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, 1998
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 4, 1998 was 8,220,924.
Transitional small business disclosure format (check one):
Yes No X
--- ---
The exhibit index appears in sequentially numbered page: N/A
1
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, 1998 . . . . . . . . . . . . . . . . . .. . 4
Statements of Operations for the three months ended June 30, 1998 and 1997. . . . .. . 5
Statements of Cash Flows for the three months ended June 30, 1998 and 1997. . . . .. 6
Statements of Stockholders' Equity as of June 30, 1998. . . . . . . . . . . . . . .. . 7
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis or Plan of Operations . . . . . . . . . . . .. . 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . .. 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
Board of Directors
e-Net, Inc.
We have reviewed the accompanying balance sheet of e-Net, Inc. (a Delaware
Corporation) as of June 30, 1998, 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, 1998, 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 27, 1998, 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, 1998, 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 7, 1998
3
e-NET, INC.
BALANCE SHEETS
ASSETS
June 30, 1998 March 31, 1998
------------- --------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 9,726,123 $ 855,743
Short-term investments, at market 3,878,085 960,248
Accounts receivable 649,965 334,602
Inventory 277,209 202,917
Prepaid expenses 192,518 176,264
---------------- --------------
Total Current Assets 14,723,900 2,529,774
Deposits and Other Assets 14,821 14,821
Property, and Equipment, Net 468,111 372,403
Software Development Costs, Net 780,698 805,188
---------------- --------------
$ 15,987,530 $ 3,722,186
---------------- --------------
---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade 417,496 314,010
Accrued liabilities 475,799 561,093
---------------- --------------
Total Current Liabilities 893,295 875,103
Long Term Debt - -
---------------- --------------
Total Liabilities 893,295 875,103
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares
authorized, 8,220,924 and 5,750,000 shares outstanding
at June 30 and March 31, 1998, respectively 82,209 57,500
Stock subscriptions and notes receivable (23) (46)
Additional paid-in capital 28,264,688 14,163,090
Retained deficit (13,252,639) (11,373,461)
---------------- --------------
Total Stockholders' Equity 15,094,235 2,847,083
---------------- --------------
$ 15,987,530 $ 3,722,186
---------------- --------------
---------------- --------------
The accompanying notes are an integral part of these statements.
4
e-NET, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
1998 1997
----------- -----------
Sales
Products $ 303,895 $ 1,170
Services 129,375 86,834
----------- -----------
Total sales 433,270 88,004
Cost of Product Sold and Service Provided
Products 190,323 630
Services 43,248 37,943
----------- -----------
Total cost of product sold and service provided 233,571 38,573
Gross Profit 199,699 49,431
Operating Expenses
Selling, general and administrative 1,532,884 638,549
Research and development 554,737 22,992
----------- -----------
Loss from Operations (1,887,922) (612,110)
Interest and Financing Charges
Interest and financing expense -- (10,103)
Other expenses (68,789) (32,213)
Interest income 77,533 67,109
----------- -----------
Loss Before Income Taxes (1,879,178) (587,317)
Income Tax Provision -- --
----------- -----------
Net Loss $(1,879,178) $ (587,317)
----------- -----------
----------- -----------
Loss per Share $ (.28) $ (.11)
----------- -----------
----------- -----------
Weighted Average Shares Outstanding 6,795,362 5,585,165
The accompanying notes are an integral part of these statements.
