================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
-------------
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-29204
HOMECOM COMMUNICATIONS, INC
---------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 58-2153309
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3495 Piedmont Road
Building 12, Suite 110
Atlanta, Georgia 30305
----------------------
(Address of principal executive offices)
(404) 237-4646
--------------
(Issuer's Telephone Number)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 18, 2004, there
were 14,999,157 shares of the registrant's Common Stock, par value $0.0001 per
share.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
HOMECOM COMMUNICATIONS, INC.
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
March 31, 2004 December 31, 2003
(unaudited)
-------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 142,267 $ 71,818
Accounts receivable, net 138,636 274,418
------------ ------------
Total current assets 280,903 346,236
Prepaid expenses 11,838 27,257
Furniture, fixtures and equipment held for sale 105,624 105,624
Licensed Technology rights, net 821,853 871,164
------------ ------------
Total assets $ 1,220,218 $ 1,350,281
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,079,203 $ 2,807,924
------------ ------------
Total current liabilities 3,079,203 2,807,924
Note payable 364,000 255,000
Convertible preferred stock (See Note 7) 6,442,133 6,442,133
------------ ------------
Total liabilities 9,885,336 9,505,057
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value, 15,000,000 shares authorized,
14,999,156 shares issued and outstanding at March 31, 2004
and December 31, 2003 1,500 1,500
Preferred stock, Series H, $.01 par value, 13,500 shares
authorized, 13,500 shares issued and outstanding at March
31, 2004 and December 31, 2003, convertible, participating,
$13,500,000 liquidation value at March 31, 2004 and
December 31, 2003 135 135
Treasury stock, 123,695 shares at March 31, 2004 and
December 31, 2003 (8,659) (8,659)
Additional paid-in capital 19,228,820 19,228,820
Accumulated deficit (27,886,914) (27,376,572)
------------ ------------
Total stockholder's deficit (8,665,118) (8,154,776)
------------ ------------
Total liabilities and stockholder's deficit $ 1,220,218 $ 1,350,281
============ ============
The accompanying notes are an integral part of these financial statements.
2
HOMECOM COMMUNICATIONS, INC.
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003
Three Months Ended
March 31,
(unaudited)
----------------------------
2004 2003
------------ ------------
Revenues $ 620 $
Cost of Revenues 558
------------ ------------
GROSS PROFIT 62
------------ ------------
OPERATING EXPENSES:
General and administrative 262,566 31,090
Depreciation and amortization 49,311
------------ ------------
Total operating expenses 311,877 31,090
------------ ------------
OPERATING LOSS (311,815) (31,090)
OTHER EXPENSES (INCOME)
Interest expense 241,716
Other income, net (70,191)
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (553,531) 39,101
INCOME TAX PROVISION (BENEFIT)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (553,531) 39,101
INCOME FROM DISCONTINUED OPERATIONS 43,189 100,622
------------ ------------
NET GAIN (LOSS) (510,342) 139,723
DEEMED PREFERRED STOCK DIVIDEND (176,764)
------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (510,342) $ (37,041)
============ ============
GAIN (LOSS) PER SHARE - BASIC AND DILUTED:
CONTINUING OPERATIONS (0.037) (0.009)
DISCONTINUED OPERATIONS 0.003 0.007
------------ ------------
LOSS PER SHARE - BASIC AND DILUTED $ (0.034) $ (0.002)
============ ============
WEIGHTED NUMBER OF SHARES OUTSTANDING 14,999,157 14,999,157
The accompanying notes are an integral part of these financial statements.
3
HOMECOM COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003
Three Months Ended
March 31,
(unaudited)
----------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(510,342) $ 139,723
Adjustments to reconcile net loss to cash used in
operating activities:
Provision for bad debts 22,537 15,495
Change in operating assets and liabilities:
Accounts receivable 113,245 (23,387)
Prepaid expenses 15,419 14,907
Accounts payable and accrued expenses 320,590 (147,667)
--------- ---------
Net cash used in operating activities (38,551) (929)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures, and equipment (21,165)
--------- ---------
Net cash used in investing activities (21,165)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Note Payable 109,000
--------- ---------
Net cash provided by financing activities 109,000
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 70,449 (22,094)
CASH AND CASH EQUIVALENTS at beginning of period 71,818 160,342
--------- ---------
CASH AND CASH EQUIVALENTS at end of period $ 142,267 $ 138,248
========= =========
The accompanying notes are an integral part of these financial statements.
