Item 1. Business
History
Meganet was organized under the laws of the State of Nevada on March 26, 2009. On March 26, 2009, the Company issued 100,000,000 shares of common stock to the founding shareholders, valued at $0.021833 per share or $2,183,379 as consideration for equipment with a historical net book value of $2,205,365, liabilities of $50,000 and other net receivables of $28,104. The valuation was determined based upon the predecessor value of the assets and liabilities which were contributed to the Company in exchange for the shares of common stock. Each shareholder received the same number of shares held in the prior company. Meganet is an inventor, developer and marketer of data security, intelligence/counter-intelligence and military operational devices. Its customers include governments including the military of and the intelligence agencies of the United States and NATO as well as private enterprise.
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Our Products
Meganet’s products are divided into twelve main categories.
1)
Encryption - The Company owns multiple patents worldwide for the world’s most powerful encryption algorithm and the only unbreakable encryption in existence, therefore holding the promise to change the data security market forever. The company has developed a myriad of products and solutions with this algorithm and has been hugely successful in marketing these products to commercial, government and military users worldwide and has successfully secured major sales in those markets.
2)
Weapon Systems - The Company is a Weapon& Ammunition Manufacturer, Importer, Exporter & Dealer.
3)
Armored Vehicles levels B6 & B7 with optional RF jamming - producing the best armored vehicles for military ^ VIP use worldwide with optional bomb jamming.
4)
Bomb Jamming - The world’s most powerful and effective counter-IED products. Products include a 2,500 Watt Bomb Jammer on Wheels, Man Pack Jammers, Facility Jammers and many others used by the USA and NATO forces worldwide.
5)
Communication Interception - our line of cell phone interceptors includes on-the-fly real-time interception of GSM A5.1, GSM A5.2 & CDMA. Our line of Satellite interceptors includes Iridium, Inmarsat, Thuraya and Global Star. Our Wireless Interceptors includes Wi-Fi (both WEP and WPA), GPRS, UMTS and more. No other company in the world offers real-time GSM A5.1 interceptors; these are undetectable and can fit inside a small suitcase. The existing customer base includes the USA military and other agencies.
6)
Secure Communications - the world’s most extensive solutions including encrypted cell phones, encrypted land lines, encrypted fax, encrypted PDA, encrypted radios, encrypted satellite phones and more - unparalleled by any other company. These are sold to and used by the USA military and select federal agencies.
7)
Intelligence / counter-intelligence products - providing the intelligence and counter-intelligence agencies with a plethora of tools to be able to perform their duties with complete success over a wide variety of fields. SPY & RAT phones and devices are the most sophisticated devices in existence providing unparalleled intelligence assets to select agencies. In addition, bugs, bug detectors, bomb sniffers, miniature cameras, DVRs and many others tools of the trade are offered by Meganet to effectively fulfill the needs of different agencies.
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8)
Global Defense integrator offering complete national Security Solutions for border protection from land, sea & air.
9)
Unmanned Aerial Vehicles (UAVs) including airplanes, helicopters & classified. both for observation and weaponized.
10)
Ballistic projectiles & Anti Aircraft Guns and optics.
11)
Over the Horizon radar system enabling to see ships in sea over 400km away from the shore.
12)
Many classified military products
Technologies:
Encryption
The Company is an assignee of patent rights (U.S. Patent # 6,219,421) to an encryption algorithm which has yet to be broken or compromised and which is the most powerful on the market. Standard USA government encryption standard of AES is 256 bits while VME is over 1 million bits. Using this algorithm, the Company has developed a line of products using what Meganet calls Virtual Matrix Encryption or VME. These products have the capacity to protect data in biometric USB storage devices, computer files, email, chat, File Transfer Protocol (FTP), and more. VME also has digital signature applications and an electronic file shredder that allows for the secure shredding of confidential files, folders and disks. The company has put the encryption technology to multiple public challenges to try and break it for a prize of $1 million USD and even though hundreds of thousands of people tried all of them failed to break it.
Bomb Jamming
A bomb jammer prevents the detonation of an improvised explosive device (IED) also known as a roadside bomb. Meganet’s bomb jammers include motorcade applications for protecting convoys and soldier backpack applications for protecting foot patrols. Meganet has sold bomb jammers to the U.S. military, the U.S. intelligence agencies and for purposes of NATO applications. Meganet can also sell its bomb jammers outside the U.S. with a proper export license issued under the International Traffic in Arms Regulations (“ITAR”).
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Communication Interception
The Company’s products include real-time cell phone, WiFi and other communication interceptors. Our client base for interceptors is the U.S. military and certain U.S. intelligence agencies and other countries and agencies of those countries upon obtaining the necessary export licensing under ITAR.
Secure Communications
The Company’s secure communication applications include encrypted cell phones, encrypted land lines, encrypted fax, encrypted PDA, encrypted radios, encrypted satellite phones and more. These are sold to and used by the U.S. military and select federal agencies and worldwide under ITAR licensing.
Intelligence/counter-intelligence Products
In addition to products already described in other categories, Meganet has a plethora of tools enabling the intelligence/counter-intelligence world to better perform its duties. In this realm, the Company provides bugs, bug detectors, bomb sniffers, miniature cameras and SPY and RAT phones. SPY phones include such functions as the carrier being able to activate the phone for purposes of recording and/or transmitting the proceedings of face to face meeting or conferences without any indication that the phone is active or has been activated. Also, other SPY phones allow for an outside party to activate a phone for the same purposes without even the carrier being aware that the phone has been activated.
Patents and Trademarks
As mentioned earlier, the Company is an assignee of patent rights (U.S. Patent # 6,219,421 and Mexican Patent # 218564 and pending in 70 additional countries.) to an encryption algorithm that supports Meganet’s encryption products. This patent was granted ten years ago and will therefore expire in April of 2021. Even after the expiration of the patent, Meganet will still be able to produce and sell the products based upon this patent. This technology is also FIPS 140-2 certified by the NSA & NIST for government use in the USA & NATO countries.
