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 March 31, 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 March 31, 1997:
5,665,465
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 and Nine Months ended March 31, 1997 & 1996
<CAPTION>
Three Months Nine Months
Ended March 31 Ended March 31
( Unaudited ) ( Unaudited )
------------------------------ ------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales and installation $ 192,778 $ 352,299 $ 834,483 $ 1,050,123
Site development and services 205,157 -- 781,032 --
Access, Usage, and Hosting fees 504,199 215,087 1,306,063 720,340
Other fees 36,718 28,257 95,357 157,439
----------- ----------- ----------- -----------
938,852 595,643 3,016,935 1,927,902
Cost of sales 515,022 358,451 1,718,837 1,177,555
----------- ----------- ----------- -----------
Gross Profit 423,830 237,192 1,298,098 750,347
Research & Development 51,188 -- 974,284 --
Sales and Marketing expenses 232,412 11,460 670,284 19,130
General and Administrative expenses 838,319 405,014 1,949,637 1,066,274
----------- ----------- ----------- -----------
Loss from operations (698,089) (179,282) (2,296,107) (335,057)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (164,118) (2,956) (261,412) (26,522)
Gain on sales of fixed assets 2,323 -- 2,323 --
----------- ----------- ----------- -----------
Total other income (expense), net (161,795) (2,956) (259,089) (26,522)
----------- ----------- ----------- -----------
Loss before provision for income taxes (859,884) (182,238) (2,555,196) (361,579)
Income taxes 3,266 -- 3,266 --
----------- ----------- ----------- -----------
Net Loss $ (863,150) $ (182,238) $(2,558,462) $ (361,579)
=========== =========== =========== ===========
Net Loss Per Common Share $ (0.17) $ (0.08) $ (0.54) $ (0.16)
=========== =========== =========== ===========
Weighted Average Number 5,178,909 2,261,945 4,747,188 2,261,945
=========== =========== =========== ===========
<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 March 31, 1997 and June 30, 1996
<CAPTION>
ASSETS
3/31/97 6/30/96
(Unaudited)
-----------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 58,219 $ 221,875
Accounts Receivable, net 634,758 478,076
Inventories 236,235 147,409
Other Current Assets 768,400 14,298
-----------------------------------
TOTAL CURRENT ASSETS 1,697,612 861,658
PROPERTY AND EQUIPMENT, NET 623,951 488,943
GOODWILL, NET 714,996 1,088,568
OTHER ASSETS 64,445 79,342
-----------------------------------
TOTAL ASSETS $ 3,101,004 $ 2,518,511
===================================
LIABILTIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,531,048 $ 659,709
Accrued expenses 427,037 390,002
Deferred revenue 17,279 69,623
Line of credit 34,465 16,638
Notes payable 1,332,122 990,991
Current portion of capital lease obligations 36,172 24,493
-----------------------------------
TOTAL CURRENT LIABILITIES 3,378,123 2,151,456
CAPITAL LEASE OBLIGATIONS-LONG TERM 23,863 43,622
-----------------------------------
TOTAL LIABILITIES 3,401,986 2,195,078
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; par value $.001 per share
Authorized 50,000,000 shares, 5,665,465 and
4,468,322 shares issued and outstanding as of
March 31, 1997 and June 30,1996 respectively 5,665 4,468
Preferred Stock; par value $1,000 per share
Authorized 1,750 shares, 150 shares issued and
outstanding as of March 31, 1997 163,352 --
Common stock warrants 222,920
Capital paid in excess of par value of common stock 4,351,032 2,758,644
Accumulated Deficit (5,043,951) (2,439,679)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (300,982) 323,433
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,101,004 $ 2,518,511
===================================
<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 Nine Months ended March 31, 1997 and 1996
<CAPTION>
3/31/97 3/31/96
(Unaudited) (Unaudited)
----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,558,462) $ (361,579)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 307,771 73,109
Noncash compensation expenses 222,541 --
Decrease (increase) in other current assets 12,539 (8,804)
Increase in accounts receivable (156,682) (158,935)
Increase in inventory (88,826) (252,302)
Increase (decrease) in accounts payable
and accrued expenses 926,202 (141,485)
Decrease in deferred revenue (52,344) (124,477)
----------------------------------
Net cash used in operating activities (1,387,261) (974,473)
----------------------------------
Cash flows from investing activities:
Purchase of property and Equipment (276,116) (39,301)
----------------------------------
Net cash used in investing activities (276,116) (39,301)
----------------------------------
Cash flows from financing activities:
Repayment on borrowings (379,116) (126,725)
Proceeds from borrowings 1,000,000 --
Repayments on capital leases (22,526) (12,604)
Issuance of shares under Reg D 738,011 1,159,727
Issuance of shares under Reg S 163,352 --
----------------------------------
Net cash provided by financing activities 1,499,721 1,020,398
----------------------------------
Net increase (decrease) in cash (163,655) 6,624
==================================
Cash at beginning of period 221,875 56,437
----------------------------------
Cash at end of period $ 58,219 $ 63,061
==================================
<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 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, 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. In addition, as described in Notes 7 and 9, the Company is delinquent in
principal payments on its senior collateralized promissory notes (Notes),
and has entered into preliminary discussions with several companies
regarding merger, acquisition, asset sales, and other potential
transactions. 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. 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 5,178,909 shares for the three months
ended March 31, 1997 and 4,747,188 shares for the nine months ended March
31, 1997. There were 2,261,945 weighted average shares outstanding for the
three and nine months ended March 31, 1996. 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 $51,188 of research and development expense during the
three months ended March 31, 1997. This is a reduction from prior quarters
due primarily to the licensing of the Company's IBS Internet software
product to Breakthrough Software Inc. (Breakthrough) completed in the prior
quarter. Total nine month expenditures on research and development were
$974,284.
