<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 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 000-21535
PROSOFT I-NET SOLUTIONS, INC.
-----------------------------
(Exact Name of Registrant as Specified in its Charter)
NEVADA 87-0448639
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3001 Bee Caves Road, Suite 220 Austin , Texas 78746
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (512) 328-6140
--------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter 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 [_]
The number of shares of the registrant's common stock, $.001 par value,
outstanding as of March 16, 1998, was 11,415,926 shares.
<PAGE>
<TABLE>
<CAPTION>
Prosoft I-Net Solutions, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
January 31, July 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,328,823 $ 12,911,684
Tuition and accounts receivable, less allowances
of $41,369 and $506,182, respectively 4,353,591 1,646,765
Notes receivable from officers/shareholders 190,959 308,370
Prepaid expenses and other current assets 619,497 878,048
------------ ------------
Total current assets 15,492,870 15,744,867
------------ ------------
Accounts receivables due in more than twelve months 800,000 0
------------ ------------
Property and equipment:
Computer equipment and software 5,796,871 5,489,035
Office equipment, furniture and fixtures 1,488,081 1,030,460
------------ ------------
7,284,952 6,519,495
Less accumulated depreciation 2,887,521 1,480,185
------------ ------------
4,397,431 5,039,310
------------ ------------
Goodwill, net 2,676,686 0
------------ ------------
Total assets 23,366,987 20,784,177
============ ============
Liabilities and stockholders' equity
Current liabilities:
Note Payable $ 50,000 $ 0
Accounts payable 370,713 1,817,314
Accrued payroll and related expenses 476,235 924,781
Payable to underwriters 0 1,454,375
Deferred revenue 166,149 67,959
Current portion of capital lease obligations 1,481,414 1,960,221
------------ ------------
Total current liabilities 2,544,511 6,224,650
Obligations under capital leases, net of current portion 1,291,584 1,519,965
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized - 50,000,000
Issued and outstanding - 11,399,426 and
10,119,651 shares, respectively 11,399 10,120
Additional capital 48,391,991 36,764,338
Note receivable from stockholder (9,500) (9,500)
Deficit (28,862,998) (23,725,396)
----------- ------------
Total stockholders' equity 19,530,892 13,039,562
------------ ------------
Total liabilities and shareholders' equity $ 23,366,987 $ 20,784,177
============ ============
</TABLE>
<PAGE>
Prosoft I-Net Solutions, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended January 31, Six Months Ended January 31,
------------------------------ ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Training $ 1,525,062 $ 453,401 $ 2,726,790 $ 967,082
Courseware 1,600,000 - 3,426,921 -
----------- ----------- ----------- -----------
Total revenue 3,125,062 453,401 6,153,711 967,082
----------- ----------- ----------- -----------
Costs and expenses:
Cost of services 3,057,886 1,367,224 6,628,777 2,421,243
Sales and marketing 671,633 743,163 1,369,273 1,183,536
General and administrative 1,521,901 2,017,796 3,382,051 4,106,027
----------- ----------- ----------- -----------
Total costs and expenses 5,251,420 4,128,183 11,380,101 7,710,806
Loss from operations (2,126,358) (3,674,782) (5,226,390) (6,743,724)
Interest income, net 47,088 (6,983) 88,788 50,294
----------- ----------- ----------- -----------
Loss before provision for income taxes (2,079,270) (3,681,765) (5,137,602) (6,693,430)
Provision for state franchise tax - - - 4,000
----------- ----------- ----------- -----------
Net loss $(2,079,270) $(3,681,765) $(5,137,602) $(6,697,430)
=========== =========== =========== ===========
Net loss per share $ (0.19) $ (0.50) $ (0.48) $ (0.91)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 11,072,690 7,378,408 10,756,972 7,364,292
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prosoft I-Net Solutions, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flow
(Unaudited)
Six Months Ended January 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities
Net loss $(5,137,602) $(6,697,430)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,418,533 371,722
Changes in operating assets and liabilities:
Tuition and accounts receivable (3,473,776) (263,533)