Meganet has also applied for patent protection on a technology it calls T-Sequence. A patent on this technology has not been granted but is pending. This technology allows for deterministic prime numbers testing in polynomial time and factoring in real time.
Meganet has the following registered trademarks that it uses to identify its products and ideas in the marketplace: Secure Information is Power ™, Virtual Matrix Encryption ™, Meganet Corporation ™, Solutions for a Large Universe ™, VME ™, Ciphertext ™, Cipherlock ™, and Cipherfile ™.
Copyrights:
VMEware ©
VME Office ©
VME Sign ©
VME Mail ©
VME Shredder ©
VME Cell ©
VME Phone ©
VME Satellite ©
VME Radio ©
VME Fax ©
VME PDA ©
VME Spy ©
VME RAT ©
VME Interceptor ©
VME Jammer ©
VME Terminator ©
VME ManPack ©
VME Drive ©
VME Gateway ©
VME BioDrive ©
VME USB Drive ©
VME Suite ©
VME Control ©
VME Central ©
VME Config ©
VME Editor ©
VME Batch ©
Our Business Structure
Much of the value of our company and its products is based upon our intellectual property that provides, for example, the effectiveness of our encryption products and interceptor products. The intellectual property is normally in the form of software. The hardware such as USB storage devices or phones that we sell are typically comprised of off the shelf technology. However, when the hardware component is loaded with our proprietary software, the data on the storage device or the communications on the phones become encrypted to an extent that the product obtains it value. Though some of our intellectual property is protected by patent rights, much of it is protected by trade secrets. Accordingly, to protect our intellectual property from a rogue employee for example, access to our intellectual property is very limited within the Company.
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The manufacturing of the hardware components of our products is conducted by independent third parties. We have no production contracts with these parties but rather order product via purchase orders when we have obtained an order from a client. We have manufacturers that over time we have come to trust, that deliver superior hardware product, whose identities we even consider as trade secrets. However, as stated previously, when the hardware product reaches us, it is superior product but does not go beyond what would be considered off the shelf technology. The software component that Meganet is assigned is then loaded into the product and shipped.
With the exception of the creation and production of our 59 software products which are created in house by our CEO, Mr. Saul Backal, many elements of our business operations from hardware manufacturing to sells to shipping are handled by third parties pursuant to purchase orders or invoicing without ongoing contractual arrangements. In this way, the Company has the flexibility to change suppliers as needed and the Company’s intellectual property is protected. Because of this, Meganet has only two employees. However, because of these two employees and the reliable third parties at the Company’s disposal, the ability of the Company to handle product orders is scalable and almost any size of a product order can be handled. It is possible that as the Company grows, additional employees will become necessary.
Marketing
Meganet actively markets its products. It is difficult, however, to track immediate results from specific marketing activities since our products typically have a long sales cycles. We market direct via a federal government GSA (U.S. General Services Administration) schedule, via a government SEWP (Solutions for Enterprise-Wide Procurement), via our website, via email, via electronic catalogs and domestic and international distributors.
We use database marketing to create personalized communications to customers or potential customers. We accumulate all data in the database and then use analytical tools to target a new product at the best matching customers or potential customers. We also use traditional marketing tools such as newspapers, TV interviews and mailings. We reach out with new products to potential markets through press releases and other trade show and/or media events. We network heavily with existing clients and potential clients that we know can benefit from new products or improved products we are bringing to market.
Competition
Our competition consists principally of other defense industry contractors. Of this group, the five that are among the largest and constitute our main competition are Lockheed Martin, General Dynamics, Northrop Grumman, Harris Corporation and ITT Corporation. Because of the effectiveness of the VME Technology that supports our encryption products and which is protected by U.S. Patent # 6,219,421, and the effectiveness of certain of our real-time interceptor products that to date, no one we know of has been able to duplicate, Meganet feels it does not have competition in relation to these products. However, because of the effectiveness of some of these products and because of their importance in military and intelligence applications, our markets in some products are limited to the U.S. military and certain federal agencies. However, with most of our products our market is worldwide after obtaining the necessary export license under ITAR. If these entities are not purchasing these products at a particular time or if we have supplied them all that they need at any particular time, our opportunity to sell product is limited, even if we do not have competition with respect to these products.
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Government Regulation
The U.S. military and other federal agencies are almost the exclusive end-users of many of our products. To market to the military and these agencies, it is necessary that we have proper certifications from the U.S. government which we do have at this time. We are also subject to import/export laws which prohibit us from selling our products to anyone other than U.S. federal agencies and military unless we obtain proper export licensing under ITAR. It is necessary for us to continue to comply with these rules and regulations to which we are subject.
Research and Development
Our products have been and are developed by our founder and CEO. When he conceives of a hardware component the Company needs in connection with a new product, he orders the hardware from one of the manufacturers in whom he has come to trust. If the manufacturer does not have the type of hardware needed as a ready product, the engineers of the manufacturer develop the product in order to fill the order to Meganet. Therefore the cost of the engineering work is included in the cost of the product to Meganet and is not borne directly by the customer. The cost of the development of the software by our CEO is merely a component of his salary. It is possible that the Company may outsource development work and incur research and development expense in that manner. However, it has not done so during the last two years. Our CEO spends 30% of his full working time on research and development. Accordingly, that is the amount of time spent by Meganet on research and development.
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Item 1A.
Item 1A. Risk Factors
If we lose our government certification, we would lose the ability to market to the U.S. Military and federal agencies.
The U.S. military and U.S. federal agencies comprise almost our entire sales market. We have the right to market to these agencies because we are certified as a government supplier. If we should ever lose this certification, it is almost certain that our business would fail.
If we fail to convince the market place that we have competitive products, we will not be commercially successful.
Even if we are successful in designing products competitive to those of our competitors, it is an ongoing need for us to educate and convince the market place of that competitiveness. If we are unable to do so, we will not be able to achieve the market penetration necessary to remain commercially successful and our investors may lose their investments.
If third party manufacturers do not perform in a commercially reasonable manner, Meganet may not be successful.
