10QSB 1 macreport10qsb053105.txt PERIOD ENDED 05-31-05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the quarterly period ended May 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from to ----------- ------------ Commission File Number: 333-64244 THE MACREPORT.NET, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-3584538 ------------------------------ ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 Broadhollow Road Suite PH11 Melville, NY 11747 ----------------------------------------------------------- (Address, including zip code, of principal executive offices) (631) 423-4222 -------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X No ----- ----- (2) Yes X No ----- ----- 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. The number of shares of Common Stock outstanding as of May 31, 2005 was 17,293,041. THE MACREPORT.NET, INC. FORM 10-QSB May 31, 2005 INDEX PART I - FINANCIAL INFORMATION Page Item 1. ---- Unaudited Condensed Consolidated Balance Sheet 3 Unaudited Condensed Consolidated Statements of Operations 4 Unaudited Condensed Consolidated Statements of Cash Flows 6 Unaudited Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Controls and Procedures 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults by the Company upon Its Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- THE MACREPORT.NET, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED MAY 31, 2005 ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 891,333 Marketable securities 459,744 Accounts receivable 6,440 Other current assets 4,000 ----------- Total current assets 1,361,517 PROPERTY AND EQUIPMENT, net 1,752,397 OTHER ASSETS Deposits 10,221 ----------- Total other assets 10,221 ----------- Total assets $ 3,124,135 =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses $ 249,314 Notes payable 1,387,466 Current Portion of Loan Payable - Related Party 229,737 Deferred revenue 89,495 ----------- Total current liabilities 1,956,012 Loan Payable - Related Party 638,619 ----------- Total Liabilities 2,594,631 COMMITMENTS STOCKHOLDERS' EQUITY: Preferred stock $.0001 par value, authorized 5,000,000 shares, no shares issued -- Common stock $.0001 par value, authorized 25,000,000 shares, 17,293,041 shares issued and outstanding 1,730 Additional paid-in-capital 3,731,872 Deficit (3,204,098) ----------- Total stockholders' equity 529,504 ----------- Total liabilities and stockholders' equity $ 3,124,135 =========== See accompanying notes to condensed consolidated financial statements. 3
THE MACREPORT.NET, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED Three months Three months ending ending May 31, May 31, 2005 2004 ------------ ------------ REVENUES $ 441,590 $ 789,911 COST OF REVENUES 187,590 75,261 ------------ ------------ GROSS PROFIT 254,000 714,650 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 603,287 344,002 ------------ ------------ (LOSS) INCOME BEFORE OTHER INCOME (EXPENSE) (349,287) 370,648 OTHER INCOME (EXPENSE): Net Rental Loss (67,500) -- Unrealized (loss) gain on non-marketable securities (111,406) 6,770 Gain on sale of marketable securities 339 34,733 Interest expense (36,090) (21,237) Interest income 65 -- ------------ ------------ (214,592) 20,266 ------------ ------------ (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (563,879) 390,914 PROVISION FOR INCOME TAXES -- -- ------------ ------------ NET (LOSS) INCOME $ (563,879) $ 390,914 ============ ============ (LOSS) INCOME PER COMMON SHARE: BASIC $ (0.03) $ 0.02 ============ ============ DILUTED $ (0.03) $ 0.02 ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 17,293,041 16,283,809 ============ ============ DILUTED 17,293,041 16,704,233 ============ ============ See accompanying notes to condensed consolidated financial statements. 4
THE MACREPORT.NET, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED Six months Six months ending ending May 31, May 31, 2005 2004 ------------ ------------ REVENUES $ 919,240 $ 1,118,519 COST OF REVENUES 303,983 128,660 ------------ ------------ GROSS PROFIT 615,257 989,859 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,060,666 519,479 ------------ ------------ (LOSS) INCOME BEFORE OTHER INCOME (EXPENSE) (445,409) 470,380 OTHER INCOME (EXPENSE): Net Rental Loss (191,133) -- Other income 5,000 Unrealized (loss) gain on non-marketable securities (30,834) 8,860 (Loss) gain on sale of marketable securities (543,486) 39,867 Interest expense (62,686) (42,704) Interest income 1,508 -- ------------ ------------ (821,631) 6,023 ------------ ------------ (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (1,267,040) 476,403 PROVISION FOR INCOME TAXES 125 -- ------------ ------------ NET (LOSS) INCOME $ (1,267,165) $ 476,403 ============ ============ (LOSS) INCOME PER COMMON SHARE: BASIC $ (0.08) $ 0.03 ============ ============ DILUTED $ (0.08) $ 0.03 ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 16,869,964 16,278,524 ============ ============ DILUTED 16,869,964 16,694,524 ============ ============ See accompanying notes to condensed consolidated financial statements. 5
