Back to GetFilings.com
Form 10-Q
--------------
U.S. Securities and Exchange Commission
Washington, D.C. 20549
---------------
(MARK ONE)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
---------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------
COMMISSION FILE NUMBER: 000-26881
---------------
NETNATION COMMUNICATIONS, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-08034 38
(State or other jurisdiction (I.R.S. Employer I.D. No.)
of incorporation or organization)
1410 - 555 WEST HASTINGS STREET
VANCOUVER, BRITISH COLUMBIA, CANADA, V6B 4N6
(Address of principal executive offices)
(Zip Code)
604/688-8946
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports 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.
Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as of August
1, 2002 was 15,218,002.
Page 1 of 14
NETNATION COMMUNICATIONS, INC.
FORM 10-Q
JUNE 30, 2002
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-June 30, 2002 (unaudited)
and December 31, 2001 (audited) 3
Condensed Consolidated Statements of Operations and Deficit-Three Month
And Six Month Periods Ended June 30, 2002 (unaudited) and 2001 (unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity-Six Month
Period Ended June 30, 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows-Six Month Periods
Ended June 30, 2002 (unaudited) and 2001 (unaudited) 6
Condensed Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
Page 2 of 14
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(Expressed in U.S. dollars)
June 30, December 31,
2002 2001
------------ --------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,511,245 $ 1,678,950
Accounts receivable, net of allowance for doubtful accounts
of $27,302 (December 31, 2001 - nil) 89,473 107,208
Prepaid expenses and deposits 213,129 245,733
Deferred expenses 620,980 557,941
Deferred tax asset 250,000 250,000
------------ --------------
3,684,827 2,839,832
Deferred expenses 204,038 135,734
Fixed assets, net of accumulated depreciation of $1,440,142
(December 31, 2001 - $1,092,999) 763,792 1,050,862
Investments 100,000 100,000
------------ --------------
$ 4,752,657 $ 4,126,428
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 242,506 $ 235,880
Contingent lease payments (Note 5(b)) 381,254 381,254
Customer deposits 65,697 83,335
Deferred revenue 2,033,064 1,934,936
Capital lease liability 21,651 19,183
------------ --------------
2,744,172 2,654,588
Deferred revenue 502,025 455,228
Capital lease liability 14,348 24,652
Stockholders' equity:
Common stock
Authorized:
50,000,000 common shares with a par value of $0.0001 each
Issued:
15,218,002 (December 31, 2001 - 15,245,321) common shares 1,522 1,525
Additional paid-in capital 5,911,202 5,988,123
Deferred stock-based compensation (76,506) (287,554)
Accumulated other comprehensive income 14,601 14,601
Deficit (4,358,707) (4,724,735)
------------ --------------
1,492,112 991,960
------------ --------------
$ 4,752,657 $ 4,126,428
============ ==============
See accompanying condensed notes to consolidated financial statements.
Page 3 of 14
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations and Deficit
(Expressed in U.S. dollars)
Three month period ended June 30, Six month period ended June 30,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 1,740,954 $ 1,615,550 $ 3,427,385 $ 3,190,336
Cost of sales 574,743 519,496 1,117,815 1,023,814
--------------- --------------- --------------- ---------------
Gross profit 1,166,211 1,096,054 2,309,570 2,166,522
Expenses:
Sales and marketing 252,905 351,340 519,154 764,965
General and administration 570,267 570,147 1,077,247 1,054,057
Depreciation and amortization 191,332 159,971 347,141 314,844
--------------- --------------- --------------- ---------------
1,014,504 1,081,458 1,943,542 2,133,866
--------------- --------------- --------------- ---------------
Net earnings 151,707 14,596 366,028 32,656
Deficit, start of period (4,510,414) (5,464,592) (4,724,735) (5,482,652)
--------------- --------------- --------------- ---------------
Deficit, end of period $ (4,358,707) $ (5,449,996) $ (4,358,707) $ (5,449,996)
=============== =============== =============== ===============
Earnings per share, basic and diluted $ 0.01 $ 0.00 $ 0.02 $ 0.00
=============== =============== =============== ===============
Weighted average number of common shares outstanding, basic 15,218,002 15,238,134 15,222,040 15,252,945
=============== =============== =============== ===============
Weighted average number of common shares outstanding, diluted 15,218,002 15,327,190 15,222,040 15,357,768
=============== =============== =============== ===============
See accompanying condensed notes to consolidated financial statements.