The Company relies on third parties to manufacture the hardware components of its products while our software components and products are created in house by our CEO, Mr. Saul Backal. The Company does not have supply contracts with the hardware manufacturers and instead works on an order-by-order basis. By not having supply contracts, the Company runs the risk that its current suppliers of hardware components will opt to discontinue their relationship with the Company thereby interrupting the flow of hardware components and limiting the Company’s ability to operate its business. If alternative third party manufacturers could not be located in a timely manner, the Company would go out of business and investors would lose their entire investment.
Our primary competitors are large department of defense contractors who have established names, products and almost unlimited resources to develop new products.
There are approximately five dominant defense contractors in our industry. They include Lockheed Martin, General Dynamics, Northrop Grumman, Harris Corporation and ITT Corporation. They have been able to successfully launch their products, and penetrate the marketplace. While we hope to design and market products that are competitive with those offered by these contractors, there is no assurance that we will be able to do so. Unless we are able to persuade government agencies that we have products superior to those of these dominant defense contractors, we will be unable to generate sufficient sales of our products to continue to be successful. Further, these contractors have numerous contracts within the government and its agencies, who may be unwilling to switch their buying habits to our Company.
Claims by others that our products infringed their patents or other intellectual property rights could adversely affect our financial condition.
Any claim of patent or other proprietary right infringement brought against us would be time consuming to defend and would likely result in costly litigation, diverting the time and attention of our management. Moreover, an adverse determination in a judicial or administrative proceeding could prevent us from developing, manufacturing and/or selling some of our products, which could harm our business, financial condition and operating results. Claims against our patents may cost the Company significant expenses to defend and if our patents are not upheld, the Company may not be able to continue operations and the investors may lose their entire investment.
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We may not be able to protect our patent rights, trademarks, and other proprietary rights.
We believe that our patent rights, trademarks, and other proprietary rights are important to our success and our competitive position. While we have patents and licenses with respect to certain of our products, there is no assurance that they are adequate to protect our proprietary rights. Furthermore, manufacturers in third world countries have a reputation for abusing such rights, which abuse is almost impossible to prevent. Accordingly, we plan to devote substantial resources to the maintenance of these rights. However, the actions taken by us may be inadequate to prevent others from infringing upon our rights which could compromise any competitive position we may develop in the marketplace.
Military and intelligence operations are government agencies which are subject to budgetary constraints, which may inhibit sales.
Government agencies are generally subject to budgets which limit the amount of money that they can spend on weapons and device procurement. It may be that although a government agency is interested in acquiring our products, it will be unable to purchase our products because of budgetary constraints. Further, the lead time for an agency acquiring new weapons and receiving approval to acquire them may delay sales to such agencies. Any such delay will have an adverse effect upon our revenues.
If we cannot retain or hire qualified personnel, our business could fail.
Our business is a technical and highly specialized area of the military and intelligence supply industry. We are dependent on the genius and skills of our CEO and founder Mr. Saul Backal. The loss of Mr. Backal could disrupt our research and development and product promotion activities. We believe that our future success will depend in large part upon our ability to retain the services of Mr. Backal or attract and retain highly skilled, scientific and managerial personnel to replace him if that ever became necessary. We face intense competition for these kinds of personnel from other companies and organizations. We might not be successful in hiring or retaining the personnel needed for our company to be successful.
Our CEO and founder, Mr. Saul Backal, is an at-will employee and could leave Meganet’s employ upon his own volition.
Mr. Backal has an employment contract with Meganet. However, the contract provides that Mr. Backal’s employment is at-will and that he can leave Meganet at any time should he decide to do so. Should Mr. Backal leave Meganet’s employ at this time or in the near future, it would be very disruptive to the immediate future economic prospects of Meganet and probably the long term economic prospects as well.
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Meganet’s officers and directors own over 50% of Meganet’s shares of common stock and can effectively control Meganet’s affairs.
Meganet’s officers and directors own approximately 54% of Meganet’s shares of common stock. As a result, they are able to control matters requiring approval by Meganet’s shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. The officers and directors may have interests that differ from other shareholders and may vote in a way with which disagree and which may be adverse to minority shareholder interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of Meganet, could deprive Meganet’s shareholders of an opportunity to receive a premium for their shares of common stock as part of a sale of Meganet and might ultimately affect the market price of Meganet’s common stock.
If the controlling shareholders sell a large number of shares all at once or in blocks, the value of Meganet’s shares would most likely decline.
The three officers and directors own approximately 54,000,000 of the 100,000,000 common shares that are issued and outstanding. Meganet’s common stock is presently not traded on any market or securities exchange, but should a market develop, shares sold at a price below the current market price at which the common stock is trading will cause that market price to decline. Moreover, the offer or sale of large numbers of shares at any price may cause the market price to fall.
Meganet’s sales are sporadic making it impossible to sustain a steady cash flow from month to month.
The purchasers of our products are predominantly governments and militaries which can create sporadic sales cycles typified by large purchases separated by low or quite periods in between. In the event Meganet does not have a larger sale over a long period of time, the Company will not have the business revenue necessary to sustain business operations without obtaining capital from sources other than from business operations.
Meganet’s business operations suffer in a down world economy.
Meganet’s clients are predominantly governments and militaries that often have budget cut backs during a down economy due to declines in tax revenue. Management believes Meganet’s sales have been less over the past several years than they otherwise would have been because of the down world economy. Unless the world economy improves, it is possible that it will be difficult for the Company to obtain larger product sales in the future.
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Item 1B.
Item 1B. Unresolved Staff Comments.
Not Applicable
Item 2.
Item 2. Properties
On January 1, 2010, the Company entered into a 60 month lease for its 10,000 square foot office and shop space located in Las Vegas Nevada. The lease required no security deposit and provides for monthly payments of $10,000. The lease provides for a 60 month renewal period at the expiration to the lease period which the Company anticipates to exercise.
Item 3.
Item 3. Legal Proceedings
The Company is not a party to any pending legal proceeding.
