UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------------
(MARK ONE)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 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)
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 November
8, 2002 was 15,218,002.
Page 1 of 17
NETNATION COMMUNICATIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-September 30, 2002 (unaudited)
and December 31, 2001 (audited) 3
Condensed Consolidated Statements of Operations and Deficit-Three Month
And Nine Month Periods Ended September 30, 2002 (unaudited) and 2001 (unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity-Nine Month
Period Ended September 30, 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows-Nine Month Periods
Ended September 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. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Certifications 16
Page 2 of 17
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(Expressed in U.S. dollars)
September 30, December 31,
2002 2001
--------------- --------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,860,790 $ 1,678,950
Accounts receivable, net of allowance for doubtful accounts
of $27,302 (December 31, 2001 - nil) 92,975 107,208
Prepaid expenses and deposits 209,651 245,733
Deferred expenses 611,569 557,941
Deferred tax asset 250,000 250,000
--------------- --------------
4,024,985 2,839,832
Deferred expenses 200,568 135,734
Fixed assets, net of accumulated depreciation of $1,607,069
(December 31, 2001 - $1,092,999) 623,742 1,050,862
Investments 100,000 100,000
--------------- --------------
$ 4,949,295 $ 4,126,428
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 277,051 $ 235,880
Contingent lease payments (Note 5(b)) 381,254 381,254
Customer deposits 29,145 83,335
Deferred revenue 1,982,225 1,934,936
Capital lease liability 21,556 19,183
--------------- --------------
2,691,231 2,654,588
Deferred revenue 475,221 455,228
Capital lease liability 7,786 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 - (287,554)
Accumulated other comprehensive income 14,601 14,601
Deficit (4,152,268) (4,724,735)
--------------- --------------
1,775,057 991,960
--------------- --------------
$ 4,949,295 $ 4,126,428
=============== ==============
See accompanying condensed notes to consolidated financial statements.
Page 3 of 17
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations and Deficit
(Expressed in U.S. dollars)
Three month period ended September 30, Nine month period ended September 30,
2002 2001 2002 2001
-------------------- --------------------- ------------------- ---------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 1,736,434 $ 1,691,773 $ 5,163,819 $ 4,882,108
Cost of sales 580,803 548,934 1,698,618 1,572,748
-------------------- --------------------- ------------------- ---------------------
Gross profit 1,155,631 1,142,839 3,465,201 3,309,360
Expenses:
Sales and marketing 300,101 298,414 819,255 1,063,379
General and administration 482,165 477,729 1,559,412 1,531,785
Depreciation and amortization 166,926 156,699 514,067 471,543
-------------------- --------------------- ------------------- ---------------------
949,192 932,842 2,892,734 3,066,707
-------------------- --------------------- ------------------- ---------------------
Net earnings 206,439 209,997 572,467 242,653
Deficit, start of period (4,358,707) (5,449,996) (4,724,735) (5,482,652)
-------------------- --------------------- ------------------- ---------------------
Deficit, end of period $ (4,152,268) $ (5,239,999) $ (4,152,268) $ (5,239,999)
==================== ===================== =================== =====================
Earnings per share, basic and diluted $ 0.01 $ 0.01 $ 0.04 $ 0.02
==================== ===================== =================== =====================
Weighted average number of common
shares outstanding, basic 15,218,002 15,238,321 15,220,679 15,248,017
==================== ===================== =================== =====================
Weighted average number of common
shares outstanding, diluted 15,218,002 15,238,321 15,220,679 15,297,678
==================== ===================== =================== =====================
See accompanying condensed notes to consolidated financial statements.
Page 4 of 17
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statement of Stockholders' Equity
(Expressed in U.S. Dollars)
Nine month period ended September 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 - - - 192,733 - - 192,733
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 - - - - - 572,467 572,467
----------- -------- ------------- -------------- ------------- ------------ -----------
Balance at
September 30, 2002 15,218,002 $ 1,522 $ 5,911,202 $ - $ 14,601 $(4,152,268) $1,775,057
=========== ======== ============= ============== ============= ============ ===========
See accompanying condensed notes to consolidated financial statements.
