Item 1. Financial Statements
The Financial Statements of the Registrant required to be filed with this 10-Q Quarterly Report were prepared by management and commence below, together with related notes. In the opinion of management, the Financial Statements fairly present the financial condition of the Registrant.
MEGANET CORPORATION
BALANCE SHEETS
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ASSETS
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June 30,
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March 31,
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2016
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2016
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(Unaudited)
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Current assets:
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Cash
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$
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123
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$
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1,627
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Total current assets
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123
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1,627
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Property and equipment, net
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13,900
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18,104
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Total assets
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$
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14,023
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$
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19,731
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
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Accounts payable and accrued liabilities
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$
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1,205,559
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$
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1,139,767
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Officer loan
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761,498
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760,285
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Total current liabilities
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1,967,057
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1,900,052
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Total liabilities
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1,967,057
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1,900,052
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Stockholders'
equity (
deficit
):
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Common stock; $0.001 par value, 100,000,000 shares authorized and
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100,000,000 and 100,000,000 shares issued and outstanding, respectively
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100,000
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100,000
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Additional paid-in capital
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2,944,560
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2,925,555
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Accumulated deficit
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(4,997,594
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)
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(4,905,876
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)
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Total stockholders' deficit
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(1,953,034
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)
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(1,880,321
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)
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Total liabilities and stockholders' deficit
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$
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14,023
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$
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19,731
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The accompanying notes are an integral part of these unaudited financial statements.
MEGANET CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months Ended
June 30,
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2016
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2015
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Revenues
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$
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120
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$
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81,083
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Cost of revenues
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--
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--
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Gross profit
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120
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81,083
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Operating expenses:
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General and administrative
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8,617
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19,008
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Depreciation
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4,204
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10,898
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Compensation and related payroll taxes
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30,012
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38,108
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Rent
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30,000
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30,131
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Total operating expenses
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72,833
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98,145
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Loss before other expenses
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(72,713
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)
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(17,062
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)
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Other income (expenses)
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Bitcoin mining income
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--
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2,385
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Interest expense
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(19,005
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)
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(15,839
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)
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Total other income (expenses)
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(19,005
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)
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(13,454
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)
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Loss before income taxes
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(91,718
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)
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(30,516
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)
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Provision for income taxes
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-
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-
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Net loss
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$
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(91,718
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)
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$
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(30,516
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)
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Basic loss per common share
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$
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(0.00
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)
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$
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(0.00
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)
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Basic weighted average common
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shares outstanding
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100,000,000
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100,000,000
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The accompanying notes are an integral part of these unaudited financial statements.
MEGANET CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Three Months Ended
June 30,
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2016
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2015
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Cash flows from operating activities:
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Net loss
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$
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(91,718
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)
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$
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(30,516
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)
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Adjustments to reconcile net loss to net
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cash (used) provided by operating activities:
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Depreciation
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4,204
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10,898
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Imputed interest on officer advance
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19,005
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15,839
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Changes in operating assets and liabilities:
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Increase in accounts payable and accrued expenses
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65,792
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74,523
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Increase (decrease) in deferred revenue
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-
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(40,000
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)
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Net cash used in operating activities
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(2,717
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)
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30,744
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Cash flows from financing activities:
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Advances from officer
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3,597
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550
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Repayment of officer advances
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(2,384
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)
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(31,215
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)
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Net cash provided by financing activities
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1,213
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(30,665
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)
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Net change in cash
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(1,504
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)
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|
79
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Cash, beginning of period
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1,627
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|
94
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Cash, end of period
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$
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123
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$
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173
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid for interest
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$
|
-
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|
|
$
|
-
|
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Cash paid for taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these unaudited financial statements.