Item 4.
Item 4. Mine Safety Disclosures
N/A
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PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
There is no “established trading market” for our shares of common stock. We are not listed on any OTC Market or any other listing system or exchange. The Company has no common equity that is subject to outstanding options or warrants to purchase, or securities convertible into, common equity. The Company has 100,000,000 common shares issued and outstanding, 42,000,000 of which could be sold at this time pursuant to Rule 144 promulgated under the Securities Act.
Holders
As of May 26, 2015, the number of record holders of the Company’s common stock is approximately 684.
Dividends
Holders of shares of common stock are entitled to share pro rata in dividends and distributions with respect to the common stock when, as and if declared by the Board of Directors out of funds legally available therefore. We have not paid any dividends on our common stock and intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy is subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, capital requirements and the financial condition of Meganet.
Securities Authorized for Issuance under Equity Compensation Plans
We have no equity compensation plans.
Item 6.
Item 6. Selected Financial Data
Not required for smaller reporting companies.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Operations
Meganet is focused on the development of data security solutions for enterprise, large organizations and corporations around the globe, including the U.S. Department of
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Defense, Military Intelligence and the Federal Government. The Company has developed and does develop products that it believes are attractive and important to these markets.
Working with government in a business capacity can be a long and arduous process. Governments and their agencies have constant budget restraints and lengthy product procurement processes. In many if not in most cases, a bidding process is required before an order for goods can be placed with a private supplier. Before products can be sold to the U.S. Government or to any of its agencies, the product and/or its supplier must be certified by the U.S. Government, which certification is not easy to obtain. From the time a product is developed until the time it is actually shipped to an agency in return for payment can be months if not years.
The financial statements that form part of this annual report have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our independent accountants that audited the financial statements observed that the Company requires capital for its contemplated operational and marketing activities and that the Company’s ability to raise additional capital through the future issuances of common stock is unknown and that the obtainment of additional financing, the successful development of the Company’s contemplated plan of operations, and its transition to the attainment of profitable operations are necessary for the Company to continue operations. The independent accountants concluded that the ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern.
Our management has been with Meganet from its inception and has in the past shepherded all software products from the development stage through the government procurement process to final delivery and payment. Management believes that despite the Company’s current illiquid position, the Company is in a strong position with respect to the upcoming 18 to 24 months of operations estimating Meganet has more than $200,000,000 of potential product sales in the so-called product pipeline. Being in the pipeline does not mean that product has necessarily been bought, sold or ordered. It does mean that products are somewhere in the bidding and/or procurement process and in management’s opinion have a reasonable chance of becoming orders, having a portion of those orders delivered and thereby producing collected revenues for the Company in material amounts within the next 18 to 24 months. Management reasonably expects 50% of the potential product sales in its pipeline to produce revenue. At the present time Meganet has confirmed sales to two third world countries, one in the amount of $130,000,000 and one in the amount of $85,000,000. However, Meganet has not received the up-front cash deposit for either order that it requires before Meganet will begin filling the order. It is the potential of these two orders that account for much of the $200,000,000 pipeline estimate set forth earlier in this paragraph. These two orders have been delayed due to budgetary issues within the respective countries.
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The cash deposit necessary to begin the implementation of each sale is $50,000,000. With regard to the $130,000,000 sale, the implementation will take 18 months. The product for this sale will not be delivered and accepted until approximately 18 months after Meganet receives the cash deposit to begin work. Accordingly, revenue for this sale will not be booked for 18 months after receipt of the initial deposit. With regard to the $85,000,000 sale, implementation will take approximately 14 months. In this case, product will be produced and delivered from time to time during the 14 month period. The initial product delivery valued at more than $50,000,000 will take place approximately six months after the receipt of the $50,000,000 deposit. Accordingly, the initial deposit of $50,000,000 will be booked as revenue upon the acceptance of that initial product shipment. It should be noted that when the initial deposits are made is under the sole control of the countries to whom the sales have been made.
The confirmed sales to the two third world countries are for defense/security type products and were originally slated to be procured by the countries out of their respective defense budgets for the 2015 fiscal year. However, in each case, the 2015 defense funds were spent by the countries on other priorities and the purchase of Meganet’s products have now been delayed until 2016. Meganet has been told by each country that monies allocated in their 2016 defense budgets will be allocated to the purchase and the installation of Meganet’s products. It should be noted that Company management will make every effort to finalize these two sales through and including receipt of all payment and believes based upon information it has at this time that it will be successful. However, until payment is actually received, there can be no guarantee that management will be successful in these efforts.
Liquidity
At March 31, 2014, the Company had cash in the amount of $131 compared to $1,251,749 in current liabilities. On a monthly basis the Company has fixed expenditures including without limitation rent and salary in the approximate amount of $20,000. This $20,000 includes the $10,000 monthly salary of our CEO which he does not take but rather accrues if money is not available for payment of the salary. Taking this into consideration, the Company needs $15,000 per month which equals $180,000 for 12 months to sustain operations and estimates it will need $180,000 in additional capital to sustain business operations over the next twelve months. Our CEO will lend the full $180,000 to Meganet, if cash is not otherwise available within the Company. Two thirds or 67% of this amount will pay rent, approximately 13% will pay property taxes, approximately 5% will pay utilities, 10% will pay salary and the remaining 5% will pay for maintenance and miscellaneous office expenses such as mail and shipping expense and office supplies. During the fiscal year ended March 31, 2014, our CEO advanced to the Company the net amount of $539,878 to meet the financial needs of the Company.
It is common for companies to resolve illiquid positions by attempting to raise additional working capital through the sale of equity capital or short term borrowing from third parties. However, our management does not believe this will be necessary. Rather management believes there will be sales sufficient to cover the next 18 to 24 months of cash operating expenses; however, there can be no surety that anticipated sales will materialize. Also, in the event that sales anticipated during the next 18 to 24 months are funded in the later end of the 18 to 24 month period, it will be necessary for the Company to procure additional operating capital during the early months of the next 18 to 24 month period. In order to provide for this potential situation, our CEO has agreed to contribute additional amounts to capital as needed to cover operating expenses.
