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 November 30, 1999 Commission File No. 33-23430-D
NETCOMMERCE, INC.
(Formerly Virtual Enterprises, Inc.)
(Exact name of registrant as specified in its charter)
Nevada 84-1091271
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4695 MacArthur Court, Suite 530, Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
(949) 475-6755
(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 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 30, 1999, there were 16,240,272 shares of the Registrant's
$.01 par value common stock issued and outstanding. There were also outstanding
warrants to purchase up to 668,014 shares of the Registrant's common stock.
[NETCOM\10Q:113099a.wpd]
<PAGE>
NETCOMMERCE, INC.
INDEX
Page
PART I
Item 1. Financial Statements
Consolidated Balance Sheet - November 30, 1999.......................1
Consolidated Statements of Operations - Six Months and Three
Months Ended
November 30, 1999 and 1998........................................2
Consolidated Statements of Stockholders' Equity
Six Months Ended November 30, 1999 ..............................3
Consolidated Statements of Cash Flows - Six Months Ended
November 30, 1999 and 1998........................................4
Notes to Financial Statements........................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................8
PART II
Item 1. Legal Proceedings...................................................10
Item 2. Changes In Securities...............................................10
Item 3. Defaults Upon Senior Securities.....................................10
Item 4. Submission of Matters to a Vote of Security Holders.................10
Item 5. Other Information...................................................10
Item 6. Exhibits and Reports on Form 8-K....................................10
I
[NETCOM\10Q:113099a.wpd]
<PAGE>
NetCommerce, Inc.
(Formerly, Virtual Enterprises, Inc.)
Consolidated Balance Sheet
November 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ -
Accounts Receivable 49,629
Total current assets 49,629
Property and equipment, net of accumulated
depreciation of $165,228 229,411
Goodwill, net of accumulated amortization
of $171,779 710,363
Client lists, net of accumulated amortization
of $67,887 185,115
Prepaid Expenses 275,800
Deposits 9,692
Total assets $ 1,460,010
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 470,616
Accrued compensation to officers 42,000
Accrued consulting fees 186,000
Other accrued liabilities 144,158
Deferred revenue 113,077
Notes Payable 350,000
Total current liabilities 1,305,851
Notes payable to officers 287,133
Total liabilities 1,592,984
Stockholders' equity:
Common stock, par value $0.01; 50,000,000 shares
authorized, 16,240,272 shares issued and outstanding
Additional paid in capital 162,403
Accumulated deficit 2,793,316
(3,088,693)
Total stockholders' equity (132,974)
Total liabilities and stockholders' equity $ 1,460,010
</TABLE>
See accompanying notes to consolidated financial statements.
[NETCOM\10Q:113099a.wpd]
1
<PAGE>
NetCommerce, Inc.
(Formerly, Virtual Enterprises, Inc.)
Consolidated Statements of Operations
For The Six Months and Three Months Ended November 30, 1999 and 1998
<TABLE>
Three Months Ended Six Months Ended
November 30, Novemeber 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues $ 193,460 $ 76,560 $ 399,619 $ 114,840
Expenses:
Salaries and wages 86,596 39,834 135,800 72,426
Consulting fees and commissions 357,937 152,211 447,078 276,747
Common stock issued to employees for
services rendered - 51,877 - 94,322
Other operating expenses 72,910 160,993 558,833 292,715
Total expenses 517,443 404,915 1,141,711 736,210
Operating loss (323,983) (328,355) (742,092) (621,370)
Interest expense 127,949 26,177 239,212 47,594
- (190) - (345)
Loss before income taxes (451,932) (354,342) (981,213) (668,619)
Income taxes - - 1,600 -
Net loss $(451,932) $ (354,342) $(982,813) $(668,619)
Basic and diluted earnings per share $ (.03) $ (.02) $ (.06) $ (.04)
</TABLE>
[NETCOM\10Q:113099a.wpd]
2
<PAGE>
NetCommerce, Inc.
(Formerly, Virtual Enterprises, Inc.)
