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 December 31, 1996 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 December 31,
1996: 4,910,465
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
<PAGE>
Part I. FINANCIAL INFORMATION
<TABLE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months ended December 31, 1996 & 1995
<CAPTION>
Three Months Six Months
Ended December 31 Ended December 31
(Unaudited) (Unaudited)
--------------------------------------------------------------------
1996 1995 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales and installation $ 345,927 $ 349,298 $ 641,705 $ 697,824
Site development and services 347,488 -- 575,875 --
Access, Usage, and Hosting fees 424,590 293,456 801,864 505,253
Other fees 33,479 25,616 58,639 129,182
----------- ----------- ----------- -----------
1,151,484 668,370 2,078,084 1,332,259
Cost of sales 596,935 424,550 1,203,816 819,104
----------- ----------- ----------- -----------
Gross Profit 554,549 243,820 874,268 513,155
Research & Development 764,532 -- 923,096 --
Sale and Marketing Expenses 245,364 2,832 437,872 7,670
General and Administrative expenses 614,257 370,700 1,111,318 661,260
----------- ----------- ----------- -----------
Loss from operations (1,069,604) (129,712) (1,598,018) (155,775)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 508 -- 524 --
Interest expense (100,920) (5,858) (157,566) (11,783)
----------- ----------- ----------- -----------
Total other income (expense), net (100,412) (5,858) (157,042) (11,783)
----------- ----------- ----------- -----------
Loss before provision for income taxes (1,170,016) (135,570) (1,755,060) (167,558)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net Loss $(1,170,016) $ (135,570) $(1,755,060) $ (167,558)
=========== =========== =========== ===========
Net Loss Per Common Share $ (0.26) $ (0.06) $ (0.39) $ (0.07)
=========== =========== =========== ===========
Weighted Average Number
of Shares Outstanding 4,536,020 2,261,945 4,536,020 2,261,945
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
EDnet, Inc.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and June 30, 1996
ASSETS
<TABLE>
<CAPTION>
12/31/96 6/30/96
(Unaudited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 181,196 $ 221,875
Accounts Receivable, net 737,994 478,076
Inventories 296,843 147,409
Other Current Assets 159,110 14,298
----------- -----------
TOTAL CURRENT ASSETS 1,375,143 861,658
PROPERTY AND EQUIPMENT, NET 664,282 488,943
GOODWILL, NET 758,357 1,088,568
OTHER ASSETS 243,932 79,342
----------- -----------
TOTAL ASSETS $ 3,041,714 $ 2,518,511
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,448,497 $ 659,709
Accrued expenses 646,213 390,002
Deferred revenue 13,986 69,623
Line of credit 16,522 16,638
Notes payable 1,328,781 990,991
Current portion of capital lease obligations 39,460 24,493
----------- -----------
TOTAL CURRENT LIABILITIES 3,493,459 2,151,456
CAPITAL LEASE OBLIGATIONS--LONG TERM 33,097 43,622
----------- -----------
TOTAL LIABILITIES 3,526,556 2,195,078
STOCKHOLDERS' EQUITY
Common stock; par value $.001 per share
Authorized 50,000,000 shares,4,910,465
and 4,468,322 shares issued and
outstanding as of December 31, 1996 4,910 4,468
and June 30, 1996, respectively.
