SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] 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 001-16381
CERISTAR, INC.
(Exact name of the registrant as specified in its charter)
DELAWARE 87-0642448
(State or other jurisdiction (IRS employer identification number)
of incorporation or organization)
50 WEST BROADWAY, SUITE 1100
SALT LAKE CITY, UTAH 84101
(Address of principal executive officers)
801-350-2017
(Registrant's telephone number, including area code)
Indicate by checkmark 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__
State the number of shares outstanding of each of the issuer classes of
common equity as of November 13, 2003.
Common Stock, par value $.001 7,854,197
(Title of each class) (Number of shares)
CERISTAR CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL STATEMENT
Item 1. Financial Statements
Condensed Consolidated Unaudited Balance Sheet at September 30, 2003
Condensed Consolidated Unaudited Statements of Operations for the three
and nine months ended September 30, 2003 and 2002
Condensed Consolidated Unaudited Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002
Notes to Condensed Consolidated Unaudited Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Exhibits and Reports
Signatures
Exhibits
CERISTAR, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEET
SEPTEMBER 30, 2003
(unaudited)
September 30,
Assets 2003
------ ----------------
Current assets:
Cash $ -
Accounts receivable, net of allowance for
doubtful accounts of $7,917 90,696
Prepaid expenses 15,678
Deposits 8,379
---------------
Total current assets 114,753
Property and equipment, net 771,398
---------------
$ 886,151
---------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Checks written in excess of cash in bank $ 3,472
Accounts payable 427,885
Accrued payroll and other liabilities 262,647
Short-term notes payable, net of unamortized
discount of $52,500 139,928
Unearned revenue 167,980
Equipment purchase obligation 366,096
Related party convertible debt 103,000
Convertible notes payable, net of unamortized
discount of $19,000 178,000
---------------
Total current liabilities 1,649,008
Commitments -
Stockholders' deficit:
Preferred stock, $.001 par value; 1,000,000 shares
authorized, no shares issued and outstanding -
Common stock, $.001 par value, voting, 25,000,000 shares
authorized, 7,810,214 shares issued and outstanding 7,810
Additional paid-in capital 10,256,898
Deferred compensation (235,677)
Subscriptions receivable (400,016)
Accumulated deficit (10,391,872)
---------------
Total stockholders' deficit: (762,857)
---------------
Total liabilities and stockholders'deficit $ 886,151
---------------
See accompanying notes to financial statements
1
CERISTAR, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
For The Periods Ended September 30,
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------------------- -------------------------------
Revenues from Services $ 73,850 $ 189,380 $ 250,090 $ 248,370
Revenues from Equipment 4,754 415 17,709 278,070
-------------------------------- -------------------------------
Total Revenues 78,604 189,795 267,799 526,440
Cost of sales 145,466 105,812 396,109 217,329
Selling, general, and administrative expense 1,012,735 2,017,851 2,981,694 2,630,876
-------------------------------- -------------------------------
Loss from operations (1,079,597) (1,933,868) (3,110,004) (2,321,765)
Other income (expense) 3 1,000 734 1,002
Interest expense (58,628) (3,077) (102,998) (16,732)
-------------------------------- -------------------------------
Loss before benefit for income taxes (1,138,222) (1,935,945) (3,212,268) (2,337,495)
Benefit for income taxes - - - -
-------------------------------- -------------------------------
Net loss $ (1,138,222) $ (1,935,945) $ (3,212,268) $ (2,337,495)
-------------------------------- -------------------------------
Loss per common share basic and diluted $ (0.15) $ (0.46) $ (0.63) $ (0.59)
-------------------------------- -------------------------------
Weighted average shares - basic and diluted 7,367,000 4,224,000 5,139,000 3,932,000
-------------------------------- -------------------------------
See accompanying notes to financial statements
2
CERISTAR, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF CASH FLOWS
For The Nine Months Ended September 30,
Nine Months Ended
September 30,
2003 2002
--------------------------------------
Cash flows from operating activities:
Net loss $ (3,212,268) $ (2,337,495)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 83,631 88,668
Stock issued for services 451,585 1,671,169
