UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANCE ACT OF 1934
For the transition period from _____________ to ________________
Commission File Number 0-22969
Paladyne Corp.
(Name of Small Business Issuer in its charter)
Delaware 59-3562953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650A Gum Branch Road, Jacksonville, NC 28540
(Address of Principal Executive Offices)
910-478-0097
(Issuer's Telephone Number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Checked whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding as of
December 31, 2001
Common Stock, $.001 PAR VALUE 16,709,351
Transitional Small Business Disclosure Format (check one): Yes ___ No [X]
1
TABLE OF CONTENTS
Page
----
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets - November 30, 2001
and August 31, 2001 4
Condensed Consolidated Statements of Operations -
three months ended November 30, 2001 and
November 30, 2000 5
Condensed Consolidated Statements of Cash Flows -
three months ended November 30, 2001 and November 30, 2000 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I.
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements for the
three months ended November 30, 2001 and November 30, 2000 have been prepared by
Paladyne Corp., a Delaware corporation.
3
PALADYNE CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, 2001 AUGUST 31, 2001
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 288,071 $ 158,225
Accounts receivable, net of allowance
for doubtful accounts of $114,000
and $607,999, respectively 1,813,976 1,414,473
Prepaid expenses and other current assets 36,739 113,960
----------- -----------
Total Current Assets 2,138,786 1,686,658
Furniture and fixtures 360,000 360,000
Computers and software 1,944,332 1,643,218
Leasehold improvements 1,212,119 1,209,967
Accumulated depreciation (1,035,895) (783,449)
----------- -----------
Property and equipment, net 2,480,556 2,429,736
Other assets 18,311 28,685
----------- -----------
$ 4,637,653 $ 4,145,079
=========== ===========
LIABILITIES AND DEFICIENCY IN
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,099,935 $ 2,500,585
Notes payable 2,630,301 2,663,752
Accrued preferred stock dividends 159,800 149,600
Current portion of capital lease obligations 646,439 816,649
----------- -----------
Total current liabilities 6,536,475 6,130,586
Notes payable 2,719,699 2,986,248
Capital lease obligations 574,507 634,230
----------- -----------
Total liabilities 9,830,681 9,751,064
COMMITMENTS AND CONTINGENCIES
DEFICIENCY IN STOCKHOLDERS' EQUITY
Preferred stock:
Series A 137 137
Series C 632 --
Common stock 16,709 16,709
Additional paid-in capital 13,834,930 12,869,647
Accumulated deficit (19,045,436) (18,492,478)
----------- -----------
Total deficiency in stockholders' equity (5,193,028) (5,605,985)
----------- -----------
$ 4,637,653 $ 4,145,079
=========== ===========
See accompanying notes to condensed consolidated unaudited financial statements
4
PALADYNE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
NOVEMBER, 30 NOVEMBER, 30
2001 2000
(UNAUDITED) (UNAUDITED)
------------- ------------
Total Revenues $ 2,440,276
Cost of Revenues 1,316,794
------------
Gross Profit 1,123,482
Selling, general and administrative expenses 1,250,829
Depreciation and amortization 252,446
------------
Loss from operations (379,793)
Other income (expense):
Interest income
Interest expense (173,166)
------------
Loss from continuing operations, before
income taxes and discontinued operations (552,959)
Income tax benefits --
------------
Loss from continuing operations, before
discontinued operations (552,959)
Loss from discontinued operations -- (409,765)
------------ ------------
Loss (552,959)
------------
(409,765)
Cumulative Convertible Preferred
Stock Dividend Requirement (10,200) (10,200)
------------ ------------
Loss attributable to common stockholders $ (563,159) $ (419,965)
------------ ------------
Weighted average common shares outstanding:
Basic 16,709,351 8,459,351
Diluted 16,709,351 8,459,351
Earnings (loss) per share:
Basic $ (.03) $ (.05)
Diluted $ (.03) $ (.05)
See accompanying notes to condensed consolidated unaudited financial statements
5
PALADYNE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
NOVEMBER, 30 NOVEMBER, 30
2001 2000
(UNAUDITED) (UNAUDITED)
----------- ------------
Cash flows used in operating activities $(103,245) $(277,767)
Cash flows provided by (used in) investing activities (273,091) 80,713
Cash flows provided by financing activities 446,182 2,500
----------- ------------
Net increase (decrease) in cash and
cash equivalents
69,846 (194,554)
Cash and cash equivalents at beginning of period 158,225 635,612
----------- ------------
Cash and cash equivalents at end of period $ 228,071 $ 441,057
=========== ============
Supplemental Cash Flow Information:
Cash paid for interest $ 173,166 $ --
Non cash investing and financing activities:
Accrual of preferred stock dividend 10,200 10,200
Preferred shares issued in exchange for debt 300,000
See accompanying notes to condensed consolidated unaudited financial statements
6
PALADYNE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The consolidated financial information included herein contains the information
for Paladyne Corp. and its wholly owned subsidiary. All significant
inter-company transactions and balances have been eliminated.
