U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to _______________
Commission file number 000-26751
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CyPost Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 98-0178674
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)
900-1281 West Georgia St., Vancouver, British Columbia, Canada V6E 3J7
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(Address of Principal Executive Offices) (Zip Code)
(604) 904-4422
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(Issuer's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 21,562,025 as of April 2,
2001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission ("Commission"). While these statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for fair presentation of the results of the interim period, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto, which are included in the Annual
Report on Form 10-KSB, as amended, of CyPost Corporation (the "Company"), for
the fiscal year ended December 31, 2000, previously filed with the Commission.
The Company's business operations are presently conducted in Canada and
the United States. Dollar values in this Report are expressed in U.S. Dollars,
unless indicated otherwise. On March 31, 2001, one Canadian Dollar ("CDN") was
worth $.6342 U.S. Dollars.
The accompanying notes are an integral part of these consolidated
financial statements.
2
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
(U.S. Dollars)
2001 2000
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
CASH $ 185,811 $ 250,631
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE 297,031 173,207
INSURANCE PROCEEDS RECEIVABLE 38,984 58,488
PREPAIDS AND DEPOSITS 145,453 250,534
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667,279 732,860
PROPERTY AND EQUIPMENT, NET 712,054 751,020
GOODWILL AND OTHER INTANGIBLES, NET OF 2,735,052 3,193,015
ACCUMULATED AMORTIZATION
OTHER ASSETS 4,079 5,371
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$ 4,118,464 $ 4,682,266
=========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE & ACCRUED LIABILITIES $ 1,057,543 $ 1,026,666
LOANS 2,110,000 2,110,000
DEFERRED REVENUE 626,746 640,483
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TOTAL CURRENT LIABILITIES 3,794,289 3,777,149
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
SHARE CAPITAL
AUTHORIZED
5,000,000 PREFERRED STOCK WITH A PAR VALUE OF $.001
30,000,000 COMMON STOCK WITH A PAR VAUE OF $.001
ISSUED AND OUTSTANDING
PREFERRED STOCK - NONE 0 0
COMMON STOCK 21,559,493 - 2001, 21,556,993 - 2000 21,560 21,557
PAID-IN CAPITAL 14,048,816 14,047,544
ACCUMULATED DEFICIT (13,744,989) (13,197,006)
CURRENCY TRANSLATION ADJUSTMENT (1,212) 33,022
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TOTAL STOCKHOLDERS' EQUITY 324,175 905,117
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$ 4,118,464 $ 4,682,266
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
3
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(U.S. Dollars)
2001 2000
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REVENUE $1,063,823 $ 1,039,560
DIRECT COSTS (428,671) (620,381)
635,152 419,179
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EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE 622,952 1,007,783
AMORTIZATION AND DEPRECIATION 518,857 659,092
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1,141,809 1,666,875
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LOSS BEFORE OTHER INCOME (EXPENSE) (506,657) (1,247,696)
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OTHER INCOME (EXPENSE)
NET PROCEEDS FROM FIRE INSURANCE 0 107,271
INTEREST EXPENSE (41,326) (179,284)
MINORITY INTEREST 0 15,956
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NET LOSS $ (547,983) $(1,303,753)
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LOSS PER SHARE BASIC & DILUTED $ (0.03) $ (0.06)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 21,559,521 20,646,690
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
4
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(U.S. Dollars)
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (547,983) $(1,303,753)
Adjustments to reconcile net loss to cash used by
operating activities:
Amortization and depreciation 518,857 659,092
Interest expense 41,326 179,284
Fair value of stock issued for services 1,275 -
Net recovery from fire insurance - (107,271)
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13,475 (572,648)
Changes in non-cash operating accounts (56,367) 167,449
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NET CASH USED BY OPERATING ACTIVITIES (42,892) (405,199)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business - (300,000)
Purchase of property and equipment (21,928) (231,088)
Investment in software development - (67,488)
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NET CASH USED IN INVESTING ACTIVITIES (21,928) (598,576)
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CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds - 1,025,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES - 1,025,000
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NET INCREASE IN CASH (64,820) 21,225
CASH, BEGINNING OF PERIOD 250,631 415,779
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CASH, END OF PERIOD $ 185,811 $ 437,004
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
5
CYPOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(U.S. Dollars)
Additional Cummulative
Common Stock Paid-in Translation
Number Amount Capital Deficit Adjustment Total
----------- ------- ----------- ------------- ------------ ---------
BALANCE, JANUARY 1, 2001 21,556,993 $21,557 $14,047,544 $(13,197,006) $ 33,022 $ 905,117
Issued for services 2,500 3 1,272 1,275
Cummulative translation adjustment (34,234) (34,234)
Net loss (547,983) (547,983)
BALANCE, MARCH 31, 2001 21,559,493 $21,560 $14,048,816 $(13,744,989) $ (1,212) $ 324,175
The accompanying notes are an integral part of these consolidated statements.
