UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________
Commission file number: 0-20995
EDGE TECHNOLOGY GROUP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3778895
(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
901 YAMATO ROAD, SUITE 175, BOCA RATON, FLORIDA 33431
(Address of principal executive offices)
(214) 999-2245
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the issuer was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
As of April 15, 2001 the issuer had 16,016,335 shares of
Common Stock outstanding.
EDGE TECHNOLOGY GROUP, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Balance Sheets as of December 31, 2000 and
March 31, 2001 (unaudited)...................... 3
Unaudited Statements of Operations for the
Three Months Ended March 31, 2001 and 2000...... 4
Unaudited Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000...... 5
Notes to Unaudited Interim Financial
Statements...................................... 6
ITEM 2. Management's Discussion and Analysis or
Plan of Operations.............................. 7-12
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings............................... 13
ITEM 2. Changes in Securities and Use of Proceeds....... 13
ITEM 3. Defaults Upon Senior Securities................. 14
ITEM 4. Submission of Matters to a Vote of Security
Holders......................................... 15
ITEM 5. Other Information............................... 15
ITEM 6. Exhibits and Reports on Form 8-K................ 16-18
Signatures.............................................. 20
2
EDGE TECHNOLOGY GROUP, INC.
BALANCE SHEETS
December 31, March 31,
2000 2001
------------ ------------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents........ $ 169,846 $ 82,984
Accounts receivable.............. 13,504 6,056
Inventories...................... 9,096 9,804
Prepaid expenses - advance
royalties....................... 5,024 --
Other current assets............. 85,390 78,155
----------- -----------
Total current assets........ 282,860 176,999
Fixed Assets, net................ 67,394 44,102
Other Assets..................... -- 14,906
Investment - Related Party....... 4,587,262 4,587,262
Note Receivable.................. 1,400,000 1,400,000
----------- -----------
Total Assets........... $ 6,337,516 $ 6,223,269
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................. $ 390,991 $ 371,021
Accrued expenses................. 345,011 430,065
Other current liabilities........ 73,496 42,719
Notes Payable-related parties.... -- 939,000
----------- -----------
Total Current Liabilities... 809,498 1,782,805
Notes Payable-related parties.... 839,000 --
----------- -----------
Total Liabilities...... $ 1,648,498 $ 1,782,805
=========== ===========
Stockholders' Equity:
Common Stock, $.01 par value,
22,500,000 shares authorized,
16,016,335 shares issued and
outstanding at December 31, 2000
and March 31, 2001................. 160,163 160,163
Additional paid in capital.......... 37,978,720 38,090,637
Deferred stock option
compensation...................... (316,696) (287,008)
Accumulated deficit................. (33,133,169) (33,523,328)
----------- -----------
Total Stockholders' Equity
Total liabilities and .......... 4,689,018 4,440,464
----------- -----------
stockholder's equity.......... $ 6,337,516 $ 6,223,269
=========== ===========
The accompanying notes are an integral part of these
financial statements.
3
EDGE TECHNOLOGY GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31,
--------------------------
2000 2001
----------- -------------
Sales................................ $ 105,252 $ 100,055
Cost of Sales........................ 203,585 32,148
---------- -----------
Gross Profit (Loss).................. (98,333) 67,907
---------- -----------
Operating Expenses:
General and administrative...... 358,071 398,138
Selling and marketing........... 113,321 40,289
---------- -----------
Total operating expenses... 471,392 438,427
---------- -----------
Operating loss............. (569,725) (370,520)
---------- -----------
Other income (Expense):
Interest income................. 1,860 700
Interest expense................ (83,956) (18,116)
Amortization of deferred
financing fees................. (43,690) --
Gain (loss) on sale of fixed
assets......................... (63,032) 589
Financing fees.................. (2,773) (2,813)
---------- -----------
Total other income
(expense).................. (191,591) (19,640)
---------- -----------
Net loss................... (761,316) (390,160)
Provision for Preferred Stock
Dividends 123,750 --
---------- -----------
Net loss to common stockholders...... $(885,066) $ (390,160)
========= ===========
Net loss per share, basic and
diluted............................. $ (0.34) $ (0.02)
========= ===========
Weighted average common shares
outstanding........................ 2,598,832 16,016,335
========== ===========
The accompanying notes are an integral part of these
financial statements.
4
EDGE TECHNOLOGY GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended
March 31,
-----------------------
2000 2001
---------- ----------
Operating activities:
Net loss................................ $(761,316) $(390,160)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Non-cash stock compensation
expense........................... -- 141,605
Depreciation and amortization...... 169,169 9,706
Amortization of deferred financing
expenses.......................... 43,690 --
Loss (gain) on disposal of fixed 63,032 (589)
assets............................
