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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26668
HITSGALORE.COM, INC.
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(Exact name of Registrant as specified in its charter)
FLORIDA 65-0036344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10134 6TH Street, Suite J, Rancho Cucamonga, CA 91730
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (909) 481-8821
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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
Number of shares outstanding of the issuer's Common Stock, par value .001 per
share, as of March 31, 2000 - 48,265,190 shares.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HITSGALORE.COM, INC.
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2000 1999
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(UNAUDITED)
ASSETS
Current assets:
Cash $ 16,097 $ 2,223
Other current assets 2,355 4,855
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Total current assets 18,452 7,078
Property and equipment, net of accumulated
depreciation of $112,827 and $81,233,
respectively 302,308 284,151
Intangible assets, net of accumulated
amortization of $155,233 and $116,425,
respectively 310,467 349,275
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Total assets $ 631,227 $ 640,504
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft $ 98,679 $ --
Short-term borrowings 849,000 524,000
Accounts payable and accrued expenses 409,550 289,974
Due to officers and stockholders 106,705 65,000
Note payable 3,970 4,788
Allowance for cancellations and refunds 184,664 184,664
Accrued compensation and employee benefits 172,093 174,471
Merger liabilities assumed 1,726,625 1,726,625
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Total current liabilities 3,551,286 2,969,522
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Long-term portion of note payable 13,874 14,387
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Commitments and contingencies
Stockholders' deficit:
Class B convertible preferred stock, stated
value and liquidation preference - $1.00 per
share; authorized 10,000,000 shares, issued and
outstanding 100,000 shares in 2000 and 1999 54,764 54,764
Common stock, $.001 par value; authorized
50,000,000 shares, issued and outstanding
48,265,190 and 48,289,848 shares in 2000 and
1999, respectively 48,264 48,289
Additional paid in capital 2,846,114 2,809,589
Accumulated deficit (5,883,075) (5,256,047)
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Total stockholders' deficit (2,933,933) (2,343,405)
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Total liabilities and stockholders' deficit $ 631,227 $ 640,504
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See Notes to Financial Statements
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HITSGALORE.COM, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 and 1999 (UNAUDITED)
3 months ended
March 31, March 31,
2000 1999
Net revenues $ 13,042 $ 391,679
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Costs and expenses:
Selling, general and administrative expenses 569,667 180,678
Depreciation and amortization 70,403 4,343
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Total costs and expenses 640,070 185,021
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(Loss) income before income taxes (627,028) 206,658
Provision for income taxes -- 78,530
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Net (loss) income $ (627,028) $ 128,128
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Basic (loss) earnings per share $ (0.01) $ 0.02
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Diluted (loss) earnings per share $ (0.01) $ 0.01
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See Notes to Financial Statements
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HITSGALORE.COM, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 and 2000 (UNAUDITED)
3 months ended
March 31, March 31,
2000 1999
Net cash (used in) provided by operating
activities $ (436,927) $ 92,834
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Cash flows from investing activities:
Capital expenditures (49,751) (34,093)
Reduction of merger liabilities assumed -- (151,452)
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Net cash used in investing activities (49,751) (185,545)
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Cash flows from financing activities:
Proceeds from short-term borrowings 298,669 --
Bank overdraft 98,679 --
Advances from officers and stockholders 41,705 --
Proceeds from issuance of common stock
and upon exercise of options and warrants 61,499 672,932
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Net cash provided by financing activities 500,552 672,932
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Net increase in cash 13,874 580,221
Cash at beginning of the period 2,223 1,013
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Cash at end of the period $ 16,097 $ 581,234
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Supplemental Disclosure of Non-cash Investing and Financing Activities:
Issuance of common stock upon conversion
of notes payable $ -- $ 5,000
Issuance of common stock for offering costs 25,000 --
Merger liabilities assumed -- 1,867,446
Capital stock outstanding on date of Merger -- 116,557
See Notes to Financial Statements
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HITSGALORE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
SIGNIFICANT ACCOUNTING POLICIES
The unaudited balance sheets as of March 31, 2000 and 1999 and the unaudited
statements of operations and cash flows for the three months ended March 31,
2000 and 1999, have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal and recurring accruals
considered necessary for a fair presentation, have been included. Results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results for the full fiscal year.
