UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
____________________
  
FORM 10-Q
____________________
    
  
For the quarterly period ended June 30, 2017
  
  
For the transition period from ____________ to____________
  
Commission File No. 333-176256
  
MEGANET CORPORATION
(Exact name of Registrant as specified in its charter)

 
 
 Nevada
80-0376822
(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
  

2510 E. Sunset Rd. Unit 5-777
Las Vegas, NV  89120
(Address of Principal Executive Offices)

(702) 987-0087
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the Registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") 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 [  ] No [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revisited financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] No [X ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.      

Not applicable.

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:  August 23, 2017 – 100,000,000 shares of common stock, $0.001 par value.





1


 
MEGANET CORPORATION
Table of Contents

 
 

 
 
Page
PART I – FINANCIAL INFORMATION
  3
Item 1  Financial Statements
  3
Item 2  Management's Discussion and Analysis of Financial Condition and Results of Operations
  8
Item 3  Quantitative and Qualitative Disclosures About Market Risk
  13
Item 4  Controls and Procedures
  13
PART II – OTHER INFORMATION
  14
Item 1  Legal Proceedings
  14
Item 1A  Risk Factors
  14
Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  14
Item 3  Defaults Upon Senior Securities
  14
Item 4  Mine Safety Disclosures
  14
Item 5  Other Information
  14
Item 6  Exhibits
  14
SIGNATURES
  15




2


 
PART I

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
 ASSETS
 
June 30,
   
March 31,
 
   
2017
   
2017
 
     
(Unaudited)
       
Current assets:
           
 Cash
 
$
4,350
   
$
164
 
Total current assets
   
4,350
     
164
 
                 
Total assets
   
4,350
     
164
 
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
Current liabilities:
               
Accounts payable and accrued liabilities
   
1,423,840
     
1,368,700
 
Officer loan
   
819,965
     
803,113
 
Total current liabilities
   
2,243,805
     
2,171,813
 
                 
Total liabilities
   
2,243,805
     
2,171,813
 
                 
Stockholders' equity (deficit):
               
Common stock; $0.001 par value, 100,000,000 shares authorized and
               
100,000,000 and 100,000,000 shares issued and outstanding, respectively
   
100,000
     
100,000
 
Additional paid-in capital
   
3,021,708
     
3,003,880
 
Accumulated deficit
   
(5,361,163
)
   
(5,275,529
)
Total stockholders' equity (deficit)
   
(2,239,455
)
   
(2,171,649
)
                 
Total liabilities and stockholders' equity (deficit)
 
$
4,350
   
$
164
 
 

The accompanying notes are an integral part of these unaudited financial statements.
3
 
MEGANET CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
     
For the Three Months Ended
June 30,
 
   
2017
   
2016
 
             
             
Revenues
 
$
--
   
$
120
 
                 
Cost of revenues
   
--
     
--
 
                 
Gross profit
   
--
     
120
 
                 
Operating expenses:
               
General and administrative
   
7,806
     
8,617
 
Depreciation
   
--
     
4,204
 
Compensation and related payroll taxes
   
30,000
     
30,012
 
  Rent
   
30,000
     
30,000
 
Total operating expenses
   
67,806
     
72,833
 
                 
Loss before other expenses
   
(67,806
)
   
(72,713
)
                 
Other expense
               
Interest expense
   
(17,828
)
   
(19,005
)
Total other expense
   
(17,828
)
   
(19,005
)
                 
Loss before income taxes
   
(85,634
)
   
(91,718
)
                 
Provision for income taxes
   
-
     
-
 
                 
Net loss
 
$
(85,634
)
 
$
(91,718
)
                 
Basic loss per common share
 
$
(0.00
)
 
$
(0.00
)
                 
Basic weighted average common
               
shares outstanding
   
100,000,000
     
100,000,000
 
 
 
 
The accompanying notes are an integral part of these unaudited financial statements.
4

 
MEGANET CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
      
For the Years Ended
March 31,
 
   
2017
   
2016
 
             
Cash flows from operating activities:
           
Net loss
 
$
(85,634
)
 
$
(91,718
)
Adjustments to reconcile net loss to net
               
 cash (used) provided by operating activities:
               
Depreciation
   
--
     
4,204
 
Imputed interest on officer advance
   
17,828
     
19,005
 
Changes in operating assets and liabilities:
               
