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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-50588
LIGHTFIRST INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4437640
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 NORTHWEST POINT BOULEVARD, SUITE 700, ELK GROVE VILLAGE, IL 60007
(Address of principal executive offices)
(847) 640-8880
(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 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
As of July 31, 2004, there were 6,406,000 shares of the registrant's common
stock outstanding, par value $.001.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2004
TABLE OF CONTENTS
Page No.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 1
Balance Sheets as of June 30, 2004 and December 31, 2003 1
Statements of Operations 3
Statement of Stockholders' Deficiency 4
Statements of Cash Flows 5
Notes to Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 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 17
SIGNATURES 18
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
LIGHTFIRST INC.
(A Development Stage Company)
BALANCE SHEETS
June 30, December 31,
ASSETS 2004 2003
-------- -----------
(Unaudited) (Audited)
CURRENT ASSETS
Cash $ 18,852 $ 9,645
Accounts receivable, net of allowance for doubtful
accounts of $10,000 27,061 4,019
Deferred offering costs 291,516 204,853
-------- --------
TOTAL CURRENT ASSETS 337,429 218,517
PROPERTY - Computer equipment 44,196 39,430
Less accumulated depreciation 34,532 27,695
-------- --------
9,664 11,735
OTHER ASSETS
Customer list, net of accumulated amortization of
$256,468 and $217,765 at June 30, 2004 and
December 31, 2003, respectively 4,848 43,551
Deposits 67,894 17,894
-------- --------
72,742 61,445
419,835 291,697
======== ========
See notes to financial statements.
-1-
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' DEFICIENCY 2004 2003
----------- -----------
(Unaudited) (Audited)
CURRENT LIABILITIES
Line of credit payable to shareholder $ 1,829,986 $ 1,264,987
Accounts payable 665,954 430,388
Deferred revenue 238,229 130,123
Accrued payroll 1,014,021 722,855
Accrued payroll taxes and related penalties 1,144,309 1,151,670
Due to officer/shareholder 4,927 1,681
Accrued interest payable to shareholder 141,081 64,986
----------- -----------
TOTAL CURRENT LIABILITIES 5,038,507 3,766,690
LONG-TERM LIABILITIES
Notes payable to shareholder 620,000 620,000
Accrued interest payable to shareholder 124,553 88,387
----------- -----------
744,553 708,387
SHAREHOLDERS' DEFICIENCY Common stock, $.001 par value:
Authorized, 10,000,000 shares
Issued and outstanding, 6,406,000 shares 6,406 6,406
Additional paid-in capital 1,383,744 1,383,744
----------- -----------
1,390,150 1,390,150
Deficit accumulated during the development stage (6,753,375) (5,573,530)
----------- -----------
(5,363,225) (4,183,380)
$ 419,835 $ 291,697
=========== ===========
-2-
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Period from
inception For the three months ended June 30, For the six months ended June 30,
(April 11, 2001) ---------------------------------- ---------------------------------
to June 30, 2004 2004 2003 2004 2003
---------------- ----------- ----------- ----------- -----------
Revenues $ 1,376,902 $ 109,233 $ 122,506 $ 221,897 $ 247,173
Cost of revenues 1,293,799 113,659 108,327 227,921 234,146
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 83,103 (4,426) 14,179 (6,024) 13,027
General and administrative expenses 6,649,828 526,130 739,881 1,060,540 1,265,778
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (6,566,725) (530,556) (725,702) (1,066,564) (1,252,751)
Other income (expense):
Interest income 1,200 - 440 - 744
Interest expense (267,598) (59,271) (30,913) (113,281) (52,009)
Net realized gain from sale of investments 79,748 - - - -
----------- ----------- ----------- ----------- -----------
(186,650) (59,271) (30,473) (113,281) (51,265)
----------- ----------- ----------- ----------- -----------
NET LOSS $(6,753,375) $ (589,827) $ (756,175) $(1,179,845) $(1,304,016)
=========== =========== =========== =========== ===========
Net loss per share:
Basic and diluted (1.12) (0.09) (0.12) (0.18) (0.20)
Weighted average shares outstanding:
Basic and diluted 6,033,431 6,406,000 6,394,133 6,406,000 6,390,167
=========== =========== =========== =========== ===========
See notes to financial statements.