Prepaid expenses and other current assets 258,551 (363,761)
Accounts payable and payable to underwriters (2,919,184) 1,166,686
Accrued liabilities (448,546) 106,386
Deferred revenue 98,190 287,476
------------ ------------
Net cash used in operating activities (10,203,834) (5,392,454)
------------ ------------
Investing activities:
Purchase of Net Guru Technologies, Inc. (2,699,998)
Purchase of property and equipment (544,894) (620,962)
Notes receivable from officers/shareholders 117,411 (326,393)
Deposit on computer leases (93,706)
------------ ------------
Net cash used in investing activities (3,127,481) (1,041,061)
------------ ------------
Financing activities:
Issuance of common stock 11,628,932 322,059
Principal payments on debt and capital leases (880,478) (158,034)
------------ ------------
Net cash provided by financing activities 10,748,454 164,025
------------ ------------
Decrease in cash and cash equivalents (2,582,861) (6,269,490)
Cash and cash equivalents at the beginning of period 12,911,684 6,466,460
------------ ------------
Cash and cash equivalents at the end of period $10,328,823 $ 196,970
=========== ============
Supplementary disclosure of cash paid during the period for:
Interest $ 188,502 $ 30,384
=========== ============
Income taxes $ - $ 4,000
=========== ============
Supplementary disclosure on non-cash financing activities:
Equipment acquired under capital leases $ 173,290 $ -
=========== ============
</TABLE>
<PAGE>
PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed consolidated financial statements do not include footnotes and
certain financial information normally presented annually under generally
accepted accounting principles and, therefore, should be read in conjunction
with the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The results of
operations for the three months and six months periods ended January 31, 1998
are not necessarily indicative of results that can be expected for the fiscal
year ending July 31, 1998.
The condensed consolidated financial statements included herein are unaudited;
however, they contain all adjustments (consisting of normal recurring accruals)
which, in the opinion of the Company, are necessary to present fairly its
consolidated financial position, results of operations, and cash flows as of and
for the three months and six months periods ended January 31, 1998.
2. In January 1998 the Company purchased 100% of the outstanding common stock
of Net Guru Technologies, Inc. in exchange for $1,000,000 and 152,809 shares of
the Company's common stock. Subsequent operations of Net Guru Technologies,
Inc. have been consolidated with the Company's operations. Shares issued in
connection with this purchase have been valued at their fair value as of the
date the acquisition was consummated, $1,700,000. Goodwill arising from the
acquisition, $2,687,833, is being amortized over a twenty-year period that
commenced January 1, 1998.
3. In January 1998 and in October 1997 the Company sold then existing
courseware and authorization for the reproduction of such courseware to third
parties. The two agreements pursuant to which such sales were consummated allow
purchasers to reproduce and sell such courseware and provide exclusive rights to
sell courseware to customer groups specified therein. The January 1998
transaction provides exclusive rights to sell specified courseware to
educational institutions, and the October 1997 transaction provides exclusive
rights to sell specified courseware to governmental entities. The January 1998
transaction provides for minimum payments to the Company of $1.6 million over 24
months and was recognized as revenue in January 1998; and the October 1997
transaction provides for minimum payments to the Company of $1.8 million over 12
months and was recognized as revenue in October 1997.
4. The Company anticipates that its existing resources will be sufficient to
meet its needs for working capital expenditures through at least fiscal 1998.
In November 1997 the Company received proceeds of approximately $8.4 million in
a private placement through the sale of 803,638 shares of common stock. The
Company's long-term capital requirements will depend on numerous factors,
including the profitability of Training Centers, the acquisition and/or
development of additional training tools, and the potential acquisition of
complimentary businesses or product lines.