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1.
|
DESCRIPTION OF BUSINESS AND HISTORY
|
Meganet Corporation was incorporated in Nevada on March 26, 2009 (the "Company" or "Meganet"). Prior to the formation of the current entity, a now dissolved entity under the name Meganet Corporation was incorporated in California with common ownership and similar business objectives. The integration of the Company's operations from the now dissolved California company to the Nevada company is considered a recapitalization due to the common ownership resulting in the assets and liabilities being recorded at a carryover basis as determined under accounting principles generally accepted in the United States of America. The former entity had been dissolved before incorporation on March 26, 2009.
Meganet is focused on the development of data security solutions for enterprise, large organizations and corporations around the globe, including the U.S. Department of Defense, Military Intelligence and the Federal Government. The Company's data security solutions include a patented encryption algorithm which enhances security exponentially. The Company out-sources the manufacture of its counter-IED products, including bomb jammers, dismounted backpack portable jammers and facility jammers. The Company also develops and sells cell phone, satellite and wireless interceptors. Other data security solutions include encrypted cell phones, land lines, fax, PDA, radio, and satellites. Intelligence and counter-intelligence solutions include the development of SPY and RAT phones and devices for intelligence gathering. Counter-intelligence solutions include bugs, bug detectors, bomb sniffers, miniature cameras and digital video recorders. The Company maintains technology development, executive and sales offices in Las Vegas, Nevada.
The accompanying unaudited condensed consolidated financial statements have been prepared by Meganet pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements include normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with Meganet's most recent audited financial statements. Operating results for the three months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending March 31, 2017.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and has an accumulated deficit of $4,997,594 as of June 30, 2016. The Company requires capital for its contemplated operational and marketing activities. The Company's ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company's contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
Management anticipates that that there will be sales sufficient to cover the next 12 months of cash operating expenses; however, there can be no surety that anticipated sales will materialize. In order to mitigate the risk related with this uncertainty, the CEO has agreed to contribute additional amounts to capital as needed to cover operating expenses.
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3.
|
RELATED PARTY TRANSACTIONS
|
Officer loan
– During the three month period ending June 30, 2016, the Company received cash advances from its president in the amount of $3,597 and repaid $2,384. All amounts advanced to the Company are unsecured, non-interest bearing and due upon demand by the president. The balance of advances due at June 30, 2016 and March 31, 2016 was $761,498 and $760,285, respectively.
In accordance with FASB ASC 835-30 "Imputation of Interest", interest has been imputed on all advances made to Company by the president. During the three month period ending June 30, 2016 and 2015, interest has been imputed and charged to additional paid-in capital in the amount of $19,005 and $15,839, respectively.
Employment agreements
– as of June 30, 2016 the Company had only one employment agreement which was with the President and majority shareholder. The employment agreement stipulates that the President is to receive a base salary of $120,000 per annum. The agreement also contains a provision allowing for a commission to be paid equal to 10% of gross sales achieved by the President. The total expense related to this agreement was $30,012 and $38,108 for the three month period ending June 30, 2016 and 2015, respectively. As of June 30, 2016 and March 31, 2016, $901,329 and $871,317 of total compensation was unpaid and accrued in current liabilities, respectively.
Subsequent to the balance sheet date the Company received cash advances from its president in the amount of $1,900 in order to cover certain obligations that were due and repaid $6,235. All amounts advanced to the Company are unsecured, non-interest bearing and due upon demand by the president.
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words "may," "would," "could," "should," "expects," "projects," "anticipates," "believes," "estimates," "plans," "intends," "targets" or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Business Operations
Meganet is focused on the development of data security solutions for enterprise, large organizations and corporations around the globe, including the U.S. Department of Defense, Military Intelligence and the Federal Government. The Company has developed and does develop products that it believes are attractive and important to these markets.
Working with government in a business capacity can be a long and arduous process. Governments and their agencies have constant budget restraints and lengthy product procurement processes. In many if not in most cases, a bidding process is required before an order for goods can be placed with a private supplier. Before products can be sold to the U.S. Government or to any of its agencies, the product and/or its supplier must be certified by the U.S. Government, which certification is not easy to obtain. From the time a product is developed until the time it is actually shipped to an agency in return for payment can be months if not years.