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Background to Understanding the Financial Results for the Past Two Years
To understand Meganet’s financial results for the past two years, it is necessary to understand its sales cycle which is different from traditional companies that may have sales on a daily, weekly and/or monthly basis. Meganet’s sales cycle is highly sporadic as a result of its product lines and its customer mix.
Product Lines
Meganet is a technology company supplying world markets with products primarily instrumental in military defense, personal protection, data protection, home land security and other intelligence and counter-intelligence uses. Examples of products for these uses are bomb jammers and cell phone interceptors.
This product base lends itself to sporadic sales cycles for the following reasons. In times of war which can come upon a country quickly, a country will have immediate need of products for military defense uses such as bomb jammers. In times of peace, bomb jammers may not be needed for many years. To the contrary, as a country develops and implements a long term homeland security strategy, it may put out bids for certain types of intelligence and counter-intelligence products that it may leave out to bid for one to two years. To participate in such a bidding process, Meganet must maintain protectable state of the art technologies over a lengthy bidding process that it can deliver in quick fashion in the event it is awarded the bid for a particular product.
Customer Mix
Meganet’s focus is on government and military markets which has advantages and disadvantages. Advantages include the fact that governments have deep pockets and when they really need a product they can procure it and pay for it. Also, when a company such as Meganet has a technology that a government really needs, the product can sustain a large margin in the sales price. In addition, technology is often scalable. Once developed, products based upon a technology can bring close to a 100% return.
Disadvantages in selling to governments and militaries include the fact that there is fierce competition for these lucrative markets and large suppliers are notorious for using underhanded methods. Also, governments are subject to budgetary issues and budgetary crises and ever changing priorities for fixed budgeted funds. Governments have bidding requirements. This can be good and bad. Bidding does allow for companies such as Meganet to bid against the large suppliers. However, it makes for lengthy and unwieldy sales cycles that make it difficult to predict and sustain cash flow.
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Examples Illustrative of Meganet’s Sales Cycle
A good way to understand Meganet’s sales cycle is to see examples of past sales. Meganet obtained its product base and its business plan from a company called Meganet Corporation, a California corporation (“Meganet California”). In 2002, Meganet California made a sale to the U.S. Department of Labor. After soliciting the U.S. Dept of Labor for over a year, Meganet California received a software order for $4,200,000. Development costs of the software had been expensed as they were incurred and since it was software it had no production cost. Therefore the sale was virtually 100% profit to the company at the time it was realized. However, in the 12 months leading to this sale, total sales were only $100,000.
Another example is Meganet California’s sale to the U.S. Department of Transportation (the “DOT”) in 2005. After pursuing a sale for only three months which would typically be just the beginning of a solicitation cycle, an internal security breach at the DOT heightened security concerns and it issued Meganet California a $10,000,000 contract immediately. In the 12 months prior to the sale, Meganet California had sales of under $1,000,000 dollars total.
A third example is a sale to the U.S. Department of Veteran Affairs (the “DVA”) in 2007. Meganet California had been soliciting the DVA’s business for three years trying to sell a biometric USB storage device without success. One day without prior notice, Meganet California was selected as the sole source provider of biometric USB storage devices nationwide to over 5,000 facilities. Like before, sales for the prior 12 months had been under $1,000,000.
Prior Two Years
For the past two years, Meganet has been working hard toward securing some large sales which it believes will materialize in the near future. However, the financial statements included in this annual report show only sales totaling $19,481 for the fiscal year ending March 13, 2014 and $13,117 for the year ending March 31, 2013. However, this pattern of sporadic sales is typical for this Company.
Our sporadic sales cycle is not the only reason for the lack of sales in the prior two years. The global economic crisis has made many of our customers put purchases on hold. The U.S. government in particular has had many departments put projects on hold, cancel some existing projects and in many cases simply run out of budget for new products. Also in the private sector, the economic downturn has made the purchase of products like ours not a possibility at this time.
Meganet is a company that goes from one large sale to the next with low or quite periods in between.
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Results of Operations for Fiscal Year Ended March 31, 2014
During the fiscal year ended March 31, 2014, Meganet realized gross profit of $19,244. This was offset by operating expenses of $881,712 resulting in a net loss after interest expense of $909,254. However, $578,867 of the operating expense was non-cash depreciation expense. Nevertheless there was an operating cash shortfall during the year. The shortfall was covered by a net increase in officer loans to the Company of $119,593.
The Company’s revenue consists primarily of revenue from the sale of jamming and interceptor hardware and data security software. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. The Company recognizes revenue from the sale of hardware products (e.g., jammers and cell phone interceptors) and software included with hardware that is essential to the functionality of the hardware, in accordance with general revenue recognition accounting guidance. The software inherent to the functionality of the hardware is inseparable from the hardware component and does not have a standalone fair market value.
The Company has no continuing obligations, such as providing software updates, subsequent to the delivery of its products. This is true of software products as well as of hardware products for which software is a component. Accordingly, revenue recognition takes place pursuant to the guidelines in the preceding paragraph without any adjustments that would otherwise be required because of an ongoing obligation to maintain software.
In addition to the software essential to the hardware that is sold, the Company sells off the shelf software to customers that is not related to the hardware that is sold. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software and (ii) sales of software upgrades.
Generally, the Company requires customers to deposit 50% of the gross sales price upon execution of a formal intent to sell with the remaining 50% due upon delivery of the product. The Company records deferred revenue when it receives payments in advance of the delivery of products.
Comparison of the Fiscal Years Ended March 31, 2014 and 2013
Operating results for the fiscal years ended March 31, 2014 and 2013 yielded gross profit of $19,244 and $4,443 respectively, operating expenses of $881,712 and $967,607 respectively and net loss of $909,254 and $999,852 respectively. The decrease in gross profit for the year ended March 31, 2014 is indicative of the Company's sporatic sales discussed earlier in this prospectus making it impossible to forecast revenues or to sustain a steady flow of revenue from month to month. The $85,895 decrease in operating expenses was primarily a result of a decrease of $54,328 in general and administrative expense and a $29,048 in depreciation expense.