The Company has incurred losses aggregating approximately $29 million since
inception, primarily due to the start-up nature of its business. The Company
has used these funds to implement its strategy of becoming one of the leading
national training companies focused on the Internet/Intranet. This strategy
consisted of opening 35 additional state-of-the-art training centers across the
country, preparing and executing a national image defining marketing campaign in
numerous national publications, recruiting one of the nation's largest high-end
group of Internet/Intranet instructors strategically located across the nation,
recruiting top management and sales professionals, and developing one of the
largest libraries of Internet/Intranet courses available. Having substantially
completed these tasks, the Company is beginning to realize increasing revenue.
If revenue continues to grow as demonstrated in fiscal 1998 and in the fourth
quarter of fiscal 1997, the Company expects to reach quarterly profitability in
early fiscal year 1999, based on existing resources. However, no assurances can
be given that the Company will be successful in realizing these goals. If the
Company is unable to increase revenue as anticipated, management will implement
a plan to substantially reduce the size of the Company's operations. Such a
reduction in operations may reduce the Company's ability to meet expected market
demand. The Company's ability to continue as a going concern is dependent upon
its ability to obtain necessary financing, grow revenue, attain operational
efficiencies and, ultimately, sustain a profitable level of operations.
<PAGE>
5. Net loss per share is based on the weighted average number of shares of
common stock outstanding during the period. Common stock equivalents (stock
options and warrants) were not considered because the effect of their inclusion
would have been anti-dilutive.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. The statement simplifies the standards for computing earnings per share
("EPS"), and requires the presentation of both basic and diluted EPS on the face
of the statement of earnings with supplementary disclosures. SFAS 128 will be
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company has adopted SFAS 128 in the second
quarter of fiscal 1998. Such adoption had no significant impact on the
calculation or amount of basic loss per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
OVERVIEW
- --------
Prosoft I-Net Solutions, Inc. (the "Company"), is engaged in the business of
training individuals in small, medium and large organizations in Internet and
Intranet technologies, with a current emphasis on Netscape- and Microsoft-based
Internet/Intranet products and solutions. In addition, the Company is a
certified Microsoft Authorized Technical Education Center ("ATEC"), a certified
Private Post Secondary Institution in the State of California, and an approved
recipient of Job Training Partnership Act (the "JTPA") funding. In October 1997,
Prosoft was chosen by Netscape Communications Corp. ("Netscape") to be a
Netscape Education Partner ("NEP") for selected locations. This authorization
will allow the Company to conduct training on Netscape products, as well as
receive the benefits of training references and leads provided directly through
Netscape. The Company also develops proprietary Internet/Intranet courseware and
offers over 40 customized, on-line, hands-on and instructor-led
Internet/Intranet-related courses for end-users, system engineers and
developers.
FLUCTUATIONS IN QUARTERLY RESULTS
- ---------------------------------
The Company's operating results may fluctuate based on various factors,
including the frequency of course events, the frequency and size of, and
response to, the Company's marketing campaigns, the timing of the introduction
of new course titles, customer-site course events, affiliate-site course events,
Company site course events, competitive forces within the current and future
markets served by the Company, the spending patterns of its customers, inclement
weather and general economic conditions. Fluctuations in quarter-to-quarter
results may also occur depending on differences in the timing of, and the time
period between, the Company's expenditures on the development and marketing of
its courses and the receipt of revenues.
The Company's revenues and income are expected to vary significantly from
quarter to quarter due to seasonal and other factors. The Company expects
greater revenue in the second half of its fiscal year (February through July)
than in the first half of its fiscal year (August through January). This
seasonality is due in part to seasonal spending patterns of the Company's
customers, and in part to quarterly anticipated differences in the frequency and
size of the Company's marketing campaigns, as well as weather, holiday and
vacation patterns.
RESULTS OF OPERATIONS
- ---------------------
<PAGE>
Three Months Ended January 31, 1998 Compared
To the Three Months ended January 31, 1997
- ------------------------------------------
Revenue.