The consolidated financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normal recurring
adjustments) that, in the opinion of management, are necessary for a fair
statement of results for this interim period. The accompanying financial
statements include estimated amounts and disclosures based on management's
assumptions about future events. Actual results may differ from those estimates.
The results of operations and cash flows for the interim periods are not
necessarily indicative of the results to be expected for the full year.
The condensed consolidated financial statements have been prepared by 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 generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make information presented not misleading.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Form 10-KSB for the fiscal year
ended August 31, 2001 as filed with the Securities and Exchange Commission.
The Company's consolidated financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As with any new venture, concerns
must be considered in light of the normal problems, expenses and complications
encountered by entrance into established markets and the competitive environment
in which the Company operates. The consolidated financial statements do not
include, nor does management feel it necessary, any adjustments to reflect any
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern
NOTE 2. BUSINESS COMBINATION
On February 1, 2001, Paladyne Corp. ("Paladyne") through a wholly-owned
subsidiary ECOM Acquisition Corp. ("Acquisition Sub"), merged (the "Merger")
with e-commerce support centers, inc., a North Carolina corporation ("ECOM"),
pursuant to an Agreement and Plan of Merger, dated as of December 21, 2000, as
amended (collectively, the "Merger Agreement") in a transaction accounted for
using the purchase method of accounting. Upon the Merger, ECOM became a wholly
owned subsidiary of Paladyne. ECOM is a provider of Customer Relationship
Management (CRM) solutions and customer contact center services as an
outsourcing option to companies from its contact center in Jacksonville, NC. The
merger consideration (the "Merger Consideration") to the ECOM shareholders
consisted of shares of newly created Series B Convertible Preferred Stock, $.001
par value (the "Series B Preferred Stock"), Anti-Dilution Warrants and
Performance Warrants (as discussed below) and the right to receive additional
shares of Paladyne Common Stock in conjunction with future placements by
Paladyne. Terrence J. Leifheit, the principal shareholder of ECOM, and another
ECOM shareholder, delivered into escrow securities representing approximately
25% of the aggregate Merger Consideration as security for indemnification claims
Paladyne may have under the Merger Agreement.
7
NOTE 2-BUSINESS COMBINATION (continued)
Upon the Merger, Paladyne issued 4,100,000 shares of Series B Preferred Stock.
Each share of Series B Preferred Stock voted on a two-for-one basis with the
Common Stock on all matters, but with a separate vote on matters directly
affecting such Series, mandatorily converts into two shares of Paladyne Common
Stock immediately following stockholder approval of an increase in the number of
authorized shares of Common Stock, will receive any dividends declared on an
as-converted basis with the Common Stock and will have a liquidation preference
of $5.00 per share. The stockholder approval was obtained at a July 10, 2001
stockholders meeting, accordingly, the shares are deemed converted as of that
date.
To protect against dilution to the former ECOM shareholders upon exercise of
outstanding pre-Merger Paladyne options and warrants (the "Present
Options/Warrants"), Paladyne granted to them Anti-Dilution Warrants to purchase
4,000,000 shares of Paladyne Common Stock at an exercise price of $1.146 per
share (subject to adjustment), vesting as to 0.6 of a share of Common Stock for
each share of Common Stock issued upon the exercise of Present Options/Warrants,
and expiring 30 days after the later of (i) termination or exercise of all
Present Options/Warrants or (ii) notice from Paladyne as to the aggregate number
of Present Options/Warrants that were exercised. Approximately 258,000 of these
Anti-Dilution Warrants have now expired unexercised as a result of the
expiration of approximately 430,000 of the Present Options/Warrants.