Page 5 of 17
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
Nine month Nine month
period ended period ended
September 30, September 30,
2002 2001
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net earnings $ 572,467 $ 242,653
Items not involving cash:
Depreciation and amortization 514,067 471,543
Employee stock-based compensation 192,733 284,381
Changes in non-cash operating assets and liabilities:
Accounts receivable 14,233 (58,773)
Prepaid expenses and deposits 36,082 (81,293)
Deferred expenses (118,462) 40,215
Accounts payable and accrued liabilities 41,171 (306,893)
Deferred revenue 67,282 (90,308)
Customer deposits (54,190) 63,312
--------------- ---------------
Net cash provided by operating activities 1,265,383 564,837
--------------- ---------------
Investing:
Purchase of fixed assets (86,947) (189,801)
--------------- ---------------
Net cash used in investing activities (86,947) (189,801)
--------------- ---------------
Financing:
Proceeds from sale of common stock 18,355 2,250
Lease financing repayments (14,493) (2,774)
Cancellation of shares (458) (780)
--------------- ---------------
Net cash provided by (used in) financing activities 3,404 (1,304)
--------------- ---------------
Increase in cash and cash equivalents 1,181,840 373,732
Cash and cash equivalents, beginning of period 1,678,950 748,745
--------------- ---------------
Cash and cash equivalents, end of period $ 2,860,790 $ 1,122,477
=============== ===============
Supplemental disclosure:
Cash paid for:
Interest $ 5,308 $ 5,102
Income taxes $ - $ -
See accompanying condensed notes to consolidated financial statements.
Page 6 of 17
NETNATION COMMUNICATIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Nine-month periods ended September 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 17
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 (12,000) 2.25
Cancelled (24,000) 2.31
Cancelled (8,000) 4.63
Expired (100,000) 2.25
Expired (24,000) 4.13
Expired (88,000) 4.63
Exercised (4,000) 2.25
Exercised (4,000) 2.31
------------------------------------------------------------------
Outstanding, September 30, 2002 460,000 $ 2.79
==================================================================
The options outstanding at September 30, 2002 expire between February 1,
2003 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 September 30, Nine months ended September 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------
Web hosting $ 1,168,864 $ 1,130,576 $ 3,474,664 $ 3,323,086
Domain name registration 567,570 561,197 1,689,155 1,559,022
- -------------------------------------------------------------------------------------------
$ 1,736,434 $ 1,691,773 $ 5,163,819 $ 4,882,108
- -------------------------------------------------------------------------------------------
Page 8 of 17
4. SEGMENTED INFORMATION (continued):
The Company's gross profits are generated from the following business
segments:
===========================================================================================
Three months ended September 30, Nine months ended September 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------
Web hosting $ 862,041 $ 823,191 $ 2,588,169 $ 2,459,534
Domain name registration 293,590 319,648 877,032 849,826
- -------------------------------------------------------------------------------------------
$ 1,155,631 $ 1,142,839 $ 3,465,201 $ 3,309,360
- -------------------------------------------------------------------------------------------
All of the Company's assets were located in Canada as at September 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 $27,000 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 the Company. 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.
Page 9 of 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
NetNation Communications, Inc. 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. Our
common shares currently trade on the Nasdaq Small Capitalization Market under
the ticker symbol "NNCI".
We entered into the web hosting business through our 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 Communications, Inc
We are 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. We compete
in the web hosting and domain name registration markets. Our products and
services are sold worldwide, directly to customers and through value added
resellers ("VARs").
In May 1999, we were selected as an official registrar of domain names by ICANN.
The accreditation allows us 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. Through our wholly-owned subsidiary, DomainPeople, we became
operational as a domain name registrar in December of 1999.
Our 2002 revenue was generated mainly from providing web hosting services to
SMEs and domain name registration. Our web hosting customers normally pay a
setup fee and regular charges, either monthly, quarterly or annually,
thereafter. We offer a variety of hosting packages in addition to a number of
value-added services and products. This enables our customers to easily select
and modify a solution that precisely meets their individual requirements.