Training revenue for the three months ended January 31, 1998 amounted to
$1,525,062, compared to $453,401 in the three months ended January 31, 1997, an
increase of $1,071,661. This increase reflects a higher level of enrollment in
the Company's class offerings (4,082 student days in the three months ended
January 31, 1998 compared to 1,644 student days in the three months ended
January 31, 1997). The increase in student days reflects greater acceptance of
the Company's class offerings and more Training Centers being open in fiscal
1998 (36 Training Centers were open at January 31, 1998 compared to 20 Training
Centers at January 31, 1997). Average revenue per student fluctuates based on,
among other things, the Company's class offerings and participants' class
selection.
Courseware sales increased to $1,600,000 in the three months ended January 31,
1998, compared to zero in the three months ended January 31, 1997. In January
1998, the Company sold then existing courseware together with authorization for
its reproduction and resale to a third party. The agreement pursuant to which
this sale was consummated allows the purchaser to resell such courseware to
educational institutions. The agreement also provides, among other things, for
minimum payments to the Company over the next 24 months of $1.6 million, which
was recognized as revenue in January 1998.
Courseware for specific subjects is offered for sale based on management's
evaluation of the maturity of such class offerings and their stage in the class
development life cycle. Courseware sales are consummated periodically based on
purchaser's evaluation of the economic opportunities offered by the Company.
Cost of Services.
Cost of services is comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended January 31,
---------------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Instruction $1,092,855 $ 388,176
Classroom costs 1,204,595 410,045
Courseware 238,107 68,315
Other 522,329 500,688
------------------ ------------------
Total $3,057,886 $1,367,224
================== ==================
</TABLE>
The Company's cost of services includes the costs associated with course
instructors, course materials, classroom equipment, and facilities. Most course
instructors are employees and their costs are fixed in the short run. For
three to six month periods, instructor costs vary based on the Company's
expected demand for its class offerings. Instructor travel varies with, among
other things, the location of class offerings and local instructor availability.
The Company uses instructors, dedicated content employees and contractors to
develop course content and materials. The cost of content development varies
with the Company's evaluation of the effectiveness of its existing class
offerings and the anticipated release of new software products. Most equipment
and classroom facility costs are incurred at the Company's own facilities, and
are fixed for prospective periods of six to twelve months.
Cost of services for the three-month period ended January 31, 1998 was
$3,057,886, compared with $1,367,244 for the three-month period ended January
31, 1997, an increase of $1,690,642. This increase is primarily the result of
an increased number of course events, a larger course library, and an increase
in the number and training of instructors and content developers.
<PAGE>
Sales and Marketing.
Sales and Marketing expenses are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended January 31,
-----------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Advertising and trade shows $ 83,516 $190,512
Salaries and wages 487,203 360,653
Travel and entertainment 35,512 52,735
Other 65,402 139,263
---------------- ----------------
Total $671,633 $743,163
================ ================
</TABLE>
Sales and marketing expenses for the three months ended January 31, 1998
amounted to $671,633, compared to $743,163 for the three months ended January
31, 1997, a decrease of $71,530. These expenses consist of salaries,
commissions and travel-related costs of sales and marketing personnel, the costs
of designing, producing and distributing direct mail marketing and media
advertisements, and the costs of the information systems to support these
activities. Sales and marketing expense objectives are established by the
Company's management based on their evaluation of market potential, the expected
effectiveness of alternative marketing and sales strategies, and anticipated
cost-benefit relationships. Should anticipated cost-benefit relationships not
be achieved, the Company's management reevaluates programs and resets cost
objectives. The decrease in sales and marketing expense for the three months
ended January 31, 1998, compared to the three months ended January 31, 1997, is
due to reduced emphasis on advertising and was partially offset by increased
emphasis on direct contact with customers, strategic partners, and affiliates.
General and Administrative.
General and administrative expenses for the three months ended January 31, 1998
amounted to $1,521,901, compared to $2,017,796 for the three months ended
January 31, 1997, a decrease of $495,895. This decrease reflects reduced
numbers of employees involved in administrative functions and the timing of
certain administrative expenses.
