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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 quarterly period ended September 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 October 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 SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page No.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 1
Balance Sheets as of September 30, 2004 and December 31, 2003 1
Statements of Operations 3
Statements of Shareholders' 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 16
Item 4. Controls and Procedures 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURES 19
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
LIGHTFIRST INC.
(A Development Stage Company)
BALANCE SHEETS
September 30, December 31,
2004 2003
------------- ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 54,338 $ 9,645
Accounts receivable, net of allowance for doubtful
accounts of $10,000 7,579 4,019
Prepaid expenses 2,096 --
Deferred offering costs 314,287 204,853
-------- --------
TOTAL CURRENT ASSETS 378,300 218,517
PROPERTY - Computer equipment 44,196 39,430
Less accumulated depreciation 37,618 27,695
-------- --------
6,578 11,735
OTHER ASSETS
Customer list, net of accumulated amortization of
$260,742 and $217,765 at September 30, 2004 and
December 31, 2003, respectively 574 43,551
Deposits 87,894 17,894
-------- --------
88,468 61,445
473,346 291,697
======== ========
See notes to financial statements.
- 1 -
September 30, December 31,
2004 2003
----------- -----------
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Line of credit payable to shareholder $ 2,236,986 $ 1,264,987
Accounts payable 677,342 430,388
Deferred revenue 185,139 130,123
Accrued payroll 1,188,771 722,855
Accrued payroll taxes and related penalties 1,107,793 1,151,670
Due to officer/shareholder 1,701 1,681
Accrued interest payable to shareholder 191,055 64,986
----------- -----------
TOTAL CURRENT LIABILITIES 5,588,787 3,766,690
LONG-TERM LIABILITIES
Notes payable to shareholder 620,000 620,000
Accrued interest payable to shareholder 143,322 88,387
----------- -----------
763,322 708,387
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 (7,268,913) (5,573,530)
----------- -----------
(5,878,763) (4,183,380)
----------- -----------
$ 473,346 $ 291,697
=========== ===========
- 2 -
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Period from
inception For the three months ended Sept 30,
(April 11, 2001) -----------------------------------
to September 30, 2004 2004 2003
--------------------- ----------- -----------
Revenues $ 1,483,704 $ 106,802 $ 120,800
Cost of revenues 1,403,605 109,806 105,871
----------- ----------- -----------
GROSS PROFIT 80,099 (3,004) 14,929
General and administrative expenses 7,093,602 443,774 380,196
----------- ----------- -----------
LOSS FROM OPERATIONS (7,013,503) (446,778) (365,267)
Other income (expense):
Interest income 1,200 - 213
Interest expense (336,358) (68,760) (36,142)
Net realized gain from sale of investments 79,748 - -
----------- ----------- -----------
(255,410) (68,760) (35,929)
----------- ----------- -----------
NET LOSS $(7,268,913) $ (515,538) $ (401,196)
=========== =========== ===========
Net loss per share:
Basic and diluted (1.20) (0.08) (0.06)
Weighted average shares outstanding:
Basic and diluted 6,060,043 6,406,000 6,406,000
=========== =========== ===========
For the nine months ended Sept. 30,
-----------------------------------
2004 2003
----------- -----------
Revenues $ 328,699 $ 367,973
Cost of revenues 337,727 340,017
----------- -----------
GROSS PROFIT (9,028) 27,956
General and administrative expenses 1,504,314 1,645,974
----------- -----------
LOSS FROM OPERATIONS (1,513,342) (1,618,018)
Other income (expense):
Interest income - 957
Interest expense (182,041) (88,151)
Net realized gain from sale of investments - -
----------- -----------
(182,041) (87,194)
----------- -----------
NET LOSS $(1,695,383) $(1,705,212)
=========== ===========
Net loss per share:
Basic and diluted (0.26) (0.27)
Weighted average shares outstanding:
Basic and diluted 6,406,000 6,395,444
=========== ===========
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 NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30, 2004 - - - (1,695,383) (1,695,383)
------------ ------- ----------- ------------ -----------
BALANCE AT
SEPTEMBER 30, 2004 $ 6,406,000 $ 6,406 $ 1,383,744 $ (7,268,913) $(5,878,763)
============ ======= =========== ============ ===========
See notes to financial statements.