To give the former ECOM shareholders the opportunity to participate more
directly in the future performance of Paladyne resulting from the acquired ECOM
business, Paladyne granted to them Performance Warrants to purchase 500,000
shares of Paladyne Common Stock at an exercise price of $1.146 per share
(subject to adjustment), exercisable for five years and vesting in 100,000 share
tranches for each $20 million of net revenue increases, above $50 million
annually, achieved in either year or both of the two (2) year periods ending
January 31, 2002 and 2003. For the purpose of these awards, the measurement will
be on a trailing 12-month basis, and with an acceptable gross margin (20% or
greater) for each tranche to qualify.
In addition, ending upon the earlier to occur of December 20, 2002 or Paladyne's
completion of $6,500,000 in cash from sales of Common Stock or Common Stock
equivalents (the "New Securities"), ECOM shareholders will receive one share of
Common Stock for each $1.00 in gross proceeds received upon the sale of New
Securities or issuable upon conversion, exercise or exchange of New Securities.
ECOM shareholders waived their rights under this provision for the current
$3,000,000 private placement.
The Merger Agreement provided that Paladyne would grant options, at market
value, to ECOM employees for the purchase of an aggregate of 500,000 shares of
Paladyne Common Stock under its 1999 Stock Option Plan. The Compensation
Committee of the Board of Directors was authorized to grant such options upon
receipt from former ECOM management of a proposal of the ECOM employees to whom
the options should be granted. None of these options have been granted.
Immediately prior to the Merger, ECOM purchased from Gibralter Publishing, Inc.,
a North Carolina corporation, all of the tangible and intangible assets used in
ECOM 's call center operations, subject to related liabilities, pursuant to an
Option Agreement. Prior to the Merger, Gibralter had been operating the call
center on behalf of ECOM. The purchase price for these assets was $5 million
which is payable by ECOM pursuant to two amended promissory notes issued to
Gibralter and guaranteed by Paladyne, one note for $1,500,000, repayable in two
installments of $750,000, the first being due after completion of a $3,000,000
equity or convertible debt offering and the remaining payment due no sooner than
six months after the first payment and after three consecutive months of
positive cash flow from operations. The second note for $3,500,000 is repayable
in equal quarterly principal and interest payments of $377,000 beginning in
April 2002 and continuing through January 2005. Both notes bear interest at 10%
per annum and are secured by the purchased assets.
A portion of these assets used by ECOM in its contact center operations consists
of equipment that is leased by Gibraltar pursuant to various equipment leases.
Pending the receipt by Gibralter of lessor consents to the assignments of these
leases to ECOM, and in accordance with an Equipment Use Agreement entered into
by Gibralter and ECOM, Gibralter has granted to ECOM the right to possess and
use the equipment and ECOM has agreed to assume and pay to the lessors the
payments to be made by Gibralter pursuant to the leases.
8
The total purchase price and carrying value of the net assets acquired and
liabilities assumed of ECOM were as follows:
Debts assumed $ 5,000,000
Other liabilities assumed 2,375,579
Costs of acquisition 467,000
Preferred stock issued 5,765,000
Less: assets acquired (4,234,636)
-----------
Excess of purchase price over fair value of assets acquired
$ 9,372,943
===========
The 4,100,000 shares of Series B Preferred Stock issued in the Merger was valued
based upon the underlying 8,200,000 shares of Common Stock at a price of $.7031
(the average the Company's common stock price five days prior to February 1,
2001) for a total consideration of $5,765,000.
The Company has recorded the carryover basis of the net assets acquired, which
did not differ materially from their fair value. The results of operations
subsequent to the date of acquisition are included in the Company's consolidated
statement of operations.
Impairment Charge
During the year ended August 31, 2001, the Company recorded a charge of $
9,008,713 for goodwill impairment related to its ECOM subsidiary. Subsequent to
its acquisition in February 2001, the ECOM subsidiary experienced significant
changes in market conditions. This change caused the subsidiary not to reach the
sales levels the Company originally anticipated at the time of the acquisition.