Changes in assets and liabilities:
Decrease in accounts
receivable................... 30,131 7,448
Decrease in other current
assets....................... 27,751 7,235
Decrease in prepaid expense -
advance royalties............ 5,194 5,024
Decrease (increase) in
inventories.................. 3,376 (708)
Increase in other assets -- (14,906)
Decrease in accounts payable.. (33,515) (19,970)
Increase in accrued expenses.. 84,464 85,054
(Decrease) increase in other
current liabilities.......... 95,211 (30,777)
--------- ---------
Net cash used in
operating activities....... (272,813) (201,038)
--------- ---------
Investing activities:
Capital expenditures............... (13,403) --
Proceeds from the sale of assets... 77,405 14,176
Proceeds from the sale of
short-term investments............ 200,000 --
--------- ---------
Net cash provided by investing
activities................... 264,002 14,176
--------- ---------
Financing activities:
Repayment of borrowings............ (210,111) --
Borrowings on short-term notes
payable, net...................... 209,682 100,000
--------- ---------
Net cash (used in) provided by
financing activities......... (429) 100,000
--------- ---------
Net change in cash and cash
equivalents.................. (9,240) (86,862)
--------- ---------
Cash and cash equivalents at
beginning of period................... 19,724 169,846
--------- ---------
Cash and cash equivalents at end of
period................................ $ 10,484 $ 82,984
========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest............. $ 2,043 $ 237
========= =========
The accompanying notes are an integral part of these
financial statements.
5
EDGE TECHNOLOGY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
(1) BASIS OF PRESENTATION
The financial statements included herein have been prepared
by Edge Technology Group, Inc. ("Edge" or the "Company") without
audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the
accompanying unaudited financial statements include all necessary
adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the financial position, results of operations and
cash flows of the Company. The results of operations and cash
flows for the three month period ended March 31, 2001 are not
necessarily indicative of the results of operations or cash flows
that may be reported for the year ended December 31, 2001. The
unaudited financial statements included herein should be read in
conjunction with the audited financial statements and the notes
thereto included in the Company's Form 10-KSB for the year ended
December 31, 2000.
(2) Uncertainty of Proposed Plan of Operation
The Company has suffered recurring losses from
operations and has an accumulated deficit of approximately
$33.5 million at March 31, 2001.
The Company's recent focus on information technology
consulting services, business process software applications
and application services is a new business concept for the
Company and the Company cannot predict the nature and extent
of demand for its services.
During the past two years Edge has experienced declining
sales and increasing operating losses. Should this trend
continue, it will be necessary to secure additional financing to
continue operations. There can be no assurance that any
additional financing will be available on acceptable terms.
Should Edge be unable to obtain additional financing, it may be
unable to develop, enhance, and market products, retain qualified
personnel, take advantage of future opportunities, respond to
competitive pressures, or continue operations, any of which could
have a material adverse effect on its business, operating
results, financial condition and liquidity.
(3) Reverse stock split
During September 2000, Edge effected a four (4) for
one (1) reverse stock split. All share and per share amounts
have been restated accordingly.
6
(4) Investment - Related Party
In September 2000, the Company issued 2,644,841 shares
of its common stock to PurchasePooling Investment Fund in return for
9,593,824 shares of Series A Convertible Preferred Stock of
Purchase Pooling Solutions, Inc. ("Purchase Pooling").
In December 2000, the Company invested an
additional $620,000 with PurchasePooling in return for
2,214,285 shares of Series C Convertible Preferred Stock.
As a result, the Company now has an approximately 18%
ownership interest in PurchasePooling, a web-based demand
aggregator enabling government and educational entities to
save significantly on large-ticket capital items by
combining their purchasing power nationwide and globally.
The Company is accounting for this investment under the cost
method of accounting. The Company's President and CEO is
also the CEO of PurchasePooling. In 2000, the Company
entered into an agreement to acquire from Odyssey Ventures
Online S.A. 975,000 shares of Series A Convertible Preferred
Stock of PurchasePooling in exchange for 268,789 shares of
the Company's common stock. In April 2001, the agreement was
finalized and the shares of common stock were issued.
PurchasePooling is in its development stage and is not
generating any cash flow. Should PurchasePooling be unable
to generate sufficient future revenue and cash flow, it
could have a negative impact on the Company's operations.
The Company has entered into a management agreement
with PurchasePooling in which PurchasePooling pays the
Company a management fee of $20,000 per month in return for
the services provided by the Company's President and other
employees of Edge. During the three month period ended
March 31, 2001, the Company received $60,000 of management
fees from PurchasePooling which is reflected as a reduction
in general and administrative expenses in the statement of operations.
(5) Loss per Share
The Company follows SFAS No. 128, "Earnings Per
Share." SFAS No. 128 establishes standards for computing and
presenting basic and diluted earnings per share. Basic loss
per share is calculated by dividing loss attributed to
common stockholders by the weighted average number of shares
of common stock outstanding during each period. For all
periods presented basic and diluted net loss per share are
the same.
As of March 31, 2000 and 2001, due to the Company's
net losses, shares of common stock issuable upon conversion
of convertible debt and Preferred Stock and the exercise of
outstanding options and warrants have been excluded from the
computation of diluted loss per share in the accompanying
statements of operations as their impact is antidilutive.
(6) Note Receivable
In September 2000, the Company loaned $1.4 million to
Hencie, Inc. ("Hencie") in the form of a Promissory Note
(the "Note"). The Note accrues interest at a rate of 8% per
annum and the principal and interest is due on or before
November 21, 2001. The Note was convertible into 885,543
shares of Hencie's common stock through November 22, 2000,
however, the Company did not exercise the conversion option.
The Note is unsecured and guaranteed by Hencie's President.
Should Hencie be unable to generate sufficient
future revenue and cash flow, it could have a negative
impact on the Company's operations.