4
HOMECOM COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to Article 10 of Regulation S-X of the
Securities and Exchange Commission. The accompanying unaudited financial
statements reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of the financial position and results of operations of
HomeCom Communications, Inc. (the "Company," "we" or "us") for the interim
periods presented. All such adjustments are of a normal and recurring nature.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003, as filed with the Commission on May
13, 2004.
2. GOING CONCERN MATTERS AND RECENT EVENTS
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplate the
realization of assets and liquidations of liabilities in the normal course of
business. The Company has incurred significant losses since its incorporation
resulting in an accumulated deficit as of March 31, 2004 of approximately $27.9
million. The Company continues to experience negative cash flows from
operations. These factors raise doubt about the Company's ability to continue as
a going concern.
On March 27, 2003, we entered into an Asset Purchase Agreement (the "Asset
Purchase Agreement") with Tulix Systems, Inc. ("Tulix"), a company in which Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson, who are officers and
directors of the Company, are officers, directors and founding shareholders. The
Asset Purchase Agreement provides that the Company will sell to Tulix, and Tulix
will purchase from the Company, substantially all of the assets of the Company's
hosting and website maintenance business (the "Asset Sale"). The Company
recorded an anticipated loss on the sale of this business (the Internet Services
Division) of $125,030 in the fourth quarter of 2003. The final transaction will
be adjusted as provided for in the Asset Purchase Agreement and the impact will
be reflected in the Company's financial statements for the quarter in which the
transaction closes.
The parties intend to complete the Asset Sale if the conditions to closing
set forth in the Agreement are satisfied or waived. These conditions include,
among others, the requirement that all third parties who have a contractual
right to approve the assignment of their contracts to Tulix must consent to such
assignment and a condition in favor of Tulix that the largest customer of the
business to which the assets relate not have notified the Company or Tulix that
it intends to terminate its relationship with HomeCom or Tulix, that it does not
intend to transfer its business to Tulix upon completion of the Asset Sale, or
that it intends to materially change the amount of business that it does with
HomeCom or Tulix. As such, we can offer no assurance that the Asset Sale will be
completed. Neither we nor Tulix is under any obligation to pay any type of
termination fee if we do not complete the Asset Sale, and there are no other
deal protection measures. The Agreement also contains a release from Tulix
pertaining to certain matters and mutual releases with Mr. Robinson, Mr.
Bokuchava and Ms. Doijashvili regarding certain employment matters.
5
On May 22, 2003, the Company completed a transaction with Eurotech, Ltd.
("Eurotech"). The Company had entered into a License and Exchange Agreement with
Eurotech and, with respect to Articles V and VI thereof, Polymate, Ltd. and
Greenfield Capital Partners LLC, on March 27, 2003 (as amended, the "Exchange
Agreement"). In connection with the completion of the transaction, the Company
entered into a License Agreement, dated May 22, 2003 with Eurotech (as amended,
the "License Agreement"). Pursuant to the Exchange Agreement and the License
Agreement, Eurotech has licensed to the Company its rights to the EKOR, HNIPU,
Electro Magnetic Radiography/Acoustic Core (EMR/AC), Rad-X, Firesil, LEM and
Rapidly Biodegradable Hydrophobic Material (RBHM) technologies. Upon the
completion of the asset sale to Tulix, the Company's business will consist
primarily of the operations associated with these licensed technologies.
The Exchange Agreement provides that, during the period prior to closing of
the Asset Sale, the financial needs of the hosting and web site maintenance
business will be funded by the operations of that business, while the finances
relating to the new licensed technologies will be kept separate. On May 22,
2003, we executed a note in favor of one of our preferred shareholders that, as
amended, provides that we may borrow up to $460,000 for use solely in connection
with the technologies that we have licensed from Eurotech. Advances under this
agreement, which advances are secured by a security agreement, bear interest at
a rate of 10% per annum and mature on December 31, 2004. As of March 31, 2004,
we had borrowed $364,000 under this agreement. Since March 31, 2004, we have
borrowed another $96,000 from this lender under this agreement.