Interest Income, Net.
Net interest income amounted to $47,088 for the three months ended January 31,
1998, compared to net interest expense of $6,983 for the three months ended
January 31, 1997, an increase of $54,071. Interest expense, which consists
principally of interest paid on capital leases, was offset by interest earned on
higher cash balances generated by the proceeds of private placements.
Six Months Ended January 31, 1998 Compared
To the Six Months ended January 31, 1997.
- ------------------------------------------
Revenue.
Training revenue for the six months ended January 31, 1998 amounted to
$2,726,790, compared to $967,082 in the six months ended January 31, 1997, an
increase of $1,759,708. This increase reflects a higher level of enrollment in
the Company's class offerings (8,633 student days in the six months ended
January 31, 1998 compared to 2,515 student days in the six months ended January
31, 1997). The increase in student days reflects greater acceptance of the
Company's class offerings and more Training Centers being open in fiscal 1998
(36 Training Centers were open at January 31, 1998 compared to 20 Training
Centers at January 31, 1997). Average revenue per student fluctuates based on,
among other things, the Company's class offerings and participants' class
selection.
<PAGE>
Courseware sales increased to $3,426,921 in the six months ended January 31,
1998, compared to zero in the six months ended January 31, 1997. In January
1998 and in October 1997 the Company sold then existing courseware and
authorization for the reproduction of such courseware to third parties. The
agreements pursuant to which such sales were consummated allow purchasers to
reproduce and resell to specified groups customers. The January 1998
transaction allows sales to educational institutions and the October 1997
transaction covers sales to governmental entities. The January 1998 transaction
provides for minimum payments to the Company over 24 months of $1.6 million,
which was recognized as revenue in January 1998, and the October 1997
transaction provides for minimum payments to the Company over 12 months of $1.8
million, which was recognized as revenue in October 1997.
Courseware for specific subjects is offered for sale based on management's
evaluation of the maturity of such class offerings and their stage in the class
development life cycle. Courseware sales are consummated periodically based on
purchaser's evaluation of the economic opportunities offered by the Company.
Cost of Services.
Cost of services is comprised of the following:
<TABLE>
<CAPTION>
Six Months Ended January 31,
-----------------------------------------------
1998 1997
--------------------- ------------------
<S> <C> <C>
Instruction $1,949,089 $ 799,243
Classroom costs 2,596,659 820,090
Courseware 351,723 169,000
Other 1,731,306 632,910
--------------------- ------------------
Total $6,628,777 $2,421,243
===================== ==================
</TABLE>
The Company's cost of services includes the costs associated with course
instructors, content developers, course materials and equipment and classroom
facilities. Most course instructors are employees and their costs are fixed in
the short run. For three to six month periods, instructor costs vary based on
the Company's expected demand for its class offerings. Instructor travel varies
with, among other things, the location of class offerings and local instructor
availability. The Company uses employees and contractors to develop course
content and materials. The cost of content development varies with the
Company's evaluation of the effectiveness of its existing class offerings and
the anticipated release of new software products. Most equipment and classroom
facility costs are incurred at the Company's own facilities, and are fixed for
prospective periods of six to twelve months.
Cost of services for the six-month period ended January 31, 1998 was $6,628,777,
compared with $2,421,243 for the six-month period ended January 31, 1997, an
increase of $4,207,534. This increase is primarily the result of an increased
number of course events, a larger course library, and an increase in the number
and training of instructors and content developers.
Sales and Marketing.