Consolidated Statements of Stockholders' Equity
For The Six Months Ended November 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional
Paid-In Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balances, May 31, 1999 15,919,372 $159,194 $2,486,345 $(2,105,880) $ 539,659
Shares issued in connection with
loan funding 200,000 2,000 198,000 - 200,000
Net loss for peiod - - - (530,881) (530,881)
Balances for August 31, 1999 16,119,372 161,194 2,684,345 (2,636,761) 208,778
Shares issued in connection with
loan funding 100,000 1,000 99,000 - 100,000
Shares issued in settlement of
debt 20,900 209 9,971 - 10,000
Net loss for period - - - (451,932) (451,932)
Balances for November 30,
1999 16,240,272 $162,403 $2,793,316 (3,088,693) $(132,974)
</TABLE>
See accompanying notes to consolidated financial statements.
[NETCOM\10Q:113099a.wpd]
3
<PAGE>
NetCommerce, Inc.
(Formerly, Virtual Enterprises, Inc.)
Consolidated Statement of Cash Flows
For The Six Months Ended November 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (982,813) $ (668,619)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 58,654 31,200
Amortization 102,764 -
Issuance of common stock for services rendered by employees - 174,937
Change in operating assets and liabilities:
Issuance of common stock for interest, net of amortization of
$100,000 175,000 40,000
Increase in accounts payable 340,362 48,000
Increase in accrued compensation to officers 14,000 14,000
Increase in accrued consulting fees 28,000 90,000
Other (28,251) 100,482
Net cash used in operating activities (292,284) (170,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (57,716) (30,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable 350,000 -
Issuance of notes payable to officers - 200,000
Net cash provided by financing activities 350,000 200,000
Net increase (decrease) in cash - -
Cash at Beginning of Period - -
Cash at End of Period $ - $ -
</TABLE>
See accompanying notes to consolidated financial statements.
[NETCOM\10Q:113099a.wpd]
4
<PAGE>
NetCommerce, Inc.
(Formerly, Virtual Enterprises, Inc.)
Notes to Consolidated Financial Statements (Continued)
NetCommerce, Inc.
(Formerly, Virtual Enterprises, Inc.)
Notes to Consolidated Financial Statements
Note 1 - Organization and History
On August 31, 1999, the Company received notice of filing and acceptance by
the Nevada Secretary of State of its restated and amended Articles of
Incorporation. In the process, the name of the Company was changed from Virtual
Enterprises, Inc.("VTUE") to NetCommerce, Inc. ("NEET") to better reflect its
new corporate direction. On May 5, 1999, NEET acquired the assets and assumed
certain liabilities of MetroplexWeb, Inc. ("Metroplex") for 10,000,000 shares of
common stock, valued at $3,000,000. Metroplex, a Texas corporation was formed on
September 12, 1996. Metroplex is engaged primarily in the development, design,
hosting and support of Internet web pages and e-commerce applications. Metroplex
also creates, designs and administers Internet malls and city directories, where
users can search for products and services in their geographical area known as
"virtual cities." Metroplex's operations are primarily located in Dallas/Forth
Worth, Texas and are expanding into other metropolitan cities. The acquisition
of Metroplex is accounted for as a reverse merger as if Metroplex was
recapitalized by NEET. On June 30, 1998, Metroplex entered into an asset
purchase agreement with InteleSell, Inc. ("InteleSell"). In connection
therewith, Metroplex issued common stock and notes aggregating $1,335,142 to
acquire these assets. The acquisition was accounted for as a purchase.
InteleSell develops, designs and hosts Internet web pages. See Note 3 for
further discussion of this acquisition.
Recent Developments
Consistent with its operating strategy, on July 23, 1999, the Company
entered into a Memorandum of Understanding with Anyuser.Net ("Anyuser"), South
Korean corporation, of Seoul, Korea, whereby the Company intends to invest $3
million into Anyuser to acquire approximately 47% of the total issued and
outstanding common stock of Anyuser. Anyuser has developed proprietary Internet
and data/video/voice switching software for one touch video communicating over
the Internet. Under the agreement, Anyuser will provide hardware and market
video Internet services in the Asian market and the Company will obtain
exclusive licensing for Anyuser's products including the exclusive right to
market the Web Video Phone and related services in the North and South American
marketplace. Anyuser will license and market the Company's products in the Asian
market, including the Metroplex city guides, web design, web hosting and
e-commerce products. Royalty payments will be made by the parties for licensed
products. Negotiations with Anyuser are continuing.