On March 22, 2004 HomeCom Communications held a Special Meeting of the
Stockholders at which the following proposals were approved by the stockholders:
(1) a proposal to sell substantially all of the assets of HomeCom's hosting and
website maintenance business to Tulix Systems, Inc., an entity in which Timothy
R. Robinson, Gia Bokuchava and Nino Doijashvili, who are directors and officers
of HomeCom, are the sole shareholders, directors and officers; (2) a proposal to
amend HomeCom's Certificate of Incorporation to change the name of the company
to "Global Matrechs, Inc."; (3) a proposal to amend HomeCom's Certificate of
Incorporation to increase the number of shares of common stock that HomeCom is
authorized to issue from 15,000,000 to 300,000,000; (4) a proposal to amend
HomeCom's Certificate of Incorporation to allow fewer than all of the
stockholders to approve actions by written consent without a stockholder
meeting; (5) a proposal to effect a reverse split of HomeCom's common stock at a
ratio of between 1-for-5 and 1-for-15, if and when (but not later than December
31, 2004) the Board of Directors determines that such a reverse split is in the
best interests of HomeCom; (6) proposals to amend the Certificates of
Designations, Preferences and Rights of HomeCom's Series B, Series C, Series D
and Series E preferred stock to delete the mandatory conversion provisions of
those series; and, (7) a proposal to elect Michael Sheppard, Timothy R.
Robinson, Gia Bokuchava, Nino Doijashvili, and Randolph A. Graves, Jr. to serve
on HomeCom's Board of Directors.
6
3. SEGMENT INFORMATION
On March 27, 2003, we entered into the Asset Purchase Agreement with Tulix
to sell substantially all of the remaining assets of the Company's Internet
Services segment. With the entrance into the licensing agreement with Eurotech
on May 22, 2003, our Licensed Technologies Division is now the Company's only
operating segment. The Internet Services segment is presented as a discontinued
operation.
The assets and liabilities of the Internet Services segment are considered
held for sale. The following is a representation of the portion of the balance
sheets as of March 31, 2004 and December 31, 2003 that are attributable to the
segment being sold.
ASSETS
CURRENT ASSETS
Cash and cash equivalents 50,000
Accounts receivable, net 70,000
-------
Total current assets 120,000
Furniture, fixtures and equipment held for sale 105,624
-------
Total assets 225,624
=======
LIABILITIES
CURRENT LIABILITIES:
Accounts payable and accrued expenses 5,000
-------
Total current liabilities 5,000
-------
Total liabilities 5,000
=======
4. BASIC AND DILUTED LOSS PER SHARE
Loss per common share is computed by dividing net loss available to common
stockholders by the weighted average number of shares of common stock
outstanding for the period of time then ended. The effect of the Company's stock
options and convertible securities is excluded from the computations for the
three months ended March 31, 2004 and 2003, as it is antidilutive.
5. STOCK OPTIONS
The Company has adopted the disclosure requirement of Statement of
Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation-Transition and Disclosure" effective December 15, 2002. SFAS 148
amends Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation and also amends the disclosure requirements of SFAS
123 to require prominent disclosure in both annual and interim financial
statements about the methods of accounting for stock-based employee compensation
and the effect of the method used on report results. As permitted by SFAS 148
and SFAS 123, the Company continues to apply the accounting provisions of APB
25, and related interpretations, with regard to the measurement of compensation
cost for options granted under the Company's Stock Option Plan. No compensation
expense has been recorded as all options granted had an exercise price equal to
the market value of the underlying stock on the grant date. The pro-forma effect
on our results of operations, had expense been recognized using the fair value
method described in SFAS 123, using the Black-Scholes option pricing model, is
shown below.
7
For the three months ended March 31,
------------------------------------
2004 2003
---------- ----------
Loss applicable to common shareholders:
As reported (510,342) (37,041)
Pro forma (514,067) (60,326)
Basic and diluted loss per share:
As reported (0.034) (0.002)
Pro forma (0.034) (0.004)
6. TAXES
There was no provision for cash payment of income taxes for the three
months ended March 31, 2004, as the Company anticipates a net taxable loss for
the year ended December 31, 2004.