Our accreditation as an official registrar of domain names has enabled us to
register domain names without the involvement of an intermediary. As an
accredited registrar through DomainPeople, we have assumed responsibility for
ensuring that current information obtained from customers is supplied to the
central registry.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations, including the discussion on liquidity and capital resources, are
based upon our 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 us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent assets and liabilities. On
an ongoing basis, our management re-evaluates its estimates and judgments. We
believe the following critical accounting policy requires our most significant
judgment and estimates used in the preparation of the consolidated financial
statements.
Page 10 of 17
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.
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. In estimating the period that hosting services are to be
provided to customers, our management considers our past history with our
customers, the type of services we provide, and other factors that could affect
the period of time a customer would be provided services. Accordingly, the
estimate of the period of time that hosting services are to be provided to
customers is a matter of judgment and could change in the near term based on
historical experience and other factors, resulting in a material change to
recorded revenue and deferred revenue for web hosting services.
RESULTS OF OPERATIONS
For the quarter ended September 30, 2002, we achieved net earnings of $206,439
($0.01 per share) as compared to $209,997 ($0.01 per share) for the same period
in 2001 and for the nine month period ended September 30, 2002, net earnings of
$572,467 ($0.04 per share) as compared to $242,653 ($0.02 per share) for the
same period in 2001.
Revenue
Our revenue of $1,736,434 for the quarter ended September 30, 2002 represents an
increase of $44,661 or 3% over the quarter ended September 30, 2001. For the
nine months ended September 30, 2002, revenue of $5,163,819 was an increase of
$281,711 or 6% 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 our 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 our domain name
registration revenues.
The following table compares the composition of sales for the three and nine
months ended September 30, 2002 to the same periods in 2001:
Sales Three months ended Nine months ended
September 30, September 30,
---------------------------------------
2002 2001 2002 2001
---------------------------------------
Web hosting 67% 67% 67% 68%
Domain name registration 33% 33% 33% 32%
---------------------------------------
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 September 30, 2002 includes $1,679,099 related to domain
name registration.
Cost of sales
Cost of sales of $580,803 for the quarter ended September 30, 2002 represents an
increase of $31,869 or 6% over the quarter ended September 30, 2001. For the
nine months ended September 30, 2002, cost of sales of $1,698,618 represents an
increase of $125,870 or 8% over the same period in 2001. As a percentage of
sales, cost of sales increased from 32% to 33% from the third quarter of 2001 to
the same period in 2002. As a percentage of sales, cost of sales increased from
Page 11 of 17
32% to 33% from the first nine months of 2001 compared 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 our 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 September 30, 2002 increased
$1,687 or 1% from the same period in of 2001. For the nine months ended
September 30, 2002, sales and marketing expenses decreased $244,123 or 23% from
the same period in 2001. As a percentage of sales, sales and marketing expenses
decreased from 18% in the third quarter of 2001 to 17% in the third quarter of
2002. As a percentage of sales, sales and marketing expenses decreased from 22%
in the first nine months of 2001 to 16% in the first nine months of 2002. The
increase in the third quarter of 2002 as compared to the same period in 2001 was
due to an increase in advertising expenses of $51,860 or 74% offset by a
decrease in personnel costs of almost the same amount. The decrease for the
nine month year-to-date period was mainly due to a reduction in advertising
expenses of $111,848 or 28% in the first nine months of 2002 compared to the
same period in 2001 and lower personnel costs. 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 September 30, 2002
increased $4,436 or 1% from the same period in 2001. For the nine months ended
September 30, 2002, general and administration expenses increased $27,627 or 2%
over the same period in 2001. As a percentage of sales, general and
administration expenses was unchanged at 28% for the third quarter of 2001 and
2002. As a percentage of sales, general and administration expenses decreased
from 31% in the first nine months of 2001 to 30% in the first nine months 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 third quarter of 2002 increased $10,227 or
7% compared to the third quarter of 2001. For the nine months ended September
30, 2002, depreciation and amortization increased $42,524 or 9%. The increase
in depreciation and amortization expense was due to the ongoing re-evaluation of
the estimated useful life of our fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2002, operating activities generated
net cash of $1,265,383 compared to $564,837 for the same period in 2001. The
main reason for the increase in cash from operations was the increase in net
earnings, the increase in deferred revenues for domain name registrations and
web hosting services, and an increase in the accounts payable and accrued
liabilities balance.