Common stock warrants 222,920 --
Capital paid in excess of par value
of common stock 3,482,065 2,758,644
Accumulated Deficit (4,194,737) (2,439,679)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (484,842) 323,433
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,041,714 $ 2,518,511
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended December 31, 1996 & 1995
12/31/96 12/31/95
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
Net Loss $(1,755,060) $ (167,558)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 272,866 50,791
Noncash compensation expenses 51,002
Increase in Other Current Assets (19,075) (10,561)
Increase in Accounts Receivable (259,918) (152,701)
Increase in Inventory (149,434) (225,721)
Increase (Decrease) in Accounts Payable &
Accrued Expenses 1,044,883 (115,756)
Decrease in Deferred Revenue (55,637) (162,107)
----------- ----------
Net Cash used in operating activities (833,685) (732,611)
----------- ----------
Cash flows from investing activities:
Purchase of property and Equipment (263,336) (16,246)
----------- ----------
Net cash used in investing activities (263,336) (16,246)
----------- ----------
Cash flows from financing activities:
Repayment on borrowings (372,256) (126,725)
Proceeds from borrowings 1,000,000 --
Repayments on capital leases (11,820) --
Issuamce of shares under Reg D 528,108 997,500
----------- ----------
Net cash provided by financing activities 1,144,032 870,775
----------- ----------
Net (decrease) increase in cash (40,679) 121,918
=========== ==========
Cash at beginning of period 221,875 56,437
----------- ----------
Cash at end of period $ 181,196 $ 178,355
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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 Company's audited financial statements of June 30, 1996,
the Company has not been able to generate any operating profit since
inception, and is attempting to raise additional funds as described in
Notes 7 and 9. However, if the Company is unable to raise additional funds,
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's
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. Amendment to Acquisition of Internet Worldwide Business Solutions, Inc.
On December 31, 1996, the Company amended the terms of its previously
consummated acquisition of its wholly-owned subsidiary, IBS, by dividing
IBS into two separate corporations. IBS's Internet service business
continues to operate as IBS. IBS licensed to Breakthrough Software, Inc.
(BSI) certain software under development by IBS related to development,
operation, and maintenance of world-wide web sites, and the Company agreed
to lend BSI up to $250,000 (represented by an unsecured note), of which
approximately $130,000 has been lent as of December 31, 1996, to be used
for specified purposes. The Company retained ownership of 2,000,000 shares
of BSI's convertible preferred stock, which represents, after conversion
into BSI non-voting common stock, 40% of BSI's outstanding common stock. At
December 31, 1996, the Company recorded its net book value allocated to BSI
of $166,667 as its investment. Also as a part of the amendment, remaining
acquisition notes payable from the Company to the founders of IBS in the
amount of $250,000 were canceled (Note 6), and the remaining term of an
earn-out plan to such founders was canceled in consideration of the
issuance of 100% of the outstanding voting common stock (Note 8).
4. Loss per Share
Loss per share has been computed using the weighted average number of
common shares outstanding totaling 4,536,020 shares as of December 31, 1996
and 2,261,945 shares as of December 31, 1995. Due to the Company's loss
position, common equivalent shares (stock options and warrants) have been
excluded because they are anti-dilutive.
5. Research and Development
The Company incurred $764,532 of Research and Development expense during
the three months ended December 31, 1996 a major portion of which is
associated with the development of the Internet software product by IBS
(which software has now been licensed by IBS to BSI effective
5
<PAGE>
December 31, 1996 (Note 3)). Total six month expenditures on Research &
Development were $923,096.
6. Notes Payable
In July, August and September, 1996 the company borrowed a total of
$1,000,000 under three senior collateralized promissory notes (the Notes),
arranged by its financial advisor, Morgan Fuller Capital Group (Morgan
Fuller), as follows:
Date Amount Rate Due Date
July 5, 1996 $500,000 14% November 15, 1996
August 9, 1996 200,000 14% November 15, 1996
September 10, 1996 300,000 14% November 15, 1996
The Notes are collateralized by the Company's assets, with interest
originally payable quarterly starting September 30, 1996. Terms of the
Notes include a provision for conversion to a term loan with interest
increasing to 18% and principal payments of $100,000 per month. Morgan
Fuller subsequently sold participations in the Notes to certain investors
in a private placement offering.
On November 15, 1996 the Notes were extended through January 31, 1997. In
connection with the Notes and extension, the Company issued warrants as
described in Note 8 and agreed to pay Morgan Fuller a loan extension fee of
1.5%. On January 31, 1997, the Notes converted into a term loan, as
described above, with monthly principal payments commencing February 15,
1997.
In conjunction with the Company's amendment of the terms of the IBS
acquisition (Note 3), $250,000 in notes payable that were associated with
the original acquisition were canceled, and the associated goodwill
eliminated.
7. Equity Private Placements
On November 30, 1996 the Company completed a private placement of 317,143
shares of common stock priced at $1.75 per share. Each share was issued
with a warrant to purchase an additional share through November 29, 1999 at
a price of $2.50 per share. Holders of this common stock and warrants have
been granted piggyback and Form S-3 registration rights for the common
stock and common stock underlying the warrants.