The financial statements that form part of this annual report have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our independent accountants that audited the financial statements observed that the Company requires capital for its contemplated operational and marketing activities and that the Company's ability to raise additional capital through the future issuances of common stock is unknown and that the obtainment of additional financing, the successful development of the Company's contemplated plan of operations, and its transition to the attainment of profitable operations are necessary for the Company to continue operations. The independent accountants concluded that the ability to successfully resolve these factors raise substantial doubt about the Company's ability to continue as a going concern.
Our management has been with Meganet from its inception and has in the past shepherded all software products from the development stage through the government procurement process to final delivery and payment. Management believes that despite the Company's current illiquid position, the Company is in a position to receive significant income in the upcoming 18 to 24 months from the sale of products in the so-called product pipeline. Being in the pipeline does not mean that product has necessarily been bought, sold or ordered. It does mean that products are somewhere in the bidding and/or procurement process and in management's opinion have a reasonable chance of becoming orders, having a portion of those orders delivered and thereby producing collected revenues for the Company in material amounts within the next 18 to 24 months. Management reasonably expects 50% of the potential product sales in its pipeline to produce revenue.
Liquidity
At June 30, 2016, the Company had cash in the amount of $123 compared to $1,967,057 in current liabilities. On a monthly basis the Company has fixed expenditures including without limitation rent and salary in the approximate amount of $20,000. This $20,000 includes the $10,000 monthly salary of our CEO which he does not take but rather accrues if money is not available for payment of the salary. Taking this into consideration, the Company needs $15,000 per month which equals $180,000 for 12 months to sustain operations and estimates it will need $180,000 in additional capital to sustain business operations over the next twelve months. Our CEO will lend the full $180,000 to Meganet, if cash is not otherwise available within the Company. Two thirds or 67% of this amount will pay rent, approximately 13% will pay property taxes, approximately 5% will pay utilities, 10% will pay salary and the remaining 5% will pay for maintenance and miscellaneous office expenses such as mail and shipping expense and office supplies. During the three months ended June 30, 2016, our CEO advanced to the Company $3,597 and was repaid $2,384 to meet the financial needs of the Company.
It is common for companies to resolve illiquid positions by attempting to raise additional working capital through the sale of equity capital or short term borrowing from third parties. However, our management does not believe this will be necessary. Rather management believes there will be sales sufficient to cover the next 18 to 24 months of cash operating expenses; however, there can be no surety that anticipated sales will materialize. Also, in the event that sales anticipated during the next 18 to 24 months are funded in the later end of the 18 to 24 month period, it will be necessary for the Company to procure additional operating capital during the early months of the next 18 to 24 month period. In order to provide for this potential situation, our CEO has agreed to contribute additional amounts to capital as needed to cover operating expenses.
Background to Understanding the Financial Results for the Past Three Years
To understand Meganet's financial results for the past three years, it is necessary to understand its sales cycle which is different from traditional companies that may have sales on a daily, weekly and/or monthly basis. Meganet's sales cycle is highly sporadic as a result of its product lines and its customer mix.
Product Lines
Meganet is a technology company supplying world markets with products primarily instrumental in military defense, personal protection, data protection, home land security and other intelligence and counter-intelligence uses. Examples of products for these uses are bomb jammers and cell phone interceptors.
This product base lends itself to sporadic sales cycles for the following reasons. In times of war which can come upon a country quickly, a country will have immediate need of products for military defense uses such as bomb jammers. In times of peace, bomb jammers may not be needed for many years. To the contrary, as a country develops and implements a long term homeland security strategy, it may put out bids for certain types of intelligence and counter-intelligence products that it may leave out to bid for one to two years. To participate in such a bidding process, Meganet must maintain protectable state of the art technologies over a lengthy bidding process that it can deliver in quick fashion in the event it is awarded the bid for a particular product.
