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, 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 000-21659
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)
(415) 274-8800
---------------------------------------------
Issuer's telephone number, including area code
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, 1998:
8,178,419
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
<PAGE>
Part I. FINANCIAL INFORMATION
EDnet, Inc.
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and June 30, 1997
ASSETS
3/31/98 6/30/97
(Unaudited) (Unaudited)
----------- ----------
CURRENT ASSETS
Cash $42,105 $31,067
Accounts Receivable, net 496,343 445,121
Inventories 108,454 202,913
Other Current Assets 39,319 193,949
---------- ----------
TOTAL CURRENT ASSETS 686,221 873,050
PROPERTY AND EQUIPMENT, NET 468,369 556,533
OTHER ASSETS 15,904 5,478
---------- ----------
TOTAL ASSETS $1,170,494 $1,435,061
========== ==========
LIABILTIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,118,999 $1,648,167
Accrued expenses 314,964 466,455
Deferred revenue 3,376 69,193
Line of credit 9,073 34,628
Notes payable 424,580 592,286
Current portion of capital lease obligations 11,175 27,817
---------- ----------
TOTAL CURRENT LIABILITIES 1,882,167 2,838,546
LONG TERM LIABILITIES 627,244 770,904
---------- ----------
TOTAL LIABILITIES 2,509,411 3,609,450
STOCKHOLDERS' EQUITY
Common stock; par value $.001 per share
Authorized 50,000,000 shares, 8,178,419
and 5,720,465 shares issued and outstanding
as of March 31, 1998 and June 30,1997
respectively 8,178 5,720
Preferred Stock; par value $1,000 per share
Authorized 1,750 shares, 150 shares
issued and outstanding as of March 31, 1998 - 165,596
Capital paid in excess of par value
of common stock 5,332,638 4,411,577
Accumulated Deficit (6,679,733) (6,757,282)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (1,338,917) (2,174,389)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,170,494 $1,435,061
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months ended March 31, 1998 & 1997
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31 Ended March 31
( Unaudited ) ( Unaudited )
----------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales and installation $268,951 $192,778 $709,511 $834,483
Site development and services 211,417 205,157 571,296 781,032
Access, Usage, and Hosting fees 549,408 504,199 1,596,917 1,306,063
Other fees 30,128 36,718 94,208 95,357
----------------------------------------------------
1,059,904 938,852 2,971,932 3,016,935
Cost of sales 688,422 515,022 1,919,627 1,718,837
----------------------------------------------------
Gross Profit 371,482 423,830 1,052,305 1,298,098
Research & Development - 51,188 - 974,284
Sales and Marketing expenses 148,336 232,412 471,696 670,284
General and Administrative expenses 306,151 838,319 1,179,199 1,949,637
----------------------------------------------------
454,487 1,121,919 1,650,895 3,594,205
Income (loss) from operations (83,005) (698,089) (598,590) (2,296,107)
----------------------------------------------------
Other income (expense):
Interest income (expense) (16,192) (164,118) (37,985) (261,412)
Other income (expense) 214,293 2,323 551,078 2,323
----------------------------------------------------
Total other income (expense), net 198,101 (161,795) 513,093 (259,089)
----------------------------------------------------
Income (loss) before provision
for income taxes 115,096 (859,884) (85,497) (2,555,196)
Income taxes - 3,266 2,400 3,266
----------------------------------------------------
Net income (loss) $115,096 $(863,150) $(87,897) $(2,558,462)
====================================================
Net Income (Loss) Per Common Share $0.01 $(0.17) $(0.01) $(0.54)
====================================================
Weighted Average Number
of Shares Outstanding 8,032,899 5,178,909 7,516,790 4,747,188
====================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months ended March 31, 1998 and 1997
3/31/98 3/31/97
(Unaudited) (Unaudited)
---------- ----------
Cash flows from operating activities:
Net income (loss) $(87,897) $(2,558,462)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 147,201 307,771
Provision for doubtful accounts (10,930) 3,498
Noncash compensation expenses 421,244 222,541
Decrease (increase) in other current assets (22,462) 12,539
Decrease (increase) in accounts receivable (40,292) (160,180)
Decrease (increase) in inventory 22,478 (88,826)
Increase (decrease) in accounts payable