-3-
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
PERIOD FROM INCEPTION (APRIL 11, 2001) TO DECEMBER 31, 2003
AND SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
Common Stock
--------------------------- Additional Deficit accumulated Total
Number of paid-in during the shareholders'
shares Amount capital development stage deficiency
----------- ----------- ----------- ------------------- ------------
Balance at April 11, 2001 $ - $ - $ - $ - $ -
Issuance of common stock to founding shareholder 5,000,000 5,000 (4,900) - 100
Issuance of common stock to consultant 187,000 187 (137) - 50
Issuance of common stock to investors 691,800 692 691,108 - 691,800
Net loss for the period April 11, 2001 through
December 31, 2001 - - - (802,970) (802,970)
----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 2001 5,878,800 5,879 686,071 (802,970) (111,020)
Issuance of common stock to investors 508,200 508 507,692 - 508,200
Net loss for the year - - - (2,472,470) (2,472,470)
----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 2002 6,387,000 6,387 1,193,763 (3,275,440) (2,075,290)
Issuance of common stock in exchange for services 19,000 19 189,981 - 190,000
Net loss for the year - - - (2,298,090) (2,298,090)
----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 2003 6,406,000 6,406 1,383,744 (5,573,530) (4,183,380)
Net loss for the six months ended June 30, 2004 - - - (1,179,845) (1,179,845)
----------- ----------- ----------- ----------- -----------
BALANCE AT
JUNE 30, 2004 $ 6,406,000 $ 6,406 $ 1,383,744 $(6,753,375) $(5,363,225)
=========== =========== =========== =========== ===========
See notes to financial statements.
-4-
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period from
inception For the six months ended June 30,
(April 11, 2001) to --------------------------------
June 30, 2004 2004 2003
------------------- ----------- -----------
CASH FLOWS - OPERATING ACTIVITIES
Net loss for the period $(6,753,375) $(1,179,845) $(1,304,016)
Adjustments to reconcile net loss to net cash
used for operating activities:
Bad debts 16,638 - -
Compensation expense 190,000 - 190,000
Interest expense 265,634 112,261 51,564
Depreciation and amortization 291,000 45,540 49,461
Net realized (gain) from sale of investments (79,748) - -
Changes in certain assets and liabilities
affecting operations:
Accounts receivable (37,061) (23,042) (14,819)
Deposits (67,894) (50,000) (17,894)
Accounts payable 665,954 235,566 81,596
Deferred revenue 89,322 108,106 122,764
Accrued expenses 2,158,330 283,805 325,565
----------- ----------- -----------
NET CASH USED FOR
OPERATING ACTIVITIES (3,261,200) (467,609) (515,779)
CASH FLOWS - INVESTING ACTIVITIES
Increase in note receivable (6,638) - (175)
Purchases of property (44,196) (4,766) -
Purchase of investments (108,260) - -
Proceeds from the sale of investments 732,808 - -
Acquisition of customer list (112,409) - -
----------- ----------- -----------
NET CASH PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES 461,305 (4,766) (175)
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from issuance of common stock to
minority shareholders 655,250 - -
Proceeds from issuance of common stock to
founding shareholder 100 -
Proceeds from line of credit payable to shareholder 2,449,986 564,999 645,265
Deferred offering costs (291,516) (86,663) (124,928)
Due (from) to officer/shareholder 4,927 3,246 16,917
----------- ----------- -----------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 2,818,747 481,582 537,254
----------- ----------- -----------
NET INCREASE IN CASH 18,852 9,207 21,300
Cash at beginning of period - 9,645 4,608
----------- ----------- -----------
CASH AT END OF PERIOD $ 18,852 $ 18,852 $ 25,908
=========== =========== ===========
-5-
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Cont'd
(UNAUDITED)
Period from
inception
(April 11, 2001) to Six months ended June 30,
June 30, -----------------------------
2004 2004 2003
------------------- ------------ ----------
NON-CASH OPERATING, INVESTING AND
FINANCING ACTIVITIES
Investments received as consideration for
sale of common stock $544,800 $ - $ -
======== ========== ==========
Acquisition of customer list offset by
deferred revenue $148,907 $ - $ -
======== ========== ==========
Issuance of common stock in exchange for
services $190,000 $ - $ -
======== ========== ==========
See notes to financial statements.
-6-
LIGHTFIRST INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE A: UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements of LightFirst Inc. have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these interim financial statements do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of the Company's management, the unaudited interim financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the Company's results
of operations and its cash flows for the interim period. Operating results
for the six months ended June 30, 2004 are not necessarily indicative of
the results that may be expected for the full year ended December 31, 2004.
The accompanying financial statements should be read in conjunction with
the financial statements and related notes presented in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
NOTE B: GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLANS
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business as a going
concern. The Company has been in the development stage since its inception
on April 11, 2001.