5
e-NET, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
1998 1997
---------- ---------
Increase (Decrease) in Cash and
Cash Equivalents
Cash Flows from Operating Activities
Net loss $ (1,879,178) $ (587,317)
Adjustments to reconcile net loss to net cash from
operating activities
Depreciation and amortization 109,556 10,000
Stock-based compensation 13,388 -
Changes in operating assets and liabilities
(Increase) in accounts receivable (315,362) (24,735)
(Increase) in inventory (74,292) (71,317)
(Increase) in prepaid expenses, deposits and other assets (16,255) (166,510)
Increase (Decrease) in accounts payable
and accrued liabilities 18,192 (73,823)
------------------ ------------------
Net Cash Used in Operating Activities (2,143,951) (913,702)
------------------ -------------------
Cash Flows from Investing Activities
Capital expenditures (150,774) (64,161)
Capitalized software development costs (30,000) (130,745)
Investment in short term securities (2,917,837) (2,802,973)
------------------- -------------------
Net Cash Used in Investing Activities (3,098,611) (2,997,879)
------------------ -------------------
Cash Flows from Financing Activities
Netproceeds from private placement of common stock and exercise of
common stock warrants in 1998 and initial public offering
of common stock in 1997 14,088,210 5,870,082
Issuance of common stock 24,709 15,000
Payments of common stock subscriptions receivable 23 -
Payments on capital leases - (2,286)
------------------ ------------------
Net Cash Provided by Financing Activities 14,112,942 5,882,796
------------------ ------------------
Net Increase in Cash and Cash Equivalents 8,870,380 1,971,215
Cash and Cash Equivalents at Beginning of Period 855,743 379,441
------------------ ------------------
Cash and Cash Equivalents at End of Period $ 9,726,123 $ 2,350,656
------------------ ------------------
------------------ ------------------
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, 1998 5,750,000 $ 57,500 $ (46) $ 14,163,090 $(11,373,461) $ 2,847,083
Sale of common stock
in private placement 750,000 7,500 -- 5,114,188 -- 5,121,688
Exercise of common stock
warrants 1,720,924 17,209 -- 8,974,022 -- 8,991,231
Stock-based compensation -- -- -- 13,388 -- 13,388
Payment of stock subscriptions -- -- 23 -- -- 23
Net loss -- -- -- -- (1,879,178) (1,879,178)
------------ --------- -------- ------------ ----------- ------------
Balance, June 30, 1998 8,220,924 $ 82,209 $ (23) $ 28,264,688 $(13,252,639) $15,094,235
------------ --------- -------- ------------ ------------- ------------
------------ --------- -------- ------------ ------------- ------------
The accompanying notes are an integral part of these statements.
7
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, 1998 are not necessarily
indicative of the results for the fiscal year ending March 31, 1999. 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-KSB for the fiscal year ended March 31, 1998.
NOTE B--SIGNIFICANT TRANSACTIONS
Private Placement Transaction
In April 1998, the Company offered for sale to accredited investors
750,000 shares of the Company's restricted common stock, par value $.01 per
share, at $7.50 per share. The share price was based upon the average of the
last reported sales prices for the Common Stock for the five (5) business days
immediately preceding the date upon which the Offering Price is determined,
which was April 3, 1998. The transaction was completed in April 1998, and
resulted in proceeds, net of transaction costs, to the Company of approximately
$5,100,000.
Warrant Redemption
In May 1998, the Company authorized the redemption of its publicly
traded Redeemable Common Stock Purchase Warrants (Warrants). The Company had
issued 1,725,000 warrants in its initial public offering, effective April 7,
1997. Under the terms governing these Warrants, the Company was entitled to
redeem, for $.05 per Warrant, the Warrants that had not already been exercised
and converted to a share of common stock at an exercise price of $5.25, if the
Company's common stock closing bid price equaled or exceeded $10.00 per share
for a thirty consecutive trading day period. Such a period ended on May 14,
1998. The redemption occurred in June 19, 1998 and the exercise of Warrants
prior to this date resulted in proceeds, net of transaction costs, to the
Company of approximately $9,000,000.
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. The useful life of capitalized software
development costs is estimated to be three years. At June 30, 1998, the Company
has capitalized $780,698, net of accumulated amortization. Should sufficient
product sales fail to materialize, the carrying amount of capitalized software
costs may be reduced accordingly in the future. Amortization expense for the the
three-month period ended June 30, 1998 and 1997 were $54,490 and $-0-,
respectively.
NOTE E--LINE OF CREDIT FACILITY
On May 31, 1998, 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
At June 30, 1998, the Company had two stock-based compensation plans.
As permitted under generally accepted accounting principles, grants under those
plans are accounted for following APB Opinion No. 25 and related
interpretations.
8
Accordingly, only the compensation cost associated with grants to
non-employees or non-directors of the Company have been recognized in the
amount of $13,388. All options granted to employees are non-compensatory.