Earnings per Share
The weighted average number of common shares outstanding during the three months
ended March 31, 2000 and 1999 was approximately 48,264,768 and 8,433,689 shares,
respectively. The effect of outstanding options and warrants were anti-dilutive
in 2000 and were not included in the computation of loss per share. As of March
31, 2000, the Company had 540,000 options and warrants outstanding, exercisable
at prices ranging from $0.70 to $10.50 per share. The options outstanding expire
on various dates.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company incurred an
operating loss of $627,028 for the 3 month period ended March 31, 2000 and
$2,624,461 in 1999 and had a working capital deficiency of approximately
$3,532,834 at March 31, 2000 and $2,962,444 at December 31, 1999. Additionally,
the Company is subject to various legal and administrative proceedings. An
unfavorable outcome in one or more of these actions or proceedings could have an
adverse effect on the Company's liquidity and ability to maintain current
business operations. In the absence of a sufficient amount of cash flows from
operations or from financing transactions, the Company would be required to seek
other alternatives, including sale, merger or discontinuance of operations. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
SUBSEQUENT EVENTS
On April 17, 2000, the Life Foundation Trust ("LFT") defaulted on its payment
obligations to the Company under an agreement dated April 15, 1999 (the
"Agreement") and an early payment agreement dated February 16, 2000 (the "Early
Payment Agreement").
Under the Agreement, LFT was to pay $10,000,000 for the purchase of 2,000,000
shares of the Company's common stock and $10,000,000 for the development of
Local City Editions of the Company's web site. As of March 31, 2000, the Company
had fulfilled its obligations under the Agreement. The Agreement provided for
payment in full on April 15, 2000. The payment obligation is secured by a
security interest and lien on an undivided interest in a collection of Aden
stamps (the "Collectibles"). The Collectibles are held in safekeeping by an
independent trust company located in New York, NY.
The Early Payment Agreement provided for the payment of $3,500,000 on or before
February 21, 2000 and $16,500,000, in one or more installments, over a period of
thirty days following the date of the initial payment due under the Early
Payment Agreement.
As a result of the default by LFT, the Company has retained counsel to explore
its options with respect to liquidating the Collectibles in payment of monies
due under the Agreement. Because we believe that persons may attempt to defeat
the Company's claims to the collateral and may claim interests in the collateral
adverse to those of the Company, the liquidation process may be protracted and
it is too early to estimate with any degree of certainty the Company's
likelihood of recovery. Because of the uncertainty of collection on the LFT
obligation, the Company wrote off its receivables due from LFT and recorded a
charge to income of $6.9 million in 1999. The Company is not expecting to report
any additional revenues from the LFT transaction in 2000.
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The Company has instructed its stock transfer agent to cancel 1,750,000 shares
of the Company's common stock issued to LFT under the transaction, and has
retained counsel to determine what action can be taken to recover 250,000 shares
of the Company's common stock previously issued to LFT. As a result of the
default, all other pending transactions with LFT have been cancelled.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Financial
Statements and notes thereto, appearing elsewhere herein.
Net revenues-
The Company had net revenues of $13,042 for the three months ended March 31,
2000, compared with $391,679 for the three months ended March 31, 1999. From the
launch of its initial website in late 1998 until April 1999, the focus of the
Company was on the development of its business model incorporating its search
engine and free banner placements. Revenues during this period were generated by
the sale of Sponsorships, Hitsgalore Portal Services, the Key Word Bid & Rank
program and Local City Editions ("LCEs"). As more fully described below, after
April 15, 1999, the focus of the Company was on the development of LCEs under an
agreement with the Life Foundation Trust ("LFT"). Consequently, revenues from
the Company's Portal and other services declined from period to period.
On April 15, 1999, the Company entered into an agreement with the LFT for the
development and sale of a large number of LCEs in exchange for $10 million. In
order to fulfill its obligation under the LFT agreement the Company dramatically
expanded its programming staff and contract programming needs, and diverted much
of its administrative and sales staff to assist in the development of the LCEs
under the LFT Agreement.
LFT defaulted in its payment obligations to the Company for the LCEs produced
for it (see "Notes to Financial Statements - Subsequent Events"). Had LFT paid
as agreed the Company intended to launch an aggressive marketing campaign
designed to drive traffic to the Local City Editions at Hitsgalore.com, and to
recover the substantial costs incurred in developing the LCEs. The Company had
also intended to expand the Hitsgalore Portal Services and create other
products, services and incentives to encourage revenue-generating visitors to
the Company's websites.
