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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
[_] 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: 0-28403
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MindArrow Systems, Inc.
(formerly eCommercial.com, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 77-0511097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Enterprise, Suite 340, Aliso Viejo, California 92656
(Address of principal executive offices)
(949) 916-8705
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and formal fiscal year,
if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of each of the Registrant's classes of
common stock:
11,456,666
(as of June 30, 2001)
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MindArrow Systems, Inc.
Quarterly Report on Form 10-Q
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 2001 (unaudited) and
September 30, 2000 3
Consolidated Statements of Operations (unaudited) - Three and
Nine Months Ended June 30, 2001 and 2000 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) - Nine Months Ended June 30, 2001 5
Consolidated Statements of Cash Flows (unaudited) - Nine Months
Ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Part II. Other Information
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
MindArrow Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, September 30,
2001 2000
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash $ 2,424,635 $ 10,613,897
Cash, pledged 115,400 148,820
Accounts receivable, net 747,307 704,862
Prepaid expenses 43,867 289,536
Due from related parties 471,231 586,522
Other current assets - 581,788
------------ ------------
Total current assets 3,802,440 12,925,425
Fixed Assets, net 2,378,678 2,891,808
Intangible Assets, net 2,794,760 2,615,288
Investments - 100,000
Deposits 124,886 74,865
------------ ------------
Total assets $ 9,100,764 $ 18,607,386
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,427,084 $ 1,356,410
Deferred revenue 1,364,259 576,336
Due to related parties 268,670 -
------------ ------------
Total current liabilities 3,060,013 1,932,746
------------ ------------
Stockholders' Equity:
Series B Convertible Preferred Stock,
$0.001 par value; 1,750,000 shares authorized;
1,004,949 and 1,476,698 shares
issued and outstanding as of June 30, 2001 and
September 30, 2000; $8,039,592 and $11,813,584
aggregate liquidation preference as of June 30,
2001 and September 30, 2000 1,005 1,477
Series C Convertible Preferred Stock,
$0.001 par value; 3,000,000 shares authorized;
779,775 and 725,775 shares issued and outstanding
as of June 30, 2001 and September 30, 2000;
$19,494,375 and $18,144,375 aggregate liquidation
preference as of June 30, 2001 and September 30, 2000 780 726
Common Stock,
$0.001 par value; 30,000,000 shares authorized;
11,456,666 and 10,110,760 shares issued and outstanding
as of June 30, 2001 and September 30, 2000 11,457 10,111
Additional paid-in capital 70,149,571 49,181,513
Accumulated deficit (64,012,440) (32,208,804)
Unearned stock-based compensation (109,622) (310,383)
------------ ------------
Total stockholders' equity 6,040,751 16,674,640
------------ ------------
Total liabilities and stockholders' equity $ 9,100,764 $ 18,607,386
============ ============
The accompanying notes are an integral part of these statements.
Page 3
MindArrow Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------------ ----------- -------------- ------------
(uanaudited) (unaudited)
Revenues $ 822,729 $ 606,076 $ 2,739,253 $ 921,148
------------ ----------- -------------- ------------
Operating expenses:
Development 621,786 595,070 2,144,665 1,440,723
Production 431,082 442,256 1,301,044 664,785
Sales and marketing 1,205,964 1,632,781 4,969,565 5,241,520
General and administration 1,022,201 1,438,209 4,644,713 4,442,542
Depreciation and amortization 698,005 534,115 2,031,804 931,477
------------ ----------- -------------- ------------
3,979,038 4,642,431 15,091,791 12,721,047
------------ ----------- -------------- ------------
Operating loss (3,156,309) (4,036,355) (12,352,538) (11,799,899)
Interest income 31,054 207,620 222,149 300,682
Provision for income taxes - (28) - (1,628)
Minority interest - 14,949 - 14,949
Other income (expense) 2,580 - (64,157) -
Loss on transfer agent fraud (169,957) - (19,609,090) -
------------ ----------- -------------- ------------
Net loss (3,292,632) (3,813,814) (31,803,636) (11,485,896)
Beneficial conversion feature
on preferred stock - - - (12,346,440)
------------ ----------- -------------- ------------
Net loss available to common
stockholders $(3,292,632) $(3,813,814) $(31,803,636) $(23,832,336)
============ =========== ============= ============
Basic and diluted loss per share $ (0.30) $ (0.38) $ (3.00) $ (2.44)
============ =========== ============= ============
Shares used in computation of basic
and diluted loss per share 10,867,313 9,987,160 10,604,816 9,782,876
============ =========== ============= ============
The accompanying notes are an integral part of these statements.
Page 4
MindArrow Systems, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Series B Preferred Stock Series C Preferred Stock Common Stock
------------------------ ------------------------ ----------------------
Shares Amount Shares Amount Shares Amount
--------- -------- ------- --------- -------- --------
Balance, September 30, 2000 1,476,698 $ 1,477 725,775 $ 726 10,110,760 $ 10,111
Conversion of preferred stock
to common stock (471,749) (472) (6,000) (6) 483,749 484
Issuance of common stock pursuant
to exercise of options -- -- -- -- 358,334 358
Compensation expense on option
and warrant grants -- -- -- -- -- --
Stockholder repayment per
indemnification agreement -- -- -- -- -- --
Adjustment for Discrepant Shares -- -- -- -- -- --
Share contribution and cancellation -- -- -- -- (1,107,951) (1,108)
Exchange of Discrepant Shares -- -- -- -- 1,107,951 1,108
Shares cancelled pursuant to
indemnification agreement -- -- -- -- (296,177) (296)
Issuance of common stock for
acquisition of Control Commerce, Inc. -- -- 60,000 60 800,000 800
Net loss -- -- -- -- -- --
--------- -------- ------- ----- ---------- --------
Balance, June 30, 2001 (unaudited) 1,004,949 $ 1,005 779,775 $ 780 11,456,666 $ 11,457
========= ======== ======= ===== ========== ========
Additional Unearned
Paid-in Accumulated Stock-Based
Capital Deficit Compensation Total
------------ ------------ ------------ ------------
Balance, September 30, 2000 $ 49,181,513 $(32,208,804) $ (310,383) $ 16,674,640
Conversion of preferred stock
to common stock (6) -- -- --
Issuance of common stock pursuant
to exercise of options 357,976 -- -- 358,334
Compensation expense on option
and warrant grants 43,786 -- 200,761 244,547
Stockholder repayment per
indemnification agreement 348,068 -- -- 348,068
Adjustment for Discrepant Shares 18,682,398 -- -- 18,682,398
Share contribution and cancellation 1,108 -- -- --
Exchange of Discrepant Shares (1,108) -- -- --
Shares cancelled pursuant to
indemnification agreement 296 -- -- --
Issuance of common stock for
acquisition of Control Commerce, Inc. 1,535,540 -- -- 1,536,400
Net loss -- (31,803,636) -- (31,803,636)
------------ ------------ ------------- ------------
Balance, June 30, 2001 (unaudited) $ 70,149,571 $(64,012,440) $ (109,622) $ 6,040,751
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
MindArrow Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended
June 30, June 30,
2001 2000
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(unaudited)
Cash flows from operating activities:
Net loss $(31,803,636) $(11,485,896)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 2,031,804 931,477
Non-cash charges due to stock option and warrant grants 244,547 3,227,855
Minority interest - (14,949)
Non-cash charges due to contract settlements 1,191,701 -
Non-cash charge due to investment write-down 100,000 -
Non-cash charge for discrepant share adjustment 18,682,398 -
Non-cash charge for trade shows 49,145 -
Non-cash forgiveness of amount due from related party 28,333 -
Increase in accounts receivable (42,445) (274,332)
(Increase) decrease in prepaid expenses 222,786 (14,808)
(Increase) decrease in other current assets 584,288 (698,467)
Increase in deposits (19,771) (13,644)
Increase (decrease) in accounts payable and accrued liabilities (365,351) 1,090,158
Decrease in accounts payable from acquired companies - (171,767)
Increase in deferred revenue 787,923 185,249
------------ ------------
Net cash used in operations (8,308,278) (7,239,124)
------------ ------------
Cash flows from investing activities:
(Increase) decrease in cash-pledged 33,420 (2,029,930)
Purchases of fixed assets (717,706) (2,305,631)
Proceeds from sale of assets 21,051 -
Increase in investments - (100,000)
Net cash acquired in acquisitions 938,536 122,415
Decrease in due from related parties (17,722) -
Purchases of patents and trademarks (76,046) (108,867)
------------ ------------
Net cash (used in) provided by investing activities 181,533 (4,422,013)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - 21,537,356
Proceeds from issuance of common stock 183,334 315,418
Decrease in due to related parties (245,851) -
------------ ------------
Net cash (used in) provided by financing activities (62,517) 21,852,774
------------ ------------
Net increase (decrease) in cash (8,189,262) 10,191,637
Cash, beginning of period 10,613,897 4,744,741
------------ ------------
Cash, end of period $ 2,424,635 $ 14,936,378
============ ============
Cash paid for income taxes $ - $ -
============ ============
Cash paid for interest $ - $ -
============ ============
Supplemental disclosure of noncash investing activities:
In June 2001, the Company acquired Control Commerce, Inc. for
800,000 shares of common stock and 60,000 shares of Series C
preferred stock. In April 2000, the Company acquired
Fusionactive, Ltd. for 150,000 shares of common stock. $ 1,536,400 $ 2,625,000
============ ============
The accompanying notes are an integral part of these statements.
