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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 ending October 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 100 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 December 8, 1998, was 12,803,374 shares.
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Prosoft I-Net Solutions, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements
October 31, July 31,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 932,511 $ 3,311,014
Tuition and accounts receivable, less
allowances of $221,104 and $329,802,
respectively 2,084,602 2,224,638
Notes receivable from officers 402,750 422,750
Prepaid expenses and other current assets 567,849 567,596
---------- -----------
Total current assets 3,987,713 6,525,998
---------- -----------
Property and equipment:
Computer equipment and software 5,745,920 5,744,480
Office equipment, furniture and fixtures 1,939,270 1,939,270
---------- -----------
7,685,190 7,683,750
Less accumulated depreciation 5,424,087 4,584,566
---------- -----------
2,261,103 3,099,184
Goodwill, net of accumulated amortization of
$361,468 and $249,043, respectively 2,786,414 2,898,839
---------- -----------
Total assets $9,035,230 $12,524,021
========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable 805,493 1,054,866
Accrued payroll and related expenses 640,682 648,802
Deferred revenue 21,215 23,105
Current portion of capital lease obligations 1,337,634 1,465,159
---------- -----------
Total current liabilities 2,805,024 3,191,932
Obligations under capital leases, net of
current portion 375,509 559,205
---------- -----------
Total liabilities 3,180,533 3,751,137
Commitments and contingencies -- --
Common stock subject to redemption 2,056,520 2,056,520
</TABLE>
2
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<TABLE>
<S> <C> <C>
Stockholders' equity:
Common stock, $.001 par value:
Authorized - 50,000,000
Issued and outstanding - 11,750,242 and
11,502,079 shares, respectively 11,750 11,502
Additional paid-in capital 47,073,385 47,030,129
Accumulated deficit (43,212,210) (40,250,519)
------------ -----------
Total stockholders' equity 3,872,925 6,791,112
Less common stock in treasury, at cost; 11,912
Shares 74,748 74,748
------------ -----------
Total liabilities and stockholders' equity $ 9,035,230 12,524,021
============ ===========
</TABLE>
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Prosoft I-Net Solutions, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Training $ 1,696,014 $ 1,201,728
Courseware 313,015 26,921
----------- -----------
Total revenue 2,009,029 1,228,649
----------- -----------
Costs and expenses:
Cost of services 2,626,509 3,570,891
Sales and marketing 726,990 697,640
General and administrative 1,606,940 1,860,150
----------- -----------
Total costs and expenses 4,960,439 6,128,681
----------- -----------
Loss from operations (2,951,410) (4,900,032)
Interest income (expense), net (10,280) 41,700
----------- -----------
Loss before provision for income taxes (2,961,691) (4,858,332)
Provision for state franchise tax - -
----------- -----------
Net loss $(2,961,691) $(4,858,332)
=========== ===========
Net loss per share $ (.25) $ (0.48)
=========== ===========
Weighted average number of common
shares outstanding 11,626,160 10,218,501
=========== ===========
</TABLE>
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Prosoft I-Net Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net loss............................................................... $(2,961,691) $(4,858,332)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and Amortization........................................ 951,945 680,089
Changes in operating assets and liabilities:
Tuition and accounts receivable.................................... 140,036 234,992
Prepaid expenses and other current assets.......................... (253) (78,612)
Accounts payable and payable to underwriters....................... (249,373) (1,426,824)
Accrued liabilities................................................ (8,120) (7,731)
Deferred revenue................................................... (1,890) (66,780)
----------- -----------
Net cash used in operating activities.................................. (2,129,346) (5,523,198)
Investing activities:
Purchase of property and equipment................................... (1,440) (100,514)
Notes receivable from officers/shareholders.......................... 20,000 161,327
----------- -----------
Net cash provided by investing activities.............................. 18,560 60,813
----------- -----------
Financing activities:
Issuance of common stock............................................. 43,504 1,323,545
Principal payments on debt and capital leases........................ (311,221) (490,356)
----------- -----------
Net cash provided by (used in) financing activities.................... (267,717) 833,189
----------- -----------
Decrease in cash and cash equivalents.................................. (2,378,503) (4,629,196)
Cash and cash equivalents at the beginning of period................... 3,311,014 12,911,684
----------- -----------
Cash and cash equivalents at the end of period......................... $ 932,511 $ 8,282,488
=========== ===========
Supplementary disclosure of cash paid during the period for:
Interest............................................................... $ 46,004 $ 96,523
=========== ===========
Income taxes........................................................... $ 0 $ 0
=========== ===========
Supplementary disclosure on non-cash financing activities:
Equipment acquired under capital leases.............................. $ 0 $ 173,290
=========== ===========
</TABLE>
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PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The 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
month period ended October 31,1998, are not necessarily indicative of results
that can be expected for the fiscal year ending July 31, 1999. The 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 month
period ended October 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 valued at $1,700,000. In March 1998, the Company
purchased 100% of the outstanding common stock of The Chapel Hill Group-
Technology Consultants, Inc. in exchange for 68,728 shares of the Company's
common stock, valued at $500,000. The operations of the acquired companies have
been reflected in the Company's financial statements since the dates of the
acquisitions. For the quarter ended October 31, 1997, the operations of the
acquired companies were immaterial. Accordingly, a pro forma statement of
operations, giving effect to the acquisitions of the aforementioned companies as
if they occurred on August 1, 1997, is not presented.
