UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-20865
e-Net, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1929282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12800 Middlebrook Road, Suite 200, Germantown, MD 20874
(Address of principal executive offices) (Zip Code)
(301) 601-8700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report.)
Check whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
The Number Of Shares Of The Regristrant's Common Stock, $.01 Par Value Per
Share, Outstanding As Of August 5, 1997 Was 5,750,000.
Transitional Small Business Disclosure Format (check one):
Yes No X
------- ------
The Exhibit Index Appears in Sequentially Numbered Page 13
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Accountants' Review Report.............................................3
Balance Sheets as of June 30 and March 31, 1997........................4
Statements of Operations for the three months ended June 30, 1997
and 1996...............................................................5
Statements of Cash Flows for the three months ended June 30, 1997
and 1996...............................................................6
Statements of Stockholders' Equity as of June 30, 1997.................7
Notes to Financial Statements.........................................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................11
Signatures....................................................................12
Board of Directors
e-Net, Inc.
We have reviewed the accompanying balance sheet of e-Net, Inc. (a Delaware
Corporation), as of June 30, 1997, and the related statements of operations,
stockholders' equity and cash flows for the three-month period then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of March 31, 1997, and the related statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein), and in our report dated May 2, 1997, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of March
31, 1997, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Grant Thornton LLP
Vienna, Virginia
August 5, 1997
e-NET, INC.
BALANCE SHEETS
ASSETS
JUNE 30, 1997 MARCH 31, 1997
(UNAUDITED) (AUDITED)
------------- --------------
Current Assets
Cash and cash equivalents........................................................ $ 2,350,656 $ 379,441
Short-term investments........................................................... 2,802,973 --
Accounts receivable.............................................................. 137,916 113,181
Inventory........................................................................ 71,317 --
Prepaid expenses................................................................. 111,372 14,800
------------- --------------
Total Current Assets............................................................... 5,474,234 507,422
Deposits and other assets.......................................................... 77,468 7,530
Property, Plant and Equipment, Net................................................. 257,286 203,125
Deferred Initial Public Offering Costs............................................. -- 964,706
Software Development Costs......................................................... 651,598 520,853
------------- --------------
$ 6,460,586 $ 2,203,636
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade.......................................................... 93,358 105,301
Accrued liabilities.............................................................. 268,700 330,580
Capital lease obligation......................................................... 2,194 4,480
------------- --------------
Total Current Liabilities.......................................................... 364,252 440,361
Accrued Initial Public Offering Costs.............................................. -- 887,843
------------- --------------
Total Liabilities.................................................................. 364,252 1,328,204
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares authorized,
5,750,000 and 4,250,000 shares outstanding at June 30, and March 31, 1997,
respectively................................................................... 57,500 42,500
Stock subscriptions and notes receivable......................................... (46) (46)
Additional paid-in capital....................................................... 14,100,846 8,307,627
Retained deficit................................................................. (8,061,966) (7,474,649)
------------- --------------
Total Stockholders' Equity......................................................... 6,096,334 875,432
------------- --------------
$ 6,460,586 $ 2,203,636
------------- --------------
------------- --------------
The accompanying notes are an integral part of these statements.
e-NET, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
1997 1996
----------- -------------
Sales................................................................................. $ 88,004 $ 179,939
Operating Expenses
Cost of product sales and service................................................... 38,573 67,830
Selling, general and administrative................................................. 638,549 261,053
Research and development............................................................ 22,992 50,000
----------- -------------
Loss from Operations.................................................................. (612,110) (198,944)
Interest and Financing Charges Interest expense--bridge financing..................... -- (5,385,135)
Cost of abandoned stock registration................................................ -- (284,575)
Interest and financing expense...................................................... (10,103) (22,800)
Other expenses...................................................................... (32,213) (18,000)
Interest income..................................................................... 67,109 6,156
----------- -------------
Loss Before Income Taxes.............................................................. (587,317) (5,903,298)
Income Tax Provision.................................................................. -- --
----------- -------------
Net Loss.............................................................................. $ (587,317) $ (5,903,298)
----------- -------------
----------- -------------
Loss per Share........................................................................ $ (.11) $ (1.51)
----------- -------------
----------- -------------
Weighted Average Shares Outstanding................................................... 5,585,165 3,917,582
The accompanying notes are an integral part of these statements.