Page 6
MindArrow Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A--The Company and Summary of Significant Accounting Policies
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by
MindArrow Systems, Inc. and subsidiaries (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC") for
interim financial reporting. These consolidated financial statements are
unaudited and, in the opinion of management, include all adjustments (consisting
of normal recurring adjustments and accruals) necessary for a fair presentation
of the balance sheets, operating results, and cash flows for the periods
presented. Operating results for the three and nine months ended June 30, 2001
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2001. Certain financial information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted in accordance with the rules and regulations of the SEC.
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and accompanying notes, included in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2000. The consolidated balance sheet at September 30, 2000 has been derived
from the audited consolidated financial statements at that date.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
3. Basic and Diluted Net Loss Per Share
Basic net loss per share is computed using the weighted average number
of common shares outstanding during the period. Diluted net loss per share is
computed using the weighted average number of common and if dilutive, common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon conversion of convertible
preferred stock (using the if-converted method) and shares issuable upon the
exercise of stock options and warrants (using the treasury stock method). Common
equivalent shares were excluded from the computation as their effect was anti-
dilutive.
4. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
5. Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash, cash
equivalents, and accounts receivable. Substantially all of the Company's cash
and cash equivalents are held in one financial institution. As of June 30, 2001
and September 30, 2000, the carrying amounts of cash were $2,540,035 and
$10,762,717, respectively, and the bank balances were $2,497,373 and
$11,239,780, respectively, of which $100,000 was FDIC insured. Accounts
receivable are typically unsecured and derived primarily from customers located
in the United States and Hong Kong. The Company performs ongoing credit
evaluations of its customers and will maintain reserves for potential credit
losses as the need arises.
Page 7
MindArrow Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Segments
The Company has adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
financial information for those segments to be presented in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, and geographic areas. To date the Company has viewed
their operations as principally one segment. The Company has not yet determined
if, as the result of the acquisition of Fusionactive, Ltd., it will operate in
more than one segment. The following is a summary of significant geographic
markets:
North Asia
America Pacific
---------- ----------
For the nine months ended June 30, 2000:
Net revenues $ 761,968 $ 159,180
Long lived assets 4,173,565 2,693,499
For the nine months ended June 30, 2001:
Net revenues 1,966,413 772,840
Long lived assets 6,317,797 2,639,279
7. Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
. All business combinations initiated after June 30, 2001 must use the purchase
method of accounting. The pooling of interest method of accounting is
prohibited except for transactions initiated before July 1, 2001.
. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights
or are separable from the acquired entity and can be sold, transferred,
licensed, rented or exchanged, either individually or as part of a related
contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired after
June 30, 2001, will not be amortized. Effective October 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
. Effective October 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator.
. All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
The Company will continue to amortize goodwill and intangible assets
recognized prior to July 1, 2001, under its current method until October 1,
2002, at which time annual and quarterly goodwill amortization of $719,790 and
$282,380, respectively, will no longer be recognized. By September 30, 2003 the
Company will have completed a transitional fair value based impairment test of
goodwill as of October 1, 2002. By December 31, 2002, the Company will have
completed a transitional impairment test of all intangible assets with
indefinite lives. Impairment losses, if any, resulting from the transitional
testing will be recognized in the quarter ended December 31, 2002, as a
cumulative effect of a change in accounting principle.
Page 8
MindArrow Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note B--Liquidity
Since inception, the Company has funded operations by selling stock. While
revenues have increased significantly over the prior year, expenses continue to
exceed revenues. During the quarter ended June 30, 2001, the Company continued
to implement cost-savings measures designed to reduce net cash expenditures in
future quarters. Even so, the Company does not anticipate that monthly revenues
will be sufficient to offset expected expenditures until late calendar 2001.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Need for additional financing."
Note C--Investments
In January 2000, the Company made an equity investment of $100,000 into
eContributor.com, Inc., an Internet-based fundraising management and donation-
processing firm. During the quarter ended December 31, 2000, the Company
determined that the investment had no fair market value and wrote the asset
value down to zero.
Note D--Commitments and Contingencies
1. Operating Leases
In January 2001, the Company signed an amendment to the lease for its
primary facilities in Aliso Viejo, California, which resulted in an increase in
rent expense of $12,170 per month. The lease expires December 31, 2004.
As a result of the acquisition of Control Commerce, Inc. the Company
assumed two leases for office space in New York City and Encinitas, California.
The New York office lease requires monthly rent payments of $11,500 per month
and expires in July 2002. The Company is in the process of closing its existing
facility in New York and moving into a portion of these facilities. Furthermore,
the Company is negotiating to return unused space to the landlord in exchange
for extending the lease term until July 2003. The Encinitas space requires
monthly rent payments of $7,834 per month through April 2002, and $8,064 per
month through May 2003, when the lease expires. Effective July 1, 2001 the
Company entered into a sublease for the Encinitas space which provides for
rental income of $8,064 per month through April 2002, and $8,525 per month
through May 2003, when the lease expires.
2. Legal Proceedings
From time to time the Company is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights. Except as
described below, the Company is not currently aware of any legal proceedings or
claims that the Company believes will have, individually or in the aggregate, a
material adverse effect on the Company's consolidated financial position or
results of operations.
In October 2000, the Company received a refund in the amount of $500,000
resulting from excess amounts deposited with the court in connection with a
lawsuit that was settled in September 2000.
During the nine months ended June 30, 2001, 296,177 shares of common stock
were contributed to the Company and cancelled pursuant to an indemnity agreement
with a significant stockholder, in full settlement of an amount due under the
indemnity agreement.
In January 2001, 800 America, Inc. brought an action against Control
Commerce, Inc., which was acquired by MindArrow in June 2001, in state court in
New York relating to discussions of a proposed acquisition of Control Commerce
by 800 America. The complaint alleged, among other things, a breach of contract
by Control Commerce and tortious interference with a contractual relationship by
unnamed third parties. In March 2001, the case was removed to the U.S. District
Court for the Southern District of New
Page 9
MindArrow Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
York. In April 2001, MindArrow was added as a defendant to the litigation. 800
America has alleged that MindArrow wrongfully interfered with its business
relationship with Control Commerce and has alleged contractual damages of $2
million and punitive damages of $10 million against Control Commerce and
MindArrow. MindArrow and Control Commerce believe the claims against them are
without merit and intend to vigorously defend themselves in these matters. In
August 2001, MindArrow filed a motion for summary judgment to dismiss the claims
against it.
3. Acquisitions
In June 2001, the Company completed its acquisition of Control Commerce,
Inc. ("Control Commerce"), a privately-held Delaware corporation. Under the
terms of the merger agreement, a wholly-owned subsidiary of the Company was
merged with and into Control Commerce, with Control Commerce surviving the
merger and becoming a wholly-owned subsidiary of the Company.
In the merger, the shareholders of Control Commerce received in exchange
for all of their issued and outstanding capital stock of Control Commerce an
aggregate of 60,000 shares of the Company's Series C preferred stock, 800,000
shares of the Company's common stock and warrants to purchase 12,000 shares of
the Company's common stock at a price of $12.50 per share (collectively, the
"Merger Consideration"). In addition, in the event the Company closes a round of
financing on or before December 15, 2001 involving the issuance of shares of a
series of the Company's preferred stock with a liquidation preference senior to
that of the Company's Series C preferred stock (or a liquidation preference
equal to the Series C preferred stock if fifty percent or more of the new series
is sold to existing holders of the Company's Series B or Series C preferred
stock), the merger agreement permits the Control Commerce shareholders to
exchange the Merger Consideration for consideration consisting of a combination
of shares of the new series of stock and the Company's common stock, up to a
maximum of one million equivalent shares of common stock.