6
CYPOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
(U.S. Dollars)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
These financial statements have been prepared on the basis of
accounting principles applicable to a "going concern" which assume that
Cypost Corporation (the "Company") will continue in operation for at least
one year and will be able to realize its assets and discharge its liabilities
in the normal course of operations.
Several conditions and events cast doubt about the Company's ability to
continue as a going concern. The Company has incurred net losses of
approximately $13.7 million for the period from inception September 5, 1997
to March 31, 2001, has a working capital deficit of approximately $3.1
million at March 31, 2001, and requires additional financing for its business
operations.
The Company is streamlining operations and consolidating its ISP's to
enhance efficiency and reduce operating expenses. As a result of the
foregoing efforts, the operations of Intouch Internet Inc. and NetRover
Office Inc. have been fully consolidated into the Company's wholly-owned
subsidiary, NetRover Inc.
These consolidated financial statements do not reflect adjustments that
would be necessary if the Company were unable to continue as a going concern.
While management believes that the actions already taken or planned, as
described above, will mitigate the adverse conditions and events which raise
doubts about the validity of the "going concern" assumption used in preparing
these financial statements, there can be no assurance that these actions will
be successful.
If the Company were unable to continue as a going concern, then
substantial adjustments would be necessary to the carrying values of assets,
the reported amounts of its liabilities and the reported revenues and
expenses.
INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements presented have been
prepared by the Company without audit and, in the opinion of the management,
reflect all adjustments of a normal recurring nature necessary for a fair
statement of (a) the consolidated results of operations for the three months
ended March 31, 2001 and 2000, (b) the consolidated financial position at
March 31, 2001, (c) the consolidated statement of stockholders' equity for
the three months ended March 31, 2001 and (d) the consolidated cash flows for
the three months ended March 31, 2001 and 2000. Interim results are not
necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2000 has
been derived from the consolidated financial statements that have been
audited by the Company's independent auditors. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-KSB.
CONSOLIDATION
The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. In 2000, the subsidiaries include CyPost
KK, Playa Corporation, ePost Innovations Inc., NetRover Inc., NetRover Office
Inc., Hermes Net Solutions Inc., and Intouch.Internet Inc. All of the
subsidiaries, except CyPost KK, are wholly owned. Later in 2000, the Company
sold its investment in CyPost KK and abandoned its investment in Playa
Corporation. Connect Northwest and Internet Arena are DBA of CyPost
Corporation. All significant inter-company transactions and balances have
been eliminated in consolidation.
7
2. SHARE CAPITAL
On March 31, 2001, the Company reflected the issuance of 2,500 shares
of its common stock in an aggregate amount of $1,275 to one consultant at the
closing price of $0.51 per share in consideration for his providing certain
services to the Company. As of March 31, 2001, these shares have not been
issued, however for purposes of financial statement presentation, all shares
were deemed issued as of March 31, 2001.
On January 10, 2001, the Company issued an option to purchase 1,000,000
shares of the Company's common stock to Robert Adams, President, Chief
Operating Officer, Secretary and Treasurer of the Company, and an option to
purchase 125,000 shares of the Company's common stock to Tami Allan, Vice
President of North American Operations of the Company. The exercise price of
each option is $.10 per share and vests over time.
3. COMMITMENTS AND CONTIGENCIES
Canada Post Litigation
On June 11, 1999, Canada Post Corporation ("Canada Post") filed a
Statement of Claim in the Federal Court of Canada (Court File No. T-1022-99)
in which it sought injunctive and unspecified monetary relief for the
allegedly "improper" use by the Company's subsidiary, ePost Innovations,
Inc., ("ePost Innovations"), of certain marks and names which contain the
component "post". On October 18, 1999, ePost Innovations filed its Defense
and Counterclaim. In a motion heard November 24, 1999, Canada Post
Corporation challenged certain parts of the Counterclaim and the Federal
Court reserved judgment. There has been no pre-trial discovery and no trial
date has been set.