5. Consulting Agreements
The Company entered into an agreement effective January 12, 1997 with
Liviakis Financial Communications, Inc. (Liviakis), to provide investor
relations consulting services to the Company for a term of one year ending
on January 2, 1998. As payment for its services, Liviakis received 490,000
unregistered shares of common stock from the Company, valued at $643,125,
which amount will be amortized over the term of the agreement. At the end
of the consulting agreement, Liviakis will have the same demand
registration rights to register such shares with the Securities and
Exchange Commission (SEC) as given to investors in the December 31,1996
private placement of common stock initiated by the Company in the prior
quarter.
On January 31, 1997, the Company entered into a Consulting Agreement with
NET Financial International, Ltd. (NET) to assist the Company in raising up
to $5,000,000 in a series of private placements of stock, discussed below.
The Company has agreed to pay NET fees equal to 10% of
5
<PAGE>
the total capital raised in the financing as well as issuing to it a
warrant exercisable for two years allowing the purchase of shares of common
stock with a value on the date of the closing of the financing equal to 6%
of the capital raised in the financing, at an exercise price equal to the
closing bid price of the common stock on the date of the closing of the
financing. The agreement has a term of three months and thereafter is
terminable by either party upon ten days prior written notice. In addition,
if the Company seeks additional financing during the twelve month period
after the execution of the NET consulting agreement, the Company must give
NET the right of first refusal to obtain such additional financing, upon
the compensation terms described above. As of March 31, 1997 the Company
has paid NET cash fees of $15,000 and is obligated to issue warrants as
described in Note 8 in compensation for assistance in placing the Series A
Preferred Stock described in Note 8.
6. Notes Receivable
In connection with the licensing by IBS to Breakthrough of IBS' software,
completed in the prior quarter, the Company has an unsecured note
receivable from Breakthrough of $250,000 as of March 31, 1997. No further
advances will be made to Breakthrough under the note. The 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.
7. Notes Payable
On January 31, 1997, the Notes, in the amount of $1,000,000, converted into
a term loan, with interest increasing to 18% and principal payments of
$100,000 per month commencing February 15, 1997. The Company made a
$100,000 principal payment on February 15, 1997. On March 11, 1997, the
Company's financial advisor, Morgan Fuller Capital Group (Morgan Fuller)
verbally agreed to defer the March 15, 1997 payment for a two week period.
Subsequent to March 31, 1997, the Company received a written payment demand
notice from Morgan Fuller, placing the Company in default. The Company is
currently in negotiation with Morgan Fuller and participants regarding the
Notes.
8. Equity Private Placements
As of March 31, 1997 the Company had issued 265,000 shares of common stock
priced at $1.00 per share under its equity private placement of up to
$5,000,000 initiated December 31, 1996. The Company anticipates terminating
this private placement on June 30, 1997, whether fully subscribed or not.
Holders of this common stock will have piggyback and Form S-3 registration
rights.