The total purchase price of the acquisition was $1,536,400 for which the
Company issued warrants to purchase 12,000 shares of the Company's common stock
at a price of $12.50 per share, 800,000 shares of common stock, and 60,000
shares of Series C preferred stock, convertible into 120,000 shares of common
stock, at a value of $1.67 per share. The purchase price was allocated to the
assets acquired and the liabilities assumed based on their estimated fair
values. Goodwill has resulted from the excess costs over fair value of net
assets acquired.
Goodwill............................................. $930,177
Tangible assets acquired............................. 1,025,268
Liabilities assumed.................................. (419,045)
------------
$ 1,536,400
============
On August 1, 2001, the Company announced the signing of a non-binding
letter of intent to acquire privately-held Radical Communication, Inc.
("Radical"). Under the proposed terms of the transaction, the Company would
acquire substantially all of the assets of Radical in exchange for 1,980,000
shares of common stock, 135,000 shares of Series C preferred stock and an
unsecured subordinated promissory note in the aggregate principal amount of
$1,000,000. The promissory note would be payable in two annual installments of
$500,000, with the first installment due October 1, 2002. It is also
contemplated that upon the close of the proposed transaction, Radical will
designate a representative to join the Company's Board of Directors. Completion
of the acquisition is subject to entering into a definitive agreement with
Radical and to the satisfactory completion of due diligence and other conditions
to closing, including but not limited to, approval by both companies' Board of
Directors and approval by Radical's stockholders. The acquisition is expected to
close in fall 2001 if it proceeds.
Page 10
MindArrow Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Transfer Agent Fraud
In February 2001, the Company determined that between May 21, 1999 and
April 7, 2000 stock certificates representing 1,107,951 shares (the "Discrepant
Shares") were illegally authenticated by the Company's prior transfer agent or
others acting on its behalf. The Discrepant Shares were not recorded in the
stock ledger records kept by the former transfer agent. Following the discovery
of potential criminal activity, the Company contacted law enforcement officials,
Nasdaq and the SEC and has assisted law enforcement in the investigation of this
matter. On February 5, 2001, Nasdaq halted trading of MindArrow's common stock
on the Nasdaq SmallCap Market. On May 1, 2001 trading resumed.
In order to offset the impact of recognizing additional shares in the hands
of innocent purchasers, two significant shareholders entered into an agreement
with the Company pursuant to which they agreed to contribute for cancellation by
the Company 1,107,951 shares owned by them. This contribution of shares was made
concurrent with the exchange of new shares for the wrongly authenticated
certificates. The agreement provides that in the event that any of the
Discrepant Shares are recovered by the Company, an equivalent number of shares
shall be issued to the two contributing shareholders. In the event that the
Company recovers cash or property other than the Discrepant Shares, then the
Company shall issue shares of its common stock to the contributing shareholders
at a rate of one share of common stock for every $4.50 in property or cash
recovered. In no event shall the Company be obligated to issue more than
1,107,951 shares pursuant to the agreement.
On March 30, 2001, the Company issued new shares in exchange for the
Discrepant Shares and the 1,107,951 shares agreed to be contributed by the two
significant shareholders were contributed to the Company and cancelled. No gain
or loss has been recognized by the Company as a result of the share
contribution.
The Discrepant Shares entered the public float over a period of
approximately eleven months. In connection with the exchange, the Company
determined that under generally accepted accounting principles it should record
a non-recurring, non-cash charge of $18,682,398 at the time the exchange of new
shares for the Discrepant Shares occurs. Accordingly, this non-cash charge is
reflected in the accompanying consolidated financial statements for the nine
months ended June 30, 2001. This amount represents the estimated market value of
the Discrepant Shares at the time they entered the public float. The charge had
no impact on total stockholders' equity, as the Company concurrently recorded an
$18,682,398 increase to additional paid-in capital. Any amounts recovered by the
Company from the perpetrators of the fraud will be recorded as non-operating
income at the time of the recovery. The loss on transfer agent fraud of
$19,609,090 on the accompanying consolidated statement of operations includes
legal and other costs associated with investigating the fraud, implementing the
share exchange, pursuing resolution of the trading halt, and recovery of assets.
On June 25, 2001, the former transfer agent and her accomplice were
convicted of crimes arising out of their fraudulent issuance of shares, and have
agreed as part of their plea agreement to pay restitution. Authorities have
seized $4.5 million in assets that may be distributed pursuant to civil
forfeiture proceedings. The Company has made claim to these assets as partial
recovery of the loss incurred by the Company as a result of the fraud. However,
the Company can make no assurances as to when or whether it will obtain a
recovery of the seized assets.
The following is a schedule of as reported and pro forma net loss and loss
per share, illustrating the impact the Discrepant Shares would have had if the
loss of $18,682,398 associated with the Discrepant Shares had been recorded in
the periods in which the Discrepant Shares entered the public float:
Page 11
MindArrow Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Net Loss Loss Per Share
Discrepant ------------------------------ -------------------------
Period Shares Value As Reported Pro Forma As Reported Pro Forma
------ ----------- ------------- ------------- -------------- ------------ ----------
Period from inception
(March 26, 1999)
to June 30, 1999 326,742 $ (3,880,061) $ (799,762) $ (4,679,823) $(0.10) $(0.57)
Quarter ended
September 30, 1999 237,000 (1,925,626) (2,593,831) (4,519,457) (0.30) (0.46)
---------- ------------ ------------ ------------
Period from inception
(March 26, 1999)
to September 30, 1999 563,742 $ (5,805,687) $ (3,393,593) $ (9,199,280) (0.39) (1.02)
========== ============ ============ ============
Quarter ended December 31, 1999 256,414 $ (4,827,209) $ (2,252,585) $ (7,079,794) (0.23) (0.69)
Quarter ended March 31, 2000 274,810 (7,536,594) (17,765,937) (25,302,531) (1.82) (2.35)
Quarter ended June 30, 2000 12,985 (512,908) (3,813,814) (4,326,722) (0.38) (0.39)
Quarter ended September 30, 2000 - - (4,982,875) (4,982,875) (0.49) (0.49)
---------- ------------ ------------ ------------
Year ended September 30, 2000 544,209 $(12,876,711) $(28,815,211) $(41,691,922) (2.95) (3.97)
========== ============ ============ ============
Quarter ended December 31, 2000 - $ - $ (5,380,664) $ (5,380,664) (0.53) (0.53)
Quarter ended March 31, 2001 (1,107,951) 18,682,398 (23,130,340) (4,447,942) (2.16) (0.42)
Quarter ended June 30, 2001 - - (3,292,632) (3,292,632) (0.30) (0.30)
---------- ------------ ------------ ------------
Nine months ended June 30, 2001 (1,107,951) $ 18,682,398 $(31,803,636) $(13,121,238) (3.00) (1.24)
========== ============ ============ ============
The pro forma charges above would have no impact on total stockholders'
equity, as the Company would concurrently record a corresponding increase to
additional paid-in capital.
Note E--Stockholders' Equity
1. Preferred Stock Conversions
During the nine months ended June 30, 2001, 471,749 shares of Series B
preferred stock were converted into 471,749 shares of common stock pursuant to
the conversion rights of the Series B preferred stockholders. During the
quarter ended June 30, 2001, 6,000 shares of Series C preferred stock were
converted into 12,000 shares of common stock pursuant to the conversion rights
of the Series C preferred stockholders.
2. Warrants
During the nine months ended June 30, 2001, the Company issued to
consultants warrants to purchase 70,000 shares of common stock. The warrants
are exercisable at prices ranging from $5 per share to $8 per share, vest over
periods up to 3 years, and expire January 2002 through October 2005.
Additionally, during the quarter ended June 30, 2001, the Company issued
warrants to purchase 12,000 shares of common stock at a price of $12.50 per
share, as partial consideration in the Control Commerce acquisition (see Note
D3).
The Company recognizes compensation expense based on the fair value of
the warrants, as computed using the Black-Scholes option pricing model. The
Company recognized compensation expense of $74,302 for the nine months ended
June 30, 2001.