7. CONVERTIBLE PREFERED STOCK
As a requirement of the private placements of the Company's Series B, C, D
and E Convertible Preferred Stock, the Company was obligated to file and have
declared effective, within a specified time period, a registration statement
with respect to a minimum number of shares of common stock issuable upon
conversion of the Series B, C, D and E Preferred Stock. As of March 31, 2004,
such registration statement has not been declared effective and penalties are
owed. In accordance with the terms of the agreement between the parties,
penalties accrue at a percentage of the purchase price of the unregistered
securities per 30 day period. The Company accrued penalties of $159,596 as
interest expense during the quarter ending March 31, 2004. As of March 31, 2004,
$2,325,155 has been accrued into accounts payable and accrued expenses for such
penalties.
The terms of the Company's Series B, C, D, and E Convertible Preferred
Stock provides for a guaranteed return on unconverted shares of 5% for series B,
6% for series C and D, and 8% for series E. This increase in the stated value of
the preferred shares has been recorded as interest expense in the amount of
$74,320 for the quarter ending March 31, 2004. As of March 31, 2004, $224,593
has been accrued into accounts payable and accrued expenses for such increases.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Except for historical information contained herein, some matters discussed
in this report constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements include,
but may not be limited to, those statements regarding the Company's
expectations, beliefs, intentions, or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Specifically, the
Company's statements with respect to, among other things, the completion of the
sale of assets to Tulix, the viability of and plans for the technologies that we
license from Eurotech, and our ability or inability to continue as a going
concern are forward-looking statements. The Company notes that a variety of risk
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements including, among other things, our ability
8
or inability to complete the transaction with Tulix, our ability or inability to
obtain additional financing, the commercial viability of the technologies that
we license from Eurotech, our ability to market these technologies, our ability
to retain the licenses to these technologies, and other factors discussed in
this report and set forth in our Annual Report on Form 10-K and in our other
securities filings.
Historically, we developed and marketed specialized software applications,
products and services that enabled financial institutions and their customers to
use the Internet and intranets/extranets to obtain and communicate important
business information, conduct commercial transactions and improve business
productivity. We provided Internet/intranet solutions in three areas: (i) the
design, development and integration of customized software applications,
including World Wide Web site development and related network outsourcing; (ii)
the development, sale and integration of our existing software applications into
the client's operations; and, (iii) security consulting and integration
services. In October, 1999, we sold our security consulting and integration
services operations and entered into a joint marketing program with the
acquiror. During 2001, we sold our remaining software applications businesses.
On March 23, 2001, we announced our intentions to wind down our operations. On
March 27, 2003 we entered into an agreement to sell substantially all of the
assets used in our web development, hosting and website maintenance business to
Tulix. The Internet Services Division is presented as a discontinued operation.
This sale was approved by the stockholders on March 22, 2004 and the company
anticipates closing the transaction in the second quarter of 2004.
On May 22, 2003, we completed the transaction with Eurotech pursuant to
which we now license the EKOR, HNIPU, EMR/AC, Rad-X, Firesil, LEM and RBHM
technologies from Eurotech. If we complete the Asset Sale to Tulix, our
remaining assets will consist of the technologies that we license from Eurotech
and the assets related thereto, the cash and accounts receivable of our hosting
and website maintenance business that we do not transfer to Tulix, and the note
and stock that Tulix issues to us in the Asset Sale. Our liabilities after the
completion of the Asset Sale will consist of all liabilities currently reflected
on our financial statements other than the liabilities that Tulix assumes from
us (and possibly some liabilities that Tulix does assume from us, in the event
that we remain obligated for such liabilities despite our attempted assignment
of those liabilities to Tulix), as well as any liabilities that we incur in
connection with the business associated with the licensed technologies,
including the $460,000 that we have borrowed under our credit agreement with
McNab LLC, which is one of our preferred stockholders.
We have created an unincorporated division, which we call the Licensed
Technologies Division, to run the business related to the technologies that we
license from Eurotech. Mr. Sheppard and Dr. Graves serve as vice presidents of
the Licensed Technologies Division. The unincorporated division structure allows
us to operate the business within a single entity. It does, however, also
present risks. These include the risk that liabilities associated with the
technologies that we license from Eurotech may attach to the assets of our
hosting and website maintenance business, thereby jeopardizing the potential
sale to Tulix or making us liable to Tulix following the closing, and the risk
that liabilities related to the hosting and website maintenance business could
attach to the technologies that we license from Eurotech.