Pursuant to a Certificate of Designation filed with the Colorado Secretary
of State on February 2, 1997, the Company's Articles of incorporation were
amended to allow the Company to issue Series A Preferred Shares. On
February 3, 1997, the Company offered up to $1,750,000 of its Series A
Preferred Stock at $1,000 per share to non-United States persons in an
offering exempt from registration under Regulation S of the Securities Act
of 1933, as amended, under its agreement with NET, described above. The
shares are convertible into common stock at any time until the third
anniversary of their issuance at the lesser of 70% of: (i) the average of
the closing bid price of the common stock on the five trading days
preceding conversion (the "Market Price"); or (ii) the average of the
closing bid price for the common stock on the five trading days preceding
the closing (the "Closing Price"), or (iii) if the Market Price or the
Closing Price is less than $1.43 per share, the minimum price shall be
deemed to be $1.43 per share (the "Floor"). The Series A Preferred Shares
are also subject to mandatory conversion on the third anniversary of their
issuance at the lesser of 70% of the Market Price or the Closing Price,
subject to the Floor. Upon conversion, the holders of Series A Preferred
Shares will be paid a 6% cumulative dividend measured from the issuance
date through the conversion date, payable in common stock valued at the
Market Price. The Series A
6
<PAGE>
Preferred Shares have a liquidation preference of $1,000 per share and all
other stock of the Company is subordinate to such preference. Holders of
Series A Preferred Shares or the underlying conversion common stock will be
granted piggyback and Form S-3 registration rights for the underlying
common stock. As of March 31, 1997, the Company has issued 150 shares of
Series A Preferred Stock for $150,000 under this offering, has recorded a
30% preferred stock dividend associated with the conversion discount, and
has accrued a 6% cumulative dividend from the date of issuance through
March 31, 1997. The Company anticipates terminating this offering on June
30, 1997, whether fully subscribed or not. Under the agreement with NET
described in Note 5, the Company is obligated to issue warrants to NET
equal to 6% of the capital raised for its assistance in placing this stock.
The warrants will be priced and issued upon closing of the financing.
9. Subsequent Events
Consulting Agreement
The Company is finalizing an agreement to be effective April 7, 1997 with
an individual to act as the Company's President and Chief Executive
Officer. The agreement will specify cash compensation, participation in an
incentive stock option plan to be developed by the Company in the next
ninety days, and membership on the Company's Board of Directors. The
agreement may be terminated by either party with thirty days advance
notice.
Merger Discussions
On April 25, 1997, the Company announced that it has initiated preliminary
discussions with several potential partners as merger candidates. 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.
7
<PAGE>
EDNET, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended March 31, 1997, the Company's revenues were $938,852,
an increase of 58% compared to revenues of $595,643 in the comparable period
last year. Revenues for the nine months ended March 31, 1997 increased 56% to
$3,016,935, compared to revenues of $1,927,902 in the comparable period last
year. Increases in revenue are attributed to increases in network access and
usage fees associated with a larger installed base and the addition of web
development and hosting revenues associated with the acquisition of IBS. The
equipment component of revenue declined in the three months ended March 31, 1997
due to unavailability of inventory for shipment due to vendor credit
restrictions, and comparison to unusually high equipment sales in the comparable
period of the prior year which resulted from equipment promotions.
Gross Profit increased to $423,830 or 45% of sales, in the three months ended
March 31, 1997 compared to $237,192, or 40% of sales, in the equivalent period
last year. For the nine months ended March 31, 1997 gross profit increased to
$1,298,098, or 43% of sales, from $750,347, or 39% of sales, in the equivalent
period last year. Increases in gross profit as a percentage of sales are
attributed to growth in usage revenues, which carry a higher profit margin, and
the addition of web development and hosting revenues, which carry a high profit
margin.
Operating expenses (including Research & Development, Sales & Marketing, and
General & Administrative) increased to $1,121,919 in the three months ended
March 31, 1997 compared to $416,474 in the equivalent period last year. For the
nine months ended March 31, 1997 operating expenses increased to $3,594,205 from
$1,085,404 in the equivalent period last year. The Company incurred $51,188 of
research and development expense during the three months ended March 31, 1997.
This is a reduction from prior quarters due primarily to the licensing of the
Company's IBS Internet software product to Breakthrough Software Inc.
(Breakthrough) completed in the prior quarter. Total nine month expenditures on
research and development were $974,284. Operating expenses for the three and
nine month periods ending March 31, 1997 also include $313,160 and $561,112
respectively, which represent amortization of the cost of the current Liviakis
consulting agreement, amortization of goodwill, and non-recurring legal and
accounting costs associated with the prior quarter's Breakthrough transaction,
the filing of a Form 10-SB registration statement with the SEC, and the
Company's initial three-year audit. With these items excluded, operating
expenses were $757,571 for the three months ended March 31, 1997 and $2,058,809
for the nine months ended March 31, 1997, representing an 82% and 90% increase
respectively over the comparable periods in the prior year. This increase is
consistent with the necessary addition of infrastructure associated with the
Company's increase in sales. Current year operating expenses also include public
and investor relations, and other costs associated with being a public company
that were not incurred in comparable periods of the prior fiscal year.