and accrued expenses (1,069,862) 926,202
Increase (decrease) in deferred revenue (65,817) (52,344)
---------- ---------
Net cash used in operating activities (706,337) (1,387,261)
---------- ---------
Cash flows from investing activities:
Purchase of property and equipment (18,817) (276,116)
Sale of property and equipment 9,844 -
Proceeds from sale of assets 495,000 -
---------- ---------
Net cash used in investing activities 486,027 (276,116)
---------- ---------
Cash flows from financing activities:
Repayment on borrowings (310,208) (379,116)
Proceeds from borrowings 569,422 1,000,000
Repayments on capital leases (28,754) (22,526)
Issuance of common stocks 888 -
Issuance of shares under Reg D - 738,011
Issuance of shares under Reg S - 163,352
---------- ---------
Net cash provided by financing activities 231,348 1,499,721
---------- ---------
Net increase (decrease) in cash 11,038 (163,655)
========== =========
Cash at beginning of period 31,067 221,875
---------- ---------
Cash at end of period $42,105 $58,219
========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
<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 the unaudited financial statements of June
30, 1997, EDnet Inc. (the Company) has not been able to generate any profit
since inception until last quarter. The Company had executed a Letter of
Agreement (LOI) to be acquired by Curtis Mathes Holding Corporation (Curtis
Mathes) as described in Note 10, which was subsequently rescinded by Curtis
Mathes on January 29, 1998 as per Note 12. 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
Net income for the quarter ended March 31, 1998 and the loss per share for
the nine months ended March 31, 1998 has been computed using the weighted
average number of common shares outstanding totaling 8,032,899 shares for
the three months and 7,516,790 for nine months ended March 31, 1998. There
were a weighted average of 5,718,909 shares outstanding for the three
months and 4,747,188 for nine months ended March 31, 1997. Due to the
Company's loss position, common equivalent shares have been excluded
because they are anti-dilutive.
4. Notes Receivable
In connection with the licensing by IBS to Breakthrough Software, Inc.
(Breakthrough) of IBS' software, completed in the prior quarter, the
Company had an unsecured note receivable from Breakthrough of $250,000,
which was amended effective December 19, 1997. The Note was reduced by a
debt transfer by IBS and assumption by Breakthrough of the Global
Automation, Inc., debt of $91,891.65 and San Jose Mercury News of $2,000.
The $156,108.35 balance of the Note was canceled and substituted by a
Convertible Subordinated Promissory Note. On March 13, 1998, the company
sold the balance of Breakthrough's note receivable $156,108.35 to an
outside investor of Breakthrough Software, Inc. for $80,000. The Company
had established a 100% reserve against the note in fiscal year ending June
30, 1997.
<PAGE>
5. Notes Payable
On March 19, 1998, the company wrote off a forgiven debt of $100,000.00,
the first of two notes receivable from IDB Communications Group Inc (IDB).
On the advice of legal and auditing firms, these notes were kept on the
books until the four (4) year statute of limitations expired. The second
note for $100,000 will be written off on April 8, 1998.
6. Sale of Breakthrough Preferred Stock
On November 3, 1997, the Company entered into an agreement to sell the
Company's 2,000,000 shares of Breakthrough Series A Convertible Preferred
Stock for $415,000 and to exchange the balance of the unsecured note of
$156,108 due March 31, 1998 into a Convertible Promissory Note with Common
Stock Purchase Warrants as described in Note 4. The first payment of
$250,000 for the sale was received on November 7, 1997, a second payment of
$67,995.04 on December 19, 1997 and the balance of $97,004.96 on January
21, 1998.
7. Letter of Intent.
On December 23, 1997, Curtis Mathes and the Company entered into a Letter
of Intent wherein Curtis Mathes would acquire all of the outstanding shares
of the Company. In the acquisition, the outstanding Company common stock
would have been exchanged for newly issued shares of common stock of Curtis
Mathes on a one for one basis. As a result of the acquisition, the Company
would have become a wholly-owned subsidiary of Curtis Mathes. However, on
January 29, 1998, Curtis Mathes informed the Company that they had decided
not to proceed with the acquisition of the Company based on their opinion
that certain contingencies in the Letter of Intent did not occur.