NOTE G--INCOME TAXES
The Company has generated net operating losses since its inception. At
June 30, 1998, 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 73% of the Company's accounts receivable balance at June
30, 1998 were from four customers, and approximately 73% of the Company's sales
for the quarter ended June 30, 1998, were from four customers.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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-KSB for the fiscal year ended March 31, 1998, as
amended.
RESULTS OF OPERATIONS
NET SALES
Net sales for the first quarter ended June 30, 1998 were approximately
$433,000, an increase of 392% over the approximately $88,000 recorded for the
corresponding quarter of 1997. The revenue increase was driven primarily by the
general availability of the Company's T2000 product line. Product sales
increased to approximately $304,000 in the first quarter ended June 30, 1998
compared to $1,000 recorded for the corresponding quarter of 1997. The sales for
the quarter ended June 30, 1997 were primarily from one customer while the
product sales for the quarter ended June 30, 1998 were primarily from four
customers.
GROSS PROFIT
Gross profits for the first quarter ended June 30, 1998 were
approximately $200,000 or 46% of sales, compared to the approximately $49,000 or
56% of sales for the corresponding quarter of 1997. The amount of gross profit
increase was due to increased product sales as discussed above. The gross
profits on product sales for the first quarter ended June 30, 1998 were
approximately $114,000 or 37% of product sales. The product sales, cost of sales
and resulting gross profits were affected by increased capitalized software
amortization costs and sales discounts to distributors and value added
resellers.
OPERATING EXPENSES
Selling, general & administrative expenses for the first quarter ended
June 30, 1998 were approximately $1,533,000, an increase of 140% over the
approximately $639,000 recorded for the corresponding quarter of 1997. The
dollar increase in these expenses over the prior year reflected additional
spending for personnel, advertising and substantial marketing expenditures made
in connection with promotion of the Company's T2000 product line.
Research & development expenses for the first quarter ended June 30,
1998 were approximately $555,000, an increase over the approximately $23,000
recorded for the corresponding quarter of 1997. The majority of the research and
development expenditures for the 1997 quarter were software development costs
incurred on products after achieving technological feasibility and were
capitalized for future amortization.
INTEREST & FINANCING EXPENSES
Interest & financing expenses for the first quarter ended June 30,
1998 were approximately $-0-, a decrease over the approximately $10,000
recorded for the corresponding quarter of 1997. Other expenses for the first
quarter ended June 30, 1998, were approximately $69,000, an increase over the
approximately $32,000 recorded for the corresponding quarter of 1997. The
increase in other expenses are due primarily to expenses associated with the
continued registration of certain of the Company's publicly traded
securities and other related items.
OTHER
IMPACT OF INFLATION
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in supplies
or other operating costs may adversely affect the Company's operations; however,
the Company believes it may increase prices of its products and systems to
offset increases in costs of goods sold or other operating costs.
SEASONALITY
Based on its experience to date, the Company believes that its future
operating results may be subject to quarterly variations based on a variety of
factors, including seasonal changes in the weather. Such effects may not be
apparent in the Company's operating results during a period of expansion.
However, the Company can make no assurances that its business can be
significantly expanded under any circumstances.
10
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended June 30, 1998, the Company received net proceeds
of approximately $5,100,000 from a private placement of the Company's common
stock and net proceeds of approximately $9,000,000 from the exercise of the
Company's common stock warrants. The Company also renewed a $1,000,000 one year
credit facility that is secured by investments, receivables and fixed assets.
The Company used approximately $(1,756,000) in cash flows from operating
activities, excluding changes in assets and liabilities, during the first
quarter ended June 30, 1998, compared to approximately $(577,000) for the
corresponding quarter of 1997. 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 and research and
development expenses discussed above. The total net cash used by operating
activities was approximately $(2,144,000) for the first quarter ended June 30,
1998, compared to approximately $(914,000) for the corresponding quarter of
1997.
Cash used by investing activities totalled approximately $3,099,000 for
the first quarter ended June 30, 1998 as compared to approximately $2,997,900
for the corresponding quarter of 1997. The main component of that investing
activity was the investment in short-term securities of approximately
$2,917,000, as well as continued expenditures for capitalized software
development and property and equipment of approximately $30,000 and $151,000,
respectively. The majority of the expenditures related to continued development
of the Company's T2000 product line.