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Contractual Obligations
The Company has no long-term debt obligations, capital lease obligations, purchase obligations or other long-term liabilities other than the lease of its office and shop space for 60 months at $10,000 per month commencing January 1, 2010.
Off-balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
No Undisclosed Material Trends or Events
There are no trends, events or developments that occurred during the fiscal year ended March 31, 2014, or from March 31, 2014 through the date of this annual report that would indicate or would be a material departure from the financial information set forth in this annual report. Furthermore, there are no other undisclosed events or events likely to occur, of which management is aware, that would materially affect the business and/or financial information set forth in this annual report.
All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "expect," or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective investors should carefully review various risks and uncertainties identified in this report, including the matters set forth in the Company's other SEC filings. These risks and uncertainties could cause the Company's actual results to differ materially from those indicated in the forward- looking statements. The Company undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.
Although forward-looking statements in this annual report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report. We will file reports with the Securities and Exchange Commission ("SEC"). We shall make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. You can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800- SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
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We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this annual filing. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this annual report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not Required.
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Item 8.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Meganet Corporation
Las Vegas, Nevada
We have audited the accompanying balance sheets of Meganet Corporation as of March 31, 2014 and 2013, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Meganet Corporation as of March 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses, used significant cash in support of its operating activities and, based upon current operating levels, requires additional capital or significant restructuring to sustain its operation for the foreseeable future. Management’s plans in regard to these matters are also described in Note 3. This raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
June 17, 2015
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The accompanying notes are an integral part of these financial statements.
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MEGANET CORPORATION
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
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MEGANET CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these financial statements.
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MEGANET COEPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2014 and 2013
1.
DESCRIPTION OF BUSINESS AND HISTORY
Description of business - Meganet Corporation, (the “Company” or “Meganet”) is focused on the development of data security solutions for enterprise, large organizations and corporations around the globe, including the U.S. Department of Defense, Military Intelligence and the Federal Government. The Company’s data security solutions include a patented encryption algorithm which enhances security exponentially. The Company out-sources the manufacture of its counter-IED products, including bomb jammers, dismounted backpack portable jammers and facility jammers. The Company also develops and sells cell phone, satellite and wireless interceptors. Other data security solutions include encrypted cell phones, land lines, fax, PDA, radio, and satellites. Intelligence and counter-intelligence solutions include the development of SPY and RAT phones and devices for intelligence gathering. Counter-intelligence solutions include bugs, bug detectors, bomb sniffers, miniature cameras and digital video recorders. The Company maintains technology development, executive and sales offices in Las Vegas, Nevada.
History - Meganet Corporation was incorporated in Nevada on March 26, 2009. Prior to the formation of the current entity, a now dissolved entity under the name Meganet Corporation was incorporated in California with common ownership and similar business objectives. The integration of the Company’s operations from the now dissolved California company to the Nevada company is considered a recapitalization due to the common ownership resulting in the assets and liabilities being recorded at a carryover basis as determined under accounting principles generally accepted in the United States of America. The former entity had been dissolved before incorporation on March 26, 2009.
2.
SUMMARY OF SIGNIFICANT POLICIES
Basis of presentation
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation.
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on historical information, information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and cash equivalents - Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days. Cash equivalents are placed with high credit quality financial institutions and are primarily in money market funds. The carrying value of those investments approximates fair value.
Revenue recognition - The Company’s revenue consists primarily of revenue from the sale of jamming and interceptor hardware and data security software. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. The Company recognizes revenue from the sale of hardware products (e.g., jammers and cell phone interceptors) and software included with hardware that is essential to the functionality of the hardware, in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software and (ii) sales of software upgrades.
Generally, the Company requires customers to deposit 50% of the gross sales price upon execution of a formal intent to sell with the remaining 50% due upon delivery of the product. The Company records deferred revenue when it receives payments in advance of the delivery of products.
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MEGANET COEPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2014 and 2013
2. SUMMARY OF SIGNIFICANT POLICIES - (CONTINUED)
Shipping costs - Amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs are included in cost of revenue.
Software development costs - Research and development costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. The Company’s products are released soon after technological feasibility has been established. Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and software development costs have been expensed as incurred.
Costs of revenue - Cost of revenue includes raw materials, component parts, and shipping supplies. Shipping and handling costs are not a significant portion of the cost of revenue.
Property and equipment - Property and equipment are stated at the lower of cost or fair value. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which do not exceed the lease term for leasehold improvements, as follows:
The estimated useful lives are based on the nature of the assets as well as current operating strategy and legal considerations such as contractual life. Future events, such as property expansions, property developments, new competition, or new regulations, could result in a change in the manner in which the Company uses certain assets requiring a change in the estimated useful lives of such assets.
Maintenance and repairs that neither materially add to the value of the asset nor appreciably prolong its life are charged to expense as incurred. Gains or losses on disposition of property and equipment are included in the statements of operations. There were no dispositions during the periods presented.
The Company evaluates its property and equipment and other long-lived assets for impairment in accordance with related accounting standards. For assets to be held and used (including projects under development), fixed assets are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, the Company first groups its assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the “asset group”). Secondly, the Company estimates the undiscounted future cash flows that are directly associated with and expected to arise from the completion, use and eventual disposition of such asset group. The Company estimates the undiscounted cash flows over the remaining useful life of the primary asset within the asset group. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model. If an asset is still under development, future cash flows include remaining construction costs. There were no impairments during the periods presented.
Income taxes - The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. Accounting standards regarding income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future
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MEGANET COEPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2014 and 2013
2. SUMMARY OF SIGNIFICANT POLICIES - (CONTINUED)
profitability, the duration of statutory carryforward periods, the Company’s experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives.