9
EKOR
The Company is currently seeking a commercial partner with whom to
manufacture, market sell and deliver EKOR to customers in the European
Community. We intend to market EKOR(TM) for use in nuclear waste encapsulation
and nuclear debris fixation for nuclear cleanup projects, nuclear facility
decontamination and decommissionings, and nuclear waste transportation and
disposal. As part of this strategy, we intend to seek affiliations and joint
ventures with large prime contractors in the nuclear industry on a project by
project basis. While we see opportunities for EKOR and the other technologies,
however, we can offer no assurance that our efforts will be successful.
HNIPU
HNIPU is a hybrid polyurethane that does not involve the toxic isocyanates
utilized in the production of conventional polyurethane and that has lower
permeability and greater chemical resistance qualities as compared to
conventional polyurethane. We believe that these advanced characteristics, in
addition to the potential reduced risk from the elimination of isocyanates in
its production, make HNIPU superior to conventional polyurethanes in connection
with their use in a number of industrial application contexts such as
manufacturing automotive components, paints, foams, plastics and truck bed
liners; aerospace sealants, industrial adhesives, coatings, flooring, glues;
industrial equipment and machinery; and consumer goods such as appliances,
footwear, furniture and plastic products. Because of HNIPU's lower permeability
and improved chemical resistance, we think that industrial paints and coatings
are a potential target market for HNIPU.
On November 17, 2003, HomeCom entered into an agreement with Environmental
Friendly Materials, GMBH ("EFM"), a German company, for the manufacture and sale
of HNIPU for the European marketplace. EFM has been given non-exclusive license
to manufacture and distribute HNIPU and intends to manufacture it at various
locations across Europe. EFM has told us that it anticipates beginning
production in the fourth quarter of 2004.
Because HNIPU represents a new class of polymer compounds closely related
to polyurethanes, we hope that a variety of products will emerge from the
development of variations and improvements to the existing HNIPU binders that
have worldwide industrial applications. For this reason, we intend to seek to
license HNIPU to large industrial polymer and chemical manufacturers who can
sell the various HNIPU binders to international industrial manufacturers. The
focus will be to transfer the existing binder product technologies under
licensing agreements from the laboratory to the manufacturer. We intend to
follow up on existing agreements, current evaluations, and active discussion for
HNIPU binder production.
Our revenues and operating results have varied substantially from period to
period, and should not be relied upon as an indication of future results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31,
2003
10
NET SALES. Net sales for the three month period ended March 31, 2004 were
$620. These consisted of the sale of samples of EKOR and HNIPU and were
recognized upon shipment of the materials. There were no sales in the first
quarter of 2003 as HomeCom had not yet entered into the licensing agreement with
Eurotech.
COST OF SALES. Cost of sales includes the cost of materials, handling,
shipping, and any associated customs clearance costs. The cost of sales for the
first quarter of 2004 was $558. There were no cost of sales in the first quarter
of 2003 as HomeCom had not yet entered into the licensing agreement with
Eurotech.
GROSS PROFIT. Gross profit was $62 or 10% of sales for the first quarter of
2004. There was no gross profit in the first quarter of 2003 as HomeCom had not
yet entered into the licensing agreement with Eurotech.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries for administrative personnel, insurance and other administrative
expenses, as well as expenses associated with maintaining the corporation's
records and reporting in compliance with its status as a public corporation.
General and administrative expenses increased from $31,090 in the first quarter
of 2003 to $262,566 in the first quarter of 2004. This increase is due to the
cost of the Licensed Technologies Division.
DEPRECIATION AND AMORTIZATION. With the write down of the carrying value of
all fixed assets in the fourth quarter of 2000, the Company has suspended
depreciation of its remaining assets in anticipation of a sale. Amortization
expense of $49,311, which represents three months of amortization of the
intangible Licensed Technologies, was recognized in the first quarter of 2004.
OTHER INCOME. There was no income outside of normal operations for the
first quarter of 2004. Other income in the first quarter of 2003 consisted of
$1,351 in interest earned on money market accounts, and $68,840 in the reversal
of accruals related to defaults on leases of capital equipment which were
resolved at a lower cost than estimated.
