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: MARCH 31, 2003
--------------
[ ] 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
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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
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(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 May 8,
2003 was 15,206,002.
NETNATION COMMUNICATIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002 (audited) 3
Condensed Consolidated Statements of Operations and Deficit
for the Three Month Periods Ended March 31, 2003 (unaudited)
and 2002 (unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity
for the Three Month Period Ended March 31, 2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 2003 (unaudited)
and 2002 (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
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(Expressed in U.S. dollars)
March 31, December 31,
2003 2002
------------ --------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,666,185 $ 3,334,561
Accounts receivable, net of allowance for doubtful accounts
of $nil (December 31, 2002 - $27,302) 80,386 97,389
Prepaid expenses and deposits 231,309 216,120
Deferred expenses 657,852 623,363
Deferred tax asset 400,000 400,000
------------ --------------
5,035,732 4,671,433
Deferred expenses 218,283 205,676
Fixed assets, net of accumulated depreciation of $1,905,207
(December 31, 2002 - $1,772,309) 472,797 482,315
Investments 100,000 100,000
------------ --------------
$ 5,826,812 $ 5,459,424
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 409,826 $ 269,463
Contingent lease payments (Note 5(b)) 381,254 381,254
Customer deposits 44,146 58,225
Deferred revenue 2,107,579 2,103,537
Capital lease liability 18,566 20,338
------------ --------------
2,961,371 2,832,817
Deferred revenue 516,209 481,581
Capital lease liability 2,619 3,983
Stockholders' equity:
Share capital
Authorized:
50,000,000 common shares with a par value of $0.0001 each
Issued:
15,206,002 (December 31, 2002 - 15,206,002) common shares 1,521 1,521
Additional paid-in capital 5,911,083 5,911,083
Accumulated other comprehensive income 14,601 14,601
Deficit (3,580,592) (3,786,162)
------------ --------------
2,346,613 2,141,043
------------ --------------
$ 5,826,812 $ 5,459,424
============ ==============
See accompanying condensed notes to consolidated financial statements.
3
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations and Deficit
(Expressed in U.S. dollars)
Three month Three month
period ended period ended
March 31, 2003 March 31, 2002
---------------- ----------------
(unaudited) (unaudited)
Sales $ 1,813,042 $ 1,686,431
Cost of sales 621,120 543,072
---------------- ----------------
Gross profit 1,191,922 1,143,359
Expenses:
Sales and marketing 324,975 266,249
General and administration 485,170 496,002
Foreign currency translation losses 4,095 10,978
Bad debt expense 7,012 -
Gain on disposal of fixed assets (9,836) -
Depreciation and amortization 174,936 155,809
---------------- ----------------
986,352 929,038
---------------- ----------------
Net earnings 205,570 214,321
Deficit, beginning of period (3,786,162) (4,724,735)
---------------- ----------------
Deficit, end of period $ (3,580,592) $ (4,510,414)
================ ================
Earnings per share, basic and diluted $ 0.01 $ 0.01
================ ================
Weighted average shares used in computing
earnings per share, basic 15,206,002 15,226,123
================ ================
Weighted average shares used in computing
earnings per share, diluted 15,206,002 15,241,283
================ ================
See accompanying condensed notes to consolidated financial statements.
4
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statement of Stockholders' Equity
(Expressed in U.S. Dollars)
Three month period ended March 31, 2003
(Unaudited)
Accumulated
Common Stock Additional Other
------------------- Paid-In Comprehensive
Shares Amount Capital Income Deficit Total
---------- ------- ---------- -------------- ------------ ----------
Balance at
December 31, 2002 15,206,002 $ 1,521 $5,911,083 $ 14,601 $(3,786,162) $2,141,043
Net earnings and
comprehensive income - - - - 205,570 205,570
---------- ------- ---------- -------------- ------------ ----------
Balance at
March 31, 2003 15,206,002 $ 1,521 $5,911,803 $ 14,601 $(3,580,592) $2,346,613
========== ======= ========== ============== ============ ==========
See accompanying condensed notes to consolidated financial statements.