Page 4 of 14
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statement of Stockholders' Equity
(Expressed in U.S. Dollars)
Six month period ended June 30, 2002
(Unaudited)
Accumulated
Common Stock Additional Deferred Other
--------------------- Paid-In Stock-based Comprehensive
Shares Amount Capital Compensation Income Deficit Total
----------- -------- ----------- -------------- ------------- ------------ -----------
Balance at
December 31, 2001 15,245,321 $ 1,525 $5,988,123 $ (287,554) $ 14,601 $(4,724,735) $ 991,960
Amortization of
deferred compensation - - - 116,227 - - 116,227
Issuance of common
stock for cash on
exercise of stock options 8,000 1 18,249 - - - 18,250
Issuance of common stock
for cash 10,500 1 104 - - - 105
Cancellation of
common stock (45,819) (5) (95,274) 94,821 - - (458)
Net earnings and
comprehensive income - - - - - 366,028 366,028
----------- -------- ----------- -------------- ------------- ------------ -----------
Balance at
June 30, 2002 15,218,002 $ 1,522 $5,911,202 $ (76,506) $ 14,601 $(4,358,707) $1,492,112
=========== ======== =========== ============== ============= ============ ===========
See accompanying condensed notes to consolidated financial statements.
Page 5 of 14
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
Six month Six month
period ended period ended
June 30, June 30,
2002 2001
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net earnings $ 366,028 $ 32,656
Items not involving cash:
Depreciation and amortization 347,141 314,844
Employee stock-based compensation 116,227 189,584
Changes in non-cash operating assets and liabilities:
Accounts receivable 17,735 5,718
Prepaid expenses and deposits 32,604 33,126
Deferred expenses (131,343) 83,586
Accounts payable and accrued liabilities 6,626 (280,274)
Deferred revenue 144,925 (141,330)
Customer deposits (17,638) 14,040
-------------- --------------
Net cash provided by operating activities 882,305 251,950
-------------- --------------
Investing:
Purchase of fixed assets (60,071) (117,241)
-------------- --------------
Net cash used in investing activities (60,071) (117,241)
-------------- --------------
Financing:
Proceeds from sale of common stock 18,355 2,250
Lease financing repayments (7,836) (9,715)
Cancellation of shares (458) (780)
-------------- --------------
Net cash provided by (used in) financing activities 10,061 (8,245)
-------------- --------------
Increase in cash and cash equivalents 832,295 126,464
Cash and cash equivalents, beginning of period 1,678,950 748,745
-------------- --------------
Cash and cash equivalents, end of period $ 2,511,245 $ 875,209
============== ==============
Supplemental disclosure:
Cash paid for:
Interest $ 3,676 $ 3,604
Income taxes $ - -
See accompanying condensed notes to consolidated financial statements.
Page 6 of 14
NETNATION COMMUNICATIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Six-month periods ended June 30, 2002 and 2001
(Unaudited)
GENERAL:
NetNation Communications, Inc. (the "Company") was incorporated on May 7,
1998 under the laws of the State of Delaware as Collectibles Entertainment
Inc. ("Collectibles").
On April 7, 1999, Collectibles acquired all of the outstanding common
shares of NetNation Communications Inc. ("NetNation Canada"). After the
transaction, the former shareholders of NetNation Canada controlled
Collectibles. As Collectibles was inactive at the time of the transaction,
this issuance was accounted for as a capital transaction of NetNation
Canada, effectively as if NetNation Canada issued common shares to acquire
the net monetary assets of Collectibles followed by a recapitalization.
Subsequent to the transaction, Collectibles changed its name to NetNation
Communications, Inc.