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. A number of important factors
could cause the Company's actual results to differ materially from those
indicated by such forward-looking statements.
Overview
Prosoft I-Net Solutions, Inc. ("Prosoft" or the "Company") is an Internet
solutions company committed to providing comprehensive Internet skills
curriculum, vendor-neutral Internet skills certification programs and
instructors to deliver the curriculum and certification. Prosoft offers more
than 50 instructor led Internet skills courses ranging from one-day end-user
workshops to 10-day certification programs. The Certified Internet Webmaster
program offered by Prosoft creates the professional skills required to develop
and implement e-business solutions for the Internet age. The certification
testing program is administered worldwide by testing leader Sylvan Prometric.
The Company also sells its courseware to Authorized Training Center resellers.
Historically, Internet instruction has been offered through Company-operated
training centers ("Training Centers") that offer training to students from large
and small organizations across the United States. The Company also offers
tailored onsite training using customer facilities. As of October 31, 1998, the
Company operated 12 Training Centers in 8 states and had 16 affiliate
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arrangements in 13 states. In addition to Prosoft managed sites, Prosoft has
increased its offerings through wholesale relationships with other national
training companies. The national training companies can add Prosoft curriculum
which provides them a new product line at a higher price point to augment their
desktop applications and operating system training product lines. The Company
provides training services at a wholesale cost of $1,450 to $2,600 per day.
This strategy shift to reduce Company run sites and increase distribution
through Prosoft Certified Training Centers (resellers) will begin to impact the
financial statements in fiscal second and third quarters.
Results Of Operations
- ---------------------
Three Months Ended October 31, 1998, Compared
To the Three Months Ended October 31, 1997
- ---------------------------------------------
RECLASSIFICATIONS
Certain amounts for the three months ended October 31, 1997, have been
reclassified to conform with the 1998 presentation.
REVENUE
Training revenue for the three months ended October 31, 1998, was $1,696,014,
compared to $1,201,728 in the three months ended October 31, 1997, an increase
of $494,286. This increase reflects a higher level of enrollment in the
Company's class offerings measured in students per class and total number of
class days for the quarter. Students per class were 7.3 for the three months
ended October 31, 1998, and 5.9 for the three months ended October 31, 1997.
The number of class days was 4,861 for the three months ended October 31, 1998
and 4,551 for the three months ended October 31, 1997.
Courseware sales increased to $313,015 in the three months ended October 31,
1998, compared to $26,921 in the three months ended October 31, 1997. A majority
of this amount is related to contracts which authorize the reproduction and
resale of courseware to third parties, for which revenue is recognized on a cash
basis.
COST OF SERVICES
Cost of services is composed of the following:
<TABLE>
<CAPTION>
Three Months October 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Instruction $1,226,470 $2,065,211
Classroom costs 1,018,406 1,392,064
Courseware 381,633 113,616
---------- ----------
Total $2,626,509 $3,570,891
========== ==========
</TABLE>
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The Company's cost of services includes the costs of instructors, course
materials, classroom equipment, and facilities. Most course instructors are
employees. Instructor travel varies with, among other things, the location of
class offerings and local instructor availability. The Company uses
instructors, dedicated content development 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.
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SALES AND MARKETING
Sales and marketing expenses are composed of:
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Advertising and trade shows $ 16,470 $ 16,880
Salaries and wages 627,572 631,047
Travel and entertainment 82,948 49,713
-------- --------
Total $726,990 $697,640
======== ========
</TABLE>
Sales and marketing expenses for the three months ended October 31, 1998,
amounted to $726,990, compared to $697,640 for the three months ended October
31, 1997, a increase of $29,350. 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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended October 31, 1998,
were $1,606,940, compared to $1,860,150 for the three months ended October 31,
1997, a decrease of $253,210. This decrease reflects reduced numbers of
administrative employees.