Stock warrants issued for financing costs 76,000 -
Amortization of deferred compensation 230,001 233,792
Stock subscription satisfied with services 1,356,100 -
Amortization of discount on long-term debt 46,814 -
Amortization of deferred debt issue costs - 6,000
Bad debt expense (8,200) -
Decrease (increase) in:
Accounts receivable (29,551) (160,829)
Prepaid expense (41) (8,337)
Increase (decrease) in:
Accounts payable 42,270 94,903
Accrued liabilities 173,299 42,124
Deferred revenue 45,780 14,286
--------------------------------------
Net cash used in operating activities (744,580) (355,719)
--------------------------------------
Cash flows used in investing activities-
purchase of property and equipment (92,690) (38,990)
--------------------------------------
Cash flows from financing activities:
Cash over-draft 3,472 -
Proceeds from issuance of common stock 462,390 130,039
Proceeds from related party note 103,000 63,474
Proceeds from notes payable 69,708 377,543
Principal payments on note payable (17,488) (4,513)
Proceeds on convertible short-term debt 197,000 -
Payments on convertible long-term debt (9,022) -
--------------------------------------
Net cash provided by financing activities 809,060 566,543
--------------------------------------
Net (decrease) increase in cash
and cash equivalents (28,210) 171,834
Cash and cash equivalents at beginning of period 28,210 2,518
--------------------------------------
Cash and cash equivalents at end of period $ - $ 174,352
--------------------------------------
See accompanying notes to financial statements
3
CERISTAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The accompanying condensed financial statements are
unaudited. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. CeriStar Inc.,
(the "Company") believes that the following disclosures are adequate to make the
information presented not misleading.
These condensed financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that, in the opinion of management, are necessary
to present fairly the financial position and results of operations for the
periods presented.
Interim results are not necessarily indicative of the operating results to be
expected for the full year. These financial statements should be read in
conjunction with the CeriStar's financial statements and notes thereto for the
year ended December 31, 2002 included in the Company's annual report on Form
10-KSB.
Net Loss Per Common Share-- Basic earnings per share is computed on the basis of
the weighted average number of common shares outstanding. Diluted earnings per
share is computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding stock options using the "treasury
stock" method.
The components of basic and diluted earnings per share were as follows:
EARNINGS PER SHARE
Three Months Ended Nine Months Ended
Sep. 30 Sep. 30
2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------
Net loss ( A ) ($1,138,222) ($1,935,945) ($3,212,268) ($2,337,495)
Weighted average outstanding common shares ( B ) 7,367,000 4,224,000 5,139,000 3,932,000
Dilutive effect of outstanding warrants - - - -
-------------------------------------------------------------------------------------------------------------------
Common stock and common stock equivalents ( C ) 7,367,000 4,224,000 5,139,000 3,932,000
-------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic (A/B) ($0.15) ($0.46) ($0.63) ($0.59)
-------------------------------------------------------------------------------------------------------------------
Diluted (A/C) ($0.15) ($0.46) ($0.63) ($0.59)
-------------------------------------------------------------------------------------------------------------------
4
At September 30, 2003, there were outstanding warrants to purchase 685,226
shares of common stock and debt conversion features to purchase 545,815 shares
of common stock that were not included in the computation of diluted net loss
per common share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share.
Revenue Recognition-Revenue is recognized when a valid contract or purchase
order has been executed or received, services have been performed or product has
been delivered, the selling price is fixed or determinable, and collectibility
is reasonably assured. Sales related to long-term service contracts, which do
not meet this criteria, are deferred and recognized ratably over the period of
the contract and are recorded as unearned revenue.
Stock-Based Compensation- The Company accounts for stock options granted to
employees under the recognition and measurement principles of APB Opinion No.