On November 24, 1999, DomainPeople Inc. ("DomainPeople"), a wholly-owned
subsidiary of the Company, was incorporated under the laws of the State of
Delaware and was formed to offer domain name registration and related
services. DomainPeople is accredited by the Internet Corporation for
Assigned Names and Numbers, the regulatory body charged with administering
accreditation, as a registrar for top-level domain names.
The Company's principal business activities are the provision of web site
hosting, domain name registration, and related services to small and medium
sized businesses.
1. BASIS OF PRESENTATION:
These interim condensed consolidated financial statements have been
prepared using generally accepted accounting principles in the United
States. The interim financial statements include all adjustments,
consisting solely of normal recurring adjustments, which in management's
opinion are necessary for fair presentation of the financial results for
interim periods. The financial statements have been prepared consistent
with the accounting policies described in the Company's annual audited
financial statements. Reference should be made to those statements included
with the Company's annual report filed on Form 10-K. Certain comparative
figures have been reclassified to conform to the presentation adopted in
the current period.
These condensed consolidated financial statements include the accounts of
the Company's wholly owned subsidiaries, NetNation Communications Inc.,
NetNation Communications (USA) Inc., and DomainPeople Inc. All material
intercompany balances and transactions have been eliminated.
Page 7 of 14
2. SIGNIFICANT ACCOUNTING POLICIES:
Revenue recognition:
Revenue is recognized as web site hosting, domain name and related services
are provided. Revenue from web site hosting set-up fees is recognized over
the estimated period the hosting services are provided to customers, which
typically ranges from 1 to 2 years. Domain name registration and
maintenance revenue is recognized ratably over the contract term which is
between one and ten years. Cash received in advance of meeting these
revenue recognition criteria is recorded as deferred revenue.
Deferred expenses:
The cost of registering domain names is deferred and amortized in
conjunction with the recognition of domain name registration and
maintenance revenue.
3. STOCK OPTIONS:
A summary of the Company's stock option activity is as follows:
=================================================================
Number of Weighted average
common shares exercise price
-----------------------------------------------------------------
Outstanding, December 31, 2001 724,000 $ 2.98
Cancelled (8,000) 4.63
Cancelled (6,000) 2.25
Cancelled (6,000) 2.31
Expired (88,000) 4.63
Expired (24,000) 4.13
Exercised (4,000) 2.25
Exercised (4,000) 2.31
-----------------------------------------------------------------
Outstanding, June 30, 2002 584,000 $ 2.68
=================================================================
The options outstanding at June 30, 2002 expire between July 9, 2002 and
January 9, 2006.
4. SEGMENTED INFORMATION:
The Company operates primarily two business segments consisting of web site
hosting and domain name registration. These business segments have been
segregated based on how management organizes the segments within the
business for making operating decisions and assessing performance. The
accounting policies of the business segments are the same as those
described in the summary of significant accounting policies.
The Company's revenues are generated from the following business segments:
================================================================================
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Web hosting $1,145,651 $1,118,694 $2,305,800 $2,192,510
Domain name registration 595,303 496,856 1,121,585 997,826
- --------------------------------------------------------------------------------
$1,740,954 $1,615,550 $3,427,385 $3,190,336
- --------------------------------------------------------------------------------
The Company's gross profits are generated from the following business segments:
Page 8 of 14
======================================================================================
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------
Web hosting $ 843,942 $ 835,090 $ 1,726,128 $ 1,636,344
Domain name registration 322,269 260,964 583,442 530,178
- --------------------------------------------------------------------------------------
$ 1,166,211 $ 1,096,054 $ 2,309,570 $ 2,166,522
- --------------------------------------------------------------------------------------
All of the Company's assets were located in Canada as at June 30, 2002.
5. COMMITMENTS AND CONTINGENCIES:
(a) The Company is committed to total operating lease payments for rent
for the remainder of 2002 and 2003 of approximately $54,000 and
$36,000, respectively.
(b) As at December 1, 2000, the Company discontinued lease payments on the
San Diego premises due to a number of circumstances. To date, the
landlord has not commenced legal action against the Company. Should
the landlord commence legal action against the Company, the outcome of
the proceedings is unknown. The remaining lease payments of $381,254
were accrued in the consolidated financial statements as at December
31, 2000, and a gain will be recognized in the event of a favorable
outcome.