(7) FINANCINGS
a. 2000 Infinity Loans
In 2000 and the first quarter of 2001, Infinity Investors
Limited, a related party, made certain loans to the Company
for working capital purposes. These loans totaled $319,000.
As part of the reorganization of the Company effective
September 1, 2000, Infinity Investors Limited became entitled
to the repayment of these loans. In April 2001, the loan agreement
was renegotiated to extend the payment date to January 31, 2002.
7
Catalyst Loans
In December 2000, the Company entered into a loan
agreement with Catalyst Master Fund, L.P. (the "Catalyst
Loan"), a related party, to borrow $620,000. The Catalyst
Loan was originally due on June 30, 2001 and bears interest
at a rate equal to eight percent (8%) per annum. The
Company used the proceeds of the Catalyst Loan to purchase
2,214,285 shares of Series C Convertible Preferred Stock of
PurchasePooling. Catalyst Master Fund is a shareholder of
the Company and certain of the Company's directors are also
officers of an entity that manages Catalyst Master Fund.
The Catalyst Loan is convertible at the option of the holder
into the Company's common stock at a conversion price of
$1.50 per share. The Catalyst Loan is also secured by a
pledge of substantially all of Edge's assets.
Effective April 16, 2001, the Company entered into an
amended loan agreement with Catalyst that increased the
borrowings available under the original loan agreement from
$620,000 to a total of $2,120,000. Under the amended loan
agreement, the Company can draw down amounts under the loan
agreement as the Company has need for funds, subject to the
Company being in compliance with the covenants contained in
that loan agreement. The amended loan agreement bears
interest at eight percent (8%) per annum and is due March
31, 2002. The additional amount available under the amended
loan agreement is also convertible into the Company's common
stock at a conversion price of $1.50 per share and is
secured by a pledge of substantially all of the Company's
assets.
(8) Common Stock
In September 2000, the Company issued 2,644,841 shares
of its common stock to PurchasePooling Investment Fund in
return for 9,593,824 shares of Series A Convertible Preferred
Stock of Purchase Pooling. In December 2000, the Company
invested an additional $620,000 with PurchasePooling in return
for 2,214,285 shares of Series C Convertible Preferred Stock.
As a result, the Company now has an approximate 18% ownership
interest in PurchasePooling. The Company's President and CEO
is also the CEO of PurchasePooling. In 2000, the Company
entered into an agreement to acquire from Odyssey Ventures
Online S.A. 975,000 shares of Series A Convertible Preferred
Stock of PurchasePooling in exchange for 268,789 shares of the
Company's common stock. In April 2001, the agreement was
finalized and the shares of common stock were issued.
(9) Stock Options
In July 2000, the Company granted 1,275,000 options to
purchase the Company's common stock, 225,000 to an employee
and 850,000 to a consultant of the Company at an exercise
price of $2.31 per share. Later in July 2000, the Company
granted 82,000 options to purchase the Company's common
stock to employees of the Company at an exercise price of
$2.32 per share. In both instances, the grants were made
with exercise prices equal to the fair market value of the
Company's stock at the time of the grant. For the 850,000
options to a consultant, the fair value of the options were
$1,343,000, of which $223,833 was recorded as expense in
2000 and $111,917 was recorded as expense during the three
months ended March 31, 2001.
(10) Proceedings with Former Officers and Directors
In September 1999, former officers of the Company
filed suit against Edge and certain other parties, asserting
claims for breach of contract and other matters. In October
1999, the Company counter-sued the former officers for,
among other items, breach of fiduciary duty and breach of
employment agreements. In April 2001, the Company, the
former officers, and the other individuals and entities
named in the lawsuits, entered into a settlement agreement
whereby Edge agreed to issue 100,000 shares of restricted
common stock and pay a cash amount of $30,000 to the former
officers in satisfaction of any outstanding claims or claims
to options. Accordingly, the Company recorded an accrual for
$84,000 related to this settlement which is included in
accrued expenses as of March 31, 2001.
(11) Employment Agreements
The Company has entered into employment agreements
with several of its executive officers for periods ranging
from three to four years. The agreements provide the
employees with salary, bonuses and the right to terminate
their agreements and receive certain lump sum payments of
compensation if there is a change of control of the Company.
In connection with two of the employment agreements, in
January 2001, the Company granted stock
8
options to certain executive officers to purchase up to
2,250,000 shares of the Company's common stock at an exercise
price of $1.50 per share. 25% of the options are exercisable
upon grant and an additional 18.75% vest annually each anniversary
date. The options expire 10 years from the date of grant. The
Company will not be required to record any compensation expense in
2001 as a result of the grant of these options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
The following discussion and analysis should be read in
conjunction with the financial statements and notes thereto. This
discussion and analysis contains certain forward-looking
statements that involve risks and uncertainties. Edge's actual
results and the timing of certain events could differ materially
from those discussed in the forward-looking statements as a
result of certain factors including those set forth in Edge's
filings with the Securities and Exchange Commission, specifically
including the risk factors set forth below.