The Company recorded valuation allowances on the net deferred tax assets. Management will reassess the realization of deferred tax assets based on the accounting standards for income taxes each reporting period. To the extent that the financial results of operations improve and it becomes more likely than not that the deferred tax assets are realizable, the Company will be able to reduce the valuation allowance.
Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting standards regarding uncertainty in income taxes provides a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely, based solely on the technical merits, of being sustained on examinations. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Earnings (loss) per share - Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if potentially dilutive securities had been issued. There were no potentially dilutive securities outstanding during the periods presented.
Stock-based compensation - The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
Concentration of credit risk - Financial instruments that potentially expose the Company to significant concentrations of credit risk consist principally of cash. The Company places its cash with financial institutions with high-credit ratings.
Fair value of financial instruments - The carrying amounts reflected in the balance sheets for cash, prepaid expenses, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items.
Recent Accounting Pronouncements - The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and has an accumulated deficit of $4,042,308 as of March 31, 2014. The Company requires capital for its contemplated operational and marketing activities. The Company’s ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
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MEGANET COEPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2014 and 2013
3.
GOING CONCERN (CONTINUED)
Management anticipates that that there will be sales sufficient to cover the next 12 months of cash operating expenses; however, there can be no surety that anticipated sales will materialize. In order to mitigate the risk related with this uncertainty, the CEO has agreed to contribute additional amounts to capital as needed to cover operating expenses.
4.
PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following as of March 31, 2014 and 2013:
Depreciation expense, for the years ended March 31, 2014 and 2013 was $578,867 and $607,915, respectively.
5.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of March 31, 2014 and 2013:
6.
OPERATING LEASE
Lease obligations - On January 1, 2010, the Company entered into a 60 month lease for its 10,000 square foot office space located in Las Vegas, Nevada. The lease required no security deposit and provides for monthly payments of $10,000. The lease provides for a 60 month renewal period at the expiration to the lease period which the Company anticipates to exercise. In negotiating the lease, the lessor agreed to add approximately $250,000 in leasehold improvements to the property. In exchange, the lessor also agreed to change the rate terms from 120 months at $5,000 per month to 60 months at $10,000 per month. The remaining aggregate lease payments under the operating lease for the facilities as of March 31, 2014 are $90,000.
Rental expense, for the year ended March 31, 2014 and 2013 was $120,000 and $120,000, respectively.
7.
RELATED PARTY TRANSACTIONS
Officer loan - During the years ended March 31, 2014 and 2013, the Company received net cash advances from the president in the amount of $129,640 and $389,573, respectively. All amounts advanced to the Company are unsecured, non-interest bearing and due upon demand by the president.
In accordance with FASB ASC 835-30 “Imputation of Interest” interest has been imputed on all advances made to Company by the president. During the years ended March 31, 2014 and 2013, interest has been imputed and charged to additional paid-in capital in the amount of $46,786 and $35,269, respectively.
Employment agreements - as of March 31, 2014 the Company had only one employment agreement which was with the President and majority shareholder. The employment agreement stipulates that the President is to receive a base salary of $120,000 per annum. The agreement also contains a provision allowing for a commission to be paid equal to
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MEGANET COEPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2014 and 2013
7.
RELATED PARTY TRANSACTIONS (CONTINUED)
10% of gross sales achieved by the President. The total expense related to this agreement for the years ended March 31, 2014 and 2013 was $121,948 and $121,301, respectively. As of March 31, 2014 and 2013, $621,822 and $426,160, respectively, of total compensation was unpaid and accrued in current liabilities.
The Company has accrued for unpaid payroll taxes related to these payroll expenses which amount to $73,714 and $53,836 as of March 31, 2014 and 2013, respectively. These accruals include $4,935 in interest or penalties related to the late status of these payments. Nonetheless, the Company anticipates that it will reasonably be able to negotiate the total past due amount of payroll taxes in order to effectively eliminate penalties and interest.
8.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist of the following components as of March 31, 2014 and 2013:
The federal income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 34% to pretax income from continuing operations for the years ended March 31, 2014 and 2013 due to the following:
The Company had net operating losses of approximately $2,940,000 that expire beginning in years through 2025. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
9. SUBSEQUENT EVENTS
Subsequent to the balance sheet date the Company received net cash advances from its President in the amount of $173,737 in order to cover certain obligations that were due. All amounts advanced to the Company are unsecured, non-interest bearing and due upon demand by the president.
Subsequent to December 31, 2014, the Company and GAW miners entered into a settlement agreement for the repayment of a bitcoin dispute. The agreement calls for GAW miners to make six equal monthly payments of $16,453 to the Company starting in March 2015. The Company has received the first payment. The Company will continue to recognize the payments as bitcoin income as they are received on a cash basis.
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Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures.
Under the supervision and with the participation of our management including our chief executive officer and our chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure. A discussion of the material weaknesses in our controls and procedures is described below.
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Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management evaluated the effectiveness of the Company’s internal control over financial reporting as of March 31, 2014. In making this assessment, our management used the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, our management concluded that there are material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on our evaluation under the frameworks described above, our management has concluded that our internal control over financial reporting was not effective as of March 31, 2014 due to the lack of ability to prepare and timely file required quarterly and annual filings with the Securities and Exchange Commission on Forms 10-Q and 10-K. Management has put new processes and procedures in place, including engaging a consultant to assist in the preparation of its quarterly and annual filings, to get the Company current with its filings. An additional material weakness was identified in that since there is only one person that manages the finances of the Company, the Company lacks sufficient personnel resulting in a lack of segregation of duties. As soon as our finances allow, we plan on hiring additional finance staff in order to provide the requisite separation of duties.
Changes in internal control over financial reporting
Our management, with the participation of the chief executive officer and chief financial officer, has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9(B). Other Information.
None.