The Company has a limited operating history and its future prospects are
subject to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet based
products and services. These risks include the failure to develop and
protect the Company's online brands, the failure of vendors and third-party
providers to supply hardware and software products and services, systems
and online security failure, the rejection of the Company's services by
Internet consumers, vendors and advertisers, the inability of the Company
to maintain and increase their customer base in levels sufficient to
generate profitable operations, as well as other risks and uncertainties.
The success of the Company also depends on the continued growth of the
Internet as a viable commercial marketplace.
On August 6, 2004, the Company filed a Registration Statement on Form S-1
with the Securities and Exchange Commission ("SEC"). The purpose of this
filing is to give the Company the ability to go to the public markets for
additional equity capital. There are no assurances that shares of common
stock will be sold in connection with the Registration Statement. In the
event the Company is not able to raise additional equity capital or obtain
additional amounts of debt financing, there is uncertainty as to the
Company's ability to continue as a going concern.
Management is currently devoting substantial efforts to sell its common
shares in connection with its initial public offering. Should the public
offering be consummated, management believes the Company will be better
able to execute its business plan and begin their revenue producing
activities related to electronic bill presentation and related services.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and the notes to those statements that appear
elsewhere in this report, and it contains forward-looking statements that
reflect our plans, estimates, beliefs, expectations, and intentions. You can
identify these statements by words such as "expect," "anticipate," "intend,"
"plan," "objective," "believe," "seek," "hope," "look," "is designed to,"
"estimate," "may," "will" and "continue" or similar words. Our actual results
could differ materially from those discussed in the forward-looking statements.
See "Risks and Uncertainties" for information regarding factors known to us that
could cause reported financial information not to be necessarily indicative of
future results and that could cause our future results to differ from our
expectations.
OVERVIEW
Our objective is to be a leading provider of consolidated electronic
bill presentment and payment services, or e-bill consolidation services, for
consumers. E-bill consolidation is the practice of using a single online
location to manage the bill paying process: the typical e-bill consolidator
provides electronic bill presentment, bill payment, and record-keeping services.
We have developed a new model that looks to build upon the prevailing model by
adding discounts, rebates and payment programs that add convenience and value to
the online bill paying experience.
Our model expands our role in the online billing process by positioning
us as an intermediary that will manage the relationship between consumers and
providers of household products and services, such as utilities,
telecommunications services, insurance, financial services, and others. As the
intermediary, we intend to use the combined buying power of our customer base to
negotiate volume discounts, rebate and reward arrangements, reduced interest
rates and premiums, and other money-saving advantages for our customers. In
addition, our model incorporates processes that are designed to help us overcome
the barriers that have, until now, prevented widespread adoption of e-bill
consolidation services by the mass market.
We earn revenues by providing Internet dial-up access to approximately
7,000 customers in the Chicago, Illinois area. The remaining members of our
customer base, which consists of approximately 9,000 subscribers, are in our
disadvantaged student program and pay no fee for our service. Our business plan
calls for the use of our e-bill consolidation service to create four additional
primary revenue streams:
o we intend to purchase and resell products and services to our
customers at a markup;
o we hope to earn commissions and referral fees from businesses we
introduce to our customers;
o we intend to retain a portion of any administrative discounts
that we can negotiate for our customers; and
o we intend to retain a portion of any vendor rebates our customers
earn by using a co-branded credit card that we plan to offer.
To date, we have focused mainly on building our distribution network, an
essential first step in generating all of our revenue streams. We have not yet
focused on establishing the significant strategic relationships that we believe
are essential to developing the revenue streams described above but intend to do
so following our initial public offering. Specifically, we will seek to enter
into agreements with billers that will allow us to offer money-saving benefits
to our customers. The agreements we hope to negotiate with billers will fall
into one of four categories: reseller agreements, affiliate agreements,
administrative discount agreements and rebate agreements. We expect these
agreements to provide us with revenue from price mark-ups, commissions, referral
fees, rebates and credits. We intend to negotiate bulk pre-payment terms with
many of these billers to simplify the bill-presentment process and to induce
billers to provide
-8-
our customers with greater discounts. As a result, we will, in effect, be
assuming the credit risk for these bills, which could adversely affect our
profitability. We intend to finance these bulk pre-payments with a revolving
line of credit secured by accounts receivable from a commercial lending
institution. It is likely that we will incur substantial debt under such a
credit facility, which would result in a substantial interest expense for us in
the future. In addition, we must enter into a relationship with a financial
institution that will extend credit to our customers so they can take advantage
of our full array of bill-paying options. We intend to structure such a
financial institution relationship so that we receive a portion of any loan
revenues generated by such lending. We believe completing our initial public
offering is an important factor in winning these strategic contracts, and we
intend to pursue these relationships when our initial public offering is
complete.