3. Options
During the nine months ended June 30, 2001, the Company granted
options to purchase 1,503,700 shares of common stock to employees and directors
of the Company under the 1999 and 2000 Stock Option Plans at exercise prices
from $1 to $7 per share. During the same period, options to purchase 972,514
shares were forfeited and 358,334 were exercised, resulting in outstanding
options to purchase 3,174,686 shares at June 30, 2001.
Page 12
MindArrow Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note F--Due to Related Parties
The Company terminated, effective December 31, 2000, an employment
agreement with a former executive officer, resulting in a charge to the Company
of approximately $483,000. The transaction was recorded as the reduction of a
$100,000 note receivable plus interest, payment of the exercise price on 175,000
options at $1 per share, and the balance payable in the form of cash plus a
$120,000 one year, non-interest bearing note payable. The note payable is due
in monthly installments of $10,000. All unpaid amounts as of June 30, 2001 are
included in "Due to related parties" on the accompanying consolidated balance
sheet.
The Company terminated, effective December 31, 2000, a consulting
contract with a former executive officer and significant stockholder resulting
in a charge to the Company of approximately $442,000. The amount was paid as
follows: $44,167 in cash, payable in two monthly installments through February
28, 2001, the exchange of fixed assets with a net book value of $49,432, and a
reduction of $348,068 due under the terms of an indemnity agreement. All
amounts were paid as of March 31, 2001.
The Company terminated, effective December 31, 2000, a consulting
contract with a former executive officer, current director, and significant
stockholder, resulting in a charge to the Company of $267,250. The transaction
was recorded as a non-interest bearing note payable with payments due through
March 2002, and is included in "Due to related parties" on the accompanying
consolidated balance sheet. Additionally, in January 2001, options to purchase
57,000 shares of common stock at an exercise price of $5 per share were granted
in connection with this contract cancellation, resulting in compensation expense
of $76,380.
Page 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read together with our consolidated
financial statements and related notes included elsewhere in this quarterly
report on Form 10-Q.
Overview
Our business was founded in March 1999. We were a development-stage company
until December 31, 1999. Principal operations commenced in January 2000. On
April 24, 2000, we acquired 90% of Fusionactive, Ltd. in exchange for 150,000
shares of our common stock. The results of operations of Fusionactive have been
included in the consolidated financial statements commencing April 1, 2000. The
results of operations of Fusionactive from April 1 through April 23 are
immaterial to our consolidated results. In June 2001, we acquired Control
Commerce, Inc. in exchange for 800,000 shares of our common stock, 60,000 shares
of our Series C preferred stock and a warrant to purchase 12,000 shares of our
common stock. The results of operations of Control Commerce have been included
in the consolidated financial statements commencing June 1, 2001.
Through June 30, 2001, our revenues were derived from professional
services, transaction charges and license fees for our software product,
MindArrow Messenger. Professional services include Message production and design
consultation, e-Marketing consulting and software implementation and training
services. Transaction charges are for delivery and tracking of MindArrow
Messages. The Control Commerce product Virtual Kiosk is an e-commerce enabling
technology that will be integrated into our existing messaging and software
products.
Revenues are recognized when the professional services are rendered
and transaction charges are recognized when the MindArrow Messages are
delivered. We recognize software license fee revenue when persuasive evidence of
an agreement exists, the product has been delivered, we have no remaining
significant obligations with regard to implementation, the license fee is fixed
or determinable and collection of the fee is probable. Fusionactive's revenue
from media sales is recognized upon placing advertisements.
We record cash receipts from clients and billed amounts due from clients in
excess of revenue recognized as deferred revenue. The timing and amount of cash
receipts from clients can vary significantly depending on specific contract
terms and can therefore have a significant impact on the amount of deferred
revenue in any given period.
We currently sell our products and services through a direct sales force
and a small network of resellers.
Need for additional financing
The capital requirements associated with developing our network and
corporate infrastructure have been and will continue to be significant. We have
been substantially dependent on private placements of our equity securities to
fund such requirements.
We do not anticipate that monthly revenues will be sufficient to offset
expected expenditures until late calendar 2001. Based on our current operating
plan and available cash, we anticipate that we will need to obtain additional
financing before then. We have no current arrangements with respect to sources
of additional financing and there is no certainty that we will be able to raise
additional funds. We plan to seek additional financing but the market for
privately placed equity securities of companies like ours is, at this time, very
difficult. We also have made a claim to recover assets seized from our former
transfer agent and an accomplice as partial restitution arising from the loss
incurred by the Company as a result of the transfer agent fraud (see Note D4 to
our Financial Statements) but we can not be certain when or whether we will
obtain a recovery of the seized assets. If the Company is unsuccessful in
raising additional funds or obtaining a recovery of the seized assets prior to
September 30, 2001, the liquidity position of the Company will be materially and
adversely effected and we could be required to make drastic cost reductions,
which
Page 14
could negatively impact our operations. All of the statements contained in this
Report on Form 10-Q are qualified by these facts.
Results of operations
For the three and nine months ended June 30, 2001, revenues totaled
$822,729 and $2,739,253, respectively, compared to $606,076 and $921,148 for the
corresponding periods in fiscal 2000. The increase from the previous year was
due to our expanded product and service offerings and the overall growth of our
customer base.
For the three and nine months ended June 30, 2001, our operating loss
was $3,156,309 and $12,352,538, respectively, compared to $4,036,355 and
$11,799,899 for the corresponding periods in fiscal 2000. The reduction in the
quarterly loss results from increased revenue and our efforts to reduce costs
across the board. The increase in the operating loss for the nine months ended
June 30, 2001 results primarily from increased depreciation and amortization
expenses in the current year. Other cost increases were offset by the increase
in revenue over the previous year.
In February 2001, the Company determined that between May 21, 1999 and
April 7, 2000 stock certificates representing 1,107,951 shares (the "Discrepant
Shares") were illegally authenticated by the Company's prior transfer agent or
others acting on its behalf. The Discrepant Shares were not recorded in the
stock ledger records kept by the former transfer agent. Following the discovery
of potential criminal activity, the Company contacted law enforcement officials,
Nasdaq and the SEC and has assisted law enforcement in the investigation of this
matter. On February 5, 2001, Nasdaq halted trading of MindArrow's common stock
on the Nasdaq SmallCap Market. On May 1, 2001 trading resumed.
In order to offset the impact of recognizing additional shares that
may be in the hands of innocent purchasers, two significant shareholders entered
into an agreement with the Company pursuant to which they agreed to contribute
for cancellation by the Company 1,107,951 shares owned by them. This
contribution of shares was made concurrent with the exchange of new shares for
the wrongly authenticated certificates. The agreement provides that in the event
that any of the Discrepant Shares are recovered by the Company, an equivalent
number of shares shall be issued to the two contributing shareholders. In the
event that the Company recovers cash or property other than the Discrepant
Shares, then the Company shall issue shares of its common stock to the
contributing shareholders at a rate of one share of common stock for every $4.50
in property or cash recovered. In no event shall the Company be obligated to
issue more than 1,107,951 shares pursuant to the agreement.
On March 30, 2001, the Company issued new shares in exchange for the
Discrepant Shares and the 1,107,951 shares agreed to be contributed by the two
significant shareholders were contributed to the Company and cancelled. No gain
or loss has been recognized by the Company as a result of the share
contribution.
The Discrepant Shares entered the public float over a period of
approximately eleven months. In connection with the exchange, the Company
determined that under generally accepted accounting principles it should record
a non-recurring, non-cash charge of $18,682,398 at the time the exchange of new
shares for the Discrepant Shares occurs. Accordingly, this non-cash charge is
reflected in the accompanying consolidated financial statements. This amount
represents the estimated market value of the Discrepant Shares at the time they
entered the public float. The charge had no impact on total stockholders'
equity, as the Company concurrently recorded an $18,682,398 increase to
additional paid-in capital. Any amounts recovered by the Company from the
perpetrators of the fraud will be recorded as non-operating income at the time
of the recovery. The loss on transfer agent fraud of $19,609,090 includes legal
and other costs associated with investigating the fraud, implementing the share
exchange and pursuing resolution of the trading halt.
On June 25, 2001, the former transfer agent and her accomplice were
convicted of crimes arising out of their fraudulent issuance of shares, and have
agreed as part of their plea agreement to pay restitution. Authorities have
seized $4.5 million in assets that may be distributed pursuant to civil
forfeiture proceedings. The Company has made claim to
Page 15
these assets as partial recovery of the loss incurred by the Company as a
result of the fraud. However, the Company can make no assurances as to when or
whether it will obtain a recovery of the seized assets.