Sales and marketing expenses are comprised of the following:
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended January 31,
------------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Advertising and trade shows $ 100,396 $ 325,416
Salaries and wages 893,147 571,098
Travel and entertainment 85,225 87,981
Other 290,505 199,041
---------------- -----------------
Total $1,369,273 $1,183,536
================ =================
</TABLE>
Sales and marketing expenses for the six months ended January 31, 1998 amounted
to $1,369,273, compared to $1,183,536 for the six months ended January 31, 1997,
an increase of $185,737. These expenses consist of salaries commissions and
travel-related costs of sales and marketing personnel, the costs of designing,
producing and distributing direct mail marketing and media advertisements, and
the costs of the information systems to support these activities. Sales and
marketing expense objectives are established by the Company's management based
on their evaluation of market potential, the expected effectiveness of
alternative marketing and sales strategies, and anticipated cost- benefit
relationships. Should anticipated cost-benefit relationships not be achieved,
the Company's management reevaluates programs and resets cost objectives.
The increase in sales and marketing expense for the six months ended January 31,
1998, compared to the six months ended January 31, 1997 is due to an increase in
marketing and sales efforts, intended to reach a broader range of potential
customers, to expand the Company's presence in certain U.S. Cities and to
communicate the availability of new course titles. During the most recent six
month period the Company has placed significantly more emphasis on direct
contact with customers, strategic partners, and affiliates and less emphasis on
advertising.
General and Administrative.
General and administrative expenses for the six months ended January 31, 1998
amounted to $3,382,051, compared to $4,106,027 for the six months ended January
31, 1997, a decrease of $723,976. This decrease reflects reduced numbers of
employees involved in administrative functions and the timing of certain
administrative expenses.
Interest Income, Net.
Net interest income amounted to $88,788 for the six months ended January 31,
1998, compared to $50,294 for the six months ended January 31, 1997, an increase
of $38,494. Interest expense, which consists principally of interest paid on
capital leases, was offset by interest earned on higher cash balances generated
by the proceeds of private placements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
From inception, the Company has financed its operations and met
substantially all of its capital expenditure requirements primarily through net
proceeds from private sales of equity securities. Cash and cash equivalents
decreased from $12,911,684 at July 31, 1997 to $10,328,823 at January 31, 1998.
Such decrease was the result of net cash used by operations, $10,203,834, and
was partially offset by proceeds from private placements of common stock of
approximately $8.4 million.
For the six months ending January 31, 1998, operating activities required
cash of $10,203,834. The net loss for the six-month period amounted to
$5,137,602. Cash was also required to finance greater amounts of tuition and
accounts receivable, $3,473,776, and to liquidate accounts payable and payable
to underwriters, $2,919,184. Higher receivable balances resulted from the
Company's October 1997 and January 1998 sales of courseware and courseware
reproduction rights. During the six months ended January 31, 1998, allowances
for doubtful accounts and for estimated returns of courseware materials
<PAGE>
decreased by approximately $460,000. Such decrease reflects the return of
certain courseware which was provided for as of July 31, 1997. Liquidation of
accounts payable and payable to underwriters resulted from contractual payments
required by courseware development contracts, payment of costs associated with
fiscal 1997 courseware sales, cessation of outbound telemarketing activities,
settlement of year end performance accruals, and requests for payments by
underwriters of fees earned. These cash uses were partially offset by
depreciation and amortization accruals and normal fluctuations in other current
asset and current liability account balances.
In January 1998, the Company purchased 100% of the outstanding common stock
of Net Guru Technologies, Inc. in exchange for $1,000,000 and 152,809 shares of
the Company's common stock. Subsequent operations of Net Guru Technologies,
Inc., which have not been significant to the Company's consolidated operations,
have been combined with the Company's operations. Shares issued in connection
with this purchase have been valued at their fair value as of the date the
acquisition was consummated, $1,700,000. Goodwill arising from the acquisition,
$2,687,833, is being amortized over a twenty-year period that commenced January
1, 1998.
During the six months ended January 31, 1998, the Company invested $544,894
in equipment and leasehold improvements. This amount could vary going forward
based upon the rate of growth in expansion and the Company's continued
expenditures on system implementation. Plans have been implemented to increase
the capacity of many of the Company's management information systems to handle
the anticipated growth in sales, and the Company is developing a sophisticated
customer reservation system and an enhanced web page for customers.