On May 25, 1999, ePost Innovations filed a statement of Claim in the
British Columbia Court (Court File No. C992649) seeking a declaration that
the public notice of Canada Post's adoption and use of CYBERPOSTE and
CYBERPOST on November 18, 1998 and December 9, 1998 respectively, did not
affect the Company's use of CyPost and ePost Innovations as trademarks and
trade-names prior to said dates. ePost Innovations sought summary judgment
for such a declaration and on September 14, 1999, the court rejected summary
judgment on the basis that no right of ePost Innovations was being infringed
and that a trial of the issues was more appropriate. The rejection is pending
appeal. There has been no pre-trial discovery (except to the extent that some
was done as part of the summary judgment application) and no trial date has
been set.
Canada Post seeks relief in the form of preventing ePost Innovations
from using trademarks, trade-names or brand names and does not seek monetary
damages. Accordingly, the Company does not believe that this litigation will
have a material impact on its future results of operations, financial
condition and liquidity.
By order of the Federal Court dated January 25, 2001, ePost
Innovations was required to appoint new counsel in this matter, failing which
Canada Post would be permitted to move to strike ePost Innovations' Statement
of Defense and Counterclaim. On April 6, 2001, the Federal Court ruled on
Canada Post's November 24, 1999 motion, whereby it was ordered that certain
portions of ePost Innovations' Statement of Defense and Counterclaim be
stricken, and that by a Supplemental Order of the Federal Court dated April
9th, 2001, Canada Post be required to file its Reply and Defense to
Counterclaim by April 25, 2001. Canada Post has filed a motion to extend the
time for filing its Reply and Defense to Counterclaim, which is scheduled to
be heard by the Federal Court on May 14, 2001. ePost Innovations does not
intend to oppose the motion. Canada Post's motion to extend time includes a
motion to strike ePost Innovations' Defense and Counterclaim for failure to
appoint new counsel. Canada Post is prepared to withdraw this aspect of its
motion if ePost Innovations appoints new counsel by May 11, 2001. ePost
Innovations did not appoint new counsel by such date.
ePost Innovations and Canada Post are engaged in settlement
discussions to resolve the litigation. However, due to the inherent
uncertainties of litigation, the Company cannot predict whether the parties
will reach a definitive settlement and, if they do, whether the terms of any
settlement will be favorable to the Company.
8
Berry Litigation
On March 31, 2000, the Company commenced suit in the Supreme Court
of British Columbia, Action #S001822, Vancouver Registry against Tia Berry
(the "Tia Action"), the wife of Steven Berry ("Berry"), the former President
and Chief Executive Officer of the Company. In the Tia Action, the Company
claims $42,516 (CDN) from Tia Berry on account of monies paid to her by the
Company which she was not entitled to receive. Tia Berry has filed a
Statement of Defense in the Tia Action in which she alleges that the payments
which she received from the Company were to reimburse her for business
expenses which she had charged to her credit cards on behalf of Berry. The
Tia Action has not yet been set for trial.
On April 4, 2000, Berry commenced an action in the Supreme Court of
the State of New York, County of New York (Index No. 601448/2000), against
the Company and Continental Stock Transfer Company ("Continental"), (the "New
York Action"). In the New York Action, Berry claimed damages for alleged
conversion, fraud, breach of contract and breach of fiduciary duty all
arising from the alleged wrongful Stop Transfer Order which the Company
placed relating to 75,000 shares of the Company's Common Stock registered in
Berry's name and the Company's cancellation of a further 600,000 shares (the
"Contingent Shares"). The complaint in the New York Action claims damages in
excess of $3,000,000 with the precise amount to be determined at trial.
Berry received the 600,000 Contingent Shares upon condition that he
would remain in the Company's employ as Chief Executive Officer for at least
two years. Berry commenced his employment with the Company on January 4,
1999, and resigned his employment with the Company on January 17, 2000.
Following Berry's resignation, the Company attempted to have a Stop Transfer
Order issued with respect to the 75,000 shares registered in Berry's name and
cancel the 600,000 Contingent Shares. The Stop Transfer Order was not
effective and Berry subsequently sold the 75,000 shares.