INTEREST EXPENSE. Interest expense for the first quarter of 2004 consisted
of $74,320 in interest charges on the Series B, C, D and E preferred stock,
$159,596 in penalty interest on the Series B, C, D and E preferred stock and
$7,800 in interest expense on the notes related to the Licensed Technologies
Division.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of capital are extremely limited. We have incurred operating
losses since inception and as of March 31, 2004, we had an accumulated deficit
of $27,886,914 and a working capital deficit of $2,798,300. On March 23, 2001,
we announced our intentions to wind down operations. We have entered into an
agreement to sell substantially all of the operating assets of our hosting and
website maintenance business to Tulix and we have entered into an agreement
whereby we license certain technologies from Eurotech. If we complete the Tulix
transaction, our primary assets will include cash and accounts receivable that
we do not transfer to Tulix, the assets that we license from Eurotech, and the
consideration that we receive from Tulix in the Asset Sale (consisting primarily
of a secured promissory note for $70,000 (although the amount of this note is
subject to adjustment) and shares of common stock of Tulix that, when issued,
will represent 15% of the outstanding shares of Tulix common stock).
11
On May 22, 2003, we executed a note in favor of one of our preferred
shareholders that, as amended, provides that we may borrow up to $460,000 for
use solely in connection with the technologies that we have licensed from
Eurotech. Advances under this agreement, which advances are secured by a
security agreement, bear interest at a rate of 10% per annum and mature on
December 31, 2004. As of March 31, 2004, we had borrowed $364,000 under this
agreement. Since March 31, 2004, we have borrowed another $96,000 from this
lender under this agreement.
On September 30, 2003, we entered into a Private Equity Credit Agreement
with Brittany Capital Management LLC ("Brittany"), which also beneficially owns
approximately 37.6% of the outstanding shares of our common stock. Pursuant to
this agreement, the Company has agreed to issue and sell to Brittany up to
$10,000,000 worth of the Company's common stock over the next three years. The
Company may sell these shares to Brittany from time to time, in its discretion,
subject to certain minimum and maximum limitations. Prior to any sales, however,
the Company is required to file a registration statement with, and have such
registration statement declared effective by, the Securities and Exchange
Commission relating to the shares to be issued. The number of shares of common
stock to be purchased by Brittany at any time will be determined by dividing (i)
the dollar amount requested by the Company by (ii) the market price of the
common stock, less a discount of 9% of the market price. The Company is required
to sell at least $1,000,000 worth of common stock to Brittany under the
agreement. If the Company does not do so, the agreement provides that the
Company will pay penalties to Brittany. The amount of the penalties will equal
to 91% of the difference between $1,000,000 (the minimum amount of common stock
that the Company is required to sell to Brittany under the agreement) and the
amount of common stock actually sold to Brittany during the term of the
agreement. The Company has agreed that, no later than December 31, 2004, it will
reserve and keep available for issuance a number of shares of common stock
sufficient to enable it to fulfill its obligations under this agreement. The
agreement provides that the number of shares to be purchased by Brittany in any
particular sale shall not exceed a number of shares that would cause Brittany to
own more than 9.9% of the then-outstanding shares of common stock. Also, in
connection with this agreement, the Company has entered into a Registration
Rights Agreement with Brittany pursuant to which the Company has agreed to
register, within 150 days after the Company's Certificate of Incorporation is
amended to increase the number of authorized shares of common stock to at least
150,000,000 shares, at least 20,000,000 shares of common stock, subject to
increases if the number of shares of common stock sold under the Private Equity
Credit Agreement exceeds 20,000,000 shares. If, by December 31, 2004, the
registration statement has not been declared effective, then the Private Equity
Credit Agreement and the Registration Rights Agreement will terminate and the
Company will be required to pay Brittany the penalties described above.
We can provide no assurance that the financing sources described above, or
any other financing that we may obtain in the future (if we are able to obtain
financing from any other sources, and we can provide no assurances that we will
be able to obtain any such financing), will enable us to sustain our operations.
The aforementioned factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements included herein have
been prepared assuming the Company is a going concern and do not include any
adjustments that might result should the Company be unable to continue as a
going concern.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
The Company's management has conducted an evaluation, under the supervision
and with the participation of the Company's Executive Vice President and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on this evaluation, the Executive Vice President and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of our last evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material legal proceedings. From time to time, we
are involved in various routine legal proceedings incidental to the conduct of
our business.