Beginning in March 2004 and ending on July 12, 2004, we conducted an
initial public offering of securities pursuant to a Registration Statement on
Form S-1 that was declared effective by the Securities and Exchange Commission
on February 13, 2004. As we did not sell the required minimum number of shares
of our common stock before the expiration of the offering period, that offering
terminated. On August 6, 2004, we filed a new Registration Statement on Form S-1
with the Commission for the purpose of terminating the prior offering and of
commencing a new offering of our common stock, which will be conducted for 90
days following effectiveness. We suspended offering activities upon termination
of the prior offering and will recommence such activities once the Commission
declares our new Registration Statement effective.
Our main cost of revenue consists of fees paid for telecommunications
services, network and collocation costs, all related to operating our network
and connecting end users to the Internet.
Sales and marketing expenses consist primarily of costs of building a
distribution channel of City Managers. We have built an extensive network of
independently contracted associates to distribute our service to communities in
the metropolitan area surrounding Chicago, Illinois.
General and administrative expenses consist primarily of salary,
benefits, and related expenses for management, technical, customer support and
accounting personnel; expenses relating to facilities; professional fees; and
other general corporate expenses. We expect that, in support of the continued
growth of our business and our operations as a public company, sales, general
and administrative expenses will continue to increase for the foreseeable
future.
Since our inception in April 2001, we have incurred significant losses
and, as of June 30, 2004, we had an accumulated deficit of $6,753,375. These
losses have resulted from the significant costs incurred for marketing and
building our distribution channel and expenses for the development and
maintenance of our technology platform. We intend to continue to invest heavily
in marketing, product development, and technology. As a result, we believe that
we will continue to incur substantial operating losses for the foreseeable
future.
CRITICAL ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which require that management make numerous estimates and assumptions. Actual
results could differ from those estimates and assumptions, affecting our
reported results of operations and financial position. Our significant
accounting policies are more fully described in Note A to our audited financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2003. The critical accounting policies described here are those
that are most important to the depiction of our financial condition and results
of operations. Their application requires our management's subjective judgment
in making estimates about the effect of matters that are inherently uncertain.
We have incurred costs in connection with raising additional capital
through the sale of our common stock. These costs have been capitalized and will
be charged against additional paid-in capital should common stock be issued. If
there is no issuance of common stock, the costs incurred will be charged to
operations.
-9-
Revenue Recognition. Revenues consist of subscriber Internet access
service fees and are recorded when earned (i.e., at the time services are
provided). Deferred revenue consists of amounts collected for annual Internet
access service subscriptions at the beginning of the subscription year. Of this
deferred revenue, a proportionate amount is recognized at the end of each month
in which service has been provided.
Deferred Income Taxes. Deferred income tax assets and liabilities arise
from temporary differences associated with differences between the financial
statement and tax basis of assets and liabilities, as measured by the enacted
tax rates that are expected to be in effect when these differences reverse.
Deferred tax assets and liabilities are classified as current or noncurrent,
depending on the classification of the assets or liabilities to which they
relate. Deferred tax assets and liabilities not related to an asset or liability
are classified as current or noncurrent depending on the periods in which the
temporary differences are expected to reverse. The principal types of temporary
differences between assets and liabilities for financial statement and tax
return purposes are set forth in Note H to the financial statements included in
our Annual Report.
RESULTS OF OPERATIONS
The following table summarizes our operating results in dollars and as
a percentage of total revenue for each of the periods shown.