On May 19, 2000 CyPost and ePost Innovations commenced suit in the
Supreme Court of British Columbia, Action #S002798, Vancouver Registry,
against Berry and his wife, Tia Berry (the "BC Action"). In the BC Action,
the Company seeks an order directing Berry to return the 600,000 Contingent
Shares to the Company for cancellation or an order entitling the Company to
cancel the same on the basis that Berry did not fulfill the employment
conditions which were the condition precedent to his becoming the beneficial
owner of the Contingent Shares.
In the BC Action, the Company also claims at least Cdn$800,000 from
Berry on account of breach of fiduciary duty, negligence, breach of statutory
duties and breach of contract arising from Berry's failure to properly carry
out his employment responsibilities. In the BC Action, the Company also
claims Cdn$34,013 from Berry and Tia Berry on account of conspiracy to
defraud and injure the Company and ePost Innovations by causing certain
personal expenses to be paid by the Company rather than by Berry and Tia
Berry personally. The Company also claims punitive and exemplary damages from
Berry and Tia Berry in the BC Action.
On May 25, 2000, the Company moved in the New York Action for an
order dismissing the action against the Company for lack of jurisdiction or,
in the alternative, on the basis of forum non conveniens. On September 5,
2000, the court dismissed the New York Action on forum non conveniens
grounds, subject to the Company making certain stipulations in the New York
Action. Those stipulations have been made and the appeal period in the New
York Action has expired without Berry or any other party appealing the
September 5, 2000 order.
The issues raised by Berry and the Company in the New York Action
will be litigated in the BC Action together with the further issues raised by
the Company in the BC Action. The Company feels that Berry's claims in the
New York Action were without merit and that the Company will be successful in
obtaining an order declaring that Berry's 600,000 Contingent Shares be
cancelled and further entitling the Company to substantial damages. The
Company will vigorously pursue its position in all respects.
On December 21, 2000, Berry and Tia Berry commenced suit in the
Supreme Court of British Columbia, Action #S006790, Vancouver Registry,
against CyPost, ePost Innovations, Kelly Shane Montalban, J. Thomas W.
Johnston, Carl Whitehead and Robert Sendoh (the "Berry Action"). Statements
of Defense have been filed on behalf of the Company and the other defendants.
9
The Plaintiffs in the Berry Action allege that the Tia Action, the
BC Action, and the action by Kelly Shane Montalban (Supreme Court of British
Columbia, Action #S002147, Vancouver Registry), against Berry for specific
performance of an option agreement (the "Montalban Action"), collectively,
amount to an abuse of process, malicious prosecution, unlawful interference
with the Plaintiffs' economic rights, or were commenced pursuant to a civil
conspiracy to injure the Plaintiffs.
In the Berry Action, the Plaintiffs seek a declaration that Berry is
entitled to the 600,000 Contingent Shares and claim unspecified damages which
are estimated at Cdn$2,000,000 based on the Statement of Claim. They also
claim punitive or aggravated damages and costs. The Company believes that the
allegations in the Berry Action are without merit and they will be vigorously
defended.
It is expected that the Tia Action, the BC Action and the Berry
Action will be consolidated for the purposes of trial due to the fact that
there are numerous issues of fact and law which are common to all of these
actions. The Company believes that trial will likely take place in the fall
of 2002.
A loss by the Company of the claim for monetary damages would have a
material adverse effect on the Company's future results of operations,
financial condition and liquidity; however, the Company does not expect to
lose this action and believes additionally that it would be able to negotiate
reasonable payment terms should it lose this suit.
The Company is also subject to routine litigation from time to time
in the operations of its business. None of such routine litigation is
material to the Company, its assets or results of operations.
Due to the inherent uncertainties of litigation, the Company cannot
predict the outcome of any litigation to which it is a party.