Customer Mix
Meganet's focus is on government and military markets which has advantages and disadvantages. Advantages include the fact that governments have deep pockets and when they really need a product they can procure it and pay for it. Also, when a company such as Meganet has a technology that a government really needs, the product can sustain a large margin in the sales price. In addition, technology is often scalable. Once developed, products based upon a technology can bring close to a 100% return.
Disadvantages in selling to governments and militaries include the fact that there is fierce competition for these lucrative markets and large suppliers are notorious for using underhanded methods. Also, governments are subject to budgetary issues and budgetary crises and ever changing priorities for fixed budgeted funds. Governments have bidding requirements. This can be good and bad. Bidding does allow for companies such as Meganet to bid against the large suppliers. However, it makes for lengthy and unwieldy sales cycles that make it difficult to predict and sustain cash flow.
Examples Illustrative of Meganet's Sales Cycle
A good way to understand Meganet's sales cycle is to see examples of past sales. Meganet obtained its product base and its business plan from a company called Meganet Corporation, a California corporation ("Meganet California"). In 2002, Meganet California made a sale to the U.S. Department of Labor. After soliciting the U.S. Department of Labor for over a year, Meganet California received a software order for $4,200,000. Development costs of the software had been expensed as they were incurred and since it was software it had no production cost. Therefore the sale was virtually 100% profit to the company at the time it was realized. However, in the 12 months leading to this sale, total sales were only $100,000.
Another example is Meganet California's sale to the U.S. Department of Transportation (the "DOT") in 2005. After pursuing a sale for only three months which would typically be just the beginning of a solicitation cycle, an internal security breach at the DOT heightened security concerns and it issued Meganet California a $10,000,000 contract immediately. In the 12 months prior to the sale, Meganet California had sales of under $1,000,000 dollars total.
A third example is a sale to the U.S. Department of Veteran Affairs (the "DVA") in 2007. Meganet California had been soliciting the DVA's business for three years trying to sell a biometric USB storage device without success. One day without prior notice, Meganet California was selected as the sole source provider of biometric USB storage devices nationwide to over 5,000 facilities. Like before, sales for the prior 12 months had been under $1,000,000.
For the past two years, Meganet has been working hard toward securing some large sales which it believes will materialize in the near future. However, the financial statements included in this annual report show sales minimal sales. However, this pattern of sporadic sales is typical for this Company.
Our sporadic sales cycle is not the only reason for the lack of sales in the prior two years. The global economic crisis has made many of our customers put purchases on hold. The U.S. government in particular has had many departments put projects on hold, cancel some existing projects and in many cases simply run out of budget for new products. Also in the private sector, the economic downturn has made the purchase of products like ours not a possibility at this time.
Meganet is a company that goes from one large sale to the next with low or quite periods in between.
Comparison of the Fiscal Quarters Ended June 30, 2016 and 2015
Operating results for the fiscal quarters ended June 30, 2016 and 2015 yielded gross profit of $120 and $81,083 respectively, operating expenses of $72,833 and $98,145 respectively and net loss of $91,718 and $30,516 respectively. Non-cash depreciation expense was $4,204 for the quarter ended June 30, 2016 and $10,898 for the quarter ended June 30, 2015, and was responsible for some of the net loss for both three month periods.
Contractual Obligations
The Company has no long-term debt obligations, capital lease obligations, purchase obligations or other long-term liabilities. The Company pays rent of $10,000 per month for its office and shop space on a month to month basis.
Off-balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
No Undisclosed Material Trends or Events
There are no trends, events or developments that occurred during the fiscal quarter ended June 30, 2016, or from June 30, 2016 through the date of this quarterly report that would indicate or would be a material departure from the financial information set forth in this quarterly report. Furthermore, there are no other undisclosed events or events likely to occur, of which management is aware, that would materially affect the business and/or financial information set forth in this quarterly report.