GENERAL
Edge Technology Group, Inc. operates, acquires and invests
in technology products and services including information
technology consulting services, business process software
applications and application service providers. We are in the
early stages of continuing to broaden and expand the scope of its
business to include business opportunities beyond our historical
golf training technology products. As part of this expansion, we
intend to seek opportunities in technology products and services
for acquisition by Edge to include in an overall business
strategy of developing a complete business process software
application and delivery targeted primarily towards middle market
businesses. We have historically developed, marketed and sold
personalized CD-ROM and videotape golf lessons featuring One-on-
One instruction by leading professional golfer Greg Norman.
Edge also effected the following changes in management during the
first part of 2001:
* Pierre Koshakji served as our President from September 5,
2000 until January 23, 2001 when he began serving in his current
position of Vice President.
* On January 18, 2001, Johan Schotte resigned his position as
Chairman of the Board of Directors. The Board of Directors of
Edge is currently engaged in a search for a Chairman. On January
19, 2001, Mr. Peters and Mr. Koshakji resigned from their
positions as members of the Board of Directors.
* On January 23, 2001, Edge entered into an employment
agreement effective January 2, 2001 with Graham C. Beachum II for
Mr. Beachum to serve as our President and Chief Executive
Officer. Mr. Beachum has assembled other personnel to develop and
expand Edge's business model.
* On January 23, 2001, Mr. Beachum was also elected to our
Board of Directors. As of May 15, 2001, our Board of Directors
consisted of Graham C. Beachum II, J. Keith Benedict and John A.
Wagner.
As a result of our reorganization in September 2000, our
business strategy is changing. We have expanded our business
model to include developing additional technology solutions
through organic growth, investments in other businesses or
acquisitions of other businesses. These strategies will require
significant amounts of capital to undertake. We will be entirely
dependent on raising additional capital through public or private
offerings of our debt or equity securities. We can give no assurance
that we will be able to raise any additional capital for the purposes
of funding the historical business operations of Edge or any
contemplated businesses we may desire to enter.
The majority of our cost of sales is contributed to Edge's
fixed operating costs which includes operator salaries, vehicle
storage and depreciation and our fixed overhead expenses.
Approximately 25% of the cost of sales are variable costs related
to sales and production. These costs include the cost of the
videotapes and CD-ROMs, royalties to Greg Norman and sales
commissions.
We believe that significantly higher sales levels are needed
before we may be able to generate profits on the One-on-One with
Greg Norman product. We believe that will not achieve such sales
levels in 2001 and we can give no assurance that we will ever
achieve such sales levels, that our variable costs will remain
constant as a percent of sales or that we will not incur
additional fixed costs.
9
RESULTS OF OPERATIONS
Quarter ended March 31, 2001 compared with quarter ended March
31, 2000.
Sales for the three months ended March 31, 2001 decreased
4.9% to $100,055, as compared to $105,252 for the three months
ended March 31, 2000. This decrease in sales in 2001, as compared
to 2000, is due to fewer events being performed in 2001.
The cost of sales for the three months ended March 31, 2001
decreased 84.2% to $32,148, as compared to $203,585 for the three
months ended March 31, 2000. This decrease in the cost of sales
is primarily attributable to the lower cost of sales associated
with the management and consulting services Edge performed.
Operating expenses for the three months ended March 31, 2001
decreased 6.9% to $438,427, as compared to $471,392 for the
three months ended March 31, 2000. This decrease was primarily
attributable to a decrease in executive salaries and salaries
relating to personnel associated with Edge's strategy of
acquiring and operating technology businesses. As of April 15,
2001, Edge had two executive employees and six employees.
Interest expense for the three months ended March 31, 2001
decreased 78.4% to $18,116 from $83,956 for the three months
ended March 31, 2000. This decrease is primarily attributable to
the elimination of penalty interest payable on the convertible
notes that were converted into common stock in September 2000.
As a result of the above, operating loss for the three
months ended March 31, 2001 decreased 35.0% to $370,520 as
compared to $569,725 for the three months ended March 31, 2000.
The Provision for Preferred Stock Dividends of $123,750 for
the three months ended March 31, 2000 relates to the dividends on
the Company's Series A-2 Convertible Preferred Stock. The
dividends commenced on January 1, 2000. As of December 31, 2000,
all of the outstanding preferred stock had been converted into
common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has suffered recurring losses from operations
and has an accumulated deficit of approximately $33.5 million at
March 31, 2001.
The Company's plan of operation and prospects are largely
dependent upon the Company's ability to achieve significant
market acceptance for its products, establish and maintain
satisfactory relationships with those who arrange golf events,
successfully hire and retain skilled technical, marketing and
other personnel, and successfully implement its new business plan
and strategy. There can be no assurance that the Company will be
able to continue to implement its business plan. Failure to
implement its business plan would have a material adverse effect
on the Company.
Demand and market acceptance for the Company's One-on-One
personalized CD-ROM and videotape golf lesson continues to be
subject to a high level of uncertainty. Achieving market
acceptance for the Company's One-on-One products will require
significant efforts and expenditures by the Company to create
awareness and demand. The Company's prospects will be
significantly affected by its ability to successfully build an
effective sales organization and successfully implement its
business plan. The Company has limited marketing and technical
experience and limited financial, personnel and other resources
to independently undertake extensive marketing activities. The
Company's strategy and preliminary and future marketing plans may
be subject to change as a result of a number of factors,
including progress or delays in the Company's marketing efforts
and changes in market conditions. To the extent that the Company
enters into third-party marketing and distribution arrangements
in the future, it will be dependent on the marketing efforts of
such third parties and in certain instances on the popularity and
sales of their products. There can be no assurance that the
Company's strategy will result in successful product
commercialization or that the Company's efforts will result in
initial or continued market acceptance for the Company's
products. If the Company's strategy is unsuccessful, it could
have a significant impact on the Company's operations. The
Company's recent focus on information technology consulting
services, business process software
10
applications and application services is a new business concept
for the Company and the Company cannot predict the nature and
extent of demand for its services.
