UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 000-21659
---------
EDnet, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1273795
- --------------------------------------------------------------------------------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Union Street, San Francisco, California 94111
- --------------------------------------------------------------------------------
Address of principal executive offices (Zip Code)
Issuer's telephone number, including area code (415) 274-8800
-------------------
Check 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___.
Number of shares outstanding of the issuer's common stock as of September 30,
1997: 7,858,465
Transitional Small Business Disclosure Format (Check one): Yes___ No_X_
<PAGE>
<TABLE>
Part I. FINANCIAL INFORMATION
EDnet, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended September 30, 1997 & 1996
<CAPTION>
Three Months
Ended September 30
(Unaudited)
----------------------------------------------
1997 1996
----------------------------------------------
<S> <C> <C>
Revenues:
Equipment sales and installation $ 290,228 $ 295,778
Site development and services 191,817 228,387
Access, Usage, and Hosting fees 396,571 377,275
Other fees 24,755 25,160
----------------------------------------------
903,371 926,600
Cost of sales 553,101 606,881
----------------------------------------------
Gross Profit 350,270 319,719
Research & Development - 158,564
Sales and Marketing expenses 172,638 192,508
General and Administrative expenses 722,356 497,062
----------------------------------------------
894,994 848,134
Loss from operations (544,724) (528,415)
----------------------------------------------
Other income (expense):
Interest income (expense) (4,524) (56,631)
----------------------------------------------
Total other income (expense), net (4,523) (56,631)
----------------------------------------------
Loss before provision for income taxes (549,248) (585,046)
Income taxes -- --
----------------------------------------------
Net Loss $ (549,248) $ (585,046)
==============================================
Net Loss Per Common Share $ (0.08) $ (0.18)
==============================================
Weighted Average Number
of Shares Outstanding 6,670,226 3,206,675
==============================================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
EDnet, Inc.
CONSOLIDATED BALANCE SHEETS
As of September 30, 1997 and June 30, 1997
<CAPTION>
ASSETS
9/30/97 6/30/97
(Unaudited) (Unaudited)
----------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,176 $ 31,067
Accounts Receivable, net 474,449 445,121
Inventories 212,520 202,913
Other Current Assets 202,960 193,949
----------------------------------------
TOTAL CURRENT ASSETS 891,105 873,050
PROPERTY AND EQUIPMENT, NET 500,792 556,533
OTHER ASSETS 5,478 5,478
----------------------------------------
TOTAL ASSETS $ 1,397,375 $1,435,061
========================================
LIABILTIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,615,347 $1,648,167
Accrued expenses 493,606 466,455
Deferred revenue 96,445 69,193
Line of credit 34,510 34,628
Notes payable 185,681 592,286
Current portion of capital lease obligations 20,826 27,817
----------------------------------------
TOTAL CURRENT LIABILITIES 2,446,416 2,838,546
LONG TERM LIABILITIES 767,846 770,904
----------------------------------------
TOTAL LIABILITIES 3,214,261 3,609,450
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; par value $.001 per share
Authorized 50,000,000 shares, 7,858,465 and
5,720,465 shares issued and outstanding as of
September 30, 1997 and June 30,1997 respectively 7,858 5,720
Preferred Stock; par value $1,000 per share
Authorized 1,750 shares, 150 shares issued and
outstanding as of June 30, 1997 116,776 117,541
Capital paid in excess of par value of common stock 5,316,190 4,411,577
Accumulated Deficit (7,257,711) (6,709,227)
----------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,816,887) (2,174,389)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,397,375 $1,435,061
========================================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Three Months ended September 30, 1997 and 1996
<CAPTION>
9/30/97 9/30/96
(Unaudited) (Unaudited)
-----------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (549,258) $ (585,045)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 52,672 110,182
Increase (decrease) in Provision
for doubtful accounts 3,389 4,800
Noncash compensation expenses 400,000 195,312
Decrease (increase) in other current assets (9,011) (33,136)
Decrease (increase) in accounts receivable (32,717) (89,477)
Increase in inventory (9,607) (167,893)
Increase in accounts payable
and accrued expenses 2,467 144,682
Increase (decrease) in deferred revenue 27,252 (50,487)
-----------------------------------------------