As the Company neared completion of its LCEs it began to re-focus its
development and programming efforts toward the Hitsgalore Business Exchange 2000
("HBX2000"), and on February 29, 2000 the Company launched its new website at
www.HBX2000.com. The Company has filed for U.S. patent protection of its
business-to-business e-commerce model. In addition to programming expenditures
related to the HBX2000, the Company invested significant resources in its "Live
Trading Floor" for the business exchange, located in facilities adjacent to its
administrative offices in Rancho Cucamonga, California.
The HBX2000 is a B2B Internet exchange whereby a trade organization provides
pre-qualified "one on one" sales introductions to companies listed with the
HBX2000, thus matching buyers and sellers of products and services. The HBX2000
generates revenue from monthly listing fees that companies pay to be listed on
the HBX2000 exchange. Fees range from $500 to $15,000 per month. Although
listing contracts have been executed, there were no significant HBX2000 revenues
in the 1st quarter of 2000 due to initial free period clauses and other special
incentives.
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In April 2000 the Company initiated the HBX2000 Local City Brokers program.
Under the program, Local City Brokers contact local businesses and introduce
them to the HBX2000.com. As an authorized broker for the HBX2000, the Local City
Broker will have full access to a "live floor trader" on the HBX2000 who can
match both buyers and sellers for the local businesses.
The Company believes the Hitsgalore Portal Services and the local city editions
of Hitsgalore.com can complement the HBX2000 Local City Brokers program and be
beneficial to the HBX2000 website. As a result, the Company is in the process of
modifying the LCE program and expanding its sales and support capabilities of
the Portal Services.
Selling, general and administrative expenses-
Selling, general and administrative expenses totaled approximately $569,667 and
$180,678 for the three months ended March 31, 2000 and 1999, respectively. The
increase is due to professional fees in connection with the class action
lawsuits against the Company dismissed with prejudice on February 23, 2000 and
higher overall costs, including salary expense.
Depreciation and Amortization
Depreciation and amortization for the three months ended March 31, 2000 totaled
approximately $70,403, compared to approximately $4,343 for the three months
ended March 31, 1999. The increase was due to a higher investment from period to
period in property and equipment and amortization of intangibles arising from
the from the acquisition of the internet-related assets of Solvere.
Income Taxes
For the three months ended March 31, 1999, the provision for income taxes was
approximately 38% of pre-tax income. No provision (credit) for income taxes was
made in the 2000 period due to current and cumulative prior period operating
losses.
Liquidity and Capital Resources
The Company continued to rely on short-term borrowings in the 2000 1st quarter
to fund its operations. During the 1st quarter of 2000, short-term borrowings
increased by approximately $325,000 from those outstanding on December 31, 1999.
As of March 31, 2000, the Company does not have the cash, working capital and
commitments for additional equity investments to sustain its current level of
operations and will need to raise additional funds in order to maintain
operations at current levels, expand or enhance its products and services. There
can be no assurance that any additional funds will be available to the Company.
The principal uses of cash in the 1st quarter were cash used in operations of
approximately $436,927 and capital expenditures of approximately $49,751.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
All material pending legal proceedings to which the Registrant is a party and
proceedings which have been terminated are described in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
Item 2. Changes in Securities.
During the three months ending March 31, 2000, the Company issued shares of
common stock in the following transactions:
The Company issued 35,715 shares pursuant to the exercise of warrants
outstanding at the date of the Merger and 1,000 shares in exchange for services
rendered. In addition, net shares of 75,876 that had been issued prior to the
Merger were cancelled pursuant to a settlement of pre-Merger obligations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.i. * Articles of Incorporation, as amended
3.ii * By-laws, as amended
27. ** Financial Data Schedule (Three Months Ended March 31, 2000).
* Incorporated by reference to the Company's Registration Statement on Form 10
as filed on July 23, 1996
** Filed herewith.
(b) Reports on Form 8-K:
The following reports were filed on Form 8-K for the three months ended March
31, 2000, and prior to the filing date hereof:
The Company filed a Form 8-K on April 14, 2000. The event reported was the
inability of the Company to file its Annual Report on Form 10-K for the year
ended December 31, 1999 within the grace period afforded under Rule 12b-25.
The Company filed a Form 8-K on April 17, 2000. The event reported was the
default of the Life Foundation Trust on its payment obligations to the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HITSGALORE.COM, INC. Date: June 1, 2000.
By /s/ Robert A. Thompson
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Principal Accounting
Officer and Director
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