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Report. Historical results and percentage relationships among any amounts in
these financial statements are not necessarily indicative of trends in operating
results for any future period. The statements which are not historical facts
contained in this Report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Notes to the Consolidated
Financial Statements, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements are
based on currently available operating, financial and competitive information,
and are subject to various risks and uncertainties. Future events and the
Company's actual results may differ materially from the results reflected in
these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, dependence on existing and future key strategic
and strategic end-user customers, limited ability to establish new strategic
relationships, ability to sustain and manage growth, variability of operating
results, the Company's expansion and development of new service lines, marketing
and other business development initiatives, the commencement of new engagements,
competition in the industry, general economic conditions, dependence on key
personnel, the ability to attract, hire and retain personnel who possess the
technical skills and experience necessary to meet the service requirements of
its clients, the potential liability with respect to actions taken by its
existing and past employees, risks associated with international sales, and
other risks described herein and in the Company's other SEC filings.
11
Overview
The Company is engaged in the business of providing Internet service
provider ("ISP") services ("ISP Services") for business and personal use.
Previously, the Company was also involved in developing certain software
products, which activities the Company no longer pursues.
The Company was a development stage company until the first quarter of
1999, when it began to broaden its strategic focus through the acquisition of
six ISPs. Currently, providing ISP Services is the focus of the Company's
business. The Company's business operations are presently conducted in Canada
and the United States.
The Company derives virtually all of its revenues from its ISP
Services. At present, most of the revenue from ISP Services can be attributed to
connectivity, although the Company's network of ISP Services is moving towards
focusing on Web hosting and server co-location, anticipating a strong hold over
connectivity by the larger ISPs in a few years' time.
During 2000, the Company began streamlining and consolidating its ISP
Services operations to enhance efficiency and reduce operating expenses. The
Company has embarked on a program to centralize ISP Services to the greatest
extent possible, as follows:
o Customer Support. During the second half of 2000, the Company began
consolidating all aspects of customer support (including end user
technical issues) into the Chatham, Ontario facility. In early 2001,
customer support for Oregon ISP Services customers were consolidated
into the Chatham facility and by mid-2001 it is expected that customer
support for all of the Company's ISP Services customers will be handled
by the Chatham facility.
o Billing and Collections. During the second half of 2000, the Chatham
facility took over billing and collections for British Columbia
customers, in addition to continuing billing and collections for all
other Canadian customers. It is anticipated that by mid-2001, billing
and collections for the rest of the Company's ISP Services customers
will be consolidated into the Chatham facility.
o Network Operations. During 2000, the Company reduced four maintenance
and repair teams to two regionally-based teams. A team based in Toronto
provides primary monitoring and repair of all servers and routers
covering all Canadian ISP Services customers and provides overflow
assistance to the Pacific Northwest, while a Seattle team provides
primary monitoring and repair of all servers and routers covering all
of the Pacific Northwest ISP Services customers and provides overflow
assistance to Canada.
The Company is also consolidating Web hosting and dedicated services
into Toronto, a process which began in late-2000 and is expected to be completed
by late-2001. Other ISP Services such as e-mail and user authentication (i.e.,
customer security) will continue to be
12
handled from regional data centers. Beginning in early 2001, all new Web hosting
customers, wherever located, are being hosted from Toronto. As a result of the
foregoing efforts, the operations of Intouch Internet Inc. and NetRover Office
Inc. have been fully consolidated into the Company's wholly-owned subsidiary,
NetRover Inc. ("NetRover"). The Company is also considering implementing other
consolidated services to achieve greater efficiency and cost savings.
Results of Operations for the Three Months Ended March 31, 2001 Compared to the
Three Months Ended March 31, 2000
Substantially all of the Company's revenue was earned from its ISP
operations during the three months ended March 31, 2001. These revenues are
attributable virtually entirely to the operations of the Company's ISP
businesses (Hermes Net Solutions, Inc. and NetRover, and the Connect Northwest
Internet Services and Internet Arena DBAs) which the Company acquired beginning
late in the second quarter of 1999. The Company generated net sales of
$1,063,823 for the three months ended March 31, 2001 compared to $1,039,560 for
the three months ended March 31, 2000, indicating relative stability in revenue
derived from ISP services.
Direct costs, which consist primarily of telecommunications charges in
respect of providing Internet connection services to customers, of $428,671,
were incurred for the three months ended March 31, 2001, compared to $620,381
for the three months ended March 31, 2000. The decrease in the above noted
expenses for the three months ended March 31, 2001 compared to the three months
ended March 31, 2000 results primarily from receiving service level agreement
credits from certain telecommunication providers.