25, Accounting for Stock Issued to Employees, and related Interpretations, and
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense is recognized in the financial statements
when options granted under those plans have an exercise price equal to or
greater than the market value of the underlying common stock on the date of
grant. The Company granted no options during the periods ending September 30,
2003 and 2002 to employees. However, the Company did issue 275,000 warrants to
purchase the Company's common stock in exchange for consulting services,
interest expense and debt discounts, valued at approximately $146,000.
The fair value of each warrant granted during the quarter is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions for the periods ended September 30:
2003 2002
------------------------------------------------------------------------
Expected dividend yield $0 $0
Expected stock price volatility 73.38% NA
Risk-free interest rate 4.75% 4.75%
Expected life of options 3-5 years NA
------------------------------------------------------------------------
The weighted average fair value of each warrant granted during the nine months
ended September 30, 2003 was $.53.
NOTE 2-- GOING CONCERN
The Company has a working capital deficit, a stockholders' deficit, and
recurring net losses. These factors create substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustment that might be necessary if the Company is unable to continue as a
going concern.
5
The ability of the Company to continue as a going concern is dependent on the
Company generating cash from the sale of its common stock or obtaining debt
financing and attaining future profitable operations. Management's plans include
selling its equity securities and obtaining debt financing to fund its capital
requirements and ongoing operations, however, there can be no assurance the
Company will be successful in these efforts.
NOTE 3 - DEFFERED PURCHASE OBLIGATION
The Company is obligated for certain equipment purchases initially funded by
some of its customers. During the nine months ended September 30, 2003 the
Company entered into a revised agreement with Wired LLC, in which the Company
purchased equipment in exchange for 45,000 warrants to purchase the Company's
common shares at an exercise price $1.05, and an agreement to share revenues
from certain customers. The equipment will be used in a revenue sharing venture
in which Wired LLC will receive all net profits from communications services as
provided in the agreement until it has recovered the equipment sales price of
$307,000 plus 12%. After Wired LLC has recovered the sales price of the
equipment plus 12%, net profits will be divided approximately evenly from
communications service revenue. The Company has an obligation to service, and
maintain the equipment, and support the communications services for the duration
of the contract years. The obligation has no stipulated maturity date and is
secured by the equipment.
NOTE 4 - SHORT-TERM RELATED PARTY CONVERTIBLE DEBT
During the nine months ended September 30, 2003, the Company issued convertible
debt to the Chairman of the Board of Directors of the Company and certain of his
relatives in the amount of $103,000. The debt bears interest at 8% to 12%, is
due December 31, 2003, is unsecured and is convertible into the Company's common
stock at $.65 per share.
NOTE 5 - SHORT-TERM NOTES PAYABLE
Notes payable and convertible notes payable issued during the nine months ended
September 30, 2003 consist of the following.
Convertible notes payable to a funding group totaling $197,000. The notes are
due on demand after 60 days past issuance and bear interest at 12% per year. The
notes are convertible into the Company's common stock under a beneficial
conversion rate that results in the notes being discounted at an initial value
of $49,000, of which $19,000 is unamortized at September 30, 2003.
Note payable to a funding group for $182,000 bearing interest at 15% per annum.
The note is payable in monthly installments of $5,500 beginning February 1, 2004
through August 1, 2004 at which time the remaining unpaid principal and interest
balance is due. The note includes 100,000 warrants. The total discount related
to these warrants is $63,000, of which $52,500 is unamortized at September 30,
2003. The note is guaranteed by the Chairman of the Board of Directors and is
secured by equipment of the Company.
NOTE 6 - COMMON STOCK TRANSACTIONS
The Company sold 224,440 common shares for cash value of $462,391 and issued
1,830,177 shares for services performed or to be performed valued at $1,220,728.
