UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-11730
COGNIGEN NETWORKS, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-0189377
--------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
(Address of principal executive offices)
(206) 297-6151
(Issuer's Telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
--- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class September 30, 2000
------------------------ --------------------
Common Stock, .001 par value 46,980,547
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
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COGNIGEN NETWORKS, INC.
Commission File Number: 0-11730
Quarter Ended September 30, 2000
FORM 10-QSB
Part I - FINANCIAL INFORMATION
Unaudited Consolidated Statements of Operations..........................Page 1
Unaudited Consolidated Balance Sheets....................................Page 2
Unaudited Consolidated Statements of Cash Flows..........................Page 3
Notes to Unaudited Consolidated Financial Statements.....................Page 4
Management's Discussion and Analysis or Plan of Operation................Page 6
Part II - OTHER INFORMATION..............................................Page 9
Signatures..............................................................Page 10
<PAGE>
COGNIGEN NETWORKS, INC.
Unaudited Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Revenue
Prepaid cards and pins ............................ $ 445,090 $ 181,212
Call back and switching services .................. -- 118,792
Commissions ....................................... 445,133 871,647
Allowances ........................................ (5,379) 5,059
------------ ------------
Total revenue ................................... 884,844 1,176,710
------------ ------------
Operating expenses
Prepaid cards and pins ............................ 302,637 130,830
Call back and switching services .................. -- 129,569
Marketing Commissions ............................. 345,043 457,217
Sales, general and administrative ................. 6,472,289 951,672
------------ ------------
Total operating expenses ........................ 7,119,969 1,669,288
------------ ------------
Loss from operations ................................. (6,235,125) (492,578)
Other income (expense)
Interest expense .................................. 35,550 19,650
------------ ------------
Loss before income taxes ............................. (6,270,675) (512,228)
Income taxes ......................................... -- --
------------ ------------
Net loss ............................................. $ (6,270,675) $ (512,228)
============ ============
Loss per common share - basic and diluted ............ $ (.26) $ (.01)
============ ============
Weighted average number of common shares
outstanding - basic and diluted ..................... 24,123,524 84,278,991
============ ============
</TABLE>
<PAGE>
COGNIGEN NETWORKS, INC.
Unaudited Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
------------ ------------
Assets
<S> <C> <C>
Current assets
Cash .............................................. $ 717,344 $ 275,630
Accounts receivable, net of allowance for
doubtful accounts of $5,000 ...................... 61,046 215,392
Commissions receivable, net of allowance for
doubtful accounts of $25,000 ..................... 538,163 676,795
Employee receivable ............................... 1,661 2,957
Inventory ......................................... 133,486 128,229
Other current assets .............................. 417,028 473,450
Deferred tax asset - current ...................... -- --
------------ ------------
Total current assets ........................ 1,868,728 1,772,453
------------ ------------
Property, plant and equipment, net of accumulated
depreciation of $363,121 at June 30, 2000 and
$430,592 at September 30, 2000, respectively ........ 486,291 422,472
Other assets
Deposits and other assets ......................... 88,552 100,867
Goodwill, net ..................................... 3,655,017 3,506,103
Customer lists .................................... 1,300,000 1,300,000
Deferred tax asset - non current .................. -- --
------------ ------------
Total other assets .......................... 5,043,569 4,906,970
------------ ------------
Total assets ......................................... $ 7,398,588 $ 7,101,895
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable .................................. $ 97,420 $ 198,423
Other accrued liabilities ......................... 108,324 88,561
Interest payable .................................. 239,421 256,354
Commissions payable ............................... 326,681 470,389
Payroll taxes payable ............................. 21,179 24,108
Current portion of capital leases ................. 106,551 77,276
Current portion of notes payable .................. 315,000 825,000
------------ ------------
Total current liabilities ................... 1,214,576 1,940,111
------------ ------------
Long-term portion of capital leases .................. 12,152 12,152
Long-term portion of notes payable ................... 510,000 --
------------ ------------
Total liabilities ........................... 1,736,728 1,952,263
------------ ------------
Commitments and Contingencies
Stockholders' equity
Common stock $.001 par value, 50,000,000 shares
authorized; 46,980,547 and 46,980,547 issued
and outstanding at June 30, 2000 and September 30,
2000 and 37,298,444 to be issued shares (2000) ... 84,278 84,278
Additional paid-in capital ........................ 13,594,051 13,594,051
Accumulated deficit ............................... (8,016,469) (8,528,697)
------------ ------------
Total stockholders' equity .................. 5,661,860 5,149,632
------------ ------------
Total liabilities and stockholders' equity ........... $ 7,398,588 $ 7,101,895
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
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COGNIGEN NETWORKS, INC.