Three Months Ended Six Months Ended
---------------------------------------------- ---------------------------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
---------------------- ---------------------- --------------------- ---------------------
% of Net % of Net % of Net % of Net
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
----------- -------- ----------- -------- ----------- -------- ----------- --------
Revenue $ 109,223 100.0% $ 122,506 100.0% $ 221,897 100.0% $ 247,173 100.0%
Cost of Revenue $ 113,659 104.1% $ 108,327 88.4% $ 227,921 102.7% $ 234,146 94.7%
----------- ------- ----------- ------- ----------- ------- ----------- -------
Gross Profit $ (4,426) -4.1% $ 14,179 11.6% $ (6,024) -2.7% $ 13,027 5.3%
Operating Expenses
Sales & Marketing $ 226,428 207.3% $ 373,261 304.7% $ 448,213 202.0% $ 546,322 221.0%
Product Development $ 77,014 70.5% $ 95,583 78.0% $ 180,609 81.4% $ 193,600 78.3%
General & Administrative $ 202,476 185.4% $ 246,306 201.1% $ 386,179 174.0% $ 476,395 192.7%
Depreciation & Amortization $ 20,212 18.5% $ 24,731 20.2% $ 45,539 20.5% $ 49,461 20.0%
----------- ------- ----------- ------- ----------- ------- ----------- -------
General & Administrative Total $ 526,130 481.7% $ 739,881 604.0% $ 1,060,540 477.9% $ 1,265,778 512.1%
----------- ------- ----------- ------- ----------- ------- ----------- -------
Operating Income (Loss) $ (530,556) -485.7% $ (725,702) -592.4% $(1,066,564) -480.7% $(1,252,751) -506.8%
Other Income (Expense)
Interest Income $ -- 0.0% $ 440 0.4% $ -- 0.0% $ 744 0.3%
Interest Expense $ (59,271) -54.3% $ (30,913) -25.2% $ (113,281) -51.1% $ (52,009) -21.0%
Gain (Loss) on Sale of
Investment $ -- 0.0% $ -- 0.0% $ -- 0.0% $ -- 0.0%
----------- ------- ----------- ------- ----------- ------- ----------- -------
Total Other Income $ (59,271) -54.3% $ (30,473) -24.9% $ (113,281) -51.1% $ (51,265) 20.7%
Loss before provision for income tax $ (589,827) -540.0% $ (756,175) -617.3% $(1,179,845) 531.7% $(1,304,016) -527.6%
Provision for income tax $ -- -- $ -- -- $ -- -- $ -- --
Net Income (Loss) $ (589,827) -540.0% $ (756,175) -617.3% $(1,179,845) -531.7% $(1,304,016) -527.6%
=========== ======= =========== ======= =========== ======= =========== =======
-10-
Revenue
During the three months ended June 30, 2004, net revenues decreased
10.8% relative to the three months ended June 30, 2003, from $122,506 to
$109,233. During the six months ended June 30, 2004, net revenues decreased
10.2% relative to the six months ended June 30, 2003, from $247,173 to $221,897.
The decrease in revenue was due to a reduction in the number of subscribers
resulting from non-renewals of subscriptions following the change in our network
service provider in the fourth quarter of 2003 and from normal attrition.
Dial-up Internet access service revenue accounted for all of the revenue for
these periods.
Cost of Revenue
Cost of revenue increased 4.9% from $108,327, or 88.4% of net revenues,
for the quarter ended June 30, 2003, to $113,659 or 104.1% of net revenues, for
the quarter ended June 30, 2004. Cost of revenue decreased from $234,146, or
94.7% of net revenues, for the six months ended June 30, 2003, to $227,921 or
102.7% of net revenues, for the six months ended June 30, 2004. The decrease in
costs for the six months ended June 30, 2004 can be attributed to deferred
collocation costs that resulted in excess one-time charges during the first
quarter of 2003 and to a credit for collocation services that we received in the
first quarter of 2004. The decrease was largely offset by increases in
collocation and networking charges pursuant to new collocation and networking
agreements which took effect in September 2003 and December 2003, respectively.
The increase in direct costs for the quarter ended June 30, 2004 relative to the
same quarter in the prior year can be attributed to the same increases in
networking and collocation charges discussed above. The overall increase as a
percentage of net revenue is attributable to the decrease in revenue for the
both the three-month and six-month periods ending June 30, 2004 relative to the
same periods in the prior year.
Operating Expenses
Sales and Marketing. Sales and marketing costs relate to expenses to
develop our markets and channels of distribution to those markets, primarily the
cost of building up our pool of independent sales agents, whom we call City
Managers. These costs include the salaries for the Area Directors responsible
for recruiting, training, and managing City Managers and compensation paid to
City Managers. Sales and marketing expenses decreased from $373,261, or 304.7%
of net revenue, for the three months ended June 30, 2003, to $226,428, or 207.3%
of net revenue, for the three months ended June 30, 2004. Sales and marketing
expenses decreased from $546,322, or 221.0% of net revenue, for the six months
ended June 30, 2003, to $448,213, or 202.0% of net revenue, for the six months
ended June 30, 2004. The decrease in sales and marketing expenses is 39.3% for
the three months ended June 30, 2004 and 18.0% for the six months ended June 30,
2004. These decreases are primarily attributable to the one-time issuance of
19,000 shares of stock, 250 shares of which were awarded to each of 76 City
Managers in exchange for services in June 2003. We made these awards of stock in
reliance on the exemption from registration under the federal securities laws
contained in Rule 701 under the Securities Act of 1933. The value of these
shares was calculated using the public offering price of $10.00 per share. Net
of the effect of these stock awards, sales and marketing expenses increased
23.6% for the quarter and 25.8% for the six months ended June 30, 2004,
offsetting the decrease attributable to the one-time stock issuance. The
increases in sales and marketing costs were primarily attributable to an
increase in sales and marketing personnel, including an increase in the number
of Area Directors, in the three months and six months ended June 30, 2004 as
compared to the same periods in the prior year, and to increases in health
insurance premiums for sales and marketing personnel. We increased sales and
marketing staff in preparation for the completion of our initial public offering
and the increased sales and marketing activities that we anticipate we will
undertake after the offering. The overall decrease as a percentage of net
revenues is attributable to the net decrease in costs.