6
NOTE 7 - RECEIVABLE REPURCHASE OBLIGATION
The Company sold a receivable with recourse. Since the Company does not have
sufficient experience to estimate the ultimate amount to be realized, the net
proceeds that are subject to recourse are presented as a liability in the
financial statements.
NOTE 8 - CASH FLOW INFORMATION
Actual amounts paid for interest for the nine months ended September 30, 2003
and 2002, were $8,028 and $16,732. No income taxes were paid for the respective
periods.
During the nine months ended September 30, 2003, the Company received a
commission, which reduced its deferred purchase obligation and was recorded as
an increase of $27,900 to deferred revenue.
During the nine months ended September 30, 2003, the Company reacquired 96,600
shares of its common stock for a reduction in deferred compensation of $149,333
and subscriptions receivable of $9,317.
During the nine months ended September 30, 2003, the Company disposed of
equipment in exchange for extinguishment of an accrued liability in the amount
of $12,540.
During the nine months ended September 30, 2003, the Company financed the
purchase of $307,000 of equipment through a deferred purchase obligation with
one of its customers.
During the nine months ended September 30, 2003, the Company issued 1,080,000
shares of its common stock for future consulting services, which were recorded
as subscriptions receivable in the amount of $769,144.
During the nine months ended September 30, 2003, the Company issued debt
instruments with detachable warrants to purchase the Company's common stock or
provided an embedded beneficial conversion feature in the debt instruments
issued. These transactions resulted in a discount on debt valued at $112,000.
During the nine months ended September 30, 2003 the Company purchased equipment
of $128,484 in exchange for a short-term note payable.
During the nine months ended September 30, 2002, the Company issued warrants
with a beneficial conversion feature attached to long-term debt, which resulted
in a $75,000 discount, which was the full face value of the debt.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN No. 45). FIN No. 45 requires certain guarantees to
be recorded at fair value, which is different from current practice to record a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, "Accounting for Contingencies". FIN No. 45
also requires the Company to make significant new disclosures about guarantees.
The disclosure requirements of FIN No. 45 are effective for the Company in the
first quarter of fiscal year 2003. FIN No. 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company's previous accounting
for guarantees issued prior to the date of the initial application of FIN No. 45
will not be revised or restated to reflect the provisions of FIN No. 45. The
Company does not expect the adoption of FIN No. 45 to have a material impact on
its consolidated financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Ethics" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. In the event a variable
interest entity is identified, this pronouncement may have a material impact on
its financial condition or results of operations.
7
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. Management is
continually evaluating the effect that the adoption of SFAS No. 149 but believes
it will have no material affect on its results of operations and financial
position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance may
have been accounted for as equity, must now be accounted for as liabilities (or
an asset in some circumstances). The financial instruments affected include
mandatory redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. This
Statement is effective for all such financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS 150 was adopted in the
quarter ended June 30, 2003 and did not have a material impact on CeriStar's
results of operations or financial position.
NOTE 11 - SUBSEQUENT EVENTS
In October and November 2003, the Company obtained additional debt financing.
The notes are payable to a funding group in the total amount of $277,000. The
notes are due on demand at 120 days past issuance and bear interest at 12% per
year. The notes are convertible into the Company's common stock under a
beneficial conversion rate that results in a discount to the notes of $73,000,
which will be amortized over the life of the notes.
On October 8, 2003, the Company entered into agreements with its Chief Executive
Officer for a monthly salary of $7,500 and stock options to purchase 882,000
shares and its Chief Operating Officer for a monthly salary of $7,000 and stock
options to purchase 630,000 shares. On November 18, 2003 the Company entered
into an agreement with its Chief Financial Officer for a monthly salary of
$6,500 and stock options to purchase 215,000 shares. The agreements are
effective for twelve months ending in October and November 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
for Operations
Critical Accounting Policies
In Note 1 to the audited financial statements for the fiscal year ended December
31, 2002 included in our Form 10-KSB discuss those accounting policies that are
considered to be significant in determining the results of operations and our
financial position. We believe that the accounting principles utilized by us
conform to generally accepted accounting principles in the United States of
America.