THE MACREPORT.NET, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED Six months Six months ending ending May 31, May 31, 2005 2004 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(1,267,165) $ 476,403 ----------- ----------- Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 21,747 4,629 Unrealized loss (gain) on non-marketable securities 30,834 (8,860) Realized loss (gain) on sale of securities 543,486 (39,867) Marketable securities received for payment of services (117,995) (764,603) Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable 8,268 -- Deposits (2,650) Increase (decrease) in liabilities: Accounts payable and accrued expenses (27,665) (17,263) Deferred revenue (274,538) 268,591 ----------- ----------- Total adjustments 181,487 (557,373) ----------- ----------- Net cash used in operating activities (1,085,678) (80,970) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of marketable securities 252,945 488,524 Purchase of property and equipment (1,048,477) (6,000) ----------- ----------- Net cash (used in) provided by investing activities (795,532) 482,524 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 2,000,000 -- Repayments of notes payable (78,491) -- ----------- ----------- Net cash provided by financing activities 1,921,509 -- ----------- ----------- Net increase in cash and cash equivalents 40,299 401,554 Cash and cash equivalents at beginning of period 851,034 1,868 ----------- ----------- Cash and cash equivalents at end of period $ 891,333 $ 403,422 =========== =========== See accompanying notes to condensed consolidated financial statements. 6
THE MACREPORT.NET, INC. AND SUBSIDIARY NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MAY 31, 2005 AND MAY 31, 2004 ITEM 1. NOTES TO FINANCIAL STATEMENTS ------- ----------------------------- 1. The Condensed Consolidated Balance Sheet as of May 31, 2005, the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the six months ended May 31, 2005 and May 31, 2004 have been prepared by us without audit. All unaudited amounts are subject to year-end adjustments and audit, but the Company believes all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the financial condition, results of operations and changes in cash flows for all interim periods have been made. The results of operations for interim periods are not necessarily indicative of the operating results for the full year Footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with published rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's form 10-KSB for the most recent fiscal year ended November 30, 2004. The results of operations and cash flows for the three months ended May 31, 2005 are not necessarily indicative of the results to be expected for the full year. 2. Summary of Significant Accounting Policies: ------------------------------------------- Principles of consolidation The consolidated financial statements include the accounts of the Company and three subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The subsidiaries are as follows: The Marcellus Group, LLC - A company owned 100% by the MacReport.Net that was formed in 2004 to acquire, renovate, and lease out commercial properties. As of May 31, 2005, the Marcellus Group LLC owned six buildings in the town of Marcellus, New York. MacNetworks Inc. - A company owned 100% by the MacReport.Net that was formed in 2004. As of May 31, 2005, there has been no material activity in this corporation. Spring Bay Oil Company Inc. - A company owned 77% by the MacReport.Net that was formed in 2004 to develop a product that can be used in the production of oil. As of May 31, 2005, there has been no material activity in this corporation. JA Spa, LLC - A company owned 100% by the MacReport.Net that was formed in 2005. As of May 31, 2005, there has been no material activity in this corporation. Use of estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition ------------------- Revenues from fee-based contracts with terms greater than one month are recognized ratably over the life of the contract. Advertising revenues are recognized over the period of the related ad. 7
Certain agreements with customers provide for payment in the form of restricted equity securities of publicly traded companies. In accordance with Financial Accounting Standards Board Statement No. 123(R), "Accounting for Stock Based Compensation", revenue recognized from these transactions is based on the value of similar services rendered to other customers for whom the Company receives payment in cash. Marketable securities The Company reports its investment in marketable securities under the provisions of Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities." In accordance with this standard, securities which are classified as "trading securities" are recorded in the Company's balance sheet at fair market value, with the resulting unrealized gain or loss reflected in the Company's statement of operations in the current period. Securities which are classified as "available for sale" are also reported at fair market value, however, the unrealized gain or loss on these securities is listed as a separate component of stockholders' equity. Net (loss) income per common share and per common share equivalent share The reconciliations for the six and three months ended May 31, 2005 and May 31, 2004 are as follows: Six Months Ended May 31, 2005 Loss Shares Per Share ----------------------------- ----------- ----------- ----------- Basic EPS $(1,267,165) 16,869,964 $ (0.08) Effect of Dilutive Securities -- -- -- ----------- ----------- ----------- Diluted EPS $(1,267,165) 16,869,964 $ (0.08) =========== =========== =========== Six Months Ended May 31, 2004 Income Shares Per Share ----------------------------- ----------- ----------- ----------- Basic EPS $ 476,403 16,278,524 $ 0.03 Effect of Dilutive Securities -- 416,000 -- ----------- ----------- ----------- Diluted EPS $ 476,403 16,694,524 $ 0.03 =========== =========== =========== Three Months Ended May 31, 2005 Loss Shares Per Share ------------------------------- ----------- ----------- ----------- Basic EPS $ (563,879) 17,293,041 $ (0.03) Effect of Dilutive Securities -- -- -- ----------- ----------- ----------- Diluted EPS $ (563,879) 17,293,041 $ (0.03) =========== =========== =========== Three Months Ended May 31, 2004 Income Shares Per Share ------------------------------- ----------- ----------- ----------- Basic EPS $ 390,914 16,283,809 $ 0.02 Effect of Dilutive Securities -- 420,424 -- ----------- ----------- ----------- Diluted EPS $ 390,914 16,704,233 $ 0.02 =========== =========== =========== Comprehensive (loss) Income --------------------------- Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity. Comprehensive (loss) income approximated (loss) net income for all periods presented. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The following discussion and analysis should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report. This report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of forward-looking terminology, such as "may", "will", "should", "expect", "anticipate", "estimate", "project", "continue", "plans", "intends" or other similar terminology. We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from the statements that constitute forward-looking statements as a result of various factors. Introduction and Nature of Business Our core strategy is to be a leading Web portal for financial professionals and business decision makers and worldwide provider of multimedia production and distribution services to corporations and other organizations. Our revenues have been generated from the sale of package services to public and private companies. The packages range from merely exposure on our web site to a comprehensive service package, including press release services and in certain cases, client exposure in "Institutional Investor" magazine. Overview The MacReport.Net, Inc. was incorporated as a Delaware corporation in December 2000. We commenced operations at such time. The Company is an internet information and media company formed to allow publicly and privately held companies to communicate relevant corporate information directly with the investing public. This is done through the use of a web site that provides the user with key information via management interviews, press releases, and other information. Prior to the fourth quarter of fiscal 2004, our activities had been primarily devoted to business development, proof of concept activities, recruiting personnel and other start-up activities, however, recently, our revenues have grown substantially through sales of our services and products and the Company's focus has shifted to growing its customer base. General The Macreport.net, Inc. We are an information and media company that provides a Web-based forum for public and private issuers to communicate corporate audio news content to the business, financial and investing community through our Web site, located at www.macreport.net. We have built a user friendly, highly effective Web site that aggregates and disseminates information from multiple sources. Through content partnerships, we also provide Web-based financial information to professionals who need quick access to reliable corporate, industry and market intelligence. By visiting our website, users are able to access comprehensive and up-to-the minute business and financial information on public and private companies from several information providers drawing upon multiple sources of content. Our services enable timely, online access to a wide array of proprietary and partner content. These sources include both textual information, such as news, trade press, SEC filings, executive biographies and analyst reports, and numeric information, such as company financial results, stock quotes and industry statistics. 9 We expect that visitors to our Web site use our information for their professional endeavors, including financial and competitive research, as well as for their personal activities. We believe that we provide advertisers with a large, demographically desirable business audience. We market and sell package services to public and private companies. The packages range from merely exposure on our web site to a comprehensive service package, including press release services as well as client exposure on our website. Also, the Company purchases advertising pages from "Institutional Investor" magazine and, within these pages, highlights its clients and information regarding such client's business. The press release services can range from a set amount of client press releases per month to unlimited. Subsidiaries The Company incorporated Macnetworks, Inc., a Delaware corporation that is wholly-owned