addition, the
Company plans to market and sale the global communication module (GCM) during
the fourth quarter of 1999. The GCM allows for an unlimited number of users
to interact over networks and/or the Internet using a variety of data types,
including audio, live and recorded video, text and html, among others, and
combines these various data types into one data stream.
The Company is currently planning to use the proceeds of the private
placements for expanding its marketing budget, for acquisitions of
subsidiaries and for expansion and diversification of its products and/or
other services.
The Company is also expanding its sales potential and presence by selling its
products directly to consumers over the Internet, thus eliminating significant
overhead expenses associated with wholesale and retail marketing through
existing channels.
For the three months ended September 30, 1999, the Company reported operating
income of $595,517, compared to operating income of $240,015 in the
corresponding period in 1998.
For the three months ended September 30, 1999, the Company reported net income
of $290,879, compared to net income of $240,015 in the corresponding period in
1998. These increases are primarily attributed to increased sales of the
IntelliFix 2000, ISA Cards, Web-Site Traffic Builder and Total Fax products.
The Company realizes that the sales of the Year 2000 products will
significantly decrease in the year 2000. However, the Company is currently
developing additional Internet and communications software which it
anticipates releasing beginning the first quarter of the year 2000.
Nine Months Ended September 30, 1999 and 1998
The Company's sales amounted to $6,467,014 and $1,382,961 for the nine months
ended September 30, 1999 and 1998, respectively. The Company's increase in
sales and increases in other items from operations are due primarily to the
increased sales of the IntelliFix 2000, ISA Cards, Web-Site Traffic Builder
and Total Fax products. Also, the Company had three more products in its
sales production for the first nine months that were not in the sales channels
for all nine months of the same period in 1998. In addition, sales of the ISA
Cards have increased dramatically during 1999 over the same period in 1998.
The cost of sales totaled $3,214,038 and $293,552 for the first nine months
of 1999 and 1998, respectively. Cost of sales as a percentage of sales
increased to 50% for the first nine months of 1999 from 21% for the same
period in 1998. The change in the percent of sales is primarily due to an
increase in royalty fees and cost of production for the titles being produced
and sold during the first nine months of 1999. Part of this increase is
associated with a special promotion that the Company conducted with respect to
one of its products, TotalFax. Cost of the TotalFax product increased due to
a promotion that includes the sale of a modem with the purchase of each
product. In addition, the Company's increased sales of ISA cards has increased
cost of goods sold as a percentage because the cost of production and
royalties are significantly higher for the cards than other products.
The total sales and marketing for the first nine months of 1999 amounted to
$926,830 while the same period in 1998 amounted to $425,639. The increase in
sales and marketing expenses is primarily due to the Company's aggressive
marketing of its' products through a number of major retailers.
General and administrative expenses totaled $1,100,526 and $238,234 for the
first nine months of 1999 and 1998, respectively. General and administrative
expenses amounted to 17% and 17% of sales for the first nine months of 1999
and 1998, respectively. The growth of the Company has made it necessary to
hire more employees and to lease additional office and warehouse space. In
addition, the Company has employed an investor relations firm that has
significantly increased general and administrative expenses.
For the nine months ended September 30, 1999, the Company reported operating
income of $1,225,620 compared to operating income of $425,536 in the
corresponding period in 1998.
For the nine months ended September 30, 1999, the Company reported net income
of $672,468 compared to net income of $424,893 in the corresponding period in
1998. The increase is primarily attributed to increased sales of the
IntelliFix 2000, ISA Cards Web-Site Traffic Builder and Total Fax products.
Cautionary Statement for Purposes of the "Safe Harbor Provision" of the Private
Securities Litigation Reform Act of 1995
When used in this report, the words "believe," "plan," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements are subject to certain risks and uncertainties, including
those discussed below, that could cause actual results to differ materially
from those stated. All of these forward-looking statements are based on
estimates and assumptions made by management of the Company, which although
believed to be reasonable, are inherently uncertain and difficult to predict.
There can be no assurance that the benefits or results anticipated in these
forward-looking statements will be achieved. The following important
factors, among others, could cause the Company's to no experience the results
contemplated in this report, or otherwise cause the Company's results of
operations to be adversely affected in the future: (i) the Company's reliance
on the sale of few products; (ii) the Company's dependence on the ability of
its distribution channels to market the Company's products; (iii) the
Company's dependence on one major distributor for retail sales; (iv) the
Company's reliance on its Y2K software for a majority of revenues; (v) the
uncertainty of the potential impact of the Year 2000 on computer systems; (vi)
continued or increased competitive pressures from existing competitors and new
entrants; (vii) unanticipated costs related to the Company's growth and
operating strategies; (viii) loss of key members of management; (ix)
deterioration of general economic conditions; (x) loss of customers
or customer acceptance of Company products; (xi) unanticipated problems or
"bugs" in the Company's software products; and (xii) the outcome of any
litigation the Company may be involved in. Stockholders, potential investors
and other readers are urged to consider these factors carefully in evaluating
the forward-looking statements and are cautioned not to place undo reliance
on such forward-looking statements. Many such factors are beyond the control
of the Company.