8
The preparation of consolidated financial statements requires management to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, we evaluate our
estimates, including those related to bad debts, inventories, intangible assets,
warranty obligations, product liability, revenue, and income taxes. We base our
estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual results may
differ from these estimates under different assumptions or conditions.
With respect to revenue recognition, stock based compensation, and allowance for
doubtful accounts we apply the following critical accounting policies in the
preparation of our financial statements:
Revenue Recognition
We derive revenue primarily from the sale of communications services and sales
of related communication equipment. Revenue is recognized when a valid contract
or purchase order has been executed or received, services have been performed or
product has been delivered, the selling price is fixed or determinable, and
collectibility is reasonably assured. Sales related to long-term service
contracts, which do not meet this criteria, are deferred and recognized ratably
over the period of the contract and are recorded as unearned revenue.
Accounting for Stock-based Compensation
We account for stock-based compensation issued to employees and directors under
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Under APB No. 25, compensation
related to stock options, if any, is recorded if an option's exercise price on
the measurement date is below the fair value of the company's common stock and
amortized to expense over the vesting period. Compensation expense for stock
awards or purchases, if any, is recognized if the award or purchase price on the
measurement date is below the fair value of the common stock and is recognized
on the date of award or purchase. Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation," requires pro forma
information regarding net loss and net loss per common share as if the company
had accounted for its stock options granted under the fair value method.
We account for stock-based compensation issued to persons other than employees
using the fair value method in accordance with SFAS No. 123 and related
interpretations. Under SFAS No. 123, stock-based compensation is determined as
either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. The
measurement date for these issuances is the earlier of either the date at which
a commitment for performance by the recipient to earn the equity instruments is
reached or the date at which the recipient's performance is complete.
9
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts receivables. In doing
so, we analyze accounts receivable and historical bad debts, customer
credit-worthiness, current economic trends and changes in customer payment
patterns when evaluating the adequacy of the allowance for doubtful accounts.
Forward-Looking Statements
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and the
related notes included in Item 1 of this Form 10-QSB. This discussion contains
forward-looking statements. These statements are based on our current
expectations, assumptions, estimates and projections about our business and our
industry, and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's results, levels of activity, performance or
achievement to be materially different from any future results, levels of
activity, performance or achievements expressed or implied in or contemplated by
the forward-looking statements. Our actual results and the timing of selected
events could differ materially from those anticipated in these forward-looking
statements as a result of selected factors identified in the Item 2 and Form
10-QSB.
CeriStar, Inc. undertakes no obligation to update forward-looking statements to
reflect events or circumstances occurring after the date of this Form 10-QSB.
Company and Industry Overview
CeriStar is in the data communications industry, providing a new generation of
services using fiber optics. Its principal product is the delivery of voice,
video and data services over a single fiber network. These services include
local and long distance telephone, video conferencing, and cable television with
video on demand, computer email and host of other related services.
On September 10, 2002, CeriStar merged with a wholly owned subsidiary of Planet
Resources Inc., a Delaware corporation, a non-operating company, ("Planet"), in
which all of the issued and outstanding stock of CeriStar, including shares of
Common Stock, shares of Series A Convertible Preferred Stock and shares of
Series B Convertible Preferred Stock were exchanged for shares of Planet Common
Stock. The shares of Series A and B Convertible Preferred Stock of CeriStar were
each exchanged for .757 shares of Planet Common Stock and the Common Stock of
CeriStar were each canceled and converted into .322 shares of Common Stock of
Planet. Prior to the merger Planet authorized a 1 for 5.23 reverse stock split.
The merger was accounted for as a reverse merger with CeriStar being the
accounting acquirer. On October 15, 2002, Planet Resources Inc. was renamed
CeriStar, Inc.