Net cash used in operating activities (114,813) (471,062)
-----------------------------------------------
Cash flows from investing activities:
Purchase of property and Equipment (5,065) (171,010)
-----------------------------------------------
Net cash used in investing activities (5,065) (171,010)
-----------------------------------------------
Cash flows from financing activities:
Repayment on borrowings (31,719) (35,000)
Proceeds from borrowings 131,755 1,000,000
Repayments on capital leases (10,049) (2,367)
-----------------------------------------------
Net cash provided by financing activities 89,987 962,633
-----------------------------------------------
Net increase (decrease) in cash (29,891) 320,561
===============================================
Cash at beginning of period 31,067 221,875
-----------------------------------------------
Cash at end of period $ 1,176 $ 542,436
===============================================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
EDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
In the opinion of management, the unaudited consolidated condensed
financial statements included herein have been prepared on a consistent
basis with the June 30, 1996 audited and June 30, 1997 unaudited
consolidated financial statements and include all material adjustments,
consisting of normal recurring adjustments, necessary to fairly present the
information set forth therein. As reported in the audited financial
statements of June 30, 1996 and unaudited June 30, 1997, EDnet, Inc. ("the
Company") has not been able to generate any operating profit since
inception, and is attempting to raise additional funds as described in Note
8. However, if the Company is unable to raise additional funds or
consummate a merger or other transaction, it may not have the financial
resources to continue as a going concern and may be forced to seek
protection from its creditors under Chapter 11 of the bankruptcy code. The
financial statements do not contain any adjustments that may be needed if
the Company is unable to continue as a going concern.
2. Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries Entertainment Digital Network, Inc. (EDN)
and Internet Worldwide Business Solutions, Inc. (IBS). Material
inter-company transactions and balances have been eliminated.
3. Loss per Share
Loss per share has been computed using the weighted average number of
common shares outstanding totaling 7,858,465 shares for the three months
ended September 30, 1997. There were 6,670,226 weighted average shares
outstanding for the three ended September 30, 1997. Due to the Company's
loss position, common equivalent shares have been excluded because they are
anti-dilutive.
4. Research and Development
The Company incurred no research and development expense during the three
months ended September 30, 1997.
5. Consulting Agreements
On June 30, 1997, the Company entered into a consulting agreement with
Charles Clark, pursuant to which Mr. Clark agreed to serve the Company in
advising and assisting in the structure of debt and liabilities, joint
ventures, acquisitions or merger partners, business development and
developing long term financial plans. The Company agreed to pay Mr. Clark
for re-structuring and re-organizing the Company's senior notes and debts
on the Company's balance sheet, four hundred thousand (400,000) shares of
Common Stock. These shares were issued to Mr. Clark and registered with the
Securities and Exchange Commission under Form S-8 registration under the
Securities Act of 1934 on July 25, 1997. The term of the Agreement is for
five (5) years and can be terminated by either party with a thirty (30) day
written notice under certain conditions.
6. Notes Receivable
In connection with the licensing by IBS of IBS' software to Breakthrough
Software, Inc. ("BSI"), completed in the prior fiscal year, the Company has
an unsecured note receivable from BSI of $250,000 as of September 30, 1997.
No further advances will be made to BSI under the note. The
5
<PAGE>
Company has extended the due date of the note receivable from Breakthrough
to March 31, 1998, and has established a 100% reserve against the note.
Subsequent to September 30, 1997, $93,891.65 of liabilities on IBS's
balance sheet were transferred to BSI reducing the note due from BSI to IBS
from $250,000 to $156,108.35. For other related subsequent events see (Note
9).
7. Notes Payable
On September 30, an agreement was reached whereby the Company's note
payable to Mr. Onggara in the amount of $340,000 plus accrued interest of
$35,000 was converted to shares of the Company's Common Stock at $.375 per
share, resulting in an issuance of 1,000,000 shares. The Company addressed
an unresolved commitment of options to Mr. Onggara by issuing 1,000,000
warrants priced at $1.25 each. The warrants are convertible over 3 years
and are transferable and divisible.