The forward-looking statements made herein are only made as of the date of the
Form 10-QSB and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
Year 2000 Compliance
The Company has assessed the impact of the Year 2000 issue* on its information
technology ("IT") and non-IT systems. Approximately six thousand five hundred
dollars ($6,500.00) has been incurred to upgrade existing systems so that they
are Year 2000 compatible. The Company financed the upgrades with operating
income. The Company does not anticipate additional expenditures in connection
with Year 2000 compliance for its internal systems.
The Company's two servers have been tested for Year 2000 compliance and each
has been found to meet the National Software Testing Laboratories Standard.
Each of the Company's two operating systems have also been updated for Year
2000 compliance. Management believes that its computer systems are Year 2000
compliant. Nevertheless, significant uncertainty exists concerning the
potential impact of the Year 2000 on computer systems generally. Any year
2000 compliance problems of the Company or any of its customers or such
affiliates could have a material adverse effect upon the Company's business,
results of operations, or financial condition.
The Company has evaluated the risks to the Company of a disruption in its
business resulting from Year 2000 compliance problems with its customers and
suppliers. At the present time, the Company believes that a reasonable worst
case scenario involving Year 2000 problems will be a loss of revenue due to an
interruption in certain business activities or operations. The Company has
canvassed critical suppliers and distributors and they have assured the Company
that they are Year 2000 compliant. The Company has developed contingency
plans for dealing with Year 2000 issues, including the worst case scenario
just described. The contingency plan includes but is not limited to the
following: (i) the Company will fulfill all significant orders a week before
the end of the year to assure that the orders will be delivered prior to
December 31, 1999, and (ii) purchase sufficient inventory to fulfill orders
for the first two weeks into January of 2000.
The "Year 2000 Problem" has arisen because many computer programs were
written using only the last two digits to refer to a year (i.e. "98" for
1998). Therefore, these computer programs may not properly recognize the year
2000. If not corrected, many computer applications could fail or create
erroneous results.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 6, 1999, On The Planet, Inc. filed a lawsuit in the United States
District Court for the District of Utah against Intelliquis International,
Inc. ("Intelliquis"). The claims purportedly arise out of a Software Rights
Agreement under which Intelliquis granted On The Planet "an exclusive license
for direct sales along with a nonexclusive license for all other sales
including but not limited to retail sales" for certain Y2K fix software
identified therein. On The Planet asserts that Intelliquis violated that
Agreement by engaging in direct sales or giving third parties a license to
engage in direct sales of the Y2K fix software and other related products. On
The Planet asserts claims of copyright infringement, breach of contract and
fraud. In addition to injunctive relief, On The Planet is seeking unspecified
damages including profits lost through the direct sales of the Y2K fix
software, as well as attorneys' fees and punitive damages. In response
to the lawsuit filed by On The Planet, Intelliquis has denied the claims filed
against it and has filed counterclaims seeking rescission of the Software
Rights Agreement and asserting breach of contract of that Agreement.
Intelliquis has also filed additional claims against On The Planet and its
principal, Ernest Hemple, arising from conduct that Intelliquis believes
constitutes defamation and interference with contract. If an amicable
resolution is not reached in the near future, Intelliquis intends to
vigorously defend the action and prosecute its counterclaims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
On October 25, 1999, the Company entered into an agreement to sell to ROBI
Investors LLC, a Delaware limited liability company ("Purchaser"), for
$2,000,100 in cash the following securities: (a) 2,000 shares of 6%
convertible Series A Preferred Stock, par value $0.001 per share ("Series A
Preferred Stock") (the "Initial Shares"); warrants to purchase 100,000 shares
of common stock ("Initial Warrants"); a warrant ("Conditional Warrant") to
purchase up to 3,000 shares of Series A Preferred Stock ("Additional Shares"),
with warrants to purchase up to 150,000 shares of common stock )"Additional
Warrants"). The terms and conditions of the sale are set forth in a Stock
Purchase Agreement with accompanying ancillary agreements as exhibits (the
"Stock Purchase Agreement"). The Company closed the sale on October 26, 1999.