by the Company. In February 2004, Macnetworks was appointed as a General Partner for Van Pfeiffer, L.P., a New York limited partnership and hedge fund that primarily invests in private investments in public companies. For its services, Macnetworks will receive 1.5% of the net assets and 20% of profits, if any, of Van Pfeiffer. Macnetworks has not, as of May 31, 2005, received any compensation from Van Pfeiffer. In 2004, the Company incorporated The Marcellus Group, LLC, a New York limited liability company. As of May 31, 2005, The Marcellus Group purchased six commercial building properties in Marcellus, New York for the purposes of office space for the Company. The buildings are currently being renovated for use by the Company. A certain portion of the property will be rented for retail commercial use. In 2004, the Company also incorporated SpringBay Oil Company, Inc., a New York corporation. SpringBay Oil Company was formed in 2004 to develop a product that can be used in the production monitoring of oil wells. As of May 31, 2005, there has been no material activity in this limited liability company. In February 2005, the Company incorporated JA Spa, LLC., a New York limited liability company. JA Spa, LLC was formed to develop a health spa concept within one of the properties owned by the Company in Marcellus, New York. The business plans for JA Spa, LLC are currently being prepared. Subsequent History In June 2005, the Company formed Monolith Athletic Club, LLC, a New York limited liability company. Monolith was formed to purchase a franchise and operate a professional soccer team in the Syracuse, New York area. Monolith has not as of the date of this report entered into an agreement in furtherance of its business plans. On June 29, 2005, Springbay Oil Company, Inc. merged with Monolith Athletic Club, LLC to form a new corporation, Monolith Athletic Club, Inc. 10
Selected Financial Data Six Months ended, ----------------- RESULTS OF OPERATIONS: May 31, 2005 May 31, 2004 ------------ ------------ Total revenues $ 919,240 $ 1,118,519 Net (loss) income $ (1,267,165) $ 476,403 Net (loss) income attributable to common stockholders $ (1,267,165) $ 476,403 Basic (loss) income per common share $ (0.08) $ 0.03 Diluted (loss) income per common share $ (0.08 $ 0.03 Weighted average common shares outstanding Basic 16,869,964 16,278,524 Weighted average common shares outstanding Diluted 16,869,964 16,964,524 Results of Operations Three Months ended May 31, 2005 compared with three months ended May 31, 2004. Overall Financial Situation. The Company had revenues of $441,590 for the three month period ended May 31, 2005, a decrease of $348,321 or 44% from the three month period ended May 31, 2004. The Company's revenues consisted mainly of the selling of the packages of its services. The Company has cost of revenues of $187,590 for the three month period ended May 31, 2005, an increase of $112,329 or 149% from the three month period ended May 31, 2004. The Company's cost of revenues includes the costs and expenses of its vendors and subcontractors that provide services on behalf of the Company in connection with its packages of services. The Company had stockholders' equity at May 31, 2005 in the amount of $529,504, an increase of $1,552,621 from the stockholders' deficiency at May 31, 2004 of ($1,023,117). This increase is primarily due to the company's sale of unregistered securities during the second quarter. Selling, general and administrative expenses increased from the three month period ended May 31, 2004 by $259,285 or 75% resulting in a loss from operations of ($349,287) for the three month period ended May 31, 2005. These expenses consist primarily of professional fees and other corporate expenses, including business development and general legal activities. Interest expense increased by $14,853 for the three month period ended May 31, 2005 from $21,237 for the three month period ended May 31, 2004 primarily due to the Company's debt financing in October 2004. Revenues. The Company had revenues of $441,590 for the three month period ended May 31, 2005, a decrease of $348,321 or 44% from the three month period ended May 31, 2004. Selling, General and Administrative Expenses. Selling general and administrative expenses increased from the three month period ended May 31, 2004 by $259,285 or 75%, resulting in a loss from operations of $349,287 for the three month period ended May 31, 2005. These expenses consist primarily of professional fees and other corporate expenses, including business development and general legal activities. Six Months ended May 31, 2005 compared with six months ended May 31, 2004. Overall Financial Situation. The Company had revenues of $919,240 for the six month period ended May 31, 2005, a decrease of $199,279 or 18% from the six month period ended May 31, 2004. The Company's revenues consisted mainly of the selling of the packages of its services. The Company has cost of revenues of $303,983 for the six month period ended May 31, 2005, an increase of $175,323 or 136% from the six month period ended May 31, 2004. The Company's cost of 11