On August 2, 1999 the Company formed InterCom, Inc., a Nevada corporation
("InterCom") as a wholly owned subsidiary to conduct all of the Company's
planned ventures in the telecommunications arena. To date, no operations have
commenced in InterCom, Inc.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements at November 30, 1999,
include the accounts of NEET, Metroplex and InteleSell (collectively, the
"Company"). All intercompany accounts have been eliminated in consolidation.
The accompanying consolidated financial statements reflect the historical
operations of Metroplex for all periods presented. The accompanying consolidated
financial statements include the operations of InteleSell beginning July 1,
1998.
[NETCOM\10Q:113099a.wpd]
5
<PAGE>
NetCommerce, Inc.
(Formerly, Virtual Enterprises, Inc.)
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Cont'd)
Liquidity
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Since inception, the
Company has generated cash flows from financing activities to fund losses from
operations. The Company, through NEET, expects to raise equity and/or debt
financing through a private placement of securities. The Company expects to use
the financing to fund losses from operations for the foreseeable future. Losses
from operations are expected to increase due to management's belief that
expanded marketing and sales efforts is required to significantly increase the
Company's revenues. There are no assurances that NEET will be successful in
obtaining additional funding on terms satisfactory to the Company. These factors
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Property and Equipment
Property and equipment are depreciated over their estimated useful lives
using the straight-line method ranging from three to five years. Additions and
betterments are capitalized. The cost of maintenance and repairs is charged to
expense as incurred. When depreciable property is retired or otherwise disposed
of, the related cost and accumulated depreciation and amortization are removed
from the accounts and any gain or loss is reflected in the consolidated
statements of operations.
Intangible Assets
Customer lists represent the value of customers acquired from InteleSell on
June 30, 1998. The Company assigned the value based on comparable acquisitions
of customer lists in the Company's industry. Management assigned a value of
$1,000 per customer acquired, or $253,000. The Company amortizes these costs
over its expected benefit period from the customer. In management's opinion, the
expected benefit period of its customers acquired is approximately five (5)
years, and accordingly, customer lists are amortized over five (5) years using
the straight line basis. In the event circumstances affecting customer retention
change, management will adjust the period to be benefitted prospectively.
Goodwill represents the excess of purchase price over the fair value of the
net assets of acquired businesses. Goodwill is stated at cost and is amortized
on a straight-line basis over seven (7) years. The Company assesses the
recoverability of this intangible asset quarterly, by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted cash flows. The amount of goodwill impairment, if
any, is measured based on projected undiscounted cash flows and is charged to
operations in the period in which goodwill impairment is determined by
management. To date, management has not identified any impairment of goodwill.
Revenue Recognition / Deferred Revenue
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with American Institute of Certified Public
Accountants, Statements of Position 97-2 and 98-4, "Software Revenue
Recognition." Revenue from web site development is recorded when the web site is
completed and operational. Web site hosting revenue is recognized ratably over
the contract period. Provisions for losses are recorded for bad debts for credit
customers.
[NETCOM\10Q:113099a.wpd]
6
<PAGE>
NetCommerce, Inc.
(Formerly, Virtual Enterprises, Inc.)
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Significant Accounting Policies (Cont'd)
Research and Development
Research and development costs are expensed as incurred. Statement of
Financial Accounting Standards ("SFAS") 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," does not
materially affect the Company.
Advertising Costs
The Company expenses the costs of advertising as incurred.
Provision for Income Taxes
The Company accounts for its income taxes under an asset and liability
method whereby deferred tax assets and liabilities are determined based on
temporary differences between bases used for financial reporting and income tax
reporting purposes. Income taxes are provided based on the enacted tax rates in
effect at the time such temporary differences are expected to reverse. A
valuation allowance is provided for certain deferred tax assets if it is more
likely than not that the Company will not realize tax assets through future
operations.