(c) The distribution process for .biz domain names has been the subject of
litigation in the Los Angeles Superior Court in the State of
California. On August 1, 2001 a lawsuit was brought by David Scott
Smiley against NeuLevel, Inc., the .biz registry, the Internet
Corporation for Assigned Names and Numbers ("ICANN"), and most of the
.biz-accredited registrars, including DomainPeople Inc., a
wholly-owned subsidiary of NetNation. This lawsuit alleges among other
things, that the method for assigning domain names during the start-up
period for registration of .biz domain names constituted an illegal
lottery under California law. The lawsuit seeks a refund of the fees
paid to the defendants, additional damages, costs, attorney fees, and
an injunction to stop the pre-registrations. NeuLevel has subsequently
changed its distribution process in response to this litigation. At
this time, DomainPeople Inc. has not been formally served with notice
of the legal proceedings and the outcome of the proceedings and the
amount of potential damages to DomainPeople Inc. is unknown. However,
should the plaintiff prevail in its claim, the Company may be required
to pay damages which could have a material effect on the Company's
operating results.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
NetNation was incorporated under the laws of the State of Delaware on May 7,
1998, under the name Collectibles Entertainment Inc. ("Collectibles") for the
purpose of operating an online sports card and other tradeable memorabilia
distribution business. Collectibles changed its name to NetNation
Communications, Inc. on April 14, 1999 in conjunction with the acquisition of a
web-site hosting business based in Vancouver, Canada. The common shares of
NetNation currently trade on the Nasdaq Small Capitalization Market under the
ticker symbol "NNCI".
Page 9 of 14
NetNation entered into the web hosting business through its acquisition of
NetNation Canada. NetNation Canada is a private company incorporated under the
laws of the Province of British Columbia, Canada on February 19, 1997.
NetNation Canada became a wholly owned subsidiary on April 7, 1999 pursuant to
an agreement between the shareholders of NetNation Canada and Collectibles (the
"Share Purchase Agreement"). Pursuant to the Share Purchase Agreement,
Collectibles acquired 9,000,000 Class A common shares and 1,000,000 Class B
preferred shares of NetNation Canada, being all of the issued and outstanding
shares of NetNation Canada. The purchase price for the shares of NetNation
Canada was $1,000,000 in Canadian currency, which was paid by the issuance of
10,000,000 common shares of Collectibles. After the transaction, the former
shareholders of NetNation Canada controlled Collectibles. Upon conclusion of
the acquisition, Collectibles changed its name to NetNation.
NetNation is an internet infrastructure solutions provider focused on meeting
the needs of small and medium-sized enterprises ("SMEs") and individuals who are
establishing a commercial or informational presence on the Internet. NetNation
competes in the web hosting and domain name registration markets. Its products
and services are sold worldwide, directly to customers and through value added
resellers ("VARs").
In May 1999, NetNation was selected as an official registrar of domain names by
ICANN. The accreditation allows NetNation to register top-level domain names
("TLD's") ending in .com, .net and .org, which account for approximately 50% -
75% of the world's Internet addresses. NetNation, through its wholly-owned
subsidiary, DomainPeople, became operational as a domain name registrar in
December of 1999.
NetNation's 2002 revenue was generated mainly from providing web hosting
services to SMEs and domain name registration. NetNation's web hosting
customers normally pay a setup fee and regular charges, either monthly,
quarterly or annually, thereafter. The Company offers a variety of hosting
packages in addition to a number of value-added services and products. This
enables customers to easily select and modify a solution that precisely meets
their individual requirements.
NetNation's accreditation as an official registrar of domain names has enabled
it to register domain names without the involvement of an intermediary. As an
accredited registrar, NetNation, through DomainPeople, has assumed
responsibility for ensuring that current information obtained from customers is
supplied to the central registry.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations, including the discussion on liquidity and capital resources, are
based upon the Company's consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgements that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. On an ongoing basis, management re-evaluates
its estimates and judgements. The Company believes the following critical
accounting policy requires its most significant judgement and estimates used in
the preparation of the consolidated financial statements.