-11-
Product Development. Product development costs consist of internal
costs and external fees to develop our technical platform and back-end systems,
including salaries for our software development staff. Product development costs
decreased 19.4% to $77,014, or 70.5% of net revenues for the quarter ended June
30, 2004, from $95,583, or 78.0% of net revenues, for the quarter ended June 30,
2003. Product development costs decreased 6.7% to $180,609, or 81.4% of net
revenues for the six months ended June 30, 2004, from $193,600, or 78.3% of net
revenues, for the six months ended June 30, 2003. The decrease in product
development costs was attributable to a reduction in product development
activities during the first two quarters of 2004 relative to the same periods in
the prior year. The decrease for the six-month period ending June 30, 2004 was
largely offset by the cost of measures that we took during the first quarter of
2004 to combat increasing virus activity on the Internet. As a result, product
development costs increased as a percentage of net revenues for the six-month
period ending June 30, 2004, but decreased as a percentage of net revenues for
the quarter ended June 30, 2004.
General and Administrative. The main components of general and
administrative expenses were wages and employee benefits, taxes and insurance
expenses, professional and consulting fees, public offering expenses and rent.
General and administrative expenses decreased from $246,306, or 201.1% of net
revenues, for the three months ended June 30, 2003, to $202,476, or 185.4% of
net revenues, for the three months ended June 30, 2004. General and
administrative expenses decreased from $476,395, or 192.7% of net revenues, for
the six months ended June 30, 2003, to $386,179, or 174.0% of net revenues, for
the six months ended June 30, 2004. The decrease in general and administrative
costs for both periods was primarily due to a reduction in administrative
personnel during the six months ended June 30, 2004 relative to the same period
in the prior year and to a tax penalty incurred during the six months ended June
30, 2003; the decreases were partially offset by increases in insurance costs,
printing costs, professional fees, and other administrative expenses. As a
percentage of net revenues, the decrease in general and administrative expenses
is a result of the overall decrease in costs, which is partially offset by a
decrease in net revenues.
Interest Income and Expense
Interest Income. Interest income was $0 for the six months ended June
30, 2004, $440 for the quarter ended June 30, 2003, and $744 for the six months
ended June 30, 2003. Interest income for the six months ended June 30, 2003
consisted of interest on one promissory note held by the Company. That
promissory note was not in effect during the six months ended June 30, 2004.
Interest Expense. Interest expense was $59,271 in the quarter ended
June 30, 2004 and $30,913 in the quarter ended June 30, 2003. Interest expense
was $113,281 in the six months ended June 30, 2004 and $52,009 in the six months
ended June 30, 2003. The increases in interest expense were primarily due to
increases in accrued interest resulting from increases in principal owed by us
under our operating line of credit, as well as accrual of interest on two
promissory notes made by us in July and November 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2004, our cash increased by $9,207, from
$9,645 at December 31, 2003 to $18,852 at June 30, 2004.
Net cash used in operating activities was $467,609 during the six
months ended June 30, 2004 and $515,779 during the six months ended June 30,
2003. During the six months ended June 30, 2004, we financed our operations
primarily through accrued accounts payable, accrued expenses, and accrued
interest expense of $235,566, $283,805, and $112,261 respectively.
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Net cash used for investing activities was $4,766 for the six months
ended June 30, 2004. This consisted primarily of computer equipment purchases.
Net cash used for investing activities was $175 for the six months ended June
30, 2003.
Net cash provided by financing activities was $481,582 for the six
months ended June 30, 2004 and $537,254 for the six months ended June 30, 2003.
For the six months ended June 30, 2004, cash from financing activities consisted
of $564,999 in cash received pursuant to a line of credit from a shareholder,
and was offset by deferred offering costs of $86,663.