In addition, the Company's acquisition and related business plan contemplated
the private placement of the Company's equity in order to develop the
subsidiary. Due to adverse capital market conditions, the Company was unable to
raise a significant amount of equity financing. Separately, during the year
ended August 31, 2001, the Company ceased the development of the Company's data
integration and data quality software and recorded a charge of $338,037 for
impairment of capitalized software related to this discontinued operations.
Due to the significance of the changes discussed above, management performed an
evaluation of the recoverability of all of the assets of ECOM, as described in
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of". Management
concluded from the results of this evaluation that a significant impairment
charge was required because estimated fair value was less than the carrying
value of the assets. Considerable management judgment is necessary to estimate
fair value. Accordingly, actual results could vary significantly from
managements' estimates.
Based upon the evaluation, the Company recognized an asset impairment loss of $
9,346,750 or $ .71 per share during the year ended August 31, 2001.
The following unaudited pro forma information presents the condensed
consolidated statement of operations of the Company as if the acquisition had
taken place on September 1, 2000. ECOM had a December 31 year end and
therefore, ECOM's results for the three months ended December 31, 2000 have
been consolidated with Paladyne's results for the three months ended November
30, 2000.
For the three months ended
November 30, November 30,
2001 2000
------------ -----------
Actual Pro Forma
Revenues $2,440,276 $ 1,783,765
Net loss attributable
to common stockholders $ (563,159) $(1,129,455)
Weighted average common
shares outstanding:
Basic and diluted 16,709,351 8,459,351
Earnings (loss) per share:
Basic and diluted $(.03) $(.13)
9
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense as
a result of the goodwill and increased interest expense on acquisition related
debt. They do not purport to be indicative of the results of operations that
actually would have resulted on the date indicated, or which may result in the
future.
NOTE 3. SERIES A DIVIDEND
The holders of the Company's Series A cumulative convertible preferred stock are
entitled to receive, out of the net profits of the Company, annual dividends at
the rate of $.2975 per share. If the net profits of the Company are not
sufficient to pay the preferred dividend, then any unpaid portion of the
dividend will be included in accrued expenses. The Company had accrued
cumulative preferred stock dividends of $159,800 as of November 30, 2001.
NOTE 4. STOCKHOLDERS' DEFICIT
The Series A Preferred Stock issued in the 1998 acquisition of WG Controls, a
former subsidiary, provides for annual dividends of $0.2975 per share or $40,800
per year. If the Company's profits are insufficient to pay such dividends, they
will be cumulative and accrued for payment when Company profits are adequate to
fund payment. The conversion provision of the Series A Preferred Stock calls for
each of the 137,143 preferred shares to be converted into .67361 shares of the
Company's Common Stock, or an aggregate of 92,381 shares of Common Stock when
the Company's Common Stock achieves an average closing price of $5.25 per share
for a consecutive 60-day trading period. The Series A Preferred Stock has the
same voting rights as the Common Stock and have preference to the Common Stock
in the event of any liquidation, dissolution or winding up of the Company,
whether voluntary of involuntary.
On February 1, 2001, the Board of Directors authorized the issuance of 4,100,000
shares of newly created Series B Convertible Preferred Stock in connection with
the Merger of ECOM. These shares were converted to 8,200,000 shares of the
Company's Common Stock on July 10, 2001.
On September 24, 2001, the Board of Directors authorized a private placement of
up to 600,000 units priced at $5.00 per unit, with a unit consisting of three
shares of the Company's Series C 8% Convertible Preferred Stock. Each share of
Series C Preferred Stock is convertible into 10 shares of the Company's Common
Stock commencing April 29, 2002, and is subject to mandatory conversion if the
closing market price of the Common Stock is at least $1.25 per share for any 15
consecutive trading days. Net proceeds from this private placement as of
November 30, 2001 $976,115, which is net of offering expenses of $77,135 and
includes the exchange of $300,000 in debt for this Series C preferred stock.
This resulted in the issuance of 210,650 shares of Series C Preferred Stock.
NOTE 5. INCOME TAXES
The Company has adopted Financial Accounting Standard Number 109(SFAS 109) which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Temporary differences between
taxable income reported for financial reporting purposes and income tax purposes
are insignificant.