The Company has senior promissory notes payable to Morgan Fuller Capital
Group L.L.C., with original amounts of $500,000, $200,000 and $300,000
collateralized by the Company's assets with interest payable quarterly at
14% beginning September 30, 1996. The original due date of the Notes was
extended from November 15, 1996 to February 15, 1997, when the Notes
converted into a term loan with principal in the amount of $100,000 and
interest at 18% payable monthly. The Company repaid principal of $100,000
and accrued interest on February 15, 1997, but failed to make the March 15,
1997 payment. Effective June 30, 1997, accrued penalties and interest were
forgiven, and the Notes were converted to a term loan payable in 60
installments with accrued interest at 6% commencing September 1, 1997.
Additionally, the Company agreed to re-price all warrants previously issued
to Morgan Fuller to an exercise price of $1.50.
8. Investment by T Bar W Ranch Investments
Under a subscription agreement signed July 10, 1997, the Company received a
commitment to purchase 3,750,000 shares of Common Stock at a price of $0.20
per share. Each share would be issued with a warrant to purchase an
additional share of Common Stock at an exercise price of $1.00 with an
expiration date five years from the date of issuance.
As of November 10, 1997, the total amount invested by T Bar W Ranch
Investments was $147,596. The Company has experienced delays in obtaining
the full amount of the funding commitment described above, and is working
with T Bar W Ranch Investments to determine the likelihood of full funding.
The Company is considering alternative courses of action presuming that the
full amount of T Bar W Ranch Investment's commitment will not be
forthcoming. See (Note 9) regarding merger and funding discussions.
9. Subsequent Events
Resignations:
On October 15, 1997, Alan K. Geddes, Vice President of Finance resigned his
position as Chief Financial Officer. The Company has not replaced his
position as of November 15, 1997 and his duties are presently being
performed by Tom Kobayashi, CEO and Simon Wu, Controller.
6
<PAGE>
Merger Discussions
On October 28 ,1997, the Company initiated preliminary discussions with a
potential merger partner. To date, those discussions have covered merger,
acquisition, asset sales, and other potential transactions. As of the date
of this filing, no definitive agreement has been reached.
Funding
On November 7, 1997, the Company entered a Pre-Closing Agreement (the
"Agreement") with BSI and a private investor ("Investor"). BSI contemplates
a sale of its Series B Preferred Stock to Investor on or before November
30, 1997 (the "Financing"). It is a condition to the closing of the
Financing that Investor purchase all outstanding shares of Series A
Preferred Stock (the "Series A") from EDnet (the "Purchase") and contribute
a portion of such shares to the capital of BSI. Investor has accommodated
EDnet and BSI by making a portion of the funds to be paid in the Financing
and the Purchase available prior to the closing of such transactions.
EDnet has agreed to sell its 2,000,000 shares of Series A to Investor in
exchange for $250,000 and the obligation to pay an additional $165,000 at
the closing of the Financing. The 2,000,000 shares of Series A from EDnet
is being held in escrow and will be transferred to Investor upon closing of
the Financing. In the event the Financing has not closed by November 30,
1997, 500,000 shares of Series A shall be returned to EDnet and the
obligation to pay an additional $165,000 to EDnet shall be rescinded.
7
<PAGE>
EDNET, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended September 30, 1997, the Company's revenues were
$903,371, a decrease of 3% compared to revenues of $926,600 in the same period
last year. This decrease was due primarily to a 19% decrease in revenues from
web site development and a slight decline in network equipment sales due to
certain vendor credit limitations. However, there were increases in network
access, usage fees, and recurring hosting revenues associated with a larger
installed network base.
Gross Profit increased to $350,270 or 39% of sales, in the three months ended
September 30, 1997 compared to $319,719, or 35% of sales, in the equivalent
period last year. Increases in gross profit as a percentage of sales are
attributed to the growth in network usage and web hosting revenues, each of
which carry higher profit margins.
Operating expenses (including Research & Development, Sales & Marketing, and
General & Administrative) increased to $894,994 in the three months ended
September 30, 1997 compared to $848,134 in the equivalent period last year. The
Company did not incur any Research and Development expense during the 1997
period due primarily to the elimination of investment in software development.