For the three and nine months ended June 30, 2001, our net loss available
to common stockholders was $3,292,632, or $0.30 per share, and $31,803,636, or
$3.00 per share, respectively, compared to $3,813,814, or $0.38 per share, and
$23,832,336, or $2.44 per share, for the corresponding periods in fiscal 2000.
On a pro forma basis, excluding the non-cash portion of the loss on transfer
agent fraud described above, net loss for the nine months was $13,121,238, or
$1.24 per share.
Development expenses consist primarily of salaries and related expenses for
software engineers and other technical personnel, including consultants, and
were focused on continued advancements in multimedia communication technology
and continued development of MindArrow Messenger, as well as integrating
technology acquired in the Control Commerce acquisition. Total development costs
for the three and nine months ended June 30, 2001 amounted to $621,786 and
$2,144,665, compared to $595,070 and $1,440,723 for the corresponding periods in
fiscal 2000. We charge all research and development expenses to operations as
incurred. We believe that continued investment in research and development is
critical to our long-term success. We expect development expenses to remain
constant in absolute dollars but decrease as a percentage of revenues.
Production efforts focused on building a team of creative design and client
service people to produce MindArrow Messages and assist our clients to implement
MindArrow Messenger. Total production costs for the three and nine months ended
June 30, 2001 amounted to $431,082 and $1,301,044, respectively, compared to
$442,256 and $664,785, for the corresponding periods of fiscal 2000.
Sales and marketing expenses for the three and nine months ended June 30,
2001 amounted to $1,205,964 and $4,969,565, respectively, a decrease from
$1,632,781 and $5,241,520 from the previous year. The expenses consisted
primarily of salaries and related expenses for developing our direct and
reseller organizations, as well as marketing expenses designed to create and
promote brand awareness. We have invested in a sales and marketing organization
that we believe will help add customers and expand revenues. We intend to
leverage this investment while aggressively managing our costs. Accordingly, we
expect cash-based sales and marketing expenses to remain constant in absolute
dollars but decrease as a percentage of revenues
General and administrative costs of $1,022,201 and $4,644,713 for the three
and nine months ended June 30, 2001, respectively, compared to $1,438,209 and
$4,442,542 for the corresponding periods in fiscal 2000, primarily included
salaries and related expenses for administrative, finance and human resources
personnel, professional fees and other costs of operating as a public company.
The decrease in costs from the quarter in the previous year primarily resulted
from the elimination of certain positions and consultants.
Stock-based compensation decreased to $29,388 for the three months ended
June 30, 2001 from $251,814 for the three months ended June 30, 2000. This
decrease was attributable to a decrease in the quantity of warrants granted and
vested, and the fair value of warrants as calculated using the Black-Scholes
option pricing model. Amortization of unearned stock-based compensation
represents the difference between the exercise price of stock option grants and
the deemed fair value of our stock at the time of such grants. Such amounts are
amortized over the vesting period for such grants, which is typically three
years. At June 30, 2001 we had $109,622 in unearned stock-based compensation
scheduled to be amortized as follows: $31,288 in the quarter ending September
30, 2001, and $78,334 in the fiscal year ending September 30, 2002. We do not
anticipate recording significant stock-based compensation in the future.
Liquidity and sources of capital
In addition to the following see the preceding discussion regarding "Need
for additional financing."
Page 16
Since our inception, we have funded our operations by selling stock. While
our revenues have increased significantly over the prior year, our expenses
continue to exceed revenues. During the quarter ended June 30, 2001, we
continued to implement cost-savings measures designed to reduce net cash
expenditures in future quarters. Even so, we do not anticipate that monthly
revenues will be sufficient to offset expected expenditures until late calendar
2001.
As of June 30, 2001 and September 30, 2000, we had current assets of
$3,802,440 and $12,925,425, respectively, and current liabilities of $3,060,013
and $1,932,746, respectively. This represents working capital of $742,427 at
June 30, 2001 and $10,992,679 at September 30, 2000.
For the nine months ended June 30, 2001, we used $8,308,278 of cash for
operating activities, compared to $7,239,124 used for operations in the nine
months ended June 30, 2000, which were primarily focused on growing our
organizational infrastructure to be able to service our clients.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
which was later amended by SFAS No. 137 "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 133 established standards for the accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. The statement generally requires
recognition of gains and losses on hedging instruments, based on changes in fair
value or the earnings effect of a forecasted transaction. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS No. 133 or SFAS No. 137 have not had a
material impact on our consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB
101, entitled "Revenue Recognition," which outlines the basic criteria that must
be met to recognize revenue and provides guidance for the presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. The implementation date of SAB 101 has been
deferred until no later than the fourth quarter of fiscal years beginning after
December 31, 1999. SAB 101 has not had a material impact on our financial
position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44,
entitled "Accounting for Certain Transactions Involving Stock Compensation,"
which is an interpretation of Accounting Principles Board No. 25, or APB 25.
This interpretation clarifies:
. the definition of an employee for purposes of applying APB 25;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a
business combination.
This interpretation is effective July 1, 2000. The adoption of FIN 44 has
not had a material impact on our financial position or results of operations.
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before
July 1, 2001.
Page 17
. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective October 1, 2002,
all previously recognized goodwill and intangible assets with indefinite
lives will no longer be subject to amortization.
. Effective October 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
. All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
The Company will continue to amortize goodwill and intangible assets
recognized prior to July 1, 2001, under its current method until October 1,
2002, at which time annual and quarterly goodwill amortization of $719,790 and
$282,380, respectively, will no longer be recognized. By September 30, 2003 the
Company will have completed a transitional fair value based impairment test of
goodwill as of October 1, 2002. By December 31, 2002, the Company will have
completed a transitional impairment test of all intangible assets with
indefinite lives. Impairment losses, if any, resulting from the transitional
testing will be recognized in the quarter ended December 31, 2002, as a
cumulative effect of a change in accounting principle.
Page 18
Certain of the matters and subject areas discussed in this quarterly report
on Form 10-Q contain "forward-looking statements" that are subject to a number
of risks and uncertainties, many of which are beyond our control. All
statements, other than statements of historical fact included in this report
regarding our business strategy, future operations, financial position,
estimated revenues, projected costs, prospects, plans and objectives of
management as well as third parties are forward-looking statements. Generally,
when used in this report, the words "anticipate," "intend," "estimate,"
"expect," "project," and similar expressions are intended to identify forward-
looking statements, although not all forward-looking statements contain such
identifying words. Specific examples of forward-looking statements include the
expectations that (i) our development and cash-based sales and marketing
expenses will remain constant in absolute dollars but decrease as a percentage
of revenues, and (ii) we will not record significant stock-based compensation in
the future. All forward-looking statements speak only as of the date of this
report. Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. Important factors that could cause our
actual results to differ materially from our expectations are described below
and in our other filings with the SEC.
Risk Factors
Additional factors that may affect future results
In addition to the factors discussed in the "Need for additional
financing" section of this Management's Discussion and Analysis of Financial
Conditions and Results of Operations, the following additional risk factors may
affect our future operating results.
We cannot assure you that our common stock will continue to be listed on the
Nasdaq SmallCap Market
The Nasdaq Stock Market retains discretion over whether to continue
listing our common stock on the Nasdaq SmallCap Market. Recently, the share
price of our common stock has been less than $1.00. If our common stock does not
maintain a required minimum bid price of $1.00 over a period of 30 consecutive
trading days, we may be notified by Nasdaq that we need to regain compliance
with this requirement. If we do not regain compliance with this requirement or
if we do not meet other qualification listing standards, our common stock may be
delisted from trading on the Nasdaq SmallCap market. If our common stock is
delisted from the Nasdaq SmallCap Market, your shares may become significantly
less liquid and may decline significantly in price.
Our limited operating history makes evaluation of our business difficult
Our business was formed as eCommercial.com in March 1999 and we were a
development-stage company through December 31, 1999. In January 2000, principal
operations commenced. We have recorded a cumulative net loss of $50,622,858
through June 30, 2001 and anticipate recording losses in the near term.
Accordingly, we have a limited operating history on which to base our evaluation
of current business and prospects. Our short operating history makes it
difficult to predict future results, and there are no assurances that our
revenues will increase, or that we will achieve or maintain profitability or
generate sufficient cash from operations in future periods.