Selling, general and administrative expenses were $622,952 for the
three months ended March 31, 2001 compared to $1,007,783 for the three months
ended March 31, 2000. The decrease in the above noted expenses for the three
months ended March 31, 2001 compared to the three months ended March 31, 2000
results primarily from a reduction in salaries and benefits, the abandonment of
Playa Corporation and consolidation of the operation of the Company's ISP
businesses.
The Company incurred interest expense of $41,326 for the three months
ended March 31, 2001, compared to $179,284 for the three months ended March 31,
2000, which amount included $35,784 of interest expense for the three months
ended March 31, 2000 in respect of promissory notes issued by the Company in
favor of Blue Heron Venture Fund, Ltd. (the "Blue Heron Demand Notes"), the
Company's principal creditor. These notes are unsecured, bear interest at 8% per
annum and are payable on demand. The decrease in interest expense is primarily
the result of the fact that because the Company did not borrow any additional
funds during the three months ended March 31, 2001, it did not incur any
beneficial conversion feature for such period, partially offset by an increase
in interest incurred with respect to the outstanding balance of the Blue Heron
Demand Notes. See "Liquidity and Capital Resources" below.
13
The Company had a net loss of $547,983, or $.03 per share, for the
three months ended March 31, 2001, compared to a net loss of $1,303,753, or $.06
per share, for the three months ended March 31, 2000. The decrease in net loss
for the three months ended March 31, 2001 was primarily a result of significant
decreases in direct costs; selling, general and administrative expenses;
amortization and depreciation of the assets acquired in the fiscal year 1999;
and interest expense.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on a going
concern basis, which assumes that the Company will continue in operation for at
least one year and will be able to realize its assets and discharge its
liabilities in the normal course of business. The Company incurred a net loss
for the three months ended March 31, 2001 of $547,983, compared to a net loss
for the three months ended March 31, 2000 of $1,303,753. As of March 31, 2001,
the Company had a working capital deficit of $3,127,010, which is primarily due
to the Company's use of current assets to acquire its ISP and Software Products
businesses, and professional fees. These factors indicate that the Company's
continuation as a going concern is dependent upon its ability to obtain adequate
financing.
The Company has obtained most of its financing through Blue Heron. The
loans were made under agreements pursuant to which the Company could borrow up
to $16,000,000 in unsecured loans from Blue Heron. The loans are evidenced by
the Blue Heron Demand Notes. The Blue Heron Demand Notes bear interest at 8% per
annum, are payable on demand and are convertible into shares of the Company's
Common Stock at the lender's option, in which case Blue Heron would waive its
right to be paid interest under the Blue Heron Demand Notes. During 1999,
$4,000,000 of outstanding loans were converted into 4,500,000 shares of the
Company's Common Stock. On August 16, 1999, $1,000,000 aggregate principal
amount of Blue Heron Demand Notes were converted into 1,500,000 shares of Common
Stock, at a conversion price of $0.67 per share. On November 24, 1999, an
aggregate additional principal amount of $3,000,000 of Blue Heron Demand Notes
were converted into an additional 3,000,000 shares of Common Stock, at a
conversion price of $1.00 per share.
On April 27, 2000, the Company renegotiated the conversion share price
of its remaining $2,000,000 and $10,000,000 loan facilities with Blue Heron. The
conversion feature with respect to the loan facility in the amount of $2,000,000
was reduced from $1.33 per share to $.75 per share, and the conversion feature
with respect to the loan facility in the amount of $10,000,000 was reduced from
$2.67 per share to $.75 per share.
During the fiscal year ended December 31, 2000, the Company borrowed an
additional $1,210,000 from Blue Heron. The Company did not borrow any additional
funds during the three months ended March 31, 2001. As of March 31, 2001, the
aggregate outstanding principal amount of the loans was $2,085,000. If the Blue
Heron Demand Notes in such aggregate principal amount were converted, Blue Heron
would be entitled to an additional 2,780,000 shares of the Company's Common
Stock.
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Blue Heron is free to withdraw this credit facility at any time, and
since these loans are payable on demand, the Company's ability to continue
operations is dependent upon the willingness of Blue Heron to forbear from
demanding payment. The Company believes that Blue Heron will continue to forbear
payment of the loans for the immediately foreseeable future, but it is under no
obligation to do so. Should Blue Heron demand payment, the Company would be
required to obtain financing from other sources to satisfy its obligations or
would be in default under the loans. The Company does not believe that bank
borrowings are available under present circumstances, and there can be no
assurance that any financing could be obtained from other sources. Even if
funding were available, it might be available only on terms which would not be
favorable to the Company or which Management would not find acceptable.