Operating expenses for the three month period ending September 30, 1997 also
include amortization of the full cost of $400,000 for the consulting agreement
with Charles Clark. (See Note 5) By removing this nonrecurring expense of
$400,000 in the current period and $383,721 of Research & Development,
amortization of goodwill, and consulting costs in the comparable period last
year, the operating expense would have been $494,994 for the current period
versus $464,413 for the year earlier period, representing a 6% increase.
Other expenses decreased to $4,524 in the three months ended September 30, 1997
compared to $56,631 in the equivalent period last year. The decrease in other
expenses was due to decreases in interest expense and amortization of debt
issuance costs and note discounts associated with the Notes (Note 7).
For the three months ended September 30, 1997, the Company incurred a net loss
of $549,248 or ($0.08) per share based on a weighted average of 6,670,226 shares
outstanding, compared with a net loss of $585,046, or ($0.18) per share based on
a weighted average of 3,206,675 shares outstanding in the prior year.
Financial Condition, Liquidity, and Capital Resources
At September 30, 1997, the Company's accumulated deficit was $7,257,711 and its
working capital deficit was $1,555,311. The rate of increase in the Company's
accumulated deficit declined in the quarter ended September 30, 1997 due
primarily to the elimination of Research and Development expense associated with
the licensing of the IBS Internet software product to BSI, and elimination of
other non-recurring operating expenses, such as goodwill and amortization of the
cost of Liviakis Financial Communications consulting agreement in fiscal year
ended June 30, 1997. However, this was offset by the full amortization of the
cost of $400,000 for Charles Clark's consulting agreement (Note 5). The
Company's working capital deficit improved by 410,185 since June 30, 1997 due
primarily to the conversion of Irawan Onggara note (note 7), principal plus
interest of $375,000, to common stock,
8
<PAGE>
and the private placement investment of $147,596 by T Bar W Investment (note 8).
The Company has made several adjustments to its operations to further reduce
costs, and, partially as a result of funding needs, has initiated preliminary
discussions with one potential partner regarding merger, acquisition, asset
sales and other potential transactions (Note 9).
Disclosure Pursuant to the Private Securities Litigation Reform Act of 1995
When used in this Management's Discussion and Analysis, the words "anticipate,"
"estimate," "expect," and similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks and
uncertainties, including, but not limited to, the following: risks associated
with fundraising and the company's ability to secure resources necessary to
fully develop business products; risks associated with mergers and acquisitions,
the nature of any transaction consummated, and the ability to successfully
operate a merged entity; business conditions in the telecommunications,
entertainment, advertising and Internet-related industries, and the general
economy; competitive factors such as rival networking technology, competing
products, and competitive pricing; risks associated with development,
introduction, and acceptance of new products; the company's ability to manage
its rapid growth and attract and retain key employees; and other risk factors.
Actual results may differ materially from management expectations as discussed
here.
9
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities since June 30, 1997
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) (27) Financial Data Schedule, filed electronically.
(b) Form 8-K filed July 25, 1997 to report the issuance of S-8
shares to Charles W Clark per consulting agreement. (Note 5).
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDNET, INC.
November 15, 1997 By: /s/Tom Kobayashi
-------------------
Tom Kobayashi
Chairman and CEO
By: /s/David Gustafson
-------------------
David Gustafson
Secretary
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,176
<SECURITIES> 0
<RECEIVABLES> 474,449
<ALLOWANCES> 0
<INVENTORY> 212,520
<CURRENT-ASSETS> 208,438
<PP&E> 500,792
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,397,375
<CURRENT-LIABILITIES> 3,097,485
<BONDS> 0
116,776
0
<COMMON> 7,858
<OTHER-SE> (1,824,744)
<TOTAL-LIABILITY-AND-EQUITY> 1,397,375
<SALES> 0
<TOTAL-REVENUES> 903,371
<CGS> 553,102
<TOTAL-COSTS> 894,994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,523
<INCOME-PRETAX> (549,248)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (549,248)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0
</TABLE>