Results of Operations
FOR THE COMPARATIVE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Revenue for the first nine months of fiscal 2003 was $267,799, a decrease of
$258,641, or 49% when compared to the first nine months of fiscal 2002. The
overall decrease is primarily due to the Company's transition away from selling
equipment to that of a communications service provider and the loss of a
significant customer from which revenues of $153,000 were recognized in the
first nine months of 2002. For the nine months ended September 30, 2003 revenue
was primarily generated from sale of communications services.
10
During the nine months ended September 30, 2003, CeriStar increased its ongoing
service revenue to $250,090, an increase of 0.6% over the same period during
fiscal 2002 due primarily to an increase in communications services customer
base. Revenues generated from labor, including revenues related to engineering
and design for specific IP applications, decreased by $4,193 in the nine month
period of 2003 vs. 2002. Sales from equipment decreased 94%, to $17,709 during
the first nine months of fiscal 2003, from $278,077 in the first nine months of
fiscal 2002.
CeriStar had a net loss for the nine months ended September 30, 2003 and 2002 of
$3,212,268 and $2,337,495, respectively.
Cost of revenue includes engineering, installation and equipment required to
set-up our customer base, operational costs related to bandwidth, long distance
and video services, and costs incurred to market, support and maintain our
customer base. Cost of revenue was $396,109 in the nine months ended September
30, 2003, compared to $217,329 in the nine months ended September 30, 2002. The
primary driver of the increase as a percentage of revenue was the need to
purchase fixed bandwidth capacity related to establishing and supporting the
ongoing service to our customers compared with equipment and engineering related
revenues in the prior fiscal year period.
Gross margins decreased from 59% for the nine months ended September 30, 2002 to
a negative 48% for the comparable period of 2003. Because CeriStar is developing
its customer base, the Company is required to commit certain amounts of upfront
marketing and capital expenses in pursuit of new contracts and customers that
will eventually be leveraged over a larger customer base. Hence, the margins for
the first nine months of 2002 compare more favorably with 2003, reflecting
cost-plus labor, mark-ups on certain initial equipment sales, and shorter-term
contracts. Gross margins for the first nine months of 2003, however, reflect
communications services revenues in which the cost exceeds revenues due
primarily to the purchase of fixed bandwidth, marketing and equipment for the
support of the growing customer base. New connections are expected to increase
revenues without a substantial increase in costs.
Selling, general and administrative expenses increased by $350,818 from
$2,630,876 for the nine months ended 2002 to $2,981,694 in the corresponding
period of 2003. The increase was due primarily to marketing and stock based
compensation for marketing, wages and consulting.
FOR THE COMPARATIVE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Total revenue declined in the third quarter of fiscal 2003 to $78,604 from
$189,795 in the third quarter of fiscal 2002. The overall decrease is primarily
due to the Company's transition away from selling equipment to that of a
communications service provider and the loss of a significant customer from
which revenues of $90,000 were recognized in the third quarter of 2002. For the
nine months ended September 30, 2003 revenue was primarily generated from sale
of communications services with existing equipment owned by the Company. Service
revenue for the third quarter of 2003 declined to $71,991 from $189,287 over the
same period in 2002.
11
CeriStar had a net loss in the third quarter of 2003 of $1,138,222 the loss
compared with a net loss in the second quarter of 2002 of $1,935,945.
Cost of revenue was $145,466 in the third quarter, compared to $105,812 in the
third quarter of the prior year. This increase in cost of sales in 2003 is due
to bandwidth costs.
Gross margins in the third quarter of 2003 were a negative 85% compared to a
positive 44% in 2002. Thus far, Ceristar has not generated a large enough
customer base to cover its fixed bandwidth and service costs in 2003. As
CeriStar transitions to an operating company, additional labor, engineering and
bandwidth costs have been necessary to meet the needs of customers in a variety
of locations. New customers coming on line in those locations can be added to
the existing network with little additional cost. Margins in 2002 were related
to initial equipment installation sales, which accompanied short-term service
contracts.