e-NET, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
1997 1996
----------- -------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net loss........................................................................... $ (587,317) $ (5,903,298)
Adjustments to reconcile net loss to net cash from operating activities
Interest expense--bridge financing............................................... -- 5,385,135
Depreciation and amortization.................................................... 10,000 11,334
Changes in operating assets and liabilities
(Increase) in accounts receivable.............................................. (24,735) (95,979)
(Increase) in inventory........................................................ (71,317) --
(Increase) in prepaid expenses, deposits and other assets...................... (166,510) --
(Decrease) Increase in accounts payable and accrued liabilities................ (73,823) 215,758
(Decease) in deferred revenue.................................................. -- (20,000)
----------- -------------
Net Cash (Used in) Provided by Operating Activities.................................. (913,702) (407,050)
----------- -------------
Cash Flows from Investing Activities
Capital expenditures............................................................... (64,161) (14,983)
Capitalized software development costs............................................. (130,745) (54,520)
Investment in short term securities................................................ (2,802,973) --
----------- -------------
Net Cash Used in Investing Activities................................................ (2,997,879) (69,503)
----------- -------------
Cash Flows from Financing Activities
Net proceeds from initial public offering of common stock.......................... 5,870,082 --
Issuance of common stock........................................................... 15,000 --
Proceeds from issuance of bridge notes payable..................................... -- 500,000
Payments on capital leases......................................................... (2,286) --
----------- -------------
Net Cash Provided by Financing Activities............................................ 5,882,796 500,000
----------- -------------
Net Increase in Cash and Cash Equivalents............................................ 1,971,215 23,447
Cash and Cash Equivalents at Beginning of Period..................................... 379,441 557,960
--------- -------------
Cash and Cash Equivalents at End of Period........................................... $ 2,350,656 $ 581,407
----------- -------------
----------- -------------
Supplemental Disclosures:
Income Taxes Paid.................................................................. $ -- $ --
----------- -------------
----------- -------------
Interest Paid...................................................................... $ 103 $ --
----------- -------------
----------- -------------
The accompanying notes are an integral part of these statements.
e-NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
COMMON STOCK STOCK
--------------------- SUBSCRIPTIONS ADDITIONAL TOTAL
NO. OF AND NOTES PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT EQUITY
---------- --------- --------------- ------------- ------------- ------------
Balance, April 1, 1997................. 4,250,000 $ 42,500 $ (46) $ 8,307,627 $ (7,474,649) $ 875,432
Sale of common stock in initial public
offering............................. 1,500,000 15,000 -- 5,793,219 -- 5,808,219
Net loss............................... -- -- -- -- (587,317) (587,317)
---------- --------- --------- ------------- ------------- ------------
Balance, June 30, 1997................. 5,750,000 $ 57,500 $ (46) $ 14,100,846 $ (8,061,966) $6,096,334
---------- --------- --------- ------------- ------------- ------------
---------- --------- --------- ------------- ------------- ------------
The accompanying notes are an integral part of these statements.
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited financial statements include the accounts of
e-Net, Inc. (the "Company"). Such statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the regulations of the Securities and Exchange Commission;
accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included. The
results of operations for the quarter ended June 30, 1997 are not necessarily
indicative of the results for the fiscal year ending March 31, 1998. The
accompanying unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.
NOTE B--INITIAL PUBLIC OFFERING
In April 1997, the Company completed an initial public offering of
securities consisting of 1,500,000 shares of common stock and 1,725,000 common
stock warrants. In connection with the offering, the Company received proceeds
of $5,808,219 net of all expenses associated with the offering.
NOTE C--INVENTORY
Inventory is stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method. The elements of cost include
subcontracted costs and materials handling charges.
NOTE D--SOFTWARE DEVELOPMENT COSTS
The Company has capitalized certain software development costs incurred
after establishing technological feasibility. Software costs will be amortized
over the estimated useful life of the software once the product is available for
general release to customers. At June 30, 1997, the Company has capitalized
$651,598. Should sufficient product sales fail to materialize, the carrying
amount of capitalized software costs may be reduced accordingly in the future.
NOTE E--LINE OF CREDIT FACILITY
On May 31, 1997, the Company signed a one (1) year promissory note for a
$1,000,000 line of credit facility which is secured by investments, receivables
and fixed assets of the Company.