Our ability to achieve and sustain profitability would be adversely affected if
we:
. fail to effectively market and sell our services;
. fail to develop new and maintain existing relationships with clients;
. fail to continue to develop and upgrade our technology and network
infrastructure;
. fail to respond to competitive developments;
Page 19
. fail to introduce enhancements to our existing products and services to
address new technologies and standards; or
. fail to attract and retain qualified personnel.
Our operating results are also dependent on factors outside of our control,
such as strength of competition and the growth of the market for our services.
There is no assurance that we will be successful in addressing these risks, and
failure to do so could have a material adverse effect on our financial
performance.
We expect to incur losses in the near term, and if we are unable to
generate sufficient cash flow or raise the capital necessary to allow us to
continue to meet all of our obligations as they come due, our business could
suffer.
Our future revenues are not predictable, and our results could vary
significantly
Because of our limited operating history and the emerging nature of our
markets, we are unable to reliably forecast our revenues.
Our fixed expenses, which generally are comprised of the costs of personnel
and facilities, have been averaging approximately $700,000 per month, even after
giving effect to our recent reductions in personnel. Our expected expense levels
are based, in part, on our cash resources and planned revenues. If we are
unsuccessful in generating significant revenues or raising additional funds, we
will be unable to continue expenditures at current levels. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Need
for additional financing."
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors. These factors include:
. the demand for our services;
. the addition or loss of individual clients;
. the amount and timing of capital expenditures and other costs relating
to the expansion of our operations;
. fees for professional services associated with resolving issues related
to the Discrepant Shares;
. the introduction of new products or services by us or our competitors;
and
. general economic conditions and economic conditions specific to the
Internet, such as electronic commerce and online media.
Any one of these factors could cause our revenues and operating results to
vary significantly. In addition, as a strategic response to changes in the
competitive environment, we may from time to time make certain pricing, service
or marketing decisions or acquisitions that could significantly hurt our
operating results in a given period.
Due to all of the foregoing factors, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Furthermore, it
is possible that our operating results in one or more quarters will fail to meet
the expectations of investors. In such event, the market price of our common
stock could drop.
If we are unable to obtain funding, our customers and vendors may decide not to
do business with us
Page 20
If we are unable to continue funding our operations at our current levels,
and if customers and vendors become concerned about our business prospects, they
may decide not to conduct business with us, or may conduct business with us on
terms that are less favorable than those customarily extended by them. In that
event, our net sales would decrease and our business will suffer significantly.
We are not sure if the market will accept our systems
Our ability to succeed will depend on the following, none of which can be
assured:
. the effectiveness of our marketing and sales efforts;
. market acceptance of our current and future offerings;
. the reliability of our networks and services; and
. the extent to which end users are able to receive eBrochures at
tolerable download speeds.
We operate in a market that is at a very early stage of development, is
rapidly evolving, and is characterized by an increasing number of competitors
and risk surrounding market acceptance of new technologies and services.
Potential customers must accept eBrochures as a viable alternative to
traditional commercial advertising and brochure distribution. Because this
market is so new, it is difficult to predict its size and growth rate. If the
market fails to develop as we expect, our growth will be slower than expected.
Our success also depends on the market acceptance of our technology.
For example, congestion over the Internet may interrupt eBrochure broadcasts,
resulting in unsatisfying user experiences. Some users may be unwilling to
download eBrochures due to the large size of the files. During the quarter ended
June 30, 2001, 88% of the eBrochures we sent were delivered successfully;
however, widespread adoption of eBrochure technology depends on overcoming these
obstacles, improving audio and video quality and educating clients and users. If
our technology fails to achieve broad commercial acceptance, our growth will be
slower than expected.
We may make acquisitions of complementary technologies or businesses, which may
disrupt our business and be dilutive to our existing stockholders.
We intend to consider acquisitions of businesses and technologies on an
opportunistic basis, for example, our recent acquisition of Control Commerce,
Inc. and our announced intent to acquire the assets of Radical Communications,
Inc. Acquisitions of businesses and technologies involve numerous risks,
including the diversion of management attention, difficulties in assimilating
the acquired operations, loss of key employees from the acquired company, and
difficulties in transitioning key customer relationships. In addition, these
acquisitions may result in dilutive issuances of equity securities, the
incurrence of additional debt, large one-time expenses and the creation of
goodwill or other intangible assets that result in significant amortization
expense. Any acquisition may not provide the benefits originally anticipated,
and there may be difficulty in integrating the service offerings and customer
and supplier relationships gained through acquisitions with our own. Although we
attempt to minimize the risk of unexpected liabilities and contingencies
associated with acquired businesses through planning, investigation and
negotiation, such unexpected liabilities nevertheless may accompany such
acquisitions. We cannot guarantee that we will successfully identify attractive
acquisition candidates, complete and finance additional acquisitions on
favorable terms, or integrate the acquired businesses or assets into our own.
Any of these factors could materially harm our business or our operating results
in a given period.
Network and system failures could adversely impact our business
The performance, reliability and availability of our Web sites and network
infrastructure is critical to our reputation and ability to attract and retain
clients. Our systems and operations are vulnerable to damage or interruption
from earthquake, fire, flood, power loss, telecommunications failure, Internet
breakdowns, break-ins, tornadoes and similar events. We carry business
interruption insurance to compensate for losses that may occur, but insurance is
not guaranteed to remove all risk of loss. Services
Page 21
based on sophisticated software and computer systems often encounter development
delays and the underlying software may contain errors that could cause system
failures. Any system failure that causes an interruption could result in a loss
of clients and could reduce the attractiveness of our services.
We are also dependent upon Web browsers, Internet service providers and
online service providers to provide Internet users access to our clients, users
and Web sites. Users may experience difficulties due to system failures or
delays unrelated to our systems. These difficulties may hurt audio and video
quality or result in intermittent interruptions in broadcasting and thereby slow
our growth.
Circumvention of our security measures and viruses could disrupt our business
Despite the implementation of security measures, our networks may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Anyone who is able to circumvent security measures could steal
proprietary information or cause interruptions in our operations. Service
providers have occasionally experienced interruptions in service as a result of
the accidental actions of users or intentional actions of hackers. We may have
to spend significant capital to protect against security breaches or to fix
problems caused by such breaches. Although we have implemented security
measures, there can be no assurance that such measures will not be circumvented
in the future. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to users,
which could hurt our business.
Our dependence on short-term contracts could make future revenues volatile
Although some clients enter into multi-year agreements, 65% of our
revenues through June 30, 2001 have been derived from contracts with fewer than
three months duration. Consequently, our clients can generally stop using our
systems quickly and without penalty, thereby increasing our exposure to
competitive pressures. There can be no assurance that current clients will
continue to be clients, or that we will be able to attract new clients.
We depend on continued growth in use of the Internet
Rapid growth in use of the Internet is a recent phenomenon and there can
be no assurance that use of the Internet will continue to grow or that a
sufficient base of users will emerge to support our business. The Internet may
not be accepted as a viable medium for broadcasting advertising and brochure
distribution, for a number of reasons, including:
. inadequate development of the necessary infrastructure;
. inadequate development of enabling technologies;
. lack of acceptance of the Internet as a medium for distributing rich
media advertising; and
. inadequate commercial support for Web-based advertising.
To the extent that Internet use continues to increase, there can be no
assurance that the Internet infrastructure will be able to support the demands
placed upon it, and especially the demands of delivering high-quality video
content.
Furthermore, user experiences on the Internet are affected by access speed.
There is no assurance that broadband access technologies will become widely
adopted. In addition, the Internet could lose its viability as a commercial
medium due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased government regulation. Our business could suffer if use of the
Internet grows more slowly than expected, or if the Internet infrastructure does
not effectively support the growth that does occur.
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If we do not respond to technological change, we could lose or fail to develop
customers
The development of our business entails significant technical and business
risks. To remain competitive, we must continue to enhance and improve the
functionality and features of our technology. The Internet and the ecommerce
industry are characterized by:
. rapid technological change;
. changes in client requirements and preferences;
. frequent new product and service introductions embodying new
technologies; and
. the emergence of new industry standards and practices.
The evolving nature of the Internet could render our existing systems
obsolete. Our success will depend, in part, on our ability to:
. develop and enhance technologies useful in our business;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our current and prospective clients;
and
. adapt to technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely manner.
Future advances in technology may not be beneficial to, or compatible with,
our business. Furthermore, we may not use new technologies effectively or adapt
our systems to client requirements or emerging industry standards on a timely
basis. Our ability to remain technologically competitive may require substantial
expenditures and lead time. If we are unable to adapt to changing market
conditions or user requirements in a timely manner, we will lose clients.