- 4 -
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period from
inception For the nine months ended Sept. 30,
(April 11, 2001) to -----------------------------------
September 30, 2004 2004 2003
------------------- ----------- -----------
CASH FLOWS - OPERATING ACTIVITIES
Net loss for the period $(7,268,913) $(1,695,383) $(1,705,212)
Adjustments to reconcile net loss to net cash
used for operating activities:
Bad debts 16,638 - -
Compensation expense 190,000 - 190,000
Interest expense 334,377 181,004 88,151
Depreciation and amortization 298,360 52,900 74,191
Net realized (gain) from sale of investments (79,748) - -
Changes in certain assets and liabilities
affecting operations:
Accounts receivable (17,579) (3,560) 786
Prepaid expenses (2,096) (2,096) -
Deposits (87,894) (70,000) (5,965)
Accounts payable 677,342 246,954 7,156
Deferred revenue 36,232 55,016 62,180
Accrued expenses 2,296,564 422,039 510,495
----------- ----------- -----------
NET CASH USED FOR
OPERATING ACTIVITIES (3,606,717) (813,126) (778,218)
CASH FLOWS - INVESTING ACTIVITIES
Increase in note receivable (6,638) - (305)
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) (305)
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 and notes payable to shareholder 2,856,986 971,999 899,710
Deferred offering costs (314,287) (109,434) (140,436)
Due (from) to officer/shareholder 1,701 20 18,933
----------- ----------- -----------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 3,199,750 862,585 778,207
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 54,338 44,693 (316)
Cash at beginning of period - 9,645 4,608
----------- ----------- -----------
CASH AT END OF PERIOD $ 54,338 $ 54,338 $ 4,292
=========== =========== ===========
- 5 -
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Cont'd
(UNAUDITED)
Period from
inception
(April 11, 2001) to Nine months ended Sept. 30,
September 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
September 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 nine months ended September 30, 2004 are
not necessarily indicative of the results that may be expected for the
full year ended December 31, 2004.
The accompanying unaudited 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.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission ("SEC"), which was declared effective on August
20, 2004 and will terminate on November 17, 2004. 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 remainder of our 9,000
members 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:
- we intend to purchase and resell products and services to our
customers at a markup;
- we hope to earn commissions and referral fees from businesses
we introduce to our customers;
- we intend to retain a portion of any administrative discounts
that we can negotiate for our customers; and
- 8 -
- 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. Following
our initial public offering, we intend to focus on establishing the
significant strategic relationships that we believe are essential to
developing the revenue streams described above. We have begun to enter
into discussions with a limited number of potential billers, but we do not
expect to formalize any strategic relationships until after our initial
public offering is complete. Specifically, we are seeking and will
continue to 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 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 without any shares having been sold. We
filed a new Registration Statement on Form S-1 with the Commission, which
the Commission declared effective on August 20, 2004, for the purpose of
terminating the prior offering and of commencing a new offering of our
common stock. The new offering will terminate on November 17, 2004. In the
event that our initial public offering is not consummated, the Company may
be unable to implement its business plan and may be unable to continue as
a going concern.
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.
- 9 -
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 September 30, 2004, we had an accumulated deficit of
$7,268,913. 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.
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.
- 10 -
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 Nine Months Ended
----------------------------------------- --------------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
-------------------- ------------------- --------------------- ---------------------
% of Net % of Net % of Net % of Net
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
---------- -------- ---------- -------- ------------ -------- ------------ --------
Revenue $ 106,802 100.0% $ 120,800 100.0% $ 328,699 100.0% $ 367,973 100.0%
Cost of Revenue $ 109,806 102.8% $ 105,871 87.6% $ 337,727 102.7% $ 340,017 92.4%
---------- ------ ---------- ------ ------------ ------ ------------ ------
Gross Profit $ (3,004) (2.8%) $ 14,929 12.4% $ (9,028) (2.7%) $ 27,956 7.6%
Operating Expenses
Sales & Marketing $ 177,759 166.4% $ 161,713 133.9% $ 625,972 190.4% $ 708,035 192.4%
Product Development $ 54,510 51.0% $ 45,124 37.4% $ 235,119 71.5% $ 238,722 64.9%