On April 11, 2001, the Company received a letter from Blue Heron,
stating its willingness to renegotiate the terms of the Blue Heron loans from
demand loans to term loans. No negotiations have commenced as of the date of
filing this Report and no assurance can be given that negotiations will be
undertaken. The actual terms of any such renegotiation are subject to agreement
between the Company and Blue Heron, and no assurance can be given that the
parties will reach agreement on the new terms of the loans. Kelly Shane
Montalban, a principal stockholder of the Company, may be deemed to have an
indirect pecuniary interest in Blue Heron as a result of his status as fund
manager for Blue Heron. Blue Heron is also a principal stockholder of the
Company. Blue Heron may be deemed to be an affiliate of Pacific Gate, another of
the Company's lenders, in which Mr. Montalban is the sole stockholder, sole
director and sole officer.
During the fiscal year ended December 31, 2000, the Company borrowed an
aggregate $125,000 from Pacific Gate, of which amount $25,000 was outstanding on
March 31, 2001. These loans bear interest at 8% per annum and are payable on
demand. Since these loans are payable on demand, the Company's ability to
continue operations is dependent upon the willingness of Pacific Gate to forbear
from demanding payment. The Company believes that Pacific Gate will continue to
forbear payment of the loans for the immediately foreseeable future, but it is
under no obligation to do so. Should Pacific Gate demand payment, the Company
would be required to obtain financing from other sources to satisfy its
obligations or would be in default under the loans. The Company does not believe
that bank borrowings are available under present circumstances, and there can be
no assurance that any financing could be obtained from other sources. Even if
funding were available, it might be available only on terms which would not be
favorable to the Company or which management would not find acceptable.
On April 11, 2001, the Company received a letter from Pacific Gate,
stating its willingness to renegotiate the terms of the Pacific Gate loans from
demand loans to terms loans. No negotiations have commenced as of the date of
filing this Report and no assurance can be given that negotiations will be
undertaken. The actual terms of any such renegotiation are subject to agreement
between the Company and Pacific Gate, and no assurance can be given that the
parties will reach agreement on the new terms of the loans. Pacific Gate is an
affiliate of Kelly Shane Montalban, a principal stockholder of the Company, who
is also the sole stockholder, sole director and sole officer of
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Pacific Gate; and may be deemed to be an affiliate of Blue Heron through Kelly
Shane Montalban, who is fund manager for Blue Heron.
The Company's cash position during the three months ended March 31,
2001 was $185,811, compared to $250,631 on December 31, 2000. This decrease is
primarily due to the Company's not borrowing additional funds during the three
months ended March 31, 2001.
The Company's net cash used in operating activities totaled $42,892
during the three months ended March 31, 2001, compared to $405,199 during the
three months ended March 31, 2000. This decrease is primarily due to
streamlining and consolidating of the Company's ISP Services operations, and
termination and resignation of employees in the Vancouver office during 2000.
The Company's net cash used in investing activities totaled $21,928
during the three months ended March 31, 2001, compared to $598,576 during the
three months ended March 31, 2000. This decrease is primarily due to the
Company's not acquiring any new businesses and making significantly fewer
purchases of property and equipment during the three months ended March 31,
2001.
The Company did not have any proceeds from financing activities during
the three months ended March 31, 2001, compared to $1,025,000 of such proceeds
during the three months ended March 31, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Canada Post Litigation
On June 11, 1999, Canada Post Corporation ("Canada Post") filed a
Statement of Claim in the Federal Court of Canada (Court File No. T-1022-99) in
which it sought injunctive and unspecified monetary relief for the allegedly
"improper" use by the Company's subsidiary, ePost Innovations, Inc., ("ePost
Innovations"), of certain marks and names which contain the component "post". On
October 18, 1999, ePost Innovations filed its Defense and Counterclaim. In a
motion heard November 24, 1999, Canada Post Corporation challenged certain parts
of the Counterclaim and the Federal Court reserved judgment. There has been no
pre-trial discovery and no trial date has been set.