Net cash used in investing activities for the nine months ended September 30,
2002 of $86,947 represents a reduction of $102,854 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 nine months ended September 30, 2002
was $3,404 compared to net cash used in financing activities of $1,304 for the
same period in 2001. In 2002, $18,250 was raised from the exercise of stock
options by employees.
Page 12 of 17
As at September 30, 2002, we had cash and cash equivalents of $2,860,790
compared to $1,678,950 as at December 31, 2001. The $1,181,840 increase
reflects positive cash flows from operations and cash from employee exercise of
stock options less the investment in fixed assets for the nine months ended
September 30, 2002. Based on management's current projections, we believe that
we have adequate resources for the maintenance of operations for the foreseeable
future. Management may evaluate from time to time the availability of external
financing. We 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, we received a Letter of Notice from Nasdaq indicating that we
were 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), were provided with 180
calendar days, or until January 6, 2003, to regain compliance. According to the
Nasdaq rule, compliance requires the bid price of our 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 we 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 on January 6, 2003 that we comply. If we cannot demonstrate
compliance by this date, Nasdaq will determine whether we meet one of the three
initial listing criteria for The Nasdaq SmallCap Market under MarketPlace Rule
4310(c)(2)(A), by which we may be granted an additional 180 calendar days to
demonstrate compliance with respect to our closing bid price. Our closing bid
price has been below US$1.00 since July 8, 2002. If Nasdaq determines that we
do not qualify for an extension because we do not meet one of the three criteria
under MarketPlace Rule 4310(c)(2)(A), we will be provided with written
notification that our securities will be delisted. At that time, we may appeal
the Staff Determination to delist our securities to a Nasdaq Listing
Qualification Panel. During this process, our securities will remain listed and
will continue to trade on The Nasdaq SmallCap Market. In the event that our
securities are delisted from The Nasdaq SmallCap Market, our securities may
continue to trade on the OTC Bulletin Board's (R) electronic quotation system.
If our securities are delisted from The Nasdaq SmallCap Market, this may
adversely affect the liquidity of our securities, making it more difficult for
holders of our common stock to sell their shares.
FORWARD-LOOKING STATEMENTS
The statements included in this report 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
us. These statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "plans", "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 our business, which may or may not be
realized. Because of the number and range of the assumptions underlying the
forward-looking statements, many of which are subject to significant
uncertainties and contingencies that are beyond our reasonable control, 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 we assume no obligation to
update this information. Therefore, the actual experience and results that we
achieve 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 us, 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.
Page 13 of 17
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.
ITEM 4: CONTROLS AND PROCEDURES
(a) EVALUATION OF CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO) performed an evaluation of the
effectiveness of our disclosure controls and procedures. Based on this
evaluation, our CEO and CFO have concluded that our disclosure controls and
procedures are effective to ensure that material information is recorded,
processed, summarized and reported by our management on a timely basis in order
to comply with our disclosure obligations under the Securities Exchange Act of
1934, as amended, and the SEC rules thereunder.
(b) CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As at December 1, 2000, we discontinued lease payments on the San Diego premises
due to a number of circumstances. To date, the landlord has not commenced legal
action against us. Should the landlord commence legal action against us, 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., one of our wholly-owned subsidiaries. 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, we may be required to pay
damages which could have a material effect on our operating results.
To the knowledge of our officers and directors, 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, our officers and directors know
of no legal proceedings against NetNation or its property contemplated by any
governmental authority.
Page 14 of 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
On August 15, 2002, we filed a Form 8-K, which contained disclosure under Item 7
(Exhibits) and Item 9 (Other Events and Regulation FD Disclosure).
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: November 12, 2002 /s/ Joseph Kibur
----------------------- ----------------------------------------
Joseph Kibur
Chief Executive Officer
Date: November 12, 2002 /s/ Calvin Mah
----------------------- ----------------------------------------
Calvin Mah
Chief Financial Officer
Page 15 of 17
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph Kibur, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NetNation
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Joseph Kibur
----------------------- ----------------------------------------
Joseph Kibur
Chief Executive Officer
Page 16 of 17
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Calvin Mah, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NetNation
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Calvin Mah
----------------------- ----------------------------------------
Calvin Mah
Chief Financial Officer
Page 17 of 17