Other expenses increased to $161,795 in the three months ended March 31, 1997
compared to $2,956 in the equivalent period last year. For the nine months ended
March 31, 1997 other expenses increased to $259,089 from $26,522 in the
equivalent period last year. The increase in other expenses was due to increases
in interest expense and amortization of debt issuance costs and note discounts
associated with the Notes (Note 7).
8
<PAGE>
For the three months ended March 31, 1997, the Company incurred a net loss of
$863,150 or ($0.17) per share based on a weighted average of 5,178,909 shares
outstanding, compared with a net loss of $182,238, or ($0.08) per share based on
a weighted average of 2,261,945 shares outstanding in the prior year. The
Company incurred a net loss for the nine months ended March 31, 1997 of
$2,558,462, or ($0.54) per share based on 4,747,188 weighted average shares
outstanding, compared with a net loss of $361,579, or ($0.16) per share, based
on 2,261,945 weighted average shares outstanding for the same period last year.
Financial Condition, Liquidity, and Capital Resources
At March 31, 1997, the Company's accumulated deficit was $5,043,951 and its
working capital deficit was $1,680,511. The rate of increase in the Company's
accumulated deficit declined in the quarter ended March 31, 1997 due primarily
to the elimination of Research and Development expense associated with the
licensing of the IBS Internet software product to Breakthrough (Note 4), and
elimination of other non-recurring operating expenses incurred in prior
quarters. The Company's working capital deficit improved by $437,805 since
December 31, 1996 due primarily to common and preferred shares issued under the
equity private placements described in Note 8. The Company was unable to
complete and close these offerings as planned, however, due to a decline in the
Company's stock price late in the quarter, which reduced investor's interest in
the offerings. This came at a time of critical need and prevented the Company
from making its second principal payment on the Notes (Note 7). As a result, 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 several potential partners regarding merger, acquisition, asset
sales and other potential transactions (Note 9). The Company is in active
discussions with Morgan Fuller regarding payment, conversion, and other options
on the Notes. Subsequent to March 31, 1997, the Company's stock price increased,
renewing investor interest in the Company's equity private placements.
Management is continually monitoring the Company's cash position and the status
of all of its financing alternatives.
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
Pursuant to a Certificate of Designation filed with the Colorado Secretary of
State on February 2, 1997, the Company's Articles of Incorporation were amended
to allow the Company to issue Series A Preferred shares (see Note 8 to the
unaudited consolidated condensed financial statements).
Item 3. Defaults Upon Senior Securities
On January 31, 1997, the Company's senior collateralized promissory notes, in
the amount of $1,000,000, converted into a term loan, with interest increasing
to 18% and principal payments of $100,000 per month commencing February 15,
1997. The Company made a $100,000 principal payment on February 15, 1997. On
March 11, 1997, the Company's financial advisor, Morgan Fuller Capital Group
(Morgan Fuller) verbally agreed to defer the March 15, 1997 payment for a two
week period. Subsequent to March 31, 1997, the Company received a written
payment demand notice from Morgan Fuller, placing the Company in default. The
Company is currently in negotiation with Morgan Fuller and participants
regarding the Notes (see Note 7 to the unaudited consolidated condensed
financial statements).
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 March 13, 1997 to report the February 27, 1997 sale of
Equity Securities exempt from registration pursuant to Regulation S of
the Securities Act of 1933 (Note 8).
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.
May 15, 1997 By: /s/Tom Kobayashi
------------------------------
Tom Kobayashi
Chairman of the Board
By: /s/Alan K. Geddes
------------------------------
Alan K. Geddes
Vice President, Finance and
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 58,219
<SECURITIES> 0
<RECEIVABLES> 634,758
<ALLOWANCES> 0
<INVENTORY> 236,235
<CURRENT-ASSETS> 1,547,841
<PP&E> 623,951
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,101,004
<CURRENT-LIABILITIES> 3,238,734
<BONDS> 0
163,352
0
<COMMON> 5,665
<OTHER-SE> (306,647)
<TOTAL-LIABILITY-AND-EQUITY> 3,101,004
<SALES> 0
<TOTAL-REVENUES> 3,016,935
<CGS> 1,718,837
<TOTAL-COSTS> 3,591,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 261,412
<INCOME-PRETAX> (2,555,196)
<INCOME-TAX> 3,266
<INCOME-CONTINUING> (2,558,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,558,462)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> 0
</TABLE>