Item 2. Changes in Securities and Use of Proceeds
On March 22, 2004, the Company held a Special meeting of its Stockholders
(the "Special Meeting"). At the Special Meeting, the Company's stockholders
approved amendments to the Company's Certificate of Incorporation to, among
other things, (i) increase the number of shares of common stock that the Company
is authorized to issue from 15,000,000 to 300,000,000; (ii) allow fewer than all
of the stockholders to approve actions by written consent without a stockholder
meeting; and, (iii) effect a reverse split of the Company's outstanding shares
of common stock at a ratio of between 1-for-5 and 1-for-15, if and when (but no
later than December 31, 2004) the Board of Directors determines that such a
reverse split is in the best interests of the Company.
At the Special Meeting, the Company's stockholders also approved an
amendment to the Certificates of Designations, Preferences and Rights of the
Company's Series B, Series C, Series D and Series E preferred stock to delete
the mandatory conversion provisions of those series.
In connection with the closing of the transaction with Eurotech, the
holders of the Company's Series C, Series D, and Series E Preferred Stock,
together with one holder of the Company's Series B Preferred Stock, have agreed
to refrain from converting their shares of Preferred Stock into shares of common
stock until the Company has amended its Certificate of Incorporation to
authorize at least 150,000,000 shares of common stock. In addition, the holder
of the outstanding shares of the Company's Series C, Series D and Series E
Preferred Stock has agreed to accept payment for approximately $2.3 million of
penalties that may be owed to it in shares of common stock instead of cash.
These penalties are attributable to the Company's failure to register the resale
of the shares of Common Stock into which those shares of Preferred Stock are
convertible, as the Company was required to do by its agreements with the
holders of those Preferred Shares.
13
Item 3. Defaults Upon Senior Securities
As a requirement of the private placements of the Company's Series B, C, D
and E Convertible Preferred Stock, the Company was obligated to file and have
declared effective, within a specified time period, a registration statement
with respect to a minimum number of shares of common stock issuable upon
conversion of the Series B, C, D and E Preferred Stock. As of March 31, 2004,
such registration statement has not been declared effective and penalties are
owed to the Series B, C, D and E Preferred Stock holders. In accordance with the
terms of the agreement between the parties, penalties accrue at a percentage of
the purchase price of the unregistered securities per 30 day period. During the
quarter ending March 31, 2004, the Company accrued penalties of $159,596 as
interest expense. As of March 31, 2004, $2,325,155 has been accrued into
accounts payable and accrued expenses for such penalties. Additionally, the
outstanding shares of our Series B, C, D, and E Preferred Stock were scheduled
to convert automatically into shares of common stock in March 2002, July 2002,
September 2002, and April 2003, respectively, pursuant to the Certificates of
Designations governing our Series B, C, D, and E Preferred Stock. However,
because we did not have a sufficient number of authorized shares of Common Stock
available for issuance upon conversion of these shares of Series B, C, D, and E
Preferred Stock, we are not in compliance with the requirements of our
Certificate of Incorporation. Furthermore, no shares of Series B, C, D, or E
Preferred Stock have been converted since the automatic conversion date, and we
remain obligated to convert the remaining shares of Series B, C, D, and E
Preferred Stock into shares of common stock, although our stockholders have
approved amendments to the Certificates of Designations governing our Series B,
Series C, Series D and Series E preferred stock to delete these mandatory
conversion provisions. See "Item 4 - Submission of Matters to a Vote of Security
Holders," below. If the outstanding shares of Series B, C, D, and E Preferred
Stock had been converted into shares of common stock on March 31, 2004, we would
have been obligated to issue 75,242,801 shares of common stock upon such
conversions. In connection with the closing of the transaction with Eurotech,
the holders of the Company's Series C, Series D, and Series E Preferred Stock,
together with one holder of the Company's Series B Preferred Stock, have agreed
to refrain from converting their shares of Preferred Stock into shares of common
stock until the Company has amended its Certificate of Incorporation to
authorize at least 150,000,000 shares of common stock. In addition, the holder
of the outstanding shares of the Company's Series C, Series D and Series E
Preferred Stock has agreed to accept payment for approximately $2.3 million of
penalties that may be owed to it in shares of common stock instead of cash.