Each share of Series A Preferred Stock is convertible into shares of common
stock, subject to certain adjustments and other terms as provided in the
Certificate of Designation applicable to the Series A Preferred, on the
following terms:
Each share of Series A Preferred Stock is convertible, at the option of the
holder thereof, at any time and from time to time, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
$1,000, plus the amount of any accrued and unpaid dividends the Company
elects to pay in Common Stock, by the Conversion Price (as defined below) in
effect at the time ofconversion. The Conversion Price at which shares of
Common Stock shall be deliverable upon conversion of Series A Preferred Stock
without the payment of additional consideration by the holder thereof (the
"Conversion Price") shall be the lower of (i) 115% of the average Closing Bid
Price of the shares of Common Stock for the five (5) trading days immediately
preceding the Initial Closing Date (as defined in Securities Purchase
Agreement) or (ii) 80% of the average of the three lowest Closing Bid Prices
of the shares of Common Stock for the twenty (20) trading days immediately
preceding the Series A Preferred Stock Conversion Date (as hereinafter
defined). For these purposes, the term "Closing Bid Price" means, for any
security as of any date, the closing bid price on the principal securities
exchange or trading market where the Common Stock is listed or traded as
reported by Bloomberg, L.P. ("Bloomberg") or, if applicable, the closing bid
price of the Common Stock in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing
bid price is reported for the Common Stock by Bloomberg, then the average of
the bid prices of any market makers for such security as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price of the
Common Stock can not be calculated on such date on any of the foregoing bases,
the Closing Bid Price of the Common Stock on such date shall be the fair
market value as determined by the holders of a majority of the outstanding
shares of Series A Preferred Stock being converted for which the calculation
of the Closing Bid Price is required in order to determine the Conversion
Price of such shares. For these purposes, "trading day" shall mean any
day on which the Company's Common Stock is traded for any period on the
principal securities exchange or other securities market on which the Common
Stock is then being traded. If, during any period following October 25, 1999,
as a result of the occurrence of any of the events set forth in Section 3(f)
of 3(g) of the Registration Rights Agreement, dated as of October 12, 1999, by
and between the Company and the Purchaser set forth therein, the Purchasers
set forth therein are not able to sell shares of Common Stock issuable upon
conversion of, or in lieu of dividends on, shares of Series A Preferred Stock
pursuant to a registration statement filed pursuant to such agreement, the
holders of shares of Series A Preferred Stock shall have the right, for any
purpose during such period and thereafter, to designate as the Conversion
Price any Conversion Price that would have been applicable during such period
had such Series A Preferred Stock shareholder delivered a Notice of Conversion
with respect to any such Series A Preferred Stock. For these purposes, each
date on which a notice of conversion is delivered to the Company is deemed a
"Series A Preferred Stock Conversion Date."
The initial Warrants and Additional Warrants include the following main terms
of exercise: (a)exercisable at an exercise price of $3.03 subject to certain
price anti-dilution adjustments as are provided in the First Warrant; and (b)
expires on October 25, 2002. The Conditional Warrant includes the following
main terms of exercise: (a) exercisable at an exercise price of $1,000 per
share, with a 1,000 share minimum, and (b) expires October 25, 2001.
The Company is obligated to pay Millennium Capital Holdings, LLC a placement
agent, a commission of (a) cash payments of 7.5% on the aggregate purchase
price of (i) the Initial Shares and Initial Warrants and (ii) upon exercise of
the Conditional Warrant, the Additional Shares and Additional Warrants, and
(b) the issuance of (x) common stock purchase warrants for 60,000 shares and
(y) upon the exercise of the Conditional Warrant, common stock purchase
warrants for up to 90,000 shares.
In summary , the Securities purchase Agreement contains, among other things:
(a) a covenant by the Company to not offer or sell, except in a greater than
$10 million public offering, any equity security for a period of 270 days
after the closing of the sale of the Initial Shares, closing of the Conditional
Warrant exercise, or effectiveness of the registration statement filed
pursuant to the Purchaser's registration rights (the "Lock-Up Period"): (b)
grant of a "right of first refusal" to Purchaser for any sale of securities by
the Company for 18 months following the Lock-Up Period; (c) a limitation on
the Company's ability to file a registration statement for at least 180 days
following the effectiveness of the registration statement filed pursuant to
Purchaser's registration rights; and (d) certain limitations on the payment of
dividends or distributions on common stock and redemption of Company securities.
In conjunction with the Securities Purchase Agreement, the Company entered
into a Registration Rights Agreement with the Purchaser which requires, among
other things, that the Company: (a) prepare and file withing 30 days after
October 26, 1999 one or more registration statements on Form SB-2 (or other
available form) covering resale of the shares of common stock issued (i)
pursuant to conversion of the Initial Shares and Series A Preferred Stock
shares issued under the Conditional Warrant, (ii) in lieu of dividends on the
Initial Shares and Series A Preferred Stock shares issued under the
Conditional Warrant, and (iii) upon exercise of the Initial Warrants and
Additional Warrants; (b) maintain the registration statement in effect for
certain minimum periods of time (but no more than 24 months); (c) the payment
of certain penalties to the Purchaser upon certain defined events of defaults
in the Company's obligations; (d) certain "piggyback" registration rights.
The foregoing summary of the terms of the Securities Purchase Agreement is
qualified in its entirety by reference to the Securities Purchase Agreement
and accompanying exhibits which are attached hereto as an exhibit to this Form
10-QSB.
The Company sold the securities described above in a privately negotiated
transaction with an accredited investor an without general solicitation or
advertising pursuant to the exemption from registration provided under Section
4(2) of the Securities Act of 1933, as amended and Regulation D promulgated
thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
10.1 Securities Purchase Agreement, dated
October 25, 1999, between the company and
ROBI Investors, LLC
27 Financial Data Schedule
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Intelliquis International, Inc.
By: /s/ Dave Jones
Dave Jones, Chief Financial Officer and Duly
Authorized Officer of the Registrant
Dated: November 19, 1999
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