revenues includes the costs and expenses of its vendors and subcontractors that provide services on behalf of the Company in connection with its packages of services. The Company had stockholders' equity at May 31, 2005 in the amount of $529,504, an increase of $1,552,621 from the stockholders' deficiency at May 31, 2004 of ($1,023,117). This increase is primarily due to the company's sale of unregistered securities during the second quarter. Selling, general and administrative expenses increased from the six month period ended May 31, 2004 by $541,187 or 104%, resulting in a loss from operations of $445,409 for the six month period ended May 31, 2005. Interest expense increased by $19,982 for the six month period ended May 31, 2005 from $42,704 for the six month period ended May 31, 2004 primarily due to the Company's debt financing in October 2004. Revenues. The Company had revenues of $919,240 for the six month period ended May 31, 2005, a decrease of $199,279 or 18% from the six month period ended May 31, 2004. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased from the six month period ended May 31, 2004 by $541,187 or 104%, resulting in a loss from operations of $445,409 for the six month period ended May 31, 2005. These expenses consist primarily of professional fees and other corporate expenses, including business development and general legal activities] Summary of Critical Accounting Policies; Significant Judgments and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. A summary of those accounting policies that we believe are most critical to fully understanding and evaluating our financial results is set forth below. This summary should be read in conjunction with our Annual Report on Form 10-KSB for the year ended November 30, 2004. Revenue Recognition and Allowance for Doubtful Accounts. We recognize revenue from the provision of professional services under written service contracts with our clients. We derive our revenue from fixed-price, fixed-time contracts. Revenue generated from these contracts is recognized based on the ratio of labor hours incurred to estimated total labor hours. This method is used because reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made, based on historical experience and milestones set in the contract. Revenues from fee-based contracts with terms greater than one month are recognized ratably over the life of the contract. Advertising revenues are recognized over the period of the related ad. Certain agreements with customers provide for payment in the form of restricted equity securities of publicly traded companies. In accordance with Financial Accounting Standards Board Statement No. 123(R), "Accounting for Stock Based 12 Compensation", revenue recognized from these transactions is based on the value of similar services rendered to other customers for whom the Company receives payment in cash. If we do not accurately estimate the resources required or the scope of work to be performed for a contract or we do not manage the project properly within the planned time period, then we may recognize a loss on the contract. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. We have committed unanticipated additional resources to complete projects in the past, which has resulted in lower than anticipated profitability or losses on those contracts. We expect that we will experience similar situations in the future. In addition, we may fix the price for some projects at an early stage of the process, which could result in a fixed price that turns out to be too low and, therefore, could adversely affect our business, financial condition and results of operations. In some instances during the quarter ended May 31, 2005, we provided services to clients in exchange for equity instruments of the client. We measure the fair value of the equity instrument on the date the parties come to a mutual understanding of the terms of the arrangement and a commitment for performance by us to earn the equity instruments is reached, or when the equity is earned, whichever occurs earlier. Liquidity and Capital Resources In February 2005, the Company sold 1,000,000 shares of its common stock to one individual for two million dollars ($2,000,000). The shares of common stock are restricted. The issuance of the securities in the transaction were deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act and Regulation D promulgated thereunder as transactions by an issuer not involving any public offering. In October 2004, Marcellus Group, LLC, the Company's wholly owned subsidiary, borrowed one million dollars ($1,000,000) from Crown Mill Restoration Development LLC, a New York limited liability company wholly owned by V. William Lucchetti, Jr., the Company's Chief Executive Officer, Chairman of the Board of Directors and 92% shareholder of the Company, pursuant to a promissory note. The terms of the promissory note provides that interest accrues at a rate of eight percent (8%) and the principal and interest is payable as follows: (i) monthly installments of $25,947 (representing accrued interest and $500,000 of principal) up to and including November 1, 2006; and (ii) $500,000 payment due on November 1, 2006. As of May 31, 2005, we had $891,333 in cash and cash equivalents. Current and Future Financing Needs We have spent, and expect to continue to spend, substantial amounts in connection with growing our customer base. We have 33 full time employees and 39 part time employees. We do not engage any consultants. Based on our current plans, we believe that our cash and cash equivalents and cash flows (from increasing revenues) will be sufficient to enable us to meet our planned operating needs. However, the actual amount of funds we may need to operate is subject to many factors, some of which are beyond our control. 