Deferred tax liabilities and assets are recognized for the estimated future tax
consequences of differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. The amount of the deferred tax
asset considered realizable could change materially in the near term based on
future taxable income during the carry forward period.
Page 10 of 14
RESULTS OF OPERATIONS
For the quarter ended June 30, 2002, NetNation achieved net earnings of $151,707
($0.01 per share) as compared to $14,596 ($0.00 per share) for the same period
in 2001 and for the six month period ended June 30, 2002, net earnings of
$366,028 ($0.02 per share) as compared to $32,656 ($0.00 per share) for the same
period in 2001.
Revenue
NetNation's revenue of $1,740,954 for the quarter ended June 30, 2002 represents
an increase of $125,404 or 8% over the quarter ended June 30, 2001. For the six
months ended June 30, 2002, revenue of $3,427,385 was an increase of $237,049 or
7% over the same period in 2001. The increase was due to the increase in the
number of web sites hosted and continued growth in the domain name registration
segment of NetNation's business. The introduction of the .info and .biz domain
names in the second half of 2001 and the introduction of the .name and .us
domain names in 2002 have contributed to the growth in domain name registration
revenues.
The following table compares the composition of sales for the three and six
months ended June 30, 2002 to the same periods in 2001:
Sales
Three months ended June 30, Six months ended June 30,
-------------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------------
Web hosting 66% 69% 67% 69%
Domain name registration 34% 31% 33% 31%
-------------------------------------------------------------
Total sales 100% 100% 100% 100%
-------------------------------------------------------------
Domain name registration services are billed and collected in advance of
provision of the service and are deferred and recorded as revenue on a
straight-line basis over the term of registration. The unrecognized portion of
the fees has been recorded as deferred revenue. The deferred revenue amount on
the balance sheet as at June 30, 2002 includes $1,658,672 related to domain name
registration.
Cost of sales
Cost of sales of $574,743 for the quarter ended June 30, 2002 represents an
increase of $55,247 or 11% over the quarter ended June 30, 2001. For the six
months ended June 30, 2002, cost of sales of $1,117,815 represents an increase
of $94,001 or 9% over the same period in 2001. As a percentage of sales, cost
of sales increased from 32% to 33% from the second quarter of 2001 to the same
period in 2002. As a percentage of sales, cost of sales increased from 32% to
33% from the first half of 2001 to the same period in 2002. The increase in
costs was mainly due to increased personnel costs and the costs to register
domain names. The majority of cost of sales consists of personnel costs for the
network operations center and technical support, bandwidth costs, and the costs
to register domain names for the Company's customers. Domain name registration
fees paid to the central registry are recognized as an expense over the term of
registration.
Sales and marketing expenses
Sales and marketing expenses for the quarter ended June 30, 2002 decreased
$98,435 or 28% from the same period in of 2001. For the six months ended June
30, 2002, sales and marketing expenses decreased $245,812 or 32% from the same
period in 2001. As a percentage of sales, sales and marketing expenses
decreased from 22% in the second quarter of 2001 to 15% in the second quarter of
Page 11 of 14
2002. As a percentage of sales, sales and marketing expenses decreased from 24%
in the first half of 2001 to 15% in the first half of 2002. The decrease was
mainly due to a reduction in advertising expenses of $66,724 or 48% in the
second quarter of 2002 compared to the same period in 2001 and $163,708 or 50%
in the first half of 2002 as compared to the same period in 2001 due to a more
focused and selective approach to the media and venues chosen to place
advertisements. Reductions in personnel costs also contributed to the decrease.
Sales and marketing expense consists mainly of salaries, bonuses, commissions
and advertising costs.
General and administration expenses
General and administration expenses for the quarter ended June 30, 2002
increased $120 over the same period in 2001. For the six months ended June 30,
2002, general and administration expenses increased $23,190 or 2% over the same
period in 2001. As a percentage of sales, general and administration expenses
decreased from 35% in the second quarter of 2001 to 33% in the second quarter of
2002. As a percentage of sales, general and administration expenses decreased
from 33% in the first half of 2001 to 31% in the first half of 2002. General and
administrative expenses include administrative personnel costs, bad debt
expense, rent, general office expenses, audit and legal costs, and investor
relations expenses.