From February through April 1997, the Company received gross proceeds of
approximately $22 million in a private placement through the sale of 2,081,758
shares of common stock. Net proceeds from this offering, after payment of
commissions and finders' fees, was $20,811,332. In April 1997, the Company sold
408,164 shares of its common stock to an institutional investor for $5 million.
The net proceeds from this offering were $4,700,008. In November 1997 the
Company received proceeds of approximately $8.4 million in a private placement
through the sale of 803,638 shares of common stock. No commissions or finders'
fees were paid for this offering.
The Company anticipates that its existing resources will be sufficient to
meet its needs for working capital expenditures through at least fiscal 1998.
The Company's long-term capital requirements will depend on numerous factors,
including the profitability of Training Centers, the acquisition and/or
development of additional training tools and the potential acquisition of
complementary businesses or product lines.
The Company has incurred losses aggregating approximately $29 million since
inception, primarily due to the start-up nature of its business. The Company has
used these funds to implement its strategy of becoming one of the leading
national training companies focused on the Internet/Intranet. This strategy
consisted of opening 35 additional state-of-the-art training centers across the
country, preparing and executing a national image defining marketing campaign in
numerous national publications, recruiting one of the nation's largest high-end
group of Internet/Intranet instructors strategically located across the nation,
recruiting top management and sales professionals, and developing one of the
largest libraries of Internet/Intranet courses available. Having substantially
completed these tasks, the Company is beginning to realize increasing revenue.
If revenue continues to grow as demonstrated in the fourth quarter of
fiscal 1997, and in the first two quarters of fiscal 1998, the Company expects
to reach quarterly profitability in early fiscal year 1999, based on existing
resources. However, no assurances can be given that the Company will be
successful in realizing these goals. If the Company is unable to increase
revenue as anticipated, management will implement a plan to substantially reduce
the size of the Company's operations. Such a reduction in operations may reduce
the Company's ability to meet expected market demand. The Company's ability to
continue as a going concern is dependent upon its ability to obtain necessary
financing, grow revenue, attain operational efficiencies and, ultimately,
sustain a profitable level of operations.
<PAGE>
The above discussion concerning future financing need, business expansion
and factors affecting liquidity are forward-looking statements. Although
management believes that these statements are reasonable in view of the facts
available to it, there can be no assurance that all of these statements will
prove to be accurate. There are numerous factors that could have a material
impact upon whether these projections could be realized or whether these trends
will continue.
Additional Factors That May Affect Results of Operations
Extremely Limited Operating History and Expectation of Continuing Significant
Losses
The Company has a very limited operating history, which makes it difficult
to predict future operating results. Although the Company was formed in 1985,
from its incorporation until its acquisition of Old ProSoft in March 1996, it
had no significant operations. The business of the Company was only begun in
February 1995 where it was run as a proprietorship until its acquisition by Old
ProSoft in January 1996. The first Training Center was not opened until late
1995. As a result, there is limited financial information concerning the
business of the Company of the type commonly used by investors to evaluate a
potential investment. In addition, certain aspects of the Company's business are
relatively new and have not yet been fully tested in the marketplace. The
Company incurred a net loss of $3,074,123 from December 8, 1995 through July 31,
1996. For the twelve months ended July 31, 1997, the Company incurred a net loss
of $20,651,273 and expects to continue to incur losses on a quarterly basis
through at least the end of fiscal 1998. The Company's ability to generate
significant revenues in the future is subject to uncertainty, particularly with
respect to the Internet/Intranet training on which it focuses. There can be no
assurances that the Company will be able to address any of those challenges,
that its activities will be successful or that projected earnings will result
from these activities.