General & Administrative $ 204,145 191.1% $ 148,629 122.9% $ 590,324 179.6% $ 625,026 169.8%
Depreciation & Amortization $ 7,360 6.9% $ 24,730 20.5% $ 52,899 16.1% $ 74,191 20.2%
---------- ------ ---------- ------ ------------ ------ ------------ ------
General & Administrative Total $ 443,774 415.5% $ 380,196 314.6% $ 1,504,314 457.7% $ 1,645,974 447.3%
---------- ------ ---------- ------ ------------ ------ ------------ ------
Operating Income (Loss) $ (446,778) (418.3%) $ (365,267) (302.4%) $ (1,513,342) (460.4%) $ (1,618,018) (439.7%)
Other Income (Expense)
Interest Income $ -- 0.0% $ 213 0.2% $ -- 0.0% $ 957 0.3%
Interest Expense $ (68,760) (64.4%) $ (36,142) (29.9%) $ (182,041) (55.4%) $ (88,151) (24.0%)
Gain (Loss) on Sale of
Investment $ -- 0.0% $ -- 0.0% $ -- 0.0% $ -- 0.0%
---------- ------ ---------- ------ ------------ ------ ------------ ------
Total Other Income $ (68,760) (64.4%) $ (35,929) (29.7%) $ (182,041) (55.4%) $ (87,194) (23.7%)
Loss before provision for income tax $ (515,538) (482.7%) $ (401,196) (332.1%) $ (1,695,383) (515.8%) $ (1,705,212) (463.4%)
Provision for income tax $ -- -- $ -- -- $ -- -- $ -- --
Net Income (Loss) $ (515,538) (482.7%) $ (401,196) (332.1%) $ (1,695,383) (515.8%) $ (1,705,212) (463.4%)
========== ====== ========== ====== ============ ====== ============ ======
Revenue
During the three months ended September 30, 2004, net revenues decreased
11.6% relative to the three months ended September 30, 2003, from $120,800
to $106,802. During the nine months ended September 30, 2004, net revenues
decreased 10.7% relative to the nine months ended September 30, 2003, from
$367,973 to $328,699. The decreases in revenue were 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.
- 11 -
Cost of Revenue
Cost of revenue increased 3.7% from $105,871, or 87.6% of net revenues,
for the quarter ended September 30, 2003, to $109,806 or 102.8% of net
revenues, for the quarter ended September 30, 2004. Cost of revenue
decreased from $340,017, or 92.4% of net revenues, for the nine months
ended September 30, 2003, to $337,727 or 102.7% of net revenues, for the
nine months ended September 30, 2004. The decrease in costs for the nine
months ended September 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
September 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
nine-month periods ending September 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
increased 9.9% from $161,713, or 133.9% of net revenue, for the three
months ended September 30, 2003, to $177,759, or 166.4% of net revenue,
for the three months ended September 30, 2004. The increase in sales and
marketing expenses for the quarter ended September 30, 2004 relative to
the same period in 2003 was due primarily to increases in the costs of
healthcare benefits for sales and marketing personnel and increased
printing, fulfillment, and postal expenses for sales materials. The
increase as a percentage of net revenue was attributable to this increase
in costs and to the decrease in net revenues for the same period.
Sales and marketing expenses decreased 11.6% from $708,035, or 192.4% of
net revenue, for the nine months ended September 30, 2003, to $625,972, or
190.4% of net revenue, for the nine months ended September 30, 2004. The
decrease for this period is 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 20.8% for the nine months
ended September 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, for most of the
nine-month period ended September 30, 2004 as compared to the same period
in the prior year, to increases in health insurance premiums for
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sales and marketing personnel and to increases in sales-related printing,
fulfillment, and delivery expenses. The overall decrease as a percentage
of net revenues is attributable to the net decrease in costs, and is
offset by the decrease in net revenues for the period.
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 increased 20.8% to $54,510, or 51.0% of net revenues, for the
quarter ended September 30, 2004, from $45,124, or 37.4% of net revenues,
for the quarter ended September 30, 2003. The increase in product
development costs for the quarter was attributable to an increase in
software design and development activities and to increases in the cost of
healthcare benefits for our product development staff. Product development
costs decreased 1.5% to $235,119, or 71.5% of net revenues for the nine
months ended September 30, 2004, from $238,722, or 64.9% of net revenues,
for the nine months ended September 30, 2003. The decrease in product
development costs was attributable to a decrease in product development
activities during the first two quarters of 2004, which was largely offset
by the increase in product development activities in the third quarter of
2004 and increases in healthcare benefit costs for the entire nine-month
period. Overall, the increases in product development costs as a
percentage of net revenues for both the three-month and nine-month periods
ended September 30, 2004 relative to the same periods in the prior year
are attributable to the decrease in net revenues for both periods.