For income tax reporting purposes, the Company's aggregate unused net operating
losses approximate $13,520,000, which expire through 2020. The deferred tax
asset related to the carryforward is approximately $4,400,000. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earnings history of
the Company, it is more likely than not that the benefits will be realized.
Significant changes in ownership may limit the Company's future use of its
existing net operating losses.
10
NOTE 6. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes Payable at November 30, 2001 are as follows:
2001
----
Note payable in quarterly installments of $377,000, including interest
at 10% per annum, secured by property and equipment. $ 3,500,000
Note payable in two installments of $750,000, plus interest at 10% per
annum, secured by property and equipment. The first installment is due
after completion of a $3,000,000 equity or convertible debt offering
by the Company and the remaining installment payment due the later of
six months after the first installment payment is made and after three
consecutive months of positive cash flow from operations (as defined). 1,500,000
Note payable to Bank in monthly installments of interest
only at the Bank's prime lending rate plus 1%, secured by accounts
receivable. 350,000
Capital leases, principal and interest payable in installments
through 2004, interest rates range from 8% to 13% collateralized by
specific computer and telephone equipment and software 1,220,946
-----------
6,570,946
Less: current portion (3,276,740)
-----------
$ 3,294,206
===========
NOTE 7. CONTINGENCY
A former Company employee filed a complaint against the Company alleging that
the Company owes the plaintiff additional compensation. The Company believes
that it has meritorious defenses to the plaintiff's claims and intends to
vigorously defend itself against the Plaintiff's claims.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters will not have a material adverse effect on its financial position,
results of operations or liquidity.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Since the February merger with e-commerce support centers, inc. ("ECOM"),
Paladyne Corp. (the "Company") has provided CRM-based customer and tech support,
and outbound telemarketing for business-to-business and business-to-consumer
needs, see Note 2 to the notes to the financial statements.
The Company's consolidated financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As with any new venture, concerns
must be considered in light of the normal problems, expenses and complications
encountered by entrance into established markets and the competitive environment
in which the Company operates. The consolidated financial statements do not
include, nor does management feel it necessary, any adjustments to reflect any
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern. The Company's
independent accountant's report contained a going concern qualification for the
year ended August 31, 2001.
The Company maintains substantial business relations with Gibralter Publishing,
Inc. ("Gibralter"), from which it has acquired or leased a substantial portion
of the ECOM assets in exchange for the installment notes, see note 2 to the
condensed consolidated financial statements. Gibralter continues to be the
Company's principal customer, accounting for approximately 50% of the revenues
for the quarter ended November 30, 2001.
During the three months ended November 30, 2001, the Company has continued to
reduce or eliminate non-critical expenses and operations. Certain personnel
continue to defer all or a portion of their compensation.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to the total revenues
of principal items contained in the Company's Condensed Consolidated Statements
of Operations for the three months ended November 30, 2001 and November 30,
2000, respectively. The percentages discussed throughout this analysis are
stated on an approximate basis.
Three months Ended
November 30,
2001 2000
-------------------------
(UNAUDITED)
Total revenues 100% -
Cost of revenues 53.9% -
----- ----
Gross profit 46.1% -
Operating expenses 61.6% -
----- ----
Operating loss (15.5%) -
Interest expense 7.1% -
Loss from discontinued operations - 100%
----- ----
Net income (loss) (22.6%) 100%
===== ====
12
COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2001 TO THE THREE MONTHS ENDED
NOVEMBER 30, 2000
Revenues for the three months ended November 30, 2001 were $2,440,276, cost of
sales and gross margin were $1,316,704 and $1,123,482, respectively for this
period. All of these were derived entirely from the Company's CRM-based customer
and tech support, and outbound telemarketing for business-to-business and
business-to-consumer operations. These operations began with the purchase of
ECOM on February 1, 2001 as discussed in Note 2 to the condensed financial
statements. Sales for the three months ended November 30, 2000 were attributable
entirely to the discontinued operations relating to the contract software and
service center operations and have accordingly been combined into the loss from
discontinued operations.