Cash provided by financing activities totalled approximately
$14,113,000 compared to approximately $5,883,000 for the corresponding
quarter of 1997. The Company successfully completed a private placement in
April 1998 that yielded net proceeds of approximately $5,100,000, and
exercises of the Company's common stock warrants prior to their redemption in
June 1998 yielded net proceeds of approximately $9,000,000. 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, 1998.
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 private
placement, warrant exercise, 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, as amended, 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 paragraphs 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 cautionary statements set forth in Part I, Item 1 of the Company's most
recent Annual Report on form 10-KSB, as amended, under "Forward Looking and
Cautionary Statements," as well as the following statements.
The Company has invested significant amounts in the research and
development and the initial product roll-out marketing and selling for the
Telecom 2000 product line. The emphasis, attention, and dedication of Company's
limited resources for the Telecom 2000 product line have caused and, in
management's view, will continue to cause negative operating earnings. However,
the Company believes that the value and sales potential of the Telecom 2000
product line outweighs the risk of continued operating losses.
The first products of the Telecom 2000 product line became generally
available during the second quarter of fiscal 1998 and the Company believes that
revenues will continue to grow as contracts are finalized and products are
delivered over fiscal 1999. The protracted process of obtaining governmental
regulatory approval of products (i.e. Federal Communications Commission product
certification) and the hiring of senior telecommunications sales and technical
staff in the current low-unemployment-rate economy have caused, and may continue
to cause, an effect on the delivery of the Company's products to market. To date
the Company has received all regulatory approvals which it has sought, and has
been able to hire senior telecommunications sales and technical staff, although
no assurance can be given to such results in the future.
The Company does not expect revenue growth to occur ratably over the
1999 and 2000 fiscal years; instead, the Company expects that the major impact
of the Telecom 2000 product introduction on revenues and earnings will occur
during
11
fiscal 1999. Revenue growth in fiscal 1999 will depend to a large extent
on the timing of the Company's rollout for products in the Telecom 2000 product
line.
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.
12
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
The Company's unexercised, publicly-traded common stock warrants were
redeemed effective June 19, 1998 for $.05 per warrant. By virtue of
this redemption, all such warrants have been cancelled and the owners
thereof have no further rights other than the right to receive the
redemption price.
In April 1998, the Company issued 750,000 shares of common stock in
a private placement to various investors at a price of $7.50 per
share, or an aggregate of $5,625,000. Pennsylvania Merchant Group
served as the placement agent for this transaction, for a fee of six
percent of the gross proceeds of the offering, or $337,500, plus a
five year warrant to purchase 75,000 shares of common stock at an
exercise price of $9.00 per share. The securities issued by the
Company in these transactions were "restricted" securities within
the meaning of that term as defined in Rule 144 and were issued
pursuant to the exemption provided by Rule 508 of Regulation D under
the Securities Act of 1933, as amended (the "Act") for sales of
securities by an issuer not involving any public offering. The
purchasers in this transaction were "accredited" persons as that term
is used in Regulation D under the Act.
The foregoing restricted securities were appropriately marked with a
restrictive legend and were issued for investment purposes only and
not with a view to redistribution, absent registration. The foregoing
purchasers were fully informed and advised concerning the Company, its
business, financial and other matters. The Company was informed that
each purchaser was able to bear the economic risk of its investment and
was aware that the securities were not registered under the Act and
cannot be re-offered or re-sold until they have been so registered or
until there is an available exemption from the registration
requirements of the Act. The Company's transfer agent and registrar was
instructed to mark "stop transfer" on its ledgers to assure that these
securities not be transferred absent registration or a determination
that there is an available exemption from the registration requirements
of the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Description
None.
(b) Since the end of its most recent fiscal year on March 31, 1998, e-Net, Inc.
has filed the following reports on Form 8-K:
Date of Report Item Reported
None.
13
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 13, 1998 /s/ Donald J. Shoff
----------------------------------
Donald J. Shoff
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
14