We have not generated any net cash from operations since our inception.
We have funded operations primarily through private sales of equity securities,
borrowings from third parties, deferred salary arrangements with our employees,
tax payment deferrals and trade payables.
We are party to a secured credit line agreement with a shareholder,
under which we owed an outstanding principal balance of approximately $1,830,000
as of June 30, 2004. As of the same date, we had approximately $1,170,000 in
credit available under this agreement. On March 1, 2004, the agreement was
modified to increase the credit line from $1,500,000 to $3,000,000 and on May 1,
2004, the maturity date was extended to January 1, 2005. The terms of the credit
line agreement allow the company to draw funds against the line of credit for
any legitimate business purpose with three days' notice, provided that the
creditor, in his sole discretion, approves the request. We intend to continue
financing our operations with proceeds from this credit line until we receive
the proceeds of our initial public offering. All amounts outstanding under the
line of credit loan agreement, including principal and accrued interest, become
due and payable on January 1, 2005 or upon the occurrence of an acceleration
event, as defined in the loan documents, including a successful public offering
of the company's stock.
We filed a Registration Statement on Form S-1 (File No.333-107769) with
the Securities and Exchange Commission, which was declared effective by the
Commission on February 13, 2004. Shortly thereafter, we commenced an initial
public offering, on a best efforts basis, of 2,000,000 shares of common stock at
a price of $10 per share. The offering period lasted for 150 days from
effectiveness, or until July 11, 2004. As we did not sell the required minimum
number of shares of our common stock (1,200,000 shares) by the expiration of the
offering period, the offering terminated and we refunded all proceeds we had
received for the offering, without interest. On August 6, 2004, we filed a new
Registration Statement (File No. 333-118000) with the Commission for the purpose
of terminating our previous effective registration statement and recommencing
our offering for 90 days following effectiveness. We suspended selling
activities upon termination of the prior offering and will begin selling
activities once the Commission declares the new Registration Statement
effective. The offering will close 90 days from the date on which the Commission
declares our new Registration Statement effective. To receive the proceeds of
the offering, we must sell a minimum of 1,500,000 shares for an aggregate price
of $15,000,000. We may elect to close the offering on an earlier date if we have
received subscriptions for the minimum amount of 1,500,000 shares. Receipt of
the proceeds of the offering, should it occur, will contribute significantly to
our liquidity.
Income Taxes
We have historically reported net losses and, in accordance with
accounting principles generally accepted in the United States, have not recorded
any income tax benefits from these losses. We reported a net loss for the first
six months of 2004 and have recorded income taxes at an effective tax rate of
0%. To the extent that we report taxable income in future periods, we intend to
use net operating loss carryforwards to the extent available to offset the
taxable income and reduce cash outflows for income taxes.
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RISKS AND UNCERTAINTIES
Risks and uncertainties that could impact our business, results of
operations and cash flows and cause future results to differ from our
expectations include the following: (1) that we have not completed our initial
public offering and there are no assurances that we will be able to do so; (2)
that we have historically not been profitable and we may not be able to attain
or sustain profitability; (3) that our business strategy is new and unproven;
(4) that our marketing strategy is non-traditional and may not be effective in
acquiring customers; (5) that our efforts to develop the LightFirst brand may be
unsuccessful; (6) that we have not yet entered into the agreements with
providers of households products and services that are critical for us to fully
implement our business plan and that there are no assurances that we will be
able to do so; (7) that we have not yet entered into an agreement with a bank or
similar financial institution, which is critical for us to provide some of the
features that we propose to provide, and that there are no assurances that we
will be able to do so on favorable terms or at all; (8) that we have not yet
negotiated with a commercial lending institution for a line of credit secured by
accounts receivable that we intend to use to finance the bulk pre-payments that
we intend to make to billers, and there is no assurance that we will be able to
do so on favorable terms or at all; (9) that we operate in an industry that is
highly competitive, and our competitors have greater resources and brand
recognition than we do; (10) that we rely on third-party providers for key
services that are critical to our operations and that any change in our ability
to obtain these services on reasonable terms could harm our business; (11) that
service interruptions, breakdowns, or breaches in security could cause us to
lose customers and/or expose us to liability; (12) that we may experience losses
due to defaults on payments by our customers or fraud; (13) that we might become
subject to laws and regulations, compliance with which could increase the cost
of doing business; (14) that changes in general economic conditions may have a
negative effect on our business; (15) that we may not be able to protect our
proprietary technologies or successfully defend infringement claims and may be
required to enter licensing arrangements on unfavorable terms; and (16) that
some other unforeseen event or circumstance could impair our operations. The
intention of this list is to present some of the known risks that could cause
future operating results to differ materially from our expectations and from the
forward-looking statements contained in this report. This list is not a complete
list of factors that could affect our business and results of operations, and it
should be read in conjunction with the more detailed descriptions of risk
factors contained in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 and our Registration Statement on Form S-1 filed with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have no floating rate indebtedness, hold no derivative
instruments, and do not earn foreign-sourced income. Accordingly, changes in
interest rates or currency exchange rates do not have a direct effect on our
financial position. To date the effects of inflation on us have been immaterial.