We could face liability for Internet content
As a distributor of Internet content, we face potential liability for
negligence, copyright, patent or trademark infringement, defamation, indecency
and other claims based on the content of our broadcasts. Such claims have been
brought, and sometimes successfully pressed, against Internet content
distributors. Our general liability insurance may not be adequate to indemnify
us for all liability that may be imposed. Although we generally require our
clients to indemnify us for such liability, such indemnification may be
inadequate. Any imposition of liability that is not covered by insurance or by
an indemnification by a client could harm our business.
Our operating results could be impaired if we become subject to burdensome
government regulations and legal uncertainties concerning the Internet
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet, relating to:
. user privacy;
. pricing, usage fees and taxes;
. content;
. copyrights;
. distribution;
Page 23
. characteristics and quality of products and services; and
. online advertising and marketing.
The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity or growth of the Internet could decrease
demand for our products and services, reduce our revenues and margins and
increase our cost of doing business. Moreover, the applicability of existing
laws to the Internet is uncertain with regard to many important issues,
including property ownership, intellectual property, export of encryption
technology, libel and personal privacy. The application of laws and regulations
from jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services, could also harm our business.
Our stock price has been and may continue to be volatile
The trading price of our common stock has been and is likely to continue
to be highly volatile. For example, on March 14, 2000, our common stock closed
at $51.25 per share, and on August 13, 2001, our common stock closed at $0.78
per share. Our stock price could be subject to wide fluctuations in response to
factors such as:
. the average daily trading volume of our common stock;
. actual or anticipated variations in quarterly operating results and our
need for additional financing to fund our continuing operations;
. announcements of technological innovations, new products or services
by us or our competitors;
. the addition or loss of strategic relationships or relationships with
our key
. conditions or trends in the Internet, streaming media, media delivery,
and online commerce markets;
. changes in the market valuations of other Internet, online service, or
software companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, or capital commitments;
. legal or regulatory developments;
. additions or departures of key personnel;
. sales of our common stock; and
. general market conditions.
The historical volatility of our stock price may make it more difficult to
resell shares at prices you find attractive. See also "Risk Factors - We cannot
assure you that our common stock will continue to be listed on the Nasdaq
SmallCap Market."
In addition, the stock market in general, the Nasdaq SmallCap Market, the
market for Internet and technology companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of these companies. These broad
market and industry factors may reduce our stock price, regardless of our
operating performance.
Page 24
Our efforts to protect our intellectual property rights may not sufficiently
protect us and we may incur costly litigation to protect our rights
We have filed nineteen patent applications and we plan to file additional
patent applications in the future with respect to various additional aspects of
our technologies. In addition, we have received one patent on technology we
obtained in the Control Commerce acquisition. We mark our software with
copyright notices, and intend to file copyright registration applications where
appropriate. We have also filed several federal trademark registration
applications for trademarks and service marks we use. There can, however, be no
assurance that any patents, copyright registrations, or trademark registrations
applied for by us will be issued, or if issued, will sufficiently protect our
proprietary rights.
We also rely substantially on certain technologies that are not patentable
or proprietary and are therefore available to our competitors. In addition, many
of the processes and much of our technology are dependent upon our technical
personnel, whose skill, knowledge and experience are not patentable. To protect
our rights in these areas, we require all employees, significant consultants and
advisors to enter into confidentiality agreements under which they agree not to
use or disclose our confidential information as long as that information remains
proprietary. We also require that our employees agree to assign to us all rights
to any inventions made during their employment relating to our activities, and
not engage in activities similar to ours during the term of their employment.
There can be no assurance, however, that these agreements will provide
meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure of such trade
secrets, know-how or proprietary information. Further, in the absence of patent
protection, we may be exposed to competitors who independently develop
substantially equivalent technology or otherwise gain access to our trade
secrets, knowledge or other proprietary information.
Despite our efforts to protect our intellectual property, a third party or
a former employee could copy, reverse-engineer or otherwise obtain and use our
intellectual property or trade secrets without authorization or could develop
technology competitive to ours.
Our intellectual property may be misappropriated or infringed upon.
Consequently, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our confidential information or trade
secrets, or to determine the validity or scope of the rights of others.
Litigation could result in substantial costs and diversion of management and
other resources and may not successfully protect our intellectual property.
Additionally, we may deem it advisable to enter into royalty or licensing
agreements to resolve such claims. Such agreements, if required, may not be
available on commercially reasonable or desirable terms or at all.
Our technology may infringe on the rights of others
Even if the patents, copyrights and trademarks we apply for are granted,
they do not confer on us the right to manufacture or market products or services
if such products or services infringe on intellectual property rights held by
others. If any third parties hold conflicting rights, we may be required to stop
making, using, or marketing one or more of our products or to obtain licenses
from and pay royalties to others, which could have a significant and material
adverse effect on us. There can be no assurance that we will be able to obtain
or maintain any such license on acceptable terms or at all.
We may also be subject to litigation to defend against claims of
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. If third parties hold trademark,
copyright or patent rights that conflict with our business, then we may be
forced to litigate infringement claims that could result in substantial costs to
us. In addition, if we were unsuccessful in defending such a claim, it could
have a negative financial impact. If third parties prepare and file applications
in the United States that claim trademarks used or registered by us, we may
oppose those applications and be required to participate in proceedings before
the United States Patent and Trademark Office to determine priority of rights to
the trademark, which could result in substantial costs to us. An adverse outcome
in litigation or privity proceedings could require us to license disputed rights
from third parties or to cease using such rights. Any litigation regarding our
proprietary rights could be costly, divert
Page 25
management's attention, result in the loss of certain of our proprietary rights,
require us to seek licenses from third parties and prevent us from selling our
services, any one of which could have a negative financial impact. In addition,
inasmuch as we broadcast content developed by third parties, our exposure to
copyright infringement actions may increase because we must rely upon such third
parties for information as to the origin and ownership of such licensed content.
We generally obtain representations as to the origin and ownership of such
licensed content and generally obtain indemnification to cover any breach of
such representations; however, there can be no assurance that such
representations will be accurate or given, or that such indemnification will
adequately protect us.
Our officers and directors control a significant percentage of our outstanding
stock which will enable them to exert control over many significant corporate
actions and may prevent a change in control that would otherwise be beneficial
to our stockholders
Our officers and directors beneficially own approximately 17% of our
outstanding common stock and 25% of our Series B preferred stock. This level of
ownership could have a substantial impact on matters requiring the vote of the
stockholders, including the election of our directors and most of our corporate
actions. This control could delay, defer or prevent others from initiating a
potential merger, takeover or other change in our control, even if these actions
would benefit our stockholders and us. This control could adversely affect the
voting and other rights of our other stockholders and could depress the market
price of our common stock.
The length of our sales cycle increases our costs
Many of our potential customers conduct extensive and lengthy evaluations
before deciding whether to purchase or license our products. In our experience
to date we've seen the sales cycle range anywhere up to six months. While the
potential customer is making this decision, we continue to incur salary, travel
and other similar costs of following up with these accounts. Therefore, the risk
associated with our lengthy sales cycle is that we may expend substantial time
and resources over the course of the sales cycle only to realize no revenue from
such efforts if the customer decides not to purchase from us. Any significant
change in customer buying decisions or sales cycles for our products could have
a material adverse effect on our business, results of operations, and financial
conditions.
We have a limited operating history in international markets
We have only limited experience in operating in international markets.
Although we have distributed our products and services internationally since
August 1999, we had no experience in international operations prior to the
acquisition of our Hong Kong-based subsidiary, Fusionactive Ltd., in April 2000.
To date, we have recognized approximately $1.2 million of revenue related to our
international operations in eastern Asia. There can be no assurance that our
international operations will be successful.
There are risks inherent in conducting international operations
There are many risks associated with our international operations in
eastern Asia, including, but not limited to:
. difficulties in collecting accounts receivable and longer collection
periods;
. changing and conflicting regulatory requirements;
. potentially adverse tax consequences;
. tariffs and general export and customs restrictions;
. difficulties in staffing and managing foreign operations;
. political instability;
Page 26
. fluctuations in currency exchange rates;
. the need to develop localized versions of our products;
. national standardization and certification requirements;
. seasonal reductions of business activity; and
. the impact of local economic conditions and practices.
Any of the above-listed risks could have a material adverse effect on our
future business, financial condition, or results of operations.