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The interim financial data as of November 30, 1999, and for the three
months and six months ended November 30, 1999 and 1998, is unaudited; however,
in the opinion of management, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly and
Company's financial position as of November 30, 1999, and the results of its
operations and cash flows for the Six months ended November 30, 1999 and 1998.
[NETCOM\10Q:113099a.wpd]
7
<PAGE>
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
NetCommerce is an Internet-related holding company which invests in,
develops and operates Internet service companies from majority or wholly owned
subsidiaries. NetCommerce's Internet services, including web page design,
web-hosting and ISP marketing activities are conducted through Metroplex.
NetCommerce's Internet-related telecommunications services are
developmental-stage and include prepaid calling cards, re-marketing of long
distance services and its recent venture to license and acquire an equity
interest for AnyUser, market for the new Web Video Phone software. All of the
company's telecommunication services will be conducted through InterCom, Inc.
Both Metroplex and InterCom are wholly-owned subsidiaries.
The consolidated financial statements presented herein reflect the
acquisition of Metroplex on May 5, 1999. As the acquisition resulted in a change
of control of the Company, generally accepted accounting principles required
that the transaction be accounted for as a recapitalization of Metroplex. The
accompanying consolidated financial statements reflect the historical operations
of Metroplex for the two years in the period ended May 31, 1999. The
accompanying consolidated financial statements include the operations of the
Company from May 5, 1999, the date of the reverse acquisition. On June 30, 1998,
Metroplex entered into an asset purchase agreement with InteleSell. The
acquisition was accounted for as a purchase. InteleSell develops, designs and
hosts Internet web pages. The accompanying consolidated financial statements
include the operations of Intelesell from July 1, 1998. Therefore, the results
of operations presented are substantially those of Metroplex for the years ended
May 31, 1999 and 1998.
Consistent with its operating strategy, on July 23, 1999, the Company
entered into a Memorandum of Understanding with Anyuser, whereby the Company
intends to invest $3 million into Anyuser to acquire approximately 47% of the
total issued and outstanding common stock of Anyuser. Anyuser has developed
proprietary Internet and data/video/voice switching software for one touch video
communicating over the Internet. Under the agreement, Anyuser will provide
hardware and market video Internet services in the Asian market and the Company
will obtain exclusive licensing for Anyuser's products including the exclusive
right to market the Web Video Phone and related services in the North and South
American marketplace. Anyuser will license and market the Company's products in
the Asian market, including the Metroplex city guides, web design, web hosting
and e-commerce products. Royalty payments will be made by the parties for
licensed products. Negotiations with Anyuser are continuing.
The Company is currently planning expansion into the telecommunications
arena. Accordingly, on August 2, 1999, InterCom was formed with the intention of
conducting the Company's telecommunications business as well as the licensing of
the Web Video Phone software acquired from Anyuser.
Results of Operations
Six Months Ended November 30,1999 Compared to Six Months Ended November 30, 1998
Revenues for the Six months ended November 30, 1999, were $399,619 versus
$114,840 in 1998, a 348% increase over the prior year. Revenues increased as the
Company continued to expand its operations, as well as the 1999 six months
included the operations of Intellesell for the full six months versus only five
months in 1998. The Company's revenues from web development and hosting were
$328,000 and $72,000, respectively for the current six months versus total
revenues of $115,000 for the 1998 six months. The Company recognizes hosting fee
revenues over the term of the contract, usually one year. This increase can be
attributed to the Company's emphasis on expanding its operations.
Expenses were $1,142,000 in the first six months of 1999 compared to
$736,000 in the first six months of 1998, a 155% increase. The increase was
primarily attributable to an increase in marketing and sales efforts resulting
from
[NETCOM\10Q:113099a.wpd]
8
<PAGE>
a full year of city mall operation, as well as expansion into additional
cities. Increased sales efforts required additional production and support staff
for web page design and support.
Three Months Ended November 30, 1999 Compared to Three Months Ended November 30,
1998
Revenues for the three months ended November 30, 1999, were $193,460 versus
$76,560 in 1998, a 253% increase over the prior year. Revenues increased as the
Company continued to expand its operations. The Company's revenues from web
development and hosting were $152,000 and $42,000, respectively for the current
quarter versus total revenues of $76,560 for the 1998 quarter. The Company
recognizes hosting fee revenues over the term of the contract, usually one year.