Item 4. Submission of Matters to a Vote of Security Holders
On March 22, 2004 HomeCom Communications held a Special Meeting of the
Stockholders at which the following proposals were approved by the stockholders:
(1) a proposal to sell substantially all of the assets of HomeCom's hosting and
website maintenance business to Tulix Systems, Inc., an entity in which Timothy
R. Robinson, Gia Bokuchava and Nino Doijashvili, who are directors and officers
of HomeCom, are the sole shareholders, directors and officers; (2) a proposal to
amend HomeCom's Certificate of Incorporation to change the name of the company
to "Global Matrechs, Inc."; (3) a proposal to amend HomeCom's Certificate of
Incorporation to increase the number of shares of common stock that HomeCom is
14
authorized to issue from 15,000,000 to 300,000,000; (4) a proposal to amend
HomeCom's Certificate of Incorporation to allow fewer than all of the
stockholders to approve actions by written consent without a stockholder
meeting; (5) a proposal to effect a reverse split of HomeCom's common stock at a
ratio of between 1-for-5 and 1-for-15, if and when (but not later than December
31, 2004) the Board of Directors determines that such a reverse split is in the
best interests of HomeCom; (6) proposals to amend the Certificates of
Designations, Preferences and Rights of HomeCom's Series B, Series C, Series D
and Series E preferred stock to delete the mandatory conversion provisions of
those series; and, (7) a proposal to elect Michael Sheppard, Timothy R.
Robinson, Gia Bokuchava, Nino Doijashvili, and Randolph A. Graves, Jr. to serve
on HomeCom's Board of Directors.
The votes were tabulated as follows;
1.) Approval of the Sale of Assets to Tulix Systems, Inc.
---------------------------------------------------------
Votes Votes Abstentions
Votes For Against Withheld and Non-Votes
--------- ------- -------- -------------
8,256,806 65,460 32,819 6,644,072
2.) Approval of the Proposed Amendment to Change the Name of the Company
------------------------------------------------------------------------
Votes Votes Abstentions
Votes For Against Withheld and Non-Votes
--------- ------- -------- -------------
13,971,531 99,950 174,739 752,937
3.) Proposed Increase in the Number of Authorized Shares of Common Stock
------------------------------------------------------------------------
Votes Votes Abstentions
Votes For Against Withheld and Non-Votes
--------- ------- -------- -------------
13,791,000 428,562 26,658 752,937
4.) Proposed Amendment to Permit Action by the Written Consent of a Majority of
Stockholders
-------------------------------------------------------------------------------
Votes Votes Abstentions
Votes For Against Withheld and Non-Votes
--------- ------- -------- -------------
7,864,320 467,207 23,558 6,644,072
15
5.) Proposed Reverse Split
--------------------------
Votes Votes Abstentions
Votes For Against Withheld and Non-Votes
--------- ------- -------- -------------
13,761,675 471,187 13,358 752,937
6.) Deletion of Mandatory Conversion Provisions
-----------------------------------------------
Votes Votes Abstentions
Votes For Against Withheld and Non-Votes
--------- ------- -------- -------------
Series B
--------
Common votes 8,187,210 102,156 65,719 6,644,072
Series B votes 17.813 0 0 0
Series C
--------
Common votes 8,192,210 101,916 60,959 6,644,072
Series C votes 90.479 0 0 0
Series D
--------
Common votes 8,194,910 101,916 58,259 6,644,072
Series D votes 1.291 0 0 0
Series E
--------
Common votes 8,193,810 99,816 61,459 6,644,072
Series E votes 106.35 0 0 0
7.) Election of Directors
-------------------------
Votes Votes Abstentions
Name Votes For Against Withheld and Non-Votes
---- --------- ------- -------- -------------
Michael Sheppard 13,659,005 76,455 1,005,100
Timothy Robinson 13,659,005 76,455 1,005,100
Gia Bokuchava 13,659,005 76,455 1,005,100
Nino Doijashvili 13,659,005 76,455 1,005,100
Randolph A. Graves, Jr 13,516,905 218,555 1,005,100
16
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (This certification is not "filed" for purposes
of Section 18 of the Exchange Act [15 U.S.C. 78r] or
otherwise subject to the liability of that section. Such
certification will not be deemed to be incorporated by
reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the Company
specifically incorporates them by reference.)
(b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
HOMECOM COMMUNICATIONS, INC.
By: /s/ Timothy R. Robinson
---------------------------
Name: Timothy R. Robinson
Title: Executive Vice President,
Chief Financial Officer
Date: May 21, 2004
18
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (This certification is not "filed" for purposes
of Section 18 of the Exchange Act [15 U.S.C. 78r] or
otherwise subject to the liability of that section. Such
certification will not be deemed to be incorporated by
reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the Company
specifically incorporates them by reference.)