Depreciation and amortization
Depreciation and amortization for the second quarter of 2002 increased $31,361
or 20% compared to the second quarter of 2001. For the six months ended June 30,
2002, depreciation and amortization increased $32,298 or 10%. The increase in
depreciation and amortization was due to the ongoing re-evaluation of the
estimated useful life of the Company's fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2002, operating activities generated net
cash of $882,305 compared to $251,950 for the same period in 2001. The main
reason for the increase in cash from operations was the increase in net earnings
and the increase in deferred revenues for domain name registrations and web
hosting services.
Net cash used in investing activities for the six months ended June 30, 2002 of
$60,071 represents a reduction of $57,170 from the same period in 2001. These
expenditures relate mainly to the network operations center. Similar costs may
be incurred in the future for expanding the network operations center when
appropriate.
Net cash from financing activities for the six months ended June 30, 2002 was
$10,061 compared to net cash used in financing activities of $8,245 for the same
period in 2001. In 2002, $18,250 was raised from the exercise of stock options
by employees.
As at June 30, 2002, the Company has cash and cash equivalents of $2,511,245
compared to $1,678,950 as at December 31, 2001. The $832,295 increase reflects
positive cash flows from operations and cash from employee exercise of stock
options less the investment in fixed assets for the six months ended June 30,
2002. Based on management's current projections, the Company believes that it
has adequate resources for continued very moderate growth in revenues for the
foreseeable future. The Company's management may evaluate from time to time the
availability of external financing. The Company may seek additional capital to
accelerate growth but there is no guarantee that capital will be available at
acceptable terms or at all. While there are no commitments, management may make
capital expenditures from time to time as the operations demand.
On July 8, 2002, the Company received a Letter of Notice from Nasdaq indicating
that the Company was not in compliance with the minimum USD$1.00 per share bid
price requirement for continued inclusion under Nasdaq Marketplace Rule
4310(c)(4), and therefore, in accordance with Marketplace Rule 4310(c)(8)(D),
was provided with 180 calendar days, or until January 6, 2003, to regain
compliance. According to the Nasdaq rule, compliance requires the bid price of
the Company's common stock to close at USD$1.00 per share or more for a minimum
of ten consecutive trading days before January 6, 2003. Under certain
circumstances, to ensure that the Company can sustain long-term compliance,
Nasdaq may require that the closing bid price equals USD$1.00 per share or more
for more than ten consecutive trading days before determining the Company
complies. If compliance is not demonstrated by the Company by this date, Nasdaq
will determine whether the Company meets the initial listing criteria for The
Nasdaq SmallCap Market under MarketPlace Rule 4310(c)(2)(A), by which the
Company may be granted an additional 180 calendar days to demonstrate
compliance. If Nasdaq determines that the Company does not qualify for an
extension under MarketPlace Rule 4310(c)(2)(A), the Company will be provided
with written notification that its securities will be delisted. At that time,
the Company may appeal the Staff Determination to delist its securities to a
Nasdaq Listing Qualification Panel. During this process, NetNation's securities
will remain listed and will continue to trade on the Nasdaq SmallCap Market. In
the event that the Company's securities are delisted from the Nasdaq SmallCap
Market, the Company's securities may continue to trade on the OTC Bulletin
Board's electronic quotation system. If the Company's securities are delisted
from the Nasdaq SmallCap Market, this may have an impact on the liquidity of the
Company's securities.
FORWARD-LOOKING STATEMENTS
The statements included in the discussion and analysis above that are not
historical or factual are "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995). The safe harbor
provisions provided in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, apply to
forward-looking statements made by the Company.