Edge does not currently maintain a bank credit facility.
Edge has historically financed its operations primarily through
the sale of equity securities or instruments convertible into
equity securities. On March 31, 2001, Edge had cash and cash
equivalents of $82,984, and a working capital deficit of
$1,605,806, as compared to cash and cash equivalents of $169,846,
and a working capital deficit of $526,638 at December 31, 2000.
Net cash used in operating activities for the three months ending
March 31, 2001 was $201,038. Net cash provided by investing
activities was $14,176 and $100,000 was provided by financing
activities for a total decrease in cash and cash equivalents of
$86,862. Net cash used in operating activities for the three
months ending March 31, 2000 was $272,813. Net cash provided by
investing activities for the three months ending March 31, 2000
was $264,002, and $429 was used in financing activities, for a
total decrease in cash and cash equivalents for the three months
ending March 31, 2000 of $9,240.
Edge has entered into an Amended Loan Agreement with
Catalyst Master Fund L.P., a related party, for borrowings up to
$2,120,000. Under the Amended Loan Agreement, Edge can draw down
amounts as Edge has needs for funds, subject to Edge being in
compliance with the covenants contained in the Amended Loan
Agreement. The loan bears interest at 8.0% per annum and is due
March 31, 2002. Further, the loan is convertible into Edge common
stock at a conversion price of $1.50 per share and is secured by
a pledge of substantially all of Edge's assets. As of April 12,
2001, Edge has $1,200,000 available under the Amended Loan
Agreement. Edge believes that this facility will be adequate to
fund Edge's needs for at least twelve months, although additional
financing for acquisitions as part of Edge's business plan will
be necessary. In addition, Edge owes $319,000 of principal as of
March 31, 2001 to Infinity, a related party, as a result of loans
that were not repaid in our September 2000 reorganization, as well
as additional $100,000 borrowed in the first quarter of 2001. These
loans are due January 31, 2002. Edge has no current source for
the repayment of these loans.
Edge expects to meet future liquidity requirements through
cash flows generated from operations and cash reserves and
maturities or sales of marketable securities and utilization of
its Amended Loan Agreement. It is anticipated that those sources
of funds will also fund capital expenditure programs. These
capital expenditure programs can be suspended or delayed at any
time with minimal disruption to Edge's operations if cash is
needed in other areas of Edge's operations. The expected
operating cash flow, current cash reserves and the Amended Loan
Agreement are expected to allow Edge to meet working capital
requirements during periods of low cash flows resulting from the
seasonality of the industry.
During the past two years Edge has experienced declining
sales and increasing operating losses. Should this trend
continue, it will be necessary to secure additional financing to
continue operations. There can be no assurance that any
additional financing will be available on acceptable terms.
Should Edge be unable to obtain additional financing, it may be
unable to develop, enhance, and market products, retain qualified
personnel, take advantage of future opportunities, respond to
competitive pressures, or continue operations, any of which could
have a material adverse effect on its business, operating
results, financial condition and liquidity.
On March 31, 2001, Edge had stockholders equity of
$4,440,464, as compared to stockholders equity of $4,689,018 at
December 31, 2000.
SEASONALITY
Edge's One-on-One product business has historically been
seasonal with higher sales in the second and third quarters of
each fiscal year.
THIRD-PARTY REPORTS AND PRESS RELEASES
Edge does not make financial forecasts or projections nor
does Edge endorse the financial forecasts or projections of third
parties or comment on the accuracy of third-party reports. Edge
does not participate in the preparation of the reports or the
estimates given by analysts. Analysts who issue financial
reports are not privy to non-public financial information. Any
purchase of our securities based on financial estimates provided
by analysts or third parties is done entirely at the risk of the
purchaser.
11
Edge periodically issues press releases to update
shareholders on new developments relating to Edge and our
business. These releases may contain certain statements of a
forward-looking nature relating to future events or the future
financial performance of Edge within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and which are
intended to be covered by the safe harbors created thereby.
Readers are cautioned that such statements are only
predictions and that actual events or results may materially
differ with those statements. In evaluating such statements,
readers should specifically consider the various risk factors
identified which could cause actual results to differ materially
from those indicated by such forward-looking statements.
RISK FACTORS
Readers of this report or any of our press releases should
carefully consider the following risk factors, in addition to the
other information contained herein. This report and our press
releases contain statements of a forward-looking nature relating
to future events or the future financial performance of Edge
within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and which are intended to be covered by the
safe harbors created thereby. Readers are cautioned that such
statements are only predictions and that actual events or results
may differ substantially. In evaluating those statements, readers
should specifically consider the various factors identified in
this annual report, including the matters set forth below, which
could cause actual results to differ substantially from those
indicated by those forward-looking statements.