NOTE F--NON-QUALIFIED STOCK OPTION PLAN
In April, 1997, the Board of Directors approved the adoption of the e-Net,
Inc. Non-Qualified Stock Option Plan including the allocation of up to 500,000
shares for option grants. The options are exercisable at fair market value
measured at the grant date with varying vesting schedules.
NOTE G--INCOME TAXES
The Company has generated net operating losses since it's inception. At
June 30, 1997, the Company recorded a valuation allowance in an amount equal to
the deferred tax asset due to the uncertainty of generating future taxable
income.
NOTE H--CONCENTRATION
Approximately 97% of the Company's accounts receivable balance at June 30,
1997, and the Company's sales for the quarter ended June 30, 1997, are from one
customer.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
RESULTS OF OPERATIONS
NET SALES
Net sales for the first quarter ended June 30, 1997 were approximately
$88,000, a decrease of 51% over the approximately $179,900 recorded for the
corresponding quarter of 1996. The revenue decline was driven primarily by the
lack of several large dollar value e-Net NMS software unit sales which occurred
in 1996, but did not recur in 1997, and an increased emphasis on development and
preparation for the general availability of the Company's T2000 product line.
The sales for the quarter ended June 30, 1997, were primarily from one customer.
OPERATING EXPENSES
Cost of product sales & services for the first quarter ended June 30, 1997,
were approximately $38,600, a decrease of 43% over the approximately $67,800
recorded for the corresponding quarter of 1996. The cost of product sales and
services declined as the net sales declined as described above.
Selling, general & administrative expenses for the first quarter ended June
30, 1997, were approximately $638,600, an increase of 145% over the
approximately $261,100 recorded for the corresponding quarter of 1996. The
dollar increase in these expenses over the prior year reflected additional
spending for personnel and programs consistent with the Company's emphasis on
the T2000 product line. The increased spending level in the first quarter of
1997 also reflected higher spending for programs and promotions needed to
generate and support the product roll-out, as well as substantial marketing
expenditures made in connection with the general availability of the Company's
T2000 product line.
Research & development expenses for the first quarter ended June 30, 1997,
were approximately $23,000, a 54% decrease over the approximately $50,000
recorded for the corresponding quarter of 1996. The $50,000 recorded in the
corresponding quarter of 1996 represented a one-time expenditure for the
acquisition of assets from an entity mainly comprised of prototype boards,
proprietary software code and existing research and development relating to
specific computer software products.
INTEREST & FINANCING EXPENSES
Interest & financing expenses for the first quarter ended June 30, 1997,
were approximately $24,800, a decrease over the approximately $5,704,300
recorded for the corresponding quarter of 1996. In the first quarter ended June
30, 1996, the Company's interest and financing expenses included several
one-time charges associated with the issuance of bridge loans which were
subsequently converted to equity of approximately $5,385,100, and with the cost
of an abandoned stock registration of approximately $284,600.
OTHER
To date, inflation and seasonality has not had a material impact on the
Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended June 30, 1997, the Company received net proceeds of
approximately $5,885,100 from an initial public offering of the Company's common
stock and common stock warrants. The Company also secured a $1,000,000 one year
credit facility in the quarter ended June 30, 1997, which is secured by
investments, receivables and fixed assets. The Company used approximately
$(577,300) in cash flows from operating activities, excluding changes in assets
and liabilities, during the first quarter ended June 30, 1997, compared to
approximately $(506,800) for the corresponding quarter of 1996. The increase in
cash flows used in operating activities excluding changes in assets and
liabilities was mainly due to the increase in selling, general and
administrative expenses discussed above. The total net cash used by operating
activities was approximately $(913,700) for the first quarter ended June 30,
1997, compared to approximately $(407,100) for the corresponding quarter of
1996.
Cash used by investing activities totalled approximately $2,997,900 for the
first quarter ended June 30, 1997 as compared to approximately $69,500 for the
corresponding quarter of 1996. The main component of that investing activity
was the investment in short-term securities of approximately $2,803,000, as well
as continued expenditures for capitalized software development and
property and equipment of approximately $64,200 and $130,700, respectively. The
majority of the expenditures related to continued development of the T2000
product line.