Page 12 of 14
These statements can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "intends, " "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
Management cautions the reader that these forward-looking statements addressing
the timing, costs and scope of expansion of operations or investments and other
matters contained herein or therein from time to time regarding matters that are
not historical facts, are only predictions. No assurance can be given that
future results indicated, whether expressed or implied, will be achieved. These
forward-looking statements are based upon a variety of assumptions relating to
the business of the Company, which may or may not be realized. Because of the
number and range of the assumptions underlying Company's forward-looking
statements, many of which are subject to significant uncertainties and
contingencies that are beyond the reasonable control of the Company, some of the
assumptions will not materialize and unanticipated events and circumstances may
occur subsequent to the date of this report. These forward-looking statements
are based on current expectations, and the Company assumes no obligation to
update this information. Therefore, the actual experience of the Company and
results achieved during the period covered by any particular forward-looking
statements may differ substantially from those projected. Consequently, the
inclusion of forward-looking statements are not and should not be regarded as a
representation by the Company, or any other person, that these statements will
be realized. The actual results may vary materially. There can be no assurance
that any of these expectations will be realized or that any of the
forward-looking statements contained in this report will prove to be accurate.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No significant changes in the quantitative and qualitative disclosures about
market risk have occurred from the discussion contained in our report on Form
10-K for the year ended December 31, 2001, which was filed with the Commission
on March 22, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As at December 1, 2000, the Company discontinued lease payments on the San Diego
premises due to a number of circumstances. To date, the landlord has not
commenced legal action against the Company. Should the landlord commence legal
action against the Company, the outcome of the proceedings is unknown. The
remaining lease payments of $381,254 were accrued in the consolidated financial
statements as at December 31, 2000, and a gain will be recognized in the event
of a favorable outcome.
The distribution process for .biz domain names has been the subject of
litigation in the Los Angeles Superior Court in the State of California. On
August 1, 2001 a lawsuit was brought by David Scott Smiley against NeuLevel,
Inc., the .biz registry, the Internet Corporation for Assigned Names and Numbers
("ICANN"), and most of the .biz-accredited registrars, including DomainPeople
Inc., a wholly-owned subsidiary of NetNation. This lawsuit alleges among other
things, that the method for assigning domain names during the start-up period
for registration of .biz domain names constituted an illegal lottery under
California law. The lawsuit seeks a refund of the fees paid to the defendants,
additional damages, costs, attorney fees, and an injunction to stop the
pre-registrations. NeuLevel has subsequently changed its distribution process
in response to this litigation. At this time, DomainPeople Inc. has not been
formally served with notice of the legal proceedings and the outcome of the
proceedings and the amount of potential damages to DomainPeople Inc. is unknown.
However, should the plaintiff prevail in its claim, the Company may be required
to pay damages which could have a material effect on the Company's operating
results.
To the knowledge of the officers and directors of NetNation, there are no other
pending legal proceedings or litigation of a material nature and none of its
property is the subject of a pending legal proceeding. Further, NetNation's
officers and directors know of no legal proceedings against NetNation or its
property contemplated by any governmental authority.
Page 13 of 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 2002, we held our annual general meeting of shareholders. The
following matters were considered and voted upon at the annual general meeting:
The first matter voted upon at the meeting was the election of directors. David
Talmor, Joseph Kibur, Ernest Cheung, Anil Wirasekara, and Jag Gillan were
nominated for election as directors of NetNation to hold office until their
successor are duly elected or appointed. The votes cast and withheld for such
nominees were as follows:
Name For Withheld
---- --- --------
David Talmor 10,356,324 2,400
Joseph Kibur 10,356,324 2,400
Ernest Cheung 10,356,324 2,400
Anil Wirasekara 10,356,224 2,500
Jag Gillan 10,356,324 2,400
The second matter voted upon at the meeting was the appointment of KPMG LLP,
Chartered Accountants, of Vancouver, British Columbia, as the auditors of
NetNation for the year ended December 31, 2002. There were 10,355,594 votes
cast for the appointment and 3,100 votes withheld.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
On July 10, 2002, NetNation filed a Form 8K and reported an Item 5 Other Event.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETNATION COMMUNICATIONS, INC.
Date: August 7, 2002 /s/ Joseph Kibur
-------------------------------
Joseph Kibur
Chief Executive Officer
Date: August 7, 2002 /s/ Calvin Mah
-------------------------------
Calvin Mah
Chief Financial Officer
Page 14 of 14