International markets for online marketing are in their very early stages of
development
We distribute MindArrow Messages globally. To date, we have developed or
modified into foreign language text and delivered eBrochures to recipients in
the United Kingdom, France, Switzerland, Austria, Norway, Sweden, Iceland,
Finland, Denmark, Greece, Lebanon, Mexico, Panama, Peru, Philippines, Australia,
Singapore, Hong Kong, China, and Taiwan. The markets for online advertising and
direct marketing in these countries are generally in earlier stages of
development than in the United States, and we cannot assure you that the market
for, and use of online advertising and direct marketing in international markets
such as these and others will be significant in the future. Factors that may
account for slower growth in the online advertising and direct marketing markets
include, but are not limited to:
. slower growth in the number of individuals using the Internet
internationally;
. privacy concerns;
. a lower rate of advertising spending internationally than in the United
States; and
. a greater reluctance to use the Internet for advertising and direct
marketing.
Any of the above-listed risks could have a material adverse effect on our
future business, financial condition, or results of operations.
We are subject to risks associated with governmental regulation and legal
uncertainties
We are subject to general business laws and regulations. These laws and
regulations, as well as new laws and regulations that may be adopted in the
United States and other countries with respect to the Internet, may impede the
growth of the Internet. These laws may relate to areas such as advertising,
taxation, personal privacy, content issues (such as obscenity, indecency, and
defamation), copyright and other intellectual property rights, encryption,
electronic contracts and "digital signatures," electronic commerce liability,
email, network and information security, and the convergence of traditional
communication services with Internet communications, including the future
availability of broadband transmission capability. Other countries and political
organizations are likely to impose or favor more and different regulation than
that which has been proposed in the United States, thus furthering the
complexity of regulation. In addition, state and local governments may impose
regulations in addition to, inconsistent with, or stricter than, federal
regulations. The adoption of such laws or regulations, and uncertainties
associated with their validity, applicability, and enforcement, may affect the
available distribution channels for and costs associated with our products and
services, and may affect the growth of the Internet. Such laws or regulations
may therefore harm our business.
We do not know for certain how existing laws governing issues such as
privacy, property ownership, copyright and other intellectual property issues,
taxation, illegal or obscene content, retransmission of media, and data
protection, apply to the Internet. The vast majority of such laws were
Page 27
adopted before the advent of the Internet and related technologies and do not
address the unique issues associated with the Internet and related technologies.
Most of the laws that relate to the Internet have not yet been interpreted.
Changes to or the interpretation of these laws could:
. limit the growth of the Internet;
. create uncertainty in the marketplace that could reduce demand for our
products and services;
. increase our cost of doing business;
. expose us to significant liabilities associated with content
distributed or accessed through our products or services, and with our
provision of products and services, and with the features or performance
of our products;
. lead to increased product development costs, or otherwise harm our
business; or
. decrease the rate of growth of our user base and limit our ability to
effectively communicate with and market to our user base.
Any of the above-listed consequences could have a material adverse effect
on our future business, financial condition, or results of operations.
We may be subject to legal liability in connection with the data collection
capabilities of our products and services
Our products are interactive Internet applications that by their very
nature require communication between a client and server to operate. To provide
better consumer experiences and to operate effectively, our products
occasionally send information to servers at MindArrow. Many of the services we
provide also require that users provide information to us. We post privacy
policies concerning the use and disclosure of our user data. Any failure by us
to comply with our posted privacy policies could impact the market for our
products and services, subject us to litigation, and harm our business.
In addition, the Child Online Privacy Protection Act ("COPPA") became
effective as of April 21, 2000. COPPA requires operators of commercial Web sites
and online services directed to children (under 13), and general audience sites
that know that they are collecting personal information from a child, to:
. provide parents notice of their information practices;
. obtain verifiable parental consent before collecting a child's personal
information, with certain limited exceptions;
. give parents a choice as to whether their child's information will be
disclosed to third parties;
. provide parents access to their child's personal information and allow
them to review it and/or have it deleted;
. give parents the opportunity to prevent further use or collection of
information; not require a child to provide more information than is
reasonably necessary to participate in an activity; and
. maintain the confidentiality, security, and integrity of information
collected from children.
We do not knowingly collect and disclose personal information from such
minors, and therefore believe that we are fully compliant with COPPA. However,
the manner in which COPPA may be interpreted and enforced cannot be fully
determined, and thus COPPA and future legislation such as COPPA could subject us
to potential liability, which in turn would harm our business.
Page 28
Future sales of our common stock may depress our stock price
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares are available for sale, could
adversely affect the market price for our common stock. As of June 30, 2001, we
had 11,456,666 shares of common stock outstanding. A significant number of these
shares are not publicly traded but are available for immediate resale to the
public, subject to certain volume limitations under the securities laws. We also
have reserved shares of our common stock as follows:
. 1,004,949 shares are reserved for issuance upon the conversion of our
outstanding shares of Series B preferred stock;
. 1,559,550 shares are reserved for issuance upon the conversion of our
outstanding shares of Series C preferred stock;
. 2,000,880 shares are reserved for issuance upon the exercise of
warrants;
. 3,000,000 shares are reserved for issuance under our 1999 Stock Option
Plan; and
. 1,000,000 shares are reserved for issuance under our 2000 Stock Option
Plan.
Shares underlying vested options are generally eligible for immediate
resale in the public market.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that we currently have material exposure to interest
rate, foreign currency exchange rate or other relevant market risks.
Interest Rate and Market Risk. Our exposure to market risk for changes
-----------------------------
in interest rates relates primarily to our investment profile. As of June 30,
2001, our investment portfolio consisted primarily of cash and cash equivalents,
substantially all of which were held at one financial institution. We do not
use derivative financial instruments in our investment portfolio.
Foreign Currency Exchange Risk. We do not believe that we currently have
------------------------------
material exposure to foreign currency exchange risk because of the relative
insignificance of our foreign subsidiaries. We intend to assess the need to use
financial instruments to hedge currency exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes.
Page 29
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights. Except as
described below, the Company is not currently aware of any legal proceedings or
claims that the Company believes will have, individually or in the aggregate, a
material adverse effect on the Company's consolidated financial position or
results of operations.
For a description of certain of these matters, see Note D2 to our
consolidated financial statements, which is incorporated by reference in
response to this item.
Item 2. Changes in Securities and Use of Proceeds
During the nine months ended June 30, 2001, we issued to consultants
warrants to purchase 70,000 shares of common stock. The warrants are
exercisable at prices ranging from $5 per share to $8 per share, vest over
periods up to 3 years, and expire between January 2002 and October 2005. These
warrants were issued without registration under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon the exemption from the
registration requirements of the Securities Act set forth in Section 4(2) of the
Securities Act.
In May 2001, we acquired Control Commerce, Inc. in exchange for 800,000
shares of MindArrow common stock, 60,000 shares of MindArrow Series C preferred
stock convertible into 120,000 shares of common stock, and a warrant to purchase
12,000 shares of MindArrow common stock pursuant to an exemption from
registration provided by Rule 506 of Regulation D of the Securities Act of 1933,
as amended. This transaction was made without general solicitation or
advertising. The Company believes that each purchaser (i) was an accredited
investor or a sophisticated investor (either alone or through its
representative) with access to all relevant information necessary, (ii) was
acquiring the MindArrow securities solely for his or her own account and for
investment, and (iii) does not intend to offer, sell or dispose of such
securities except in compliance with the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 MindArrow Systems, Inc. Restated Certificate of Incorporation
3.2 MindArrow Systems, Inc. Bylaws, as corrected
(b) Reports on Form 8-K
1. On June 18, 2001, MindArrow filed a report on Form 8-K relating
to an announcement regarding the completion of an acquisition of
Control Commerce, Inc.
2. On August 1, 2001, MindArrow filed a report on Form 8-K relating
to an announcement regarding the signing of a letter of intent
to acquire the assets of Radical Communication, Inc.
Page 30
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.
MindArrow Systems, Inc.
------------------------------------
(Registrant)
Date: August 14, 2001 /s/ ROBERT I. WEBBER
------------------------------------
Robert I. Webber
Chief Executive Officer, President,
(Principal Executive Officer), and
Director
Date: August 14, 2001 /s/ MICHAEL R. FRIEDL
------------------------------------
Michael R. Friedl
Chief Financial Officer, Treasurer,
(Principal Financial and Accounting Officer)
Page 31