Expenses including depreciation and amortization and interest expense were
$1,676,441, these costs all related to the Company's CRM-based customer and tech
support, and outbound telemarketing for business-to-business to
business-to-consumer operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements are for operating expenses, including
employee costs, funding of accounts receivable, capital expenditures and funding
of the operations. The Company's primary sources of cash had been from private
placements of the Company's preferred or common stock and a bank line of credit.
The Company has continued to aggressively seek additional financing or
additional equity infusion to fund the acquisition and growth of ECOM. A
private placement of the Company's Series C Preferred Stock is currently being
offered. This private placement provides for a maximum of $3,000,000, at
November 30, 2001 $1,053,250 has been raised (this includes the $300,000 issued
in exchange for debt). The Company has completed most of its cost cutting moves
including closing the Florida and Virginia offices and certain employee
reductions. Conventional bank financing has not been expanded but with
successful completion of the private placement we intend to aggressively pursue
increases in our bank financing. The Company must obtain additional capital,
primarily to enable payment of the merger related costs from the February 2001
merger with ECOM and to enable the execution of the ECOM business plan. These
merger costs, additional borrowing related to the merger, and the loss of the
Company's traditional revenue sources (discontinued operations) have strained
liquidity significantly
Cash used in operating activities was $103,245 for the three months ended
November 30, 2001. This cash decrease is primarily the result of increased
operating losses, caused by the loss of the Company's traditional revenue source
and revenue levels that are at less than a breakeven volume. Increasing revenues
or further cost cutting will be required in the future. The Company invested
$303,266 in computers and leasehold improvements during this period. The Company
met its cash requirements during the three months ended November 30, 2001
through the receipt of $753,250 (net of exchange for debt) from the sale of the
Series C preferred stock in a private placement.
While the Company has raised capital to meet its working capital requirements in
the past, additional financing is required, in order to meet current and
projected cash flow deficits from operations. The Company is seeking financing
in the form of equity and debt. There are no assurances the Company will be
successful in raising the funds required and any equity raises would be
substantially dilutive to existing shareholders.
In prior periods, significant shareholders have loaned money to or guaranteed
indebtedness of the Company to satisfy certain obligations. No assurance can be
given that such shareholders would guarantee any further indebtedness or seek to
withdraw their existing guarantees.
As the Company continues to expand, the Company will incur additional costs for
personnel. In order for the Company to attract and retain quality personnel,
management anticipates it will continue to offer competitive salaries, issue
common stock to consultants and employees, and grant Company stock options to
current and future employees.
13
The Company's independent certified public accountants have stated in their
report included in the Company's August 31, 2001 Form 10-KSB, that the Company
is experiencing difficulty in generating sufficient cash flow to meet it
obligations and sustain its operations. These factors among others may raise
substantial doubt about the Company's ability to continue as a going concern.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
RISK FACTORS AND CAUTIONARY STATEMENTS
Forward-looking statements in this report are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The Company
wishes to advise readers that actual results may differ substantially from such
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements, including, but not limited to, the
following: the ability of the Company to provide for its debt obligations and to
provide for working capital needs from operating revenue, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission.
14
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) Sale of Securities
During the fiscal quarter ended November 30, 2001,
the Company sold 210,650 shares of its Series C
Preferred Stock in a placement claimed to be exempt
from the registration provisions of the Securities
Act by reason of Section 4(2) therof. The purchasers
entered into Subscription Agreements containing
customary representations and warranties regarding
their knowledge of the Company and their
understanding of the exemption from registration. The
purchasers either paid cash or exchanged existing
outstanding indebtedness for their shares. The
Company received $1,053,250, net of commissions of
$77,135 to Attkinson Carter & Co., the placement
agent. The Series C Preferred Stock is convertible
into shares of Common Stock, see Note 4 to the
financial statements in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 Certificate of Designations to the Certificate of
Incorporation of Paladyne Corp., as filed with the Delaware
Secretary of State on November 1, 2001.
(b) Reports on Form 8-K
1. Form 8-K for an event of September 4, 2001, reporting on
Item 4, the retaining of a new independent accountant.
15
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.
PALADYNE CORP.
Date: January 22, 2002 By /s/ Terrence Leifheit
---------------------------
Terrence Leifheit
President
Date: January 22, 2002 By /s/ Clifford Clark
---------------------------
Clifford Clark
Chief Financial Officer
16