8. Revolving Credit and Security Agreement
Under a revolving credit and security agreement executed on December 30,
1997, Curtis Mathes (Lender) established a Revolving Credit in favor of the
Company in an aggregate principal amount at any one time outstanding not
exceeding $1,000,000. The amount of any borrowing may be repaid in whole or
in part within one (1) year from date of funding and such repaid amounts
may be thereafter re borrowed. All principal and accrued interest due on
such borrowing must be repaid within one (1) year from date of funding. The
annual rate of interest is at the rate equivalent to the rate described by
the Wall Street Journal as the prime rate in effect from time to time, plus
one and one-half (1.5%).The Company has granted security interest as
collateral all accounts, contract rights and general intangibles relating
to accounts, receivables and claims whether now or hereafter arising; all
inventory, wherever located and whether now or hereafter existing; and all
equipment, wherever located and whether now or hereafter arising.
The Company borrowed $75,000 under this agreement on December 30, 1997. The
Company borrowed an additional $275,000 under the Revolving Credit and
Security Agreement from January 1, 1998 to January 22, 1998. The Company
had repaid through January 27, 1998 against the loans a total of
$221,493.58 leaving a balance due on the principal of $129,987.74 and
accrued interest as of March 31, 1998 of $2,381.03.
9. Conversion of Preferred Stock
Corner Banca S A converted its 150 shares of preferred stock to 150,000
shares of common stock at $1.00 per share on January 8, 1998.
10. Subsequent Events
On April 2, 1998, Charles W. Clark submitted his resignation as a director
of EDnet, Inc. for personal reasons.
<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, 1998, the Company's revenues were
$1,059,904, an increase of 11.42% compared to revenues of $938,852 in the
comparable period last year. Increases in revenue resulted from audio codec
equipment sales, network access, usage fees and hosting revenues. Revenues for
the nine months ended March 31, 1998 decreased 1.5% to $2,971,932 compared to
revenues of $3,016,935 in the comparable period last year. Decreases in revenue
are primarily due to decreases in web site development, and for sales of
equipment in the first two quarters. The decline of equipment revenues in the
nine months ended March 31, 1998 was due to unavailability of inventory because
of vendor credit restrictions. However, there were increases in network access,
usage fees and hosting revenues associated with a growing installed base for the
past nine months.
Gross Profit decreased to $371,482 or 35% of sales, in the three months ended
March 31, 1998 compared to $423,830, or 45% of sales, in the equivalent period
last year. For the nine months ended March 31, 1998 gross profit decreased to
$1,052,305, or 35% of sales, from $1,298,098, or 43% of sales in the equivalent
period last year. Decreases in gross profit as a percentage of sales compared to
prior periods are primarily due to increase in web programmers costs and hosting
services of $185,102 for the three months ended March 31, 1998 and nine month
costs of $469,821. In prior periods these costs were shown as operating overhead
costs. If these items were included in overhead rather than cost of sales for
our current quarter and year-to-date, the gross profit for three months ended
March 31, 1998 would be $556,584 or 52% of sales compared to $423,830 or 45% of
sales in the equivalent period, and for the nine months ended March 31, 1998,
the gross profit would increase to $1,522,126 or 51% of sales from $1,298,098 or
43% of sales.
Operating expenses (including Research & Development, Sales & Marketing, and
General & Administrative) decreased to $454,487 in the three months ended March
31, 1998 compared to $1,121,919 in the equivalent period last year. For the nine
months ended March 31, 1998 operating expenses decreased to $1,650,895 from
$3,594,205 in the equivalent period last year. There were significant
non-recurring expenditures in the three months and nine months ended March 31,
1997 which included the following: (1) Three and nine months expenditures on
Research & Development were $51,188 and $974,284. (2) Expenses of $313,160 for
three months and $561,112 for nine months, included the amortization of the cost
of Liviakis consulting agreement, amortization of goodwill, non-recurring legal
and accounting costs associated with the IBS acquisition, the Company's three
year audit, the filing of Form 10-SB registration statement with the SEC, and
fees associated with the Senior Notes. The Company did not incur any research
and development expense during the current three and nine months ended March 31,
1998. This reduction in research and development from prior equivalent periods
is due primarily to the action taken to license the Company's IBS Internet
software product to Breakthrough Software Inc. (Breakthrough), rather than
continue development efforts. Other operating expenses include reductions of
$185,102 for the three months and $469,821 for nine months ended March 31, 1998,
of web development cost and hosting service expenses that are now included in
the cost of sales for web development and hosting services. The major
<PAGE>
non-recurring expense of $400,000 for the current nine months period represents
the cost of the 400,000 shares of S-8 common stock of the Company issued under
the Charles Clark consulting agreement in July, 1997.