This increase can be attributed to the Company's emphasis on expanding its
operations.
Expenses were $517,000 in the second quarter of 1999 compared to $405,000 in the
second quarter of 1998, a 128% increase. The increase was primarily attributable
to an increase in marketing and sales efforts resulting from a full year of city
mall operation, as well as expansion into additional cities. Increased sales
efforts required additional production and support staff for web page design and
support.
Liquidity and Capital Resources.
As of November 30, 1999, the Company had a working capital deficiency of
$1,256,000, an increase of $869,000 from the May 31, 1999 deficiency. The
increase was attributable to the continued accrual of professional, consulting,
and advisory services incurred but not paid and the incurrence of short term
debt during the quarter ended November 30, 1999.
The Company had a -0- cash balance at November 30, 1999. The limited
available cash balances are a direct result of the Company having negative
capital resources and losses from operations during the year ended May 31, 1999
and the current six months.
On June 6, 1999, the Company issued 8% notes payable totaling $250,000, due
and payable June 6, 2000. As an inducement to obtain the financing, the Company
issued 200,000 shares of its common stock. Management estimates the value of
such shares at $200,000 which will be amortized to interest costs over the next
12 months.
On September 1, 1999, the Company issued 8% notes payable totaling
$100,000, due and payable January 1, 2000. As an inducement to obtain the
financing, a NetCommerce shareholder pledged as collateral 235,000 shares of its
common stock. Management estimates the value of such shares at $100,000 which
will be amortized to interest costs.
On September 1, 1999, the Company issued 8% notes payable totaling $10,000,
due and payable November 1, 1999. On October 27, 1999, the Company issued 20,900
shares of its common stock as repayment of the notes payable.
The Company's plan is to seek for additional sources of capital and new
operating opportunities. Management believes that $1 to $3 million is needed to
fund sale, marketing, and product development. In the interim, the Company's
existence is dependent on continuing financial support from an affiliate.
Furthermore, the Company intends to utilize its common stock for future
financial support to finance its needs. There are no assurances that the Company
will be successful in completing an offering sufficient to meet its operating
needs. Such conditions raise substantial doubt about the Company's ability to
continue as a going concern unless substantial funds can be raised through debt
or equity capital. As such, the Company's independent accountants have modified
their report to include an explanatory paragraph with respect to the
uncertainty.
The Company has no commitments for capital expenditures or additional
equity or debt financing and no assurances can be made that its working capital
needs can be met.
Impact of Year 2000
Based on a recent and ongoing assessment, the Company has determined that
all of its operating software and systems are year 2000 compliant. It has
further determined that it will not be required to modify the software or
replace portions of the software that has been sold to customers so that
customers' computer systems will function properly with respect to dates in the
year 2000 and thereafter. The costs of becoming year 2000 compliant have not
been material to the Company. The Company has not assessed the impact on it in
the event suppliers or customers are adversely impacted by the year 2000. No
year 2000 problems have been experienced to date.
[NETCOM\10Q:113099a.wpd]
9
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no changes since the Company's last report in Item 3,
"Legal Proceedings" of Form 10-KSB for the fiscal year ended May 31, 1999.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Form 8-K - None
[NETCOM\10Q:113099a.wpd]
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NetCommerce, Inc.
Date: January 19, 2000 By: /s/ Fred G. Luke
Fred G. Luke,
Chairman of the Board and President
[NETCOM\10Q:113099a.wpd]
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> NOV-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 49,629
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,629
<PP&E> 394,639
<DEPRECIATION> (165,228)
<TOTAL-ASSETS> 1,460,010
<CURRENT-LIABILITIES> 1,305,851
<BONDS> 0
0
0
<COMMON> 162,403
<OTHER-SE> 29,429
<TOTAL-LIABILITY-AND-EQUITY> 1,460,010
<SALES> 399,619
<TOTAL-REVENUES> 399,619
<CGS> 0
<TOTAL-COSTS> 1,141,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239,212
<INCOME-PRETAX> (981,213)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (982,813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (982,813)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