On December 31, 1996, the Company initiated a private placement of up to
$5,000,000 of common stock priced at $1.00 per share. Holders of this
common stock will have piggyback and Form S-3 registration rights.
8. Stock, Options and Warrants
On December 10, 1996, the Company issued 125,000 shares of common stock to
the two former owners of IBS (then employees of IBS) earned as a part of
the revenue-based earn-out plan established at the time of acquisition.
These shares were valued at $1.5625 per share, the trading price of the
stock as of the date of issuance and resulted in increased goodwill of
$195,313. As a part of the amendment to the IBS acquisition (Note 3), the
remainder of the earn-out plan was canceled.
In connection with the Notes arranged by Morgan Fuller (Note 6), the
Company issued the following warrants to purchase shares of the Company's
common stock to Morgan Fuller and its nominees:
6
<PAGE>
Number of Exercise Expiration
Date Warrants Price Date
July 5, 1996 58,824 $4.25 July 4, 1999
September 11, 1996 67,806 $3.69 September 10, 1999
In connection with the extension of the Notes (Note 6), the Company issued
55,970 warrants to Morgan Fuller and nominees with an exercise price of
$2.68 per share to be exercised prior to November 14, 1999. Holders of
these warrants have been granted piggyback and Form S-3 registration rights
for the common stock underlying the warrant. The fair value of the warrants
issued has been recorded as debt issuance costs and discount to the Notes
and amortized over the term of the Notes. Net amounts included in Other
Current Assets and offset to Notes Payable are $123,661 and $39,509,
respectively, as of December 31, 1996.
On December 31, 1996, the Company's Incentive Stock Option Plan for certain
officers and executive employees of the Company expired, thereby reducing
outstanding and reserved incentive options by 500,000 shares. No options
were exercised under the plan.
There were no options or warrants exercised during the period.
9. Subsequent Events
Consulting Agreement with Liviakis Financial Communications, Inc.
Pursuant to an agreement effective January 12, 1997 between the Company and
Liviakis Financial Communications, Inc. (Liviakis), Liviakis agreed 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
will receive 490,000 unregistered shares of common stock from the Company,
to be valued when issued. At the end of the term of the consulting
agreement, Liviakis shall have the same demand registration rights to
register such shares with the Securities and Exchange Commission (SEC) as
given to investors in the December 1996 private placement discussed in Note
7.
Consulting Agreement with NET Financial International, Ltd.
On January 31, 1997, the Company entered into a Consulting Agreement with
NET Financial International, Ltd. (NET Financial) 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 Financial fees equal to
10% of 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 Financial consulting agreement, the Company
must give NET Financial the right of first refusal to obtain such
additional financing, upon the compensation terms described above.
7
<PAGE>
Equity Private Placement
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 Financial, 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 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.
8
<PAGE>
EDNET, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended December 31, 1996, the Company's revenues of
$1,151,484 increased 72% compared to revenues of $668,370 in the comparable
period last year. Revenues for the six months ended December 31, 1996 increased
56% to $2,078,084, compared to revenues of $1,332,259 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.
Gross Profit increased to $554,549, or 48% of sales, in the three months ended
December 31, 1996 compared to $243,820, or 36% of sales, in the equivalent
period last year. For the six months ended December 31, 1996 gross profit
increased to $874,268, or 42% of sales, from $513,155, or 39% of sales, in the
equivalent period last year. Increases in gross profit as a percentage of sales
are attributed to sales of a more profitable product mix, 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 and Administrative) increased to $1,624,153 in the three months ended
December 31, 1996 compared to $373,532 in the equivalent period last year. For
the six months ended December 31, 1996 operating expenses increased to
$2,472,286 from $668,930 in the equivalent period last year. Significant
non-recurring expenditures in the three months ended December 31, 1996 included
$764,532 of Research & Development expense, a major portion of which is
associated with the development of the Internet software product by IBS (which
software has now been licensed by IBS to BSI effective December 31, 1996 (Note
3)). Total six month expenditures on Research & Development were $923,096.