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss ................................................ $(6,270,675) $ (512,228)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization ......................... 22,908 216,385
Stock options granted for services to non employees ... 5,836,724 --
Changes in assets and liabilities
Accounts receivable ................................. 88,979 (154,346)
Commissions receivable .............................. -- (138,632)
Inventory ........................................... 4,083 5,257
Other assets ........................................ -- (57,718)
Deposits ............................................ -- (12,315)
Interest payable .................................... 35,550 16,933
Accounts payable .................................... 11,887 101,003
Accrued expenses .................................... -- (19,763)
Deferred revenue .................................... 1,926 --
Commissions payable ................................. 35,844 143,708
Payroll taxes payable ............................... 3,436 2,929
----------- -----------
6,041,337 103,441
----------- -----------
Net cash used in operations ....................... (229,338) (408,787)
----------- -----------
Cash flows from investing activities
Cash acquired in acquisition ............................ 21,248 --
Purchases of fixed assets ............................... -- (3,652)
Advances to related party ............................... (200,000) --
----------- -----------
Net cash provided by (used by) investing activities (178,752) (3,652)
----------- -----------
Cash flows from financing activities
Proceeds from subscriptions received .................... 884,289 --
Payments on notes payable ............................... (315,000) --
Proceeds from notes payable ............................. 125,000 --
Payments on capital leases .............................. -- (29,275)
----------- -----------
Net cash provided by financing activities ......... 694,289 (29,275)
----------- -----------
Net increase in cash and cash equivalents .................. 286,199 (441,714)
Cash and cash equivalents-beginning of period .............. -- 717,344
----------- -----------
Cash and cash equivalents-end of period .................... $ 286,199 $ 275,630
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
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<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Description of Business
Cognigen Networks, Inc (the Company) is engaged in the business of providing
telecommunications products and services to worldwide markets. The Company's
activities include selling prepaid calling cards, providing call switching
services, and Internet marketing of telecommunications products and services,
pagers and computers.
Note 2 - Summary of Significant Accounting Policies
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, have been made to (a) the results of consolidated
operations for the three month periods ended September 30, 2000 and 1999,
respectively, (b) the consolidated balance sheet at September 30, 2000 and (c)
the consolidated statements of cash flows for the three month periods ended
September 30, 2000 and 1999, respectively, in order to make the financial
statements not misleading.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for financial
statements. For further information, refer to the audited consolidated financial
statements and notes thereto for the year ended June 30, 2000, included in the
Company's Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission.
The results for the three month period ended September 30, 2000 may not
necessarily be indicative of the results for the fiscal year ended June 30,
2001.
Note 3 - Basis of Presentation
All per share amounts reflect the 37,298,444 shares the Company has a legal
obligation to issue in the future in connection with the reverse acquisition of
ITHC, and have been treated as outstanding from the date of acquisition.
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<PAGE>
COGNIGEN NETWORKS, INC.
Notes to Unaudited Consolidated Financial Statements
Note 4 - Stock Options
The Company issued 32,400,000 options entitling the holders to purchase the
Company's common stock at $0.46 per share. The options vest immediately and
expire five years from the date issued. The options cannot be exercised until
the Company amends it articles of incorporation or effects a reverse split of
its common stock so that it has sufficient shares available for issuance upon
the exercise of these options. 25,200,000 of these options were issued to non
employees while the remaining options were issued to employees and directors.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock options
issued to employees and directors. $6,022,044 of compensation expense was
recorded in connection with the options granted to non employees based on a
value of $.23 per option.
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<PAGE>
COGNIGEN NETWORKS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
Certain of the information discussed in this quarterly report, and in particular
in this section entitled "Management's Discussion and Analysis or Plan of
Operation," contains forward-looking statements that involve risks and
uncertainties that might adversely affect the operating results of Cognigen
Networks, Inc. ("Company") in the future in a material way. Such risks and
uncertainties include, without limitation, rate changes, fee policy or
application changes and competition. Many of these risks are beyond the control
of the Company. The Company is not entitled to rely on the safe harbor
provisions of Section 27A of the Securities Act of 1933, as amended, or Section
21E of the Securities Exchange Act of 1934, as amended, when making
forward-looking statements.
Overview
The Company is engaged in the business of providing telecommunications products
and services to worldwide markets. The Company's activities include selling
prepaid calling cards, providing call switching services, and Internet marketing
of telecommunications products and services, pagers and computers.
The Company was incorporated on May 6, 1983, in Colorado. On August 20, 1999,
the Company completed the acquisition of all of the net assets of ITHC in
exchange for up to 49,041,397 shares of the Company's common stock. For
financial statement purposes, this business combination was accounted for as an
additional capitalization of ITHC (a reverse acquisition in which ITHC was the
accounting acquirer). For accounting purposes, ITHC is considered the surviving
entity and the historical financial statements prior to the acquisition are
those of ITHC.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999.
Total revenue for the three months ended September 30, 2000 was $1,176,710
compared to $884,844 for the three months ended September 30, 1999. Total
revenue for the 2000 period consisted of $181,212 related to prepaid cards and
pins and $871,647 related to commissions. Total revenue for the comparable
period in 1999 consisted of $445,090 related to prepaid cards and pins and
$445,133 related to commissions. The $263,878, or 59%, decrease in prepaid cards
and pins is due to reduced tariff calls as a result of competition. The
$426,514, or 96%, increase in commissions is due to an increase in agents of
approximately 36,900 new agents. Call back and switching revenue for the three
months ended September 30, 2000 was $118,792 for which there was no comparable
revenue for 1999.