On May 25, 1999, ePost Innovations filed a statement of Claim in the
British Columbia Court (Court File No. C992649) seeking a declaration that the
public notice of Canada Post's adoption and use of CYBERPOSTE and CYBERPOST on
November 18, 1998 and December 9, 1998 respectively, did not affect the
Company's use of CyPost and ePost Innovations as trademarks and trade-names
prior to said dates. ePost Innovations sought summary judgment for such a
declaration and on September 14, 1999, the court rejected summary judgment on
the basis that no right of ePost Innovations was being infringed and that a
trial of the issues was more appropriate. The rejection is pending appeal. There
has been no
16
pre-trial discovery (except to the extent that some was done as part of the
summary judgment application) and no trial date has been set.
Canada Post seeks relief in the form of preventing ePost Innovations
from using trademarks, trade-names or brand names and does not seek monetary
damages. Accordingly, the Company does not believe that this litigation will
have a material impact on its future results of operations, financial condition
and liquidity.
By order of the Federal Court dated January 25, 2001, ePost Innovations
was required to appoint new counsel in this matter, failing which Canada Post
would be permitted to move to strike ePost Innovations' Statement of Defense and
Counterclaim. On April 6, 2001, the Federal Court ruled on Canada Post's
November 24, 1999 motion, whereby it was ordered that certain portions of ePost
Innovations' Statement of Defense and Counterclaim be stricken, and that by a
Supplemental Order of the Federal Court dated April 9th, 2001, Canada Post be
required to file its Reply and Defense to Counterclaim by April 25, 2001. Canada
Post has filed a motion to extend the time for filing its Reply and Defense to
Counterclaim, which is scheduled to be heard by the Federal Court on May 14,
2001. ePost Innovations does not intend to oppose the motion. Canada Post's
motion to extend time includes a motion to strike ePost Innovations' Defense and
Counterclaim for failure to appoint new counsel. Canada Post is prepared to
withdraw this aspect of its motion if ePost Innovations appoints new counsel by
May 11, 2001. ePost Innovations did not appoint new counsel by such date.
ePost Innovations and Canada Post are engaged in settlement discussions
to resolve the litigation. However, due to the inherent uncertainties of
litigation, the Company cannot predict whether the parties will reach a
definitive settlement and, if they do, whether the terms of any settlement will
be favorable to the Company.
Item 2. Changes in Securities
On January 10, 2001, the Company issued an option to purchase 1,000,000
shares of the Company's common stock to Robert Adams, President, Chief Operating
Officer, Secretary and Treasurer of the Company, and an option to purchase
125,000 shares of the Company's common stock to Tami Allan, Vice President of
North American Operations of the Company. The exercise price of each option is
$.10 per share and vests over time. The options were issued pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"), for transactions by an issuer not
involving a public offering or Regulation S promulgated thereunder for
transactions by an issuer outside the United States.
On January 23, 2001, the Company issued an aggregate 25,000 of its
common stock to three employees in consideration for their providing certain
services to the Company from September 1, 2000 through September 30, 2000. These
shares were issued pursuant to the exemption from registration contained in
Section 4(2) of the Securities Act for transactions by an issuer not involving a
public offering or Regulation S promulgated thereunder for transactions by an
issuer outside the United States.
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On June 8, 2000, the Company issued 771,426 shares of its Common Stock
to the selling stockholders of Playa Corporation ("Playa") as partial payment of
the purchase price $3,000,000 in connection with the Company's acquisition of
that company. Due to the discovery of a clerical error in the share conversion
price of the terms of the transaction, an additional 14,029 shares of the
Company's Common Stock were issued to the selling stockholders of Playa on
January 23, 2001. These shares were issued pursuant to the exemption from
registration contained in Section 4(2) of the Securities Act for transactions by
an issuer not involving a public offering or Regulation S promulgated thereunder
for transactions by an issuer outside the United States.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Capacity Agreement dated January 4, 2001 between Verizon
Northwest Inc. and CyPost Corporation for the State of Washington
10.2 Stock Option Agreement dated as of January 12, 2001 between the
Company and Robert Adams
10.3 Stock Option Agreement dated as of January 12, 2001 between the
Company and Tami Allan
(b) Reports on Form 8-K
None.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
"Registrant"
CYPOST CORPORATION
DATE: May 15, 2001 By: /s/ Robert Adams
--------------------
Robert Adams
President and Treasurer
(Principal Financial Officer)
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