Other income and expenses increased to a positive $198,101 in the three months
ended March 31, 1998 compared to a negative $161,795 during the equivalent
period last year. For the nine months ended March 31, 1998 net other income and
expenses increased to a positive $513,093 compared to a negative $259,089 in the
equivalent prior period. The increase in other income was attributed to sale of
assets for the investment of Breakthrough of $415,000 (Note 5), restructuring of
certain accounts payable debts of $165,793 and write-off of the note payable of
$100,000 from IDB (Note 5). For the three and nine month period ending March 31,
1998, other income also includes the reduction of $91,892 for transfer of debt
against the reserved note receivable from Breakthrough, and the sale of the
balance of this reserved note to an outside investor for $80,000 (Note 4).
The decrease in interest expense was due to the restructuring of senior notes on
June 30, 1997, which resulted in interest expense decreasing from $164,188 to
$16,192 for three months ended March 31, 1998 and decreasing from $261,412 to
$37,985 for nine months ended March 31, 1998 compared to their respective
comparable periods.
For the three months ended March 31, 1998, the Company produced a net income of
$115,096 or $0.01 per share based on a weighted average of 8,032,899 shares
outstanding, compared with a net loss of $863,150, or ($0.17) per share based on
a weighted average of 5,178,909 shares outstanding in the prior year. The
Company incurred a net loss for the nine months ended March 31, 1998 of $87,897,
or ($0.01) per share based on a weighted average of 7,516,790 shares
outstanding, compared with a net loss of $2,558462 or ($0.54) per share, based
on a weighted average of 4,747,188 shares in the prior period.
Financial Condition, Liquidity, and Capital Resources
At March 31, 1998, the Company's accumulated deficit was $6,679,733 and its
working capital deficit was $1,195,946. The rate of decrease in the Company's
accumulated deficit declined in the quarter ended March 31, 1998 due primarily
to the sale of assets for investment of Breakthrough (Note 6), assumption of
debt by Breakthrough against a note receivable which was fully reserved (Note
4), restructuring of the debt with certain vendors, and writing off the note
payable from IDB (Note 5). The Company's working capital deficit improved by
$769,550 since June 30, 1997 due primarily to the restructuring of Morgan
Fuller's Senior Notes, the Conversion of Irawan Onggara's Note Payable to
equity, and the improvement in net income. The Company has also made several
adjustments to its operations to further reduce costs during the nine month
period.
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,
<PAGE>
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.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
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, filed electronically
<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 11, 1998 By: /s/ Tom Kobayashi
-------------------
Tom Kobayashi
Chairman and CEO
By: /s/ David Gustafson
-------------------
David Gustafson
President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 42,105
<SECURITIES> 0
<RECEIVABLES> 496,343
<ALLOWANCES> 0
<INVENTORY> 108,454
<CURRENT-ASSETS> 55,223
<PP&E> 468,369
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,170,494
<CURRENT-LIABILITIES> 2,509,411
<BONDS> 0
0
0
<COMMON> 8,178
<OTHER-SE> (1,347,095)
<TOTAL-LIABILITY-AND-EQUITY> 1,170,494
<SALES> 0
<TOTAL-REVENUES> 2,971,932
<CGS> 1,919,627
<TOTAL-COSTS> 1,650,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,985
<INCOME-PRETAX> (636,575)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (638,975)
<DISCONTINUED> 0
<EXTRAORDINARY> 551,078
<CHANGES> 0
<NET-INCOME> (87,897)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