ITEM 4. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is
defined under Exchange Act Rule 13a-14(c), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. We have carried out an evaluation, as of the end of the period
covered by this report,
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under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
his evaluation and subject to the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely making known to him information relating to
the Company required to be disclosed in the Company's reports filed or submitted
under the Exchange Act.
There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date we completed our evaluation.
As described in the Company's registration statement on Form S-1, filed
with the Commission on August 6, 2004, and elsewhere in this report, the Company
currently has one director, Mr. Martin P. Gilmore. The Company has nominated
three independent persons for membership on the board of directors, each of whom
has agreed to serve on the board of directors upon the completion of the
Company's initial public offering. As such, the Company's sole director, who is
also the Company's Chief Executive Officer and Chief Financial Officer,
currently oversees disclosure controls and procedures. Upon the completion of
our public offering, such oversight will become the responsibility of the audit
committee.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have an outstanding tax liability, including assessed penalties, in
excess of approximately $1,144,000 as of June 30, 2004 for unpaid FICA,
Medicare, state and federal employment taxes. This tax liability arose because
certain of our employees were initially characterized as being self-employed
when they should have been characterized as our employees. We incurred the tax
liability between May 2001 and June 2003, and it includes approximately $399,000
of penalties and interest. The balance of approximately $745,000 represents the
amount under current tax law that should have been withheld from employees'
checks as well as our matching contributions to FICA, Medicare and unemployment
taxes. On July 22, 2003, the State of Illinois filed a tax lien against us for
approximately $62,000, which represents Illinois' portion of the tax liability.
To date, the Internal Revenue Service has not filed a lien against us, but it
could do so in the future. We intend to use a portion of the proceeds from our
public offering to satisfy our tax liability.
We are not a party to any other material legal proceedings.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The Company filed a Registration Statement on Form S-1 (File No. 333-107769)
with the Commission, which was declared effective by the Commission on February
13, 2004. Shortly thereafter, the Company commenced an initial public offering,
on a best efforts basis, of 2,000,000 shares of the Company's common stock at a
price of $10 per share. The offering period for this offering lasted for 150
days from effectiveness, or until July 11, 2004. As the Company did not sell the
required minimum number of shares of its common stock (1,200,000 shares) by the
expiration of the
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offering period, the offering terminated and the Company refunded all proceeds
it had received for the offering, without interest. The Company filed a new
Registration Statement on Form S-1 on August 6, 2004 (File No. 333-118000) to
serve the purpose of commencing a new offering of the Company's stock. The
offering, as described in the new Registration Statement, shall last for 90 days
from the date on which the Commission declares the new Registration Statement
effective. As of the date of this quarterly report, the Commission has not yet
declared the new Registration Statement effective.
During the period from February 13, 2004 to June 30, 2004, the Company
incurred approximately $80,000 in expenses related to its public offering. These
expenses consisted of legal fees due to the Company's law firm, and printing,
filing, and production costs. No payments for offering-related expenses have
been paid directly or indirectly to any underwriter or broker, to directors or
officers the Company or their associates, to persons owning ten (10) percent or
more of any class of equity securities of the Company, or to affiliates of the
Company.
(e) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) None
(b) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the six
months ended June 30, 2004.
ITEM 5. OTHER INFORMATION.
(a) None
(b) Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 902 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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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.
LIGHTFIRST INC.
(Registrant)
By: /s/ Martin P. Gilmore
--------------------------------------
Martin P. Gilmore
President and Chief Executive Officer
August 16, 2004
Pursuant to the requirements of the Securities Act of 1933, this report has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Martin P. Gilmore President, Chief Executive Officer and August 16, 2004
- -------------------------------------- Chairman of the Board of Directors ---------------
Martin P. Gilmore (Principal Executive Officer)
/s/ Martin P. Gilmore Chief Financial Officer August 16, 2004
- -------------------------------------- (Principal Financial Officer and ---------------
Martin P. Gilmore Principal Accounting Officer)
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