General and Administrative. The main components of general and
administrative expenses were wages and employee benefits, taxes and
insurance expenses, professional and consulting fees, and rent. General
and administrative expenses increased from $148,629, or 122.9% of net
revenues, for the three months ended September 30, 2003, to $204,145, or
191.1% of net revenues, for the three months ended September 30, 2004. The
increase in general and administrative expenses for this period is
primarily attributable to increases in professional fees, an increase in
healthcare insurance costs, and an increase in the rent for our corporate
offices due to a new lease agreement which went into effect in May 2003.
These increases were partially offset by the effect of a tax penalty that
was incurred during the quarter ended September 30, 2003. The increase as
a percentage of net revenues is attributable to this increase in costs and
to the decrease in net revenues for the same period.
General and administrative expenses decreased from $625,026, or 169.8% of
net revenues, for the nine months ended September 30, 2003, to $590,324,
or 179.6% of net revenues, for the nine months ended September 30, 2004.
The decrease in general and administrative costs for the nine-month period
ended September 30, 2004 relative to the same period in 2003 was primarily
due to a reduction in administrative personnel during the nine months
ended September 30, 2004 relative to the same period in the prior year and
to the effect of a tax penalty incurred during the nine months ended
September 30, 2003; the decreases were partially offset by increases in
rent, 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.
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Interest Income and Expense
Interest Income. Interest income was $0 for the nine months ended
September 30, 2004, $213 for the quarter ended September 30, 2003, and
$957 for the nine months ended September 30, 2003. Interest income for the
nine months ended September 30, 2003 consisted of interest on one
promissory note held by the Company. That promissory note was not in
effect during the nine months ended September 30, 2004.
Interest Expense. Interest expense was $68,760 in the quarter ended
September 30, 2004 and $36,142 in the quarter ended September 30, 2003.
Interest expense was $182,041 in the nine months ended September 30, 2004
and $88,151 in the nine months ended September 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 nine months of 2004, our cash increased by $44,693, from
$9,645 at December 31, 2003 to $54,338 at September 30, 2004.
Net cash used in operating activities was $813,126 during the nine months
ended September 30, 2004 and $778,218 during the nine months ended
September 30, 2003. During the nine months ended September 30, 2004, we
financed our operations primarily through accrued accounts payable,
accrued expenses, and accrued interest expense of $246,954, $422,039, and
$181,004 respectively.
Net cash used for investing activities was $4,766 for the nine months
ended September 30, 2004. This consisted primarily of computer equipment
purchases. Net cash used for investing activities was $305 for the nine
months ended September 30, 2003.
Net cash provided by financing activities was $862,585 for the nine months
ended September 30, 2004 and $778,207 for the nine months ended September
30, 2003. For the nine months ended September 30, 2004, cash from
financing activities consisted of $971,999 in cash received pursuant to a
line of credit from a shareholder, and was offset by deferred offering
costs of $109,434.
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 $2,237,000
as of September 30, 2004. As of the same date, we had approximately
$763,000 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
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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. We filed a new Registration Statement (File No. 333-118000) with
the Commission, which the Commission declared effective on August 20,
2004, for the purpose of terminating our previous effective registration
statement and recommencing our offering for 90 days. The offering will
terminate on November 17, 2004. 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. 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 nine 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.
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
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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 due to 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 effective Registration Statement on Form S-1 (File No. 333-118000)
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, 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 was no change in the Company's internal control over financial
reporting that occurred during the third quarter of 2004, that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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As described in the Company's registration statement on Form S-1, declared
effective by the Commission on August 20, 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 and the Company's internal control over
financial reporting. 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, of
approximately $1,108,000 as of September 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 $391,000 of penalties and interest. The balance of
approximately $717,000 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 Social Security 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) 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
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 (File No. 333-118000),
which the Commission declared effective on August 20, 2004, to serve the
purpose of commencing a new offering of the Company's stock.
During the period from February 13, 2004 to September 30, 2004, the
Company incurred approximately $100,000 in expenses related to its public
offering. These expenses consisted of
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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.
(c) 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
nine months ended September 30, 2004.
ITEM 5. OTHER INFORMATION.
(a) None
(b) Not applicable.
ITEM 6. 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
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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
November 15, 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 November 15, 2004
- --------------------- Chairman of the Board of Directors
Martin P. Gilmore (Principal Executive Officer)
/s/ Martin P. Gilmore Chief Financial Officer November 15, 2004
- --------------------- (Principal Financial Officer and
Martin P. Gilmore Principal Accounting Officer)
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