WE HAVE EXPERIENCED SIGNIFICANT AND CONTINUING LOSSES.
As of March 31, 2001, we had an accumulated deficit of
approximately $33.5 million. For the quarter ended March 31, 2001,
we recorded a net loss of $390,160. For each of the five
years ended December 31, 2000, we have recorded an operating loss;
in certain cases, a substantial operating loss. We incurred a net
loss of $8,959,625 for the year ended December 31, 2000. We believe
that we will continue to incur losses until we are able to generate
sufficient revenues to offset the operating costs associated with
commercializing our products. These losses could limit our
ability to grow and to raise new funds and could ultimately
jeopardize our ability to remain in business.
WE ARE AT A RELATIVELY EARLY STAGE WITH OUR REVISED BUSINESS
MODEL AND THEREFORE OUR BUSINESS AND PROSPECTS ARE DIFFICULT TO
EVALUATE.
Our corporate reorganization and related shift in our
business strategy commenced in September 2000 and is ongoing.
Since that time, we have been engaged principally in (1)
assembling our senior management team, (2) managing our existing
portfolio companies, (3) developing our revised business plan,
and (4) attending to various capital raising activities. As such,
we have not begun to establish, on any meaningful basis, the
strategic relationships and/or to identify the potential
businesses, products, or technologies that will be necessary for
us to ultimately succeed in the business segment in which we now
expect to compete. Accordingly, we do not have any meaningful
operating history on which to base an evaluation of our business
and prospects. Our prospects must be considered in light of the
many risks, uncertainties, expenses, delays, and difficulties
frequently encountered by companies in their early states of
development, particularly companies participating in new and
rapidly evolving markets. Some of the risks and difficulties
we expect to encounter include our ability to:
* adapt and successfully execute our revised business
plan;
* overcome the negative market stigma associated with
certain over-the- counter technology companies;
* manage and adapt to changing and expanding operations;
* implement and improve operational, financial and
management systems and processes;
* locate, negotiate with, close and ultimately integrate
additional attractive portfolio investments;
* attract, retain and motivate qualified personnel; and
* numerous other risks and difficulties experienced by
early state business models generally.
12
Because of our recent reorganization and our shift away from
a single product enterprise, we may have limited insight into
trends and conditions that may exist or might emerge and affect
our business. We cannot be certain that our revised business
strategy will be successful or that we will successfully address
these risks. As a result of our continuing losses, the low market
price of our common stock and the delisting of our common stock
from the Nasdaq SmallCap Market, we believe that it will be very
difficult, if not impossible, for Edge to raise additional
capital in the future. As of March 31, 2001, Edge had a total of
cash and cash equivalents of approximately $82,984. Edge is
unlikely to become profitable in the reasonably foreseeable
future. Accordingly, if Edge cannot raise new funds, Edge may
exhaust its cash resources and be unable to continue in business.
WE NEED ADDITIONAL FINANCING.
As of March 31, 2001, we had a total of cash and cash
equivalents of only $82,984. Accordingly, we need additional
financing immediately to implement our business strategy and are
relying entirely on the Catalyst Loan for working capital. We do
not currently maintain a credit facility with any bank or
financial institution. We believe that our ability to raise
additional financing, as either debt or equity, is further
hindered by our continuing operating losses, the low market price
of our common stock and our delisting from Nasdaq. If we are
unable to arrange additional financing as needed, we are likely
to reduce the scope of our operations or cease operations
altogether.
SUBSTANTIALLY ALL OF OUR ASSETS ARE PLEDGED.
The Catalyst Loan is secured by a pledge of substantially
all of our assets. Therefore, there is a risk that upon material
default of that loan, we could lose substantially all of our
assets through a foreclosure proceeding.
THE SHARES ELIGIBLE FOR FUTURE SALE MAY FURTHER DECREASE THE
PRICE OF OUR COMMON STOCK.
If our stockholders sell substantial amounts of their common
stock in the public market, including shares issued upon the
exercise of outstanding options, then the market price of our
common stock could fall. As of March 31, 2001 there were a
substantial number of outstanding options and warrants to
purchase shares of our common stock. The exercise of any of these
options or warrants will also have a dilutive effect on our
stockholders. Furthermore, holders of such options or warrants
are more likely to exercise them at times when Edge could obtain
additional equity capital on terms that are more favorable to us
than those provided in the options or warrants. As a result,
exercise of the options or warrants may adversely affect the
terms of such financing and would require us to issue significant
amounts of common stock at the time of exercise. The sale of a
substantial number of our common stock may adversely affect the
prevailing price of such common stock in the public market and
may impair our ability to raise capital through the sale of its
equity securities.
EDGE RELIES SIGNIFICANTLY ON ITS LICENSE WITH GREG NORMAN FOR ITS
ONE-ON-ONE PRODUCT.
In connection with the production and promotion of our
products, Edge uses, under a worldwide license, Greg Norman's
name, likeness, endorsement and certain trademarks. The initial
term of the Greg Norman license expires on December 31, 2001
subject to earlier termination pursuant to the terms thereunder.
Our business may be adversely affected if the Greg Norman license
is terminated in the future or if Greg Norman dies, becomes
disabled, retires from tournament play, experiences a significant
decline in his performance at golf tournaments, reduces his
participation in golf tournaments, commits a serious crime
or performs any act which adversely affects his reputation.