Uncertainty of Rapidly Evolving Market
The market for Internet/Intranet products and services has only recently
begun to develop and is rapidly evolving. The Company and its prospects must be
considered in light of the risks, costs and difficulties frequently encountered
by companies in their early stage of development, particularly companies in the
new and rapidly evolving Internet market. In order to be successful, the Company
must, among other things, continue to attract, retain and motivate qualified
training personnel, successfully implement its Internet/Intranet training
programs, open new Training Centers as the market demands, respond to
competitive developments and successfully develop its internal infrastructure,
particularly sales, marketing and administrative personnel and its accounting
system. Moreover, due to the intense competition in the emerging markets
addressed by the Company, the Company must seek to grow its business rapidly,
which increases the challenges facing the Company, making it more difficult for
the Company to recover from business errors.
Future Capital Requirements and Uncertainty of Future Funding
Since inception, the Company has been dependent on outside financing to fund
its growth. The Company has raised approximately $35 million from the private
placement of Common Stock since inception. The Company anticipates that the
proceeds from these offerings and cash flows from operations will be sufficient
to meet its needs for working capital expenditures through at least fiscal 1998.
However, the Company's long-term capital requirements will be dependent on
numerous factors, including the profitability of Training Centers, the
acquisition and/or development of additional training tools, and the potential
acquisition of complimentary businesses or product lines.
Need to Respond to Rapid Technological Change
The market for the Company's products and services is characterized by rapid
technological change; changing customer needs, frequent new product
introductions and evolving industry standards. These market characteristics are
exacerbated by the emerging nature of the Internet market and the fact that many
companies are expected to introduce new Internet products and services in the
near future. The Company's future success will depend in significant part on its
ability to continually and on a timely basis
<PAGE>
introduce new products, services and technologies and to continue to improve the
Company's products and services in response to both evolving demands of the
marketplace and competitive product offerings.
Highly Competitive Market
The technology training market is highly competitive. The Company is subject
to intense competition from a large number of public and private companies
providing training, many of which are older, larger and have greater financial
and personnel resources than the Company. In addition, the market for Internet
products and services has only recently begun to develop, is rapidly evolving
and is characterized by an increasing number of market entrants with competing
products and services. There can be no assurance that the Company will be able
to compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's business,
operating results and financial condition.
Impact of Year 2000
Many existing computer systems and applications, and other control devices, use
only two digits to identify a year in the date field, without considering the
impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000. The Company relies on its
systems, applications and devices in operating and monitoring all major aspects
of its business, including financial systems (such as general ledger, accounts
receivable, accounts payable and payroll), student and customer services,
embedded computer chips, networks and telecommunications equipment and end
products. The Company also relies, directly and indirectly, on external systems
of business enterprises such as customers, suppliers, creditors, financial
organizations, and of governmental entities for accurate exchange of data. The
Company's current estimate is that the costs associated with the year 2000 issue
will not have a material adverse effect on the results of operations or
financial position of the Company. However, despite the Company's efforts to
address the year 2000 impact on its internal systems, the Company may not have
fully identified such impact or whether it can resolve it without disruption of
its business and without incurring significant expense. In addition, even if
the internal systems of the Company are not materially affected by the year 2000
issue, the Company could be affected through disruption in the operations of the
enterprises with which the Company interacts.
PART II - OTHER INFORMATION
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
A Current Report on Form 8-K, dated December 23, 1997,
was filed with the Securities and Exchange Commission (the
"Commission") reporting the signing of a letter of intent
to acquire all of the outstanding stock of Net Guru
Technologies, Inc.
A Current Report on Form 8-K, dated January 1, 1998, was
filed with the Commission reporting the completion of the
acquisition of Net Guru Technologies, Inc. and the
resignation of the Company's Chief Executive Officer.
SIGNATURES
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.
PROSOFT I-NET SOLUTIONS, INC.
Dated: March 15, 1998
/s/ JERRELL M. BAIRD
---------------------------
Jerrell M. Baird
Chief Executive Officer and
Chairman of the Board
(Duly Authorized Officer)
Dated: March 15, 1998
/s/ BROOKS A. CORBIN
-----------------------------
Brooks A. Corbin
Chief Financial Officer
(Principal Financial Officer)
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