5
NETNATION COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
Three month Three month
period ended period ended
March 31, March 31,
2003 2002
-------------- --------------
(unaudited) (unaudited)
Cash provided by (used in):
Net earnings $ 205,570 $ 214,321
Items not involving cash:
Depreciation and amortization 174,936 155,809
Employee stock-based compensation - 94,797
Foreign currency translation losses 4,095 10,978
Bad debt expense 7,012 -
Gain on disposal of fixed assets (9,836) -
Changes in non-cash operating working capital:
Accounts receivable 40,560 (14,571)
Prepaid expenses and deposits (6,756) 9,484
Deferred expenses (43,866) (77,873)
Accounts payable and accrued liabilities 124,122 (39,741)
Deferred revenue (22,409) 146,168
Customer deposits (14,079) (15,092)
-------------- --------------
Net cash provided by operating activities 459,349 484,280
-------------- --------------
Investing:
Purchase of fixed assets (170,890) (21,161)
Proceeds on disposal of fixed assets 13,974 -
-------------- --------------
Net cash used in investing activities (156,916) (21,161)
-------------- --------------
Financing:
Issue of share capital, net of share issue costs - 18,355
Lease financing (4,817) (4,693)
Repurchase and cancellation of shares - (458)
-------------- --------------
Net cash provided by (used in) financing activities (4,817) 13,204
-------------- --------------
Effect of exchange rates on cash 34,008 (15,397)
-------------- --------------
Increase in cash and cash equivalents 331,624 460,926
Cash and cash equivalents, beginning of period 3,334,561 1,678,950
-------------- --------------
Cash and cash equivalents, end of period $ 3,666,185 $ 2,139,876
============== ==============
Supplemental disclosure:
Cash paid for:
Interest $ 1,625 $ 1,890
Income taxes $ - $ -
See accompanying condensed notes to consolidated financial statements.
6
NETNATION COMMUNICATIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Three-month periods ended March 31, 2003 and 2002
(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.
7
2. SIGNIFICANT ACCOUNTING POLICIES:
Stock option plan:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS No. 123"), and Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No. 123," ("FAS
No. 148"), established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation
plans. However, as allowed by FAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
below, and has adopted the disclosure requirements of FAS No. 123 and FAS
No. 148.
The Company applies the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, including FASB Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25," to account for its fixed plan
employee stock options. Under this method, compensation expense is recorded
on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. Any compensation expense recorded is
charged against operations over the service period, which generally matches
the option vesting period. No stock-based employee compensation cost was
recorded for the three months ended March 31, 2003, and March 31, 2002, as
all options granted under the Company's stock option plan had an exercise
price equal to or greater than the market value of the underlying Common
stock on the grant date. The following table illustrates the effect on net
income and net income per share, if the Company had applied the fair value
recognition provisions of FAS No. 123 to stock-based employee compensation
using the Black-Scholes option pricing methodology.
========================================================================
Three months ended March 31, 2003 2002
------------------------------------------------------------------------
Net earnings for the period:
As reported $ 205,570 $214,321
Total stock-based employee compensation expense (139,634) (50,258)
determined under fair value-based method
---------- ---------
Proforma 65,936 164,063
========== =========
Basic and diluted earnings per share:
As reported $ 0.01 $ 0.01
Proforma 0.00 0.01
------------------------------------------------------------------------
8
3. STOCK OPTIONS:
On February 14, 2003, the Company's Board of Directors approved the
immediate vesting of all non-vested stock options and that all options
would expire 30 days from that date if not exercised. On March 16, 2003,
all options unexercised at that date expired.
A summary of the Company's stock option activity is as follows:
=================================================================
Number of Weighted average
common shares exercise price
-----------------------------------------------------------------
Outstanding, December 31, 2002 437,000 $ 2.82
Cancelled (6,000) 2.25
Cancelled (30,000) 2.31
Cancelled (16,000) 4.63
Expired (36,000) 2.13
Expired (129,000) 2.25
Expired (128,000) 2.31
Expired (24,000) 4.13
Expired (68,000) 4.63
-----------------------------------------------------------------
Outstanding, March 31, 2003 - $ -
=================================================================
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 March 31, 2003 2002
----------------------------------------------------
Web hosting $1,213,434 $1,160,147
Domain name registration 599,608 526,284
----------------------------------------------------
$1,813,042 $1,686,431
----------------------------------------------------
The Company's gross profits are generated from the following business
segments:
=====================================================
Three months ended March 31, 2003 2002
----------------------------------------------------
Web hosting $ 884,264 $ 882,184
Domain name registration 307,658 261,175
----------------------------------------------------
$1,191,922 $1,143,359
----------------------------------------------------
All of the Company's assets were located in Canada as at March 31, 2003.
9
5. COMMITMENTS AND CONTINGENCIES:
(a) The Company is committed to total operating lease payments for rent
for the remainder of 2003 and 2004 of approximately $80,000 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our condensed
unaudited financial statements contained in Item 1 of this quarterly report on
Form 10-Q and audited consolidated financial statements contained in our annual
report on Form 10-K for the fiscal year ended December 31, 2002. Except for the
historical information presented in this document, the matters discussed in this
Form 10-Q, and specifically in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," or otherwise
incorporated by reference into this document contain "forward-looking
statements" (as such term is defined in the Private Securities Litigation Reform
Act of 1995). These statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "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.
The safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended,
apply to forward-looking statements made by us. These forward-looking statements
involve risks and uncertainties, including those identified within the section
entitled "Rick Factors" in our Form 10-K for the fiscal year ended December 31,
2002. The actual results that we achieve may differ materially from any
forward-looking projections due to such risks and uncertainties. These
forward-looking statements are based on current expectations, and we assume no
obligation to update this information. Readers are urged not to place undue
reliance on these forward-looking statements, and readers should carefully
review and consider the various disclosures made by us in this quarterly report
on Form 10-Q, our annual report on Form 10-K for the fiscal year ended December
31, 2002 and in our other reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors
that may affect our business.
OVERVIEW
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").
We began providing web hosting services in February 1997. 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 ("TLDs") ending in .com, .net,
..org, .info, .biz, and .name. Through our wholly-owned subsidiary, DomainPeople,
we became operational as a domain name registrar in December of 1999.
We generate revenue by 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, twice-yearly, or annually, thereafter. We
offer 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.
10
We generally collect web hosting service fees in advance, and recognize revenue
over the period during which services are provided. Setup fees are amortized
over the estimated period during which services will be provided, typically one
to two years. Recurring service fees are amortized and recognized on a
straight-line basis over the period during which services are provided. As a
result, we will generally have a significant amount of deferred revenue
attributable to web hosting services. An increase in the number of web hosting
customers will not necessarily produce corresponding increased revenues, because
adding a number of customers with low service levels may not replace the revenue
lost if one intensive user of our services decides to use another web hosting
service provider. Web hosting expenses are largely paid currently.
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, we have assumed responsibility for ensuring that current
information obtained from customers is supplied to the central registry. We
generally collect domain name registration fees in advance, and recognize
revenue on a straight-line basis over the period for which the name is
registered. As a result, we will generally have a significant amount of
deferred revenue attributable to domain name registration services. An increase
in the number of domain names that we register will generally produce a
corresponding increase in revenues, subject to changes in the price charged for
the service. The domain name registration fee that we pay to the registries for
the domain names is paid in advance and is recognized as an expense over the
period for which the name is registered. As a result, we will generally have a
significant amount of deferred expenses attributable to domain registration
services.
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 are
included in cost of sales as they are recognized as an expense over the term of
registration.
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 policies require our most
significant judgment 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 and for loss carryforwards. 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 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. The deferred tax asset realized during
2002 is based on the assumption that our 2003 income will be generally
comparable to our 2002 income. If our future income is substantially greater or
substantially less than the income we assume, there would be a corresponding
change in the actual amount of the deferred tax asset considered realizable.
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
11
historical experience and other factors, resulting in a material change to
recorded revenue and deferred revenue for web hosting services. For example, if
our experience begins to show that customers fitting a certain profile generally
use our services for 4 years, and we have been estimating they will use our
services for 2 years, we would increase the amortization period to 4 years,
effectively reducing the set-up fee revenue recognized for such customers in
each of the first 2 years by 50%.
RESULTS OF OPERATIONS
For the quarter ended March 31, 2003, we achieved net earnings of $205,570
($0.01 per share) as compared to $214,321 ($0.01 per share) for the same period
in 2002.
Revenue
Our revenue of $1,813,042 for the quarter ended March 31, 2003 represents an
increase of $126,611 or 8% over the quarter ended March 31, 2002. The increase
was due to increases in both our web hosting business and domain name
registration business.
The following table compares the composition of sales for the three months ended
March 31, 2003 to the same period in 2002:
Sales Three months
ended March 31,
-------------------
2003 2002
-------------------
Web hosting 67% 69%
Domain name registration 33% 31%
-------------------
Total sales 100% 100%
-------------------
The deferred revenue amount on the balance sheet as at March 31, 2003 includes
$1,988,608 related to domain name registration and $635,180 related to web
hosting services.
Cost of sales
Cost of sales of $621,120 for the quarter ended March 31, 2003 represents an
increase of $78,048 or 14% over the quarter ended March 31, 2002. As a
percentage of sales, cost of sales increased from 32% to 34% from the first
quarter of 2002 to the same period in 2003. The increase in costs was mainly
due to increased personnel costs and the costs to register more 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 registries are recognized as an expense over the term of
registration.
Sales and marketing expenses
Sales and marketing expenses for the quarter ended March 31, 2003 increased
$58,726 or 22% from the same period in of 2002. As a percentage of sales, sales
and marketing expenses increased from 16% in the first quarter of 2002 to 18% in
the first quarter of 2003. This increase was due to an increase in advertising
expenses of $54,774 or 61%. This increase in advertising expenses is expected
to continue in future periods. 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 March 31, 2003
decreased $10,832 or 2% from the same period in 2002. As a percentage of sales,
general and administration expenses decreased from 29% in the first quarter of
2002 to 27% in the first quarter of 2003. The decrease was due to lower stock
- -based compensation expense offset by higher professional fees and higher stock
exchange listing fees. General and administrative expenses include
administrative personnel costs, rent, general office expenses, audit and legal
costs, and investor relations expenses.