Operating expenses for the three and six month periods ending December 31, 1996
also include $36,000 and $204,000 respectively, which represent non-recurring
legal and accounting costs associated with the IBS acquisition, the Company's
initial three-year audit, the filing of a Form 10-SB registration statement with
the SEC, and fees associated with the Notes. With these items excluded,
operating expenses were $823,621 for the three months ended December 31, 1996
and $1,345,190 for the six months ended December 31, 1996, representing a 121%
and 101% 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 $100,412 in the three months ended December 31, 1996
compared to $5,858 in the equivalent period last year. For the six months ended
December 31, 1996 other expenses increased to $157,042 from $11,783 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 placement of the Notes (See Note 6).
For the three months ended December 31, 1996, the Company incurred a net loss of
$1,170,016, or ($0.26) per share based on a weighted average of 4,536,020
shares, compared with a net loss of $135,570, or ($0.06) per share based on a
weighted average of 2,261,945 shares in the prior year. The
9
<PAGE>
Company incurred a net loss for the six months ended December 31, 1996 of
$1,755,060, or ($0.39) per share based on 4,536,020 weighted average shares
outstanding, compared with a net loss of $167,558, or ($0.07) per share, based
on 2,261,945 weighted average shares outstanding for the same period last year.
Financial Condition, Liquidity, and Capital Resources
At December 31, 1996, the Company's accumulated deficit since inception was
$4,194,737 and its working capital deficit was $2,118,316. The Company's
financial condition has been adversely affected by a delay in completing the
financings described in Notes 7 and 9 to the unaudited interim financial
statements which are necessary to fund the Company's growth, by certain
non-recurring operating expenses discussed above, and by high expenditures
associated with research and development of the IBS software product that was
licensed to BSI on December 31, 1996 (Note 3).
The Company has implemented a plan of operation to address these issues and
believes that such plan should enable the Company to satisfy its cash
requirements during the upcoming twelve months. Key components of the plan are:
(1) the IBS/BSI transactions described in Note 3 will relieve the Company of
making any substantial additional funding for the research and development costs
and marketing expenses of the IBS website software that was licensed to BSI, (2)
the Company believes that conversion of the Notes described in Note 6 into a
term loan is preferable to paying off the entire balance of the Notes, and will
enable to Company to use its capital for operations, (3) on December 31, 1996,
the Company initiated a private placement of up to $5,000,000 of common stock to
finance operations and service the Notes, of which it has raised $165,000 as of
February 10 (Note 9), and (4) the Company has retained a consultant to assist
the Company in raising up to $5,000,000 in private placements of stock, the
first phase of which commenced on February 3, 1997 (Note 9).
Management believes that if a total of $5,000,000 in the offerings discussed in
the plan of operation above is raised, such amount will be sufficient to provide
the financial resources necessary to allow the Company to continue to expand its
operations and achieve profitability. Should this not occur, Management may act
to reduce the amount of the Company's spending devoted to research and
development, or take other actions to match spending to the amount of capital
raised. Management is continually monitoring the Company's cash position and the
status of these offerings.
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; business conditions in the telecommunications,
entertainment, and advertising 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.
10
<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 9 to the
unaudited consolidated condensed financial statements).
Item 3. Defaults Upon Senior Securities
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
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1996.
11
<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.
February 19, 1997 By: ________________________________
Tom Kobayashi
Chairman of the Board and
Chief Executive Officer
By: ________________________________
Alan K. Geddes
Vice President, Finance and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 181,196
<SECURITIES> 0
<RECEIVABLES> 737,994
<ALLOWANCES> 0
<INVENTORY> 296,843
<CURRENT-ASSETS> 1,375,143
<PP&E> 664,282
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,041,714
<CURRENT-LIABILITIES> 3,493,459
<BONDS> 0
<COMMON> 4,910
0
0
<OTHER-SE> (489,752)
<TOTAL-LIABILITY-AND-EQUITY> 3,041,714
<SALES> 0
<TOTAL-REVENUES> 2,078,084
<CGS> 1,203,816
<TOTAL-COSTS> 3,676,102
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157,042
<INCOME-PRETAX> (1,755,060)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,755,060)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,755,060)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> 0.00
</TABLE>