13 These factors include the following: o costs associated with any acquisitions targets; o costs associated with marketing our services; and o our ability to grow our customer base and retain our current customers. We have based our belief of not requiring any additional funds on assumptions that may prove to be wrong. 14 ITEM 3. CONTROLS AND PROCEDURES ----------------------- Within the 90-days prior to the filing of this quarterly report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Executive Vice President/Director, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Vice President/Director concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this quarterly report. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to our most recent evaluation of our internal controls. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- The Company is involved in various legal proceedings and claims incident to the normal conduct of its business. The Company believes that such legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on its financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------- In February 2005, the Company sold 1,000,000 shares of its common stock to one accredited individual for two million dollars ($2,000,000). The shares of common stock are restricted. The issuance of the securities in the transaction were deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act and Regulation D promulgated thereunder as transactions by an issuer not involving any public offering. ITEM 3. DEFAULTS BY THE COMPANY UPON ITS SENIOR SECURITIES -------------------------------------------------- During March, April and May 2003, pursuant to a loan restructuring of the $100,000 February 28, 2003 six month promissory note, the $100,000 January 14, 2002 120-day promissory note (as amended), the $100,000 November 16, 2001 60-day promissory note (as amended), and other notes (as included below) with an aggregate principal amount of $97,997, the Company received an additional $355,000 from the holder of the notes who is also a shareholder of the Company. Pursuant to the restructuring, the Company issued this shareholder (the holder of the notes) a convertible promissory note with an aggregate principal amount of $752,997 plus interest accrued pursuant to the terminated notes. In addition, pursuant to the loan restructuring, the holder of the note is entitled to be issued warrants to purchase common stock of the Company in an amount to be agreed upon between the Company and such holder. The convertible note bears interest at a rate of 8% per annum with a maturity date of May 30, 2004. Pursuant to the terms of the convertible note, prior to May 30, 2004, we may convert the balance due together with accrued interest into shares of common stock. The conversion ratio is 2.50. Each of the prior notes, the $100,000 February 28, 2003 six month promissory note, the $100,000 January 14, 2002 10-day promissory note (as amended), the $100,000 November 16, 2001 60-day promissory note (as amended), and the other notes with an aggregate principal amount of $97,997, have been cancelled. As of July 1, 2005, the note has not been repaid, but the Company is in the process of restructuring the note with the individual. Convertible promissory notes totaling $174,059 bear interest at a rate of 8% per annum with maturity dates that have expired. Pursuant to the terms of the convertible notes, if the Company does not prepay the notes prior to their expiration, on the expiration date, the Company may convert the balance due together with accrued interest into shares of the Company's common stock. The conversion ratio for these notes is the greater of : (i) the amount that is equal to the product of the closing bid price per share for the Common Stock, as reported on the over-the-counter electronic bulletin board, or such other public market that the Company's Common Stock is then traded and seventy-five percent (75%); and (ii) 3.50. The Company is currently in negotiations with these note holders with respect to the conversion of notes into common stock and expects to convert the notes within 30 days. 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. ITEM 5. OTHER INFORMATION ----------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- a) Exhibits Exhibit 31.1 Certification of V. William Lucchetti pursuant to Rule 13-14(a) and Item 307 of Regulation SB Exhibit 32.1 Certification by V. William Lucchetti Pursuant to the 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b) Reports on Form 8-K None 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MACREPORT.NET, INC. ----------------------- (Registrant) By: /s/ Vito W. Lucchetti, Jr. --------------------------------- Vito W. Lucchetti, Jr. Chairman, Chief Executive Officer and President (Principal Executive Officer and Principal Accounting and Financial Officer) Date: July 15, 2005 18