12
Depreciation and amortization
Depreciation and amortization for the first quarter of 2003 increased $19,127 or
12% compared to the first quarter of 2002. The increase in depreciation and
amortization expense was due to the fixed assets acquired in 2002 and 2003.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2003, operating activities generated net
cash of $459,349 compared to $484,280 for the same period in 2002. The main
reason for the decrease in cash from operations was the increase in cash
expenses including higher advertising expenses, professional fees and stock
exchange listing fees.
During the first quarter of 2003, the Company purchased fixed assets totaling
$170,890 compared to $21,161 for the same period in 2002. These expenditures
relate mainly to the network operations center and were for customer-specific
requirements and general improvements to our data center. We have no
contractual obligations to make further capital expenditures, but similar costs
may be incurred in the future for expanding the network operations center when
appropriate.
Net cash used in financing activities for the three months ended March 31, 2003
was $4,817 compared to net cash provided by financing activities of $13,204 for
the same period in 2002. In 2002, $18,355 was raised from the exercise of stock
options by employees.
As at March 31, 2003, the Company has cash and cash equivalents of $3,666,185
compared to $3,334,561 as at December 31, 2002. The increase reflects positive
cash flows from operations for the first quarter of 2003 after expenditures on
fixed assets. Based on management's current projections, the Company believes
that it has adequate resources to maintain its current level of operations 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.
Management continues to believe that the preponderance of small businesses in
the web hosting industry presents a likelihood of industry consolidation.
Although recent financial market conditions have not favored a trend toward
consolidation in the industry, management believes that a change in economic
conditions could lead to consolidation activity in the industry. From time to
time management has explored and evaluated whether business combinations would
be in the best interest of the shareholders. However, management has not
received any competing bona fide proposals and has not reached any definitive
agreement for a business combination.
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. We did not regain
compliance by January 6, 2003. On January 7, 2003, we were notified by Nasdaq
that we did not meet listing requirements for the Nasdaq SmallCap Market at that
time as we were not in compliance with the US$1.00 minimum bid price. We
requested to appeal our case before the Nasdaq Qualifications Panel for
continued listing on the Nasdaq SmallCap Market and the hearing was held on
February 13, 2003. The Qualifications panel granted us an extension to July 3,
2003 to regain compliance with the minumum USD$1.00 per share bid price. If we
cannot demonstrate compliance by this date, 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. On May 9, 2003 we filed a
preliminary proxy statement for our 2003 annual meeting in which we have
proposed that our shareholders approve an amendment to our certificate of
incorporation to give our Board of Directors discretion to effect a reverse
stock split to attempt to come into compliance with the minimum USD$1.00 per
share bid price requirement.
13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No significant changes in market risk have occurred since we filed our report on
Form 10-K for the fiscal year ended December 31, 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.
We have been in a dispute with a web hosting company in the Netherlands called
Netnation Europe. On March 14, 2002, we won a World Intellectual Property
Organization (WIPO) dispute involving Netnation Europe for the domain name
"netnation.info". On November 1, 2002, we lost a WIPO decision to Netnation
Europe for the domain name "netnation.biz". Netnation Europe had initially
registered the domain name during the start-up period for registration of .biz
domain names and we contested Netnation Europe's rights to the domain name. At
this time, we have not formally served Netnation Europe with notice of legal
action. Currently, the Netherland market does not represent a significant part
of our business.
To the knowledge of our officers and directors, there are no other pending legal
proceedings or litigation of a material nature and none of our property is the
subject of a pending legal proceeding. Further, our officers and directors know
of no legal proceedings against us or our property contemplated by any
governmental authority.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- ------------------------------------------------------------------
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On January 9, 2003, we filed a report on Form 8-K that included an Item 5, Other
Events, disclosure.
On March 4, 2003, we filed a report on Form 8-K that included an Item 5, Other
Events, 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: May 12, 2003 /s/ Joseph Kibur
---------------------- ----------------------------------------
Joseph Kibur
Chief Executive Officer
Date: May 12, 2003 /s/ Calvin Mah
---------------------- ----------------------------------------
Calvin Mah
Chief Financial Officer
15
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: May 12, 2003 /s/ Joseph Kibur
---------------------- ----------------------------------------
Joseph Kibur
Chief Executive Officer
16
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: May 12, 2003 /s/ Calvin Mah
---------------------- ----------------------------------------
Calvin Mah
Chief Financial Officer
17
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
18