Selling, general and administrative expenses decreased by $1,005,116 to
$1,012,735 in the third quarter of 2003 compared to $2,017,851 in 2002 primarily
due to the decrease in merger related expenses incurred in 2002.
Liquidity and Capital Resources
CeriStar's revenues are not capable of supporting its current operations.
CeriStar will be dependent on the capital markets for funding its current
operations. At September 30, 2003 the Company has a working capital deficit of
approximately $1,534,255. To meet its continuing funding needs, CeriStar
actively seeks funding through the sale of its common stock and issuance of debt
securities. No assurance can be made that the Company will be successful in
raising sufficient capital.
CeriStar believes it has proven its technology through its current customer base
and can now efficiently deliver a technically advanced product to a wide range
of residential, commercial, educational and governmental customers. In the past,
CeriStar has been focused on development and testing of its technology, whereas
now the focus is on marketing and supporting this technology. Expansion into new
market areas will be limited by the amount of investment capital and equipment
financing that can be acquired. CeriStar's current plan will require additional
equity and debt capital to fund operations. A majority of this funding will need
to be raised in the equity markets. It is anticipated that debt financing of
equipment will become increasingly available as the Company's service offerings
gain acceptance and our markets expand, thus leveraging our investment capital.
In the short term, CeriStar will remain dependent on new equity capital. No
assurance can be made that the Company will be successful in raising sufficient
capital.
The Company's long-term liquidity and capital requirements will depend upon
numerous factors, including the Company's ability to achieve a level of demand
for its services that supports its business model and its cost structure,
securing significant long-term funding for expansion efforts, and the Company's
ability to find suitable funding sources to improve its capital structure. The
Company may require additional financing or seek to raise additional funds
through bank facilities, debt or equity offerings, or other sources of capital
to meet liquidity and capital requirements. Additional funds may not be
available when needed or on terms acceptable to the Company, which could have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows. These are factors that indicate that the Company
may be unable to continue operations.
12
ITEM 3. Controls and Procedures
On October 8, 2003, we entered into an employment agreement with Fred Weismiller
to serve as our Chief Executive Officer and on November 18, 2003 we entered into
an agreement with Robert Lester to serve as our Chief Financial Officer.
(a) Within 90 days of filing this report on Form 10-QSB (the "Evaluation Date"),
our current and former Chief Executive Officer and Chief Financial Officer,
respectively and collectively, evaluated our disclosure controls and procedures,
as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation,
these officers concluded that as of the Evaluation Date, our disclosure controls
and procedures were effective in timely alerting them to material information
relating to our company required to be included in our reports filed or
submitted by us under the Exchange Act.
(b) There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
-------------------------------------------------------------------------------------------------------------------
10.01 10.01 Employment Agreement between CeriStar, Inc. and Fred This filing
Weismiller dated October 8, 2003
-------------------------------------------------------------------------------------------------------------------
10.02 10.02 Employment Agreement between CeriStar, Inc. and Michael Miller This filing
dated October 8, 2003
-------------------------------------------------------------------------------------------------------------------
10.03 10.03 Employment Agreement between CeriStar, Inc. and Robert Lester This filing
dated November 18, 2003
-------------------------------------------------------------------------------------------------------------------
31.01 31 Certification of Chief Executive Officer Pursuant to Rule This filing
13a-14
-------------------------------------------------------------------------------------------------------------------
31.02 31 Certification of Chief Financial Officer Pursuant to Rule This filing
13a-14
-------------------------------------------------------------------------------------------------------------------
32.01 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
-------------------------------------------------------------------------------------------------------------------
32.02 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
13
(b) Reports on Form 8-K
None
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date November 18, 2003 /s/Fred Weismiller
----------------- ----------------
Fred Weismiller
Chief Executive Officer
Date November 18, 2003 /s/Robert Lester
----------------- ----------------
Robert Lester
Chief Financial Officer
14