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PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Management
Executive Officers and Directors
Set forth below is certain information with respect to our executive officers and directors:
Saul Backal
Saul Backal is our Chairman and CEO and has held these positions since the inception of the Company on March 26, 2009. Prior thereto from 1997 to 2009, Mr. Backal was the Chairman and CEO of Meganet Corporation, a California corporation, which was also engaged in encryption, jamming, interception, biometric products and government & military products. With both companies, Mr. Backal was over management, organizational structure, finance, sales and marketing. Because of Mr. Backal’s intimate knowledge of Meganet, its products, clients, technologies and business operations, it is a natural fit for Mr. Backal to serve as Chairman of our board of directors.
Merav Backal
Merav Backal is vice president of the Company working with international sales, marketing, distribution, and production. She is also a director of Meganet. She has held this position since June, 2012. For approximately the past 20 years, Ms. Backal owned with her husband a large publishing house in Europe. This ownership has given Ms. Backal vast business experience in sales, marketing and international trade, all of which is helpful to our company and qualifies her as a member of our board of directors.
Orna Mizrahi
Orna Mizrahi is treasurer of the Company working with financial management and planning, accounting and controller duties. She has held this position since the inception of the Company in 2009. Prior thereto she held the same position in Meganet Corporation, the California corporation from 1999 to 2009. She is also a member of our board of directors. Ms. Mizrahi has worked as a CPA in Europe for approximately 20 years. During this time she has served as the controller for the European operations of large international companies including Sony Electronics, DES Electronics, and RAFA Pharmaceuticals. Because of this experience she is valuable to Meganet as treasurer and as a member of the board of directors.
Saul Backal and Orna Mizrahi are siblings. Merav Backal is their sister-in-law.
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Section 16(a) Beneficial Ownership Reporting Compliance
Since we have no stock registered under Section 12(b) or Section 12(g) of the Exchange Act, there are no persons who need to file reports under Section 16(a) of the Exchange Act.
Code of Ethics
The Company adopted a Code of Ethics that is filed as exhibit 14.1 hereto.
Item 11.
Item 11. Executive Compensation
Director Compensation
The Company does not compensate its directors for serving on the board of directors.
Executive Compensation
Summary Compensation Table
(1) Mr. Backal has an employment agreement which provides he is to receive a base annual salary of $120,000. In addition he is to receive 10% of the gross product sales he brings to the Company. Mr. Backal has declined to take earned compensation when the Company is not in a cash position to pay it. In 2012 Mr. Backal had total compensation of $129,168 all of which was accrued. However, during 2012 he received cash payment of $43,173 which was payment toward prior year compensation accruals. In 2013 Mr. Backal had total compensation of $121,948 all of which was accrued. In 2014 Mr. Backal had total compensation of $120,000 all of which was accrued. As of March 31, 2014, $546,160 of Mr. Backal’s total compensation was unpaid and accrued in current liabilities. Pursuant to his employment agreement, Mr. Backal is an at-will employee and may terminate his employment at any time. Also pursuant to his employment agreement, Mr. Backal has the authority to increase his own salary and the discretion to pay himself a bonus if he believes major progress in being made with the company.
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Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
As of March 15, 2015, we had 100,000,000 shares of common stock outstanding, which are our only outstanding voting securities. The following table sets forth information regarding the beneficial ownership of our common stock as of March 15, 2015, by:
·
each person who is known by us to own beneficially more than 5% of our common stock;
·
each of our executive officers;
·
each of our current directors; and
·
all officers and directors as a group.
(1)
Person’s address is 2510 E. Sunset Rd. Unit 5-777, Las Vegas, NV 89120.
Changes in Control
There are no additional present arrangements or pledges of the Company’s securities, which may result in a change in control of the Company.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
Officer loan - During the years ended March 31, 2014 and 2013, the Company received net cash advances from the president in the amount of $129,640 and $389,573, respectively. All amounts advanced to the Company are unsecured, non-interest bearing and due upon demand by the president.
Interest has been imputed on all advances made to Company by the president. During the years ended March 31, 2014 and 2013, interest has been imputed and charged to additional paid-in capital in the amount of $46,786 and $35,269, respectively.
Employment agreements - as of March 31, 2013 the Company had only one employment agreement which was with the President and majority shareholder. The employment agreement stipulates that the President is to receive a base salary of $120,000 per annum. The agreement also contains a provision allowing for a commission to be paid equal to 10% of gross sales achieved by the President. The total expense related to this agreement was $121,948 and 121,301 for the years ended March 31, 2014 and 2013, respectively. As of March 31, 2014, $548,108 of total compensation was unpaid and accrued in current liabilities.
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The Company has accrued for unpaid payroll taxes related to these payroll expenses which amount to $73,714 and $53,836 as of March 31, 2014 and 2013, respectively. These accruals include $10,347 in interest or penalties related to the late status of these payments. Nonetheless, the Company anticipates that it will reasonably be able to negotiate the total past due amount of payroll taxes in order to effectively eliminate penalties and interest.
Director Independence
We do not have any independent directors serving on our Board of Directors. The definition the Company uses to determine whether a director is independent is NASDAQ Rule 4200(a)(15). The text of this rule is attached to this Annual Report as Exhibit 99.1.
Item 14.
Item 14. Principal Accounting Fees and Services
The Following is a summary of the fees billed to the Company by its principal accountants during the fiscal years ended March 31, 2014 and 2013:
Audit Fees - Consists of fees for professional services rendered by our principal accountants for the audit of the Company’s annual financial statements and review of the financial statements included in the Company’s Forms 10-Q or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.
Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “Audit fees.”
Tax Fees - Consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.
All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit fees,” “Audit-related fees,” and “Tax fees” above.
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Item. 15. Exhibits
(1) Filed as an exhibit to the Annual Report on Form 10-K filed on September 11, 2014.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEGANET CORPORATION
By: /s/ Saul Backal
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Saul Backal, CEO
Date: June 17, 2015
In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Saul Backal
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Saul Backal, Director and
Principal Executive Officer
Principal Financial Officer
Principal Accounting Officer
Date: June 17, 2015
By: /s/ Merav Backal
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Merav Backal, Director
Date: June 17, 2015
By: /s/ Orna Mizrahi
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Orna Mizrahi, Director
Date: June 17, 2015
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