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ SMALLCAP
MARKET AND IS SUBJECT TO ADDITIONAL SIGNIFICANT RISKS.
Because we were unable to meet Nasdaq's minimum ongoing
listing requirements, Edge was delisted from the Nasdaq SmallCap
Market as of June 1, 1999. The delisting of our common stock
means that, among other things, fewer investors have access to
trade our common stock which will limit our ability to raise
capital through the sale of our securities. In addition, our
common stock is subject to penny stock regulations, which could
cause fewer brokers and market makers to execute trades in our
common stock. This is likely to hamper our common stock trading
with sufficient volume to provide liquidity and could cause our
stock price to further decrease. The penny stock
13
regulations require that broker-dealers who recommend penny
stocks to persons other than institutional accredited investors
must make a special suitability determination for the purchaser,
receive the purchaser's written agreement to the transaction prior
to the sale and provide the purchaser with risk disclosure documents
which identify risks associated with investing in penny stocks.
Furthermore, the broker-dealer must obtain a signed and dated
acknowledgement from the purchaser demonstrating that the
purchaser has actually received the required risk disclosure
document before effecting a transaction in penny stock. These
requirements have historically resulted in reducing the level of
trading activity in securities that become subject to the penny
stock rules. Holders of our common stock may find it more
difficult to sell their shares of common stock, which is expected
to have an adverse effect of the market price of the common
stock.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR
STOCK PRICE VOLATILITY.
In the past, securities class action litigation has often
been brought against a company following periods of volatility in
the market price of its securities. We may be the target of
similar litigation. Securities litigation may result in
substantial costs and divert management's attention and
resources, which may seriously harm our business, prospects,
financial condition and results of operations.
WE MUST BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
Our business plan will succeed only if we are able to
identify, acquire and integrate companies to expand our product
and service offerings. Our plan of operation and prospects are
largely dependent upon our ability to achieve significant market
acceptance for our products and services, establish and maintain
relationships with our customers, successfully hire and retain
skilled technical, marketing and other personnel, and
successfully develop, market and sell our products and services
on a timely and cost effective basis. There can be no assurance
that Edge will be able to continue to implement our business
plan. Failure to implement effectively our business plan will
have a material adverse effect on Edge.
WE MAY NOT BE ABLE TO CARRY OUT OUR ACQUISITION STRATEGY.
While we have no current agreements with respect to any
acquisition, we may make acquisitions of products, services,
technologies, systems or entire businesses in the future. This
strategy currently focuses on technology companies with products
or services such as information technology consulting, software
applications and application service providers. To be suitable
for acquisition by Edge, these companies must be small enough to
be affordable yet profitable. These candidates may be few in
number and may attract offers from companies with greater
financial resources than Edge. Acquisitions involve numerous
risks, including, among others, loss of key personnel of the
acquired company, the difficulties associated with assimilating
the personnel and operations of the acquired company, the
potential disruption of our ongoing business and the maintenance
of uniform standards, controls, procedures and polities. We
cannot assure you that Edge will be able to locate suitable
acquisition targets or that Edge will be able to complete any
acquisitions.
14
OUR CURRENT FINANCIAL CONDITION PREVENTS EDGE FROM FINANCING AN
ACQUISITION INDEPENDENTLY.
Our current financial condition will not allow Edge to
finance an acquisition independently. If Edge locates an
acquisition opportunity, it will have to depend on the
profitability of the target company and the efforts of some of
our major stockholders to attract and obtain financing. We cannot
assure you that Edge will be able to obtain financing on
acceptable terms or at all. If we cannot obtain financing, we
will not be able to complete any acquisitions.
CERTAIN OF OUR PRODUCTS MAY BE SUBJECT TO PRODUCT OBSOLESCENCE.
The markets for our Greg Norman One-on-One product may be
characterized by rapidly changing technology which could result
in product obsolescence or short product life cycles. Our
competitors could develop technologies or products that render
this product obsolete or less marketable. Accordingly, our
ability to compete in this segment may be depend upon our ability
to continually enhance and improve our product.
15
WE DEPEND ON OUR OFFICERS AND KEY PERSONNEL.
The prospects of Edge depend on the personal efforts of
Graham C. Beachum II, our President and Chief Executive Officer,
and other key personnel to implement our operating and growth
strategies. The loss of the services of these executives could
have a material adverse effect on our business and prospects
because of their experience and knowledge in the industry.
EDGE HAS A LIMITED PRODUCT LINE.
Edge currently depends entirely on the sales of a limited
product line to generate revenues. Edge may develop other
products in the future that may or may not be similar to our
current products. Edge cannot assure that our current or future
products will prove to be commercially viable. Failure to achieve
commercial viability on a timely basis would cause Edge to close
our business.
OUR INVESTMENTS MAY INCUR LOSSES AND MAY NOT HAVE ANY FUTURE
PROFITS.
Companies into which Edge makes investments may have
operating losses. As start- up companies, these businesses may
continue to incur significant increases in expenses. These
increases may adversely impact our business and their financial
condition.
WE HAVE AN UNPROVEN BUSINESS MODEL.