Cash provided by financing activities totalled approximately $5,882,800
compared to approximately $500,000 for the corresponding quarter of 1996. The
Company successfully completed an initial public offering in April 1997, which
yielded net proceeds of approximately $5,885,100. The Company has access to a
$1,000,000 credit line secured by investments, fixed assets and receivables, but
did not borrow against that line of credit during the first quarter ended June
30, 1997.
The Company expects to continue to make significant investments in the
future to support its overall growth. Currently, it is anticipated that ongoing
operations will be financed primarily from net proceeds of the initial public
offering, the line of credit facility, and from internally generated funds. The
Company presently has a line of credit, investments ,and cash and cash
equivalents on hand and believes that these will be sufficient to meet cash
requirements as needed. However, as indicated in the Company's most recent
Annual Report on Form 10-KSB, that while operating activities may provide cash
in certain periods, to the extent the Company experiences growth in the future,
the Company anticipates that its operating and product development activities
may use cash and consequently, such growth may require the Company to obtain
additional sources of financing. There can be no assurances that unforeseen
events may not require more working capital than the Company currently has at
its disposal.
FUTURE OPERATING RESULTS
The preceding paragraph and the following discussion include
forward-looking statements regarding the Company's future financial position and
results of operations. Actual financial position and results of operations may
differ materially from these statements. All such statements are qualified by
the following cautionary statements.
The Company has invested significant amounts in the research and
development and the initial product roll-out marketing and selling for the T2000
product line. The emphasis, attention, and dedication of Company's limited
resources for the T2000 product line have caused and, in management's view, will
continue to cause the negative operating earnings experienced to date.
However, the Company believes that the value and sales potential of the T2000
product line outweighs the risk of continued operating losses. The first
products of the T2000 product line became generally available during the second
quarter of fiscal 1998 and the Company believes that revenues will begin to grow
as contracts are finalized and delivered over the remainder of fiscal 1998.
The Company does not expect revenue growth to occur ratably over the 1998
fiscal year; instead, the Company expects that the major impact of the T2000
product introduction on revenues and earnings will occur during the second half
of the year. Revenue growth in the second quarter of fiscal 1998 will depend to
a large extent on the timing of the Company's roll-out for the initial products
in the T2000 product line.
The Company's ability to achieve its revenue and profitability objectives
in fiscal 1998 will depend on many factors beyond the Company's control. These
include the timing and market acceptance of the T2000 product line and other new
products and features announced and introduced by the Company and its
competitors, ant the extent to which the Company is successful in implementing
its ongoing strategy of providing high fidelity or "toll quality" data
telephony. Other factors include rapid changes in technologies and standards
relating to telecommunications and data telephony.
The foregoing forward-looking statements involve a number of risks and
uncertainties. In addition to the factors discussed above, among the other
factors that could cause actual results to differ materially are those listed in
the Company's most recent Annual Report on Form 10-KSB under the headings "Item
1 - Description of Business -- Forward-Looking and Cautionary Statements" and
"Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the Company's Registration Statement on Form SB-2,
effective April 7, 1997, under the headings "Risk Factors" and "Business", which
are incorporated by reference herein, and included from time to time in other
documents filed by the Company with the Securities and Exchange Commission.
Because of the foregoing uncertainties affecting the Company's future
operating results, past performance should not be considered to be a reliable
indicator of future performance. The use of historical trends to anticipate
results or trends in future periods may be inappropriate. In addition, the
Company's participation in a highly dynamic industry may result in significant
volatility in the price of the Company's common stock.
The Company cautions that the preceding list of cautionary statements is not
exclusive. The Company does not undertake to update any forward-looking
statements that may be made from time to time by or on behalf of the Company.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Description
10.1 Line of Credit Facility -Promissory Note with NationsBank,
N.A. dated May 31, 1997
10.2 Non-Qualified Stock Option Plan Agreement
(b) Since the end of its most recent fiscal year on March 31, 1997, e-Net,
Inc. has filed the following reports on Form 8-K:
Date of Report Item Reported
None.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
e-Net, Inc.
(Registrant)
DATE: August 5 1997 /s/ Robert A. Veschi
----------------------------------
Robert A. Veschi
President and Chief Executive Officer
(Duly Authorized Officer and Principal Financial Officer)
Exhibit Index
Sequentially
Numbered
Exhibit Description Page
10.1 Line of Credit Facility -Promissory Note with NationsBank, N.A.
dated May 31, 1997
10.2 Non-Qualified Stock Option Plan Agreement