Increase in accounts payable and accrued expenses
   
55,140
     
65,792
 
Net cash used in operating activities
   
(12,666
)
   
(2,717
)
                 
Cash flows from investing activities:
   
-
     
-
 
                 
Cash flows from financing activities:
               
Advances from officer
   
27,450
     
3,597
 
Repayment of officer advances
   
(10,598
)
   
(2,384
)
Net cash provided by financing activities
   
16,852
     
1,213
 
                 
Net change in cash
   
4,186
     
(1,504
)
                 
Cash, beginning of period
   
164
     
1,627
 
                 
Cash, end of period
 
$
4,350
   
$
123
 
     
-
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for interest
 
$
-
   
$
-
 
Cash paid for taxes
 
$
-
   
$
-
 
 
 
The accompanying notes are an integral part of these unaudited financial statements.
5

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 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 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 financial statements be read in conjunction with Meganet's most recent audited financial statements.  Operating results for the three months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending March 31, 2018.

6
2.
GOING CONCERN

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 $5,361,163 as of June 30, 2017.  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.

If sales are not sufficient to cover the next 12 months of cash operating expenses the Company's CEO has agreed to contribute additional amounts to capital as needed to cover operating expenses.

3.
RELATED PARTY TRANSACTIONS

Officer loan – During the three month period ending June 30, 2017, the Company received cash advances from its president in the amount of $27,450 and repaid $10,598. 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, 2017 and March 31, 2017 was $819,965 and $803,113, 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, 2017 and 2016, interest has been imputed and charged to additional paid-in capital in the amount of $17,828 and $19,005, respectively.
 
Employment agreements – as of June 30, 2017 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 $30,000 and $30,012 for the three month period ending June 30, 2017 and 2016, respectively.  As of June 30, 2017 and March 31, 2017, $1,021,329 and $991,329 of total compensation was unpaid and accrued in current liabilities, respectively.
 
7
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.
 
8
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, 2017, the Company had cash in the amount of $4,350 compared to $2,243,805 in current liabilities and a working capital deficit of $2,239,455 at June 30, 2017 compared to $2,171,649 at March 31, 2017. 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, 2017, our CEO advanced to the Company $27,450 and was repaid $10,598 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.
 
9
 
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.
 
10
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 quiet periods in between.

11
Comparison of the Fiscal Quarters Ended June 30, 2017 and 2016
 
Operating results for the fiscal quarters ended June 30, 2017 and 2016 yielded gross profit of $0 and $120 respectively, operating expenses of $67,806 and $72,833 respectively and net loss of $85,634 and $91,718 respectively.  The decrease in operating expenses was mainly due to a $4,204 decrease in depreciation expense in the three months ended June 30, 2017, compared to the three months ended June 30, 2016. Non-cash depreciation expense was $0 for the quarter ended June 30, 2017 and $4,204 for the quarter ended June 30, 2016.
 
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, 2017, 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.
 
12
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

The Company qualifies as a "smaller reporting company" as defined in 17 C.F.R. §229.10(f)(1), and is not required to provide information by this item.

Item 4.  Controls and Procedures.

Evaluation of disclosure controls and procedures
  
Under the supervision and with the participation of our management including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure, and (iii) is not subject to effective duel control allowing for appropriate segregation of duties.

Changes in internal control over financial reporting

Our management, with the participation of the chief executive officer and chief financial officer, has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
13
PART II - OTHER INFORMATION
  
Item 1. Legal Proceedings.
  
None
  
Item 1A.  Risk Factors.

The Company qualifies as a "smaller reporting company" as defined in 17 C.F.R. §229.10(f)(1), and is not required to provide information by this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
None

Item 3. Defaults Upon Senior Securities.
  
Not applicable.
  
Item 4. Mine Safety Disclosures.
  
Not applicable.
  
Item 5. Other Information.
  
None.

Item 6. Exhibits.

Exhibit No.                          Identification of Exhibit

 
 
3.1
 
3.2
 
31
  
32
Articles of Incorporation (1)
 
Bylaws (1)
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act.
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
Interactive Data Files


(1)
Attached as an exhibit to Form S-1 filed on August 12, 2011.
14

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
 
MEGANET CORPORATION

 
 
 
 
 
Date:
August 23, 2017
 
By:
/s/Saul Backal
 
 
 
 
Saul Backal, CEO
 
 
 
 
 


15
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