Our ability to generate revenues depends upon whether we can
generate revenues from our operations and invest in or establish
strategic relationships with operating companies to provide us
with an adequate revenue stream. If we cannot achieve or sustain
an adequate revenue stream or if our products and services, or
the products and services of companies in which we invest, do not
achieve or sustain broad market acceptance, our business,
operating results and financial condition will be materially
adversely affected. Our ability to generate future revenues
depends on a number of factors, many of which are beyond our
control, including among other things, the risk factors described
in this Report. Therefore, we are unable to forecast our revenues
with any degree of accuracy.
OUR INVESTMENTS GIVE US LIMITED CONTROL OVER THE BUSINESSES IN
WHICH WE HAVE INVESTED.
We hold approximately 18% of the outstanding capital stock
of PurchasePooling, a related party, and have an unsecured loan
to Hencie, Inc. We may not be able to direct the management and
policies of these companies or influence their future direction
in a manner that will result in increased value to Edge for the
securities Edge holds. Further, PurchasePooling and Hencie, Inc.
are in their development stages and are not generating any cash
flow. Should PurchasePooling and/or Hencie, Inc. be unable to
generate sufficient future revenue and cash flow, it could have
a negative impact on the Company's operation.
IF WE FAIL TO MANAGE OUR GROWTH AND INTEGRATE OUR ACQUIRED
BUSINESSES, OUR BUSINESS WILL BE ADVERSELY AFFECTED.
If the reorganization and business strategy discussed in
this Report results in significant growth of our operations, we
will be required to implement and improve our operating and
financial systems and controls, and to expand, train and manage
our employee base to manage this growth. We will be dependent upon
our management to assume and perform the management functions
formerly performed by management of each of the parties to the
reorganization. To the extent that our management is unable to
assume or perform these combined duties, our business, results
of operations and financial condition could be adversely affected.
There can be no assurance that the management, systems and controls
currently in place or any steps taken to improve such management,
systems and controls will be adequate in the future. In addition,
the integration of the acquired entities and their operations will
require our management to make and implement a number of strategic
operational decisions. The timing and manner of the
implementation of these decisions will materially impact our
business operations.
16
WE MUST RECRUIT AND RETAIN KEY MANAGEMENT AND TECHNICAL PERSONNEL
TO BE COMPETITIVE.
Our success depends to a significant extent on the continued
contributions, experience and knowledge of our senior management
team and key technical and marketing personnel. Our success also
depends upon our ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial, sales
and marketing personnel. No assurance can be given that we will
be able to successfully attract, assimilate or retain a
sufficient number of qualified personnel. The failure to do so
could have a material adverse effect on our business, results of
operation and financial condition.
A SMALL NUMBER OF STOCKHOLDERS, SOME OF WHICH ARE AN AFFILIATE
GROUP, HOLD LARGE AMOUNTS OF OUR COMMON STOCK AND COULD EXERCISE
CONTROL OVER EDGE, WHICH MAY RAISE CONFLICTS OF INTEREST.
A small number of stockholders, some of which are an
affiliate group, own a sufficient amount of our common stock to
exercise significant control over our business, policies and
affairs and, in general, determine the outcome of any corporate
transaction or other matters submitted to the stockholders for
approval, all in a manner that could conflict with the interests
of other stockholders.
WE MAY BECOME SUBJECT TO INCREASED REGULATORY OVERSIGHT AS A
RESULT OF OUR INVESTMENTS IN OTHER COMPANIES.
As a result of our investments in other companies, we may be
or become subject to the Investment Company Act of 1940 and other
laws that regulate investing activities. Any such regulation may
negatively impact our cost of doing business, may restrict our
business and may materially adversely affect our business,
financial condition, operating results and future prospects.
WE MAY BECOME SUBJECT TO INCREASED GOVERNMENTAL OVERSIGHT.
There can be no assurance that technology-related products
and services which are sold by us or the companies into which we
invest will not be actively regulated. Increased regulation of
technology-related products and services may slow our growth,
particularly if other countries also impose similar regulations.
Any regulation may negatively impact our cost of doing business
and may materially adversely affect our business, financial
condition, operating results and future prospects. Increased
regulation in one or more countries could materially adversely
affect our business, financial condition, operating results and
prospects.
OUR RIGHT TO ISSUE PREFERRED STOCK AND ANTI-TAKEOVER PROVISIONS
UNDER DELAWARE LAW COULD MAKE A THIRD PARTY ACQUISITION OF US
DIFFICULT.
Our certificate of incorporation provides that our board of
directors may issue preferred stock without stockholder approval.
The issuance of preferred stock could make it more difficult for
a third party to acquire us without the approval of Edge's board.
Additionally, Delaware corporate law imposes certain restrictions
on corporate control transactions that could make it more
difficult for a third party to acquire us without the approval of
our board.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Unchanged since originally reported in our Annual Report on
Form 10-K for the year ended December 31, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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
10.23 Note and Security Agreement dated as of April
16, 2001 between Edge and Catalyst Master
Fund, L.P. (filed herewith)
(b) Reports on Form 8-K
None
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Edge Technology Group INC.
By: /s/ Graham C. Beachum II
------------------------------
Graham C. Beachum II
Chairman and Chief Executive
Officer
and Principal Financial
Officer
May 14, 2001
19
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
10.23 Note and Security Agreement dated as of April 16,
2001 between Edge and Catalyst Master Fund, L.P. (filed
herewith)
20