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<PAGE>
COGNIGEN NETWORKS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Operating costs related to prepaid cards and pins for the three months ended
September 30, 2000 decreased $171,807, or 57%, to $130,830 from $302,637 during
the three months ended September 30, 1999. Operating costs related to
commissions for the three months ended September 30, 2000 increased $112,174, or
33%, to $457,217 from $345,043 during the three months ended September 30, 1999.
The cost increases are directly related to the increases in sales revenue. The
call back and switching services costs were $129,569 for the three months ended
September 30, 2000 for which there were no comparable costs for 1999.
General and administrative operating expenses increased $316,607, or 50%, to
$951,672 during the three months ended September 30, 2000 from $635,565 during
the three months ended September 30, 1999. This increase is due to increased
salaries of $123,130 as a result of more headcount and depreciation and
amortization of $193,477.
The Company incurred a loss from operations of $492,578 for the three months
ended September 30, 2000 compared to $6,235,125 for the three months ended
September 30, 1999. The decrease in operating loss during the current period is
directly related to the expense of stock options granted for services to non
employees of $5,836,724 recognized during the three months ended September 30,
1999.
Interest expense decreased $15,900, or 45%, to $19,650 for the three months
ended September 30, 2000 from $35,550 for the three months ended September 30,
1999. The reduction is a result of the payoff of a portion of debt. After
interest expense, the net loss for the three months ended September 30, 2000 was
$512,228, or $.01 loss per share, compared to a net loss of $6,270,675, or $.26
loss per share, for the three months ended September 30, 1999.
Liquidity and Capital Resources:
The Company has funded its operations to date primarily from shareholder
advances and stock subscriptions received. At September 30, 2000, the Company
had cash and cash equivalents of $275,630 and negative working capital of
$179,810.
Cash used by the Company for operating activities during the three months ended
September 30, 2000 was $408,787. A primary component of the use of cash during
the three months was the Company's net loss of $512,228 adjusted for non-cash
adjustments for depreciation and amortization of $216,385. Additional uses of
operating cash for the three months included increases in the Company's accounts
receivable of $154,346, commissions receivable of $138,632, other assets of
$57,718, and deposits of $12,315. The uses in operating cash were partially
offset by cash provided of $101,003 from accounts payable, $143,708 of
commissions payable, and $16,933 of interest payable. Cash used for investing
activities includes $3,652 for the purchase of fixed assets. Additional uses of
cash during the three months ended September 30, 2000 include payments on
capital leases of $29,275.
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<PAGE>
COGNIGEN NETWORKS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company currently has three notes payable and various capital leases with
total outstanding balances of $914,428 at September 30, 2000. Two of the notes
are due July 1, 2001 and one is due February 12, 2001. The Company has
maturities of capital leases and notes payable of $902,276 required during the
next twelve months. Cash generated from operations was not sufficient to meet
the Company's working capital requirements for the quarter ended September 30,
2000, and may not be sufficient to meet the Company's working capital
requirements for the foreseeable future. As a result, the Company is exploring
various bridge financing and/or additional equity financing to meet current
operating requirements until operations can generate sufficient cash to become
self-sustaining. There can be no assurances that the Company will be able to
secure additional debt or equity financing or that operations will produce
adequate cash flows to allow the Company to meet all of the Company's future
obligations. The Company has no significant planned capital expenditures
covering the next twelve months. The Company maintains two customer databases
containing archived names with historical records of long distance
telecommunication service users, to which the Company intends to devote
substantial efforts during the next twelve months to transform these names into
active CST customer accounts. The Company has been in negotiations with a
telemarketing firm to assist in the transformation of these names into active
accounts. The Company anticipates an initial cost of approximately $93,000 for
these telemarketing services and have received a verbal commitment from a third
party to assist in funding these telemarketing costs, as necessary. The Company
has also entered into an option agreement with a joint venture consisting of the
sellers of the customer databases, which provides that if certain targeted
levels of active customers cannot be transformed from the databases, the
Company's original investment in these databases will be refunded through the
forgiveness of the remaining debt outstanding and the return of the Company's
shares to the Company. The Company believes this agreement is a major step in
protecting the recoverability of the the Company's original investment in these
databases.
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<PAGE>
COGNIGEN NETWORKS, INC.
Commission File Number: 0-11730
Quarter Ended September 30, 2000
Form 10-QSB
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
On July 14, 2000, a Current Report on Form 8-K was filed that reported under
Item 5 that the Company had changed its name to Cognigen Networks, Inc. and that
included Articles of Amendment to the Articles of Incorporation as an exhibit
under Item 7(c).
On July 20, 2000, a Current Report on Form 8-K/A was filed reporting the name
change under Item 5 and again filing the Articles of Amendment to the Articles
of Incorporation as an exhibit under Item 7(c).
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<PAGE>
COGNIGEN NETWORKS, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COGNIGEN NETWORKS, INC.
By: /s/ Darrell H. Hughes
Darrell H. Hughes
President and Chief Executive
Officer
By: /s/ David G. Lucas
David G. Lucas
Chief Financial Officer
Denver, Colorado
November 13, 2000
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