NET INTEREST INCOME (EXPENSE)
Net interest expense was $10,280 for the three months ended October 31,
1998, compared to net interest income of $41,700 for the three months ended
October 31, 1997, a decrease of $51,980. Interest expense, which consists
principally of interest paid on capital leases, is offset by interest earned on
cash balances.
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
$3,311,014 at July 31, 1998, to $932,511 at October 31, 1998. This decrease was
the result of net cash used by operations, primarily due to a net loss of
$2,961,691 for the period.
The Company has incurred losses of approximately $43 million since inception,
primarily due to the startup nature of its business. However, due to the recent
sales reorganization and refocusing efforts, the Company is beginning to realize
increasing revenue. This shift in the business strategy should reduce in
overhead. If revenues continue to grow as demonstrated in fiscal 1998 and cost
savings are realized from programs previously discussed as anticipated, the
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Company hopes to reach quarterly profitability in the third quarter of fiscal
1999. In addition, in the second quarter of fiscal 1999,the Company received
proceeds of approximately $700,000 in a private placement of common stock, $3.2
million in a private placement of convertible debt, and secured a $3.5 million
asset based credit line. The Company anticipates that its existing resources,
along with these financings, will be sufficient to meet its needs for working
capital expenditures through at least 1999. However, no assurances can be given
that the Company will be successful in realizing its goals or obtaining this new
financing. The Company's ability to continue as a going concern depends upon
its ability to obtain necessary financing, grow revenue, attain operational
efficiencies and, ultimately, sustain a profitable level of operations.
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 or indirectly, on external
systems of business enterprises such as customers, suppliers, and creditors,
financial organizations, and governmental entities for accurate exchange of
data. The Company's current assessment 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.
Additional Factors That May Affect Results of Operations
The discussions in this Form 10-Q concerning future financing needs, changes in
business strategy, and factors affecting liquidity contain forward-looking
statements. Although management believes that these statements are reasonable
in view of the facts available to it, no assurance can be given that all of
these statements will prove to be accurate. Numerous factors could have a
material effect upon whether these projections could be realized or whether
these trends will continue. Among these factors are those set forth in the
following section, as well as those discussed elsewhere herein. For purposes of
the following, "we" and "our" refer to the Company.
Expectation of Continuing Losses
We have a limited operating history, which makes it difficult to predict our
future operating results. However, we expect to continue incurring losses on a
quarterly basis through at least the second quarter of our fiscal year ending
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July 31, 1999. We have incurred net losses of approximately $43 million from
our inception in December 5, 1995 through October 31, 1998. For the quarter
ended October 31, 1998, we incurred a net loss of $2,961,691. Our ability to
generate significant revenues in the future is subject to uncertainty. In order
to achieve profitability, we must increase our revenues. We can not assure you
that we will be able to increase revenues or achieve profitability.
Future Capital Requirements and Uncertainty of Future Funding
Since our inception, we have been dependent on outside financing to fund our
growth. We have raised approximately $47 million from the private placement of
our Common Stock since our inception and incurred losses of approximately $43
million. We began realizing increasing revenues in late fiscal 1998 due to our
sales reorganization and refocusing efforts. This shift in our business
strategy should result in a reduction in overhead expenses and, if revenues
continue to grow as demonstrated in fiscal 1998, we hope to reach quarterly
profitability in the second half of fiscal 1999. We have received proceeds of
approximately $700,000 in a private placement of our common stock, $3.2 million
in a private placement of convertible debt securities and secured a $3.5
million asset-based line of credit during the second quarter of fiscal 1999. We
believe that our existing resources, along with these financings, will be
sufficient to meet our needs for working capital expenditures through at least
1999. If we do not achieve profitability and generate positive cash flow as
anticipated, or if we are unable to obtain these financings, our ability to
continue as a going concern will be jeopardized.
Intense Competition in Training Market
We face substantial competition in the training market. Competition in the
Internet/intranet training market is intense, rapidly changing and affected by
the rapidly evolving nature of the Internet/intranet industry. A number of
other companies offer products and services similar to ours, and additional new
competitors may emerge in the near future. Many of our existing competitors
have substantially greater capital resources, technical expertise, marketing
experience, research and development status, established customers and
facilities than we do. As a result, there is a risk that we will not be able to
successfully compete with existing and future competitors which would adversely
affect our financial performance.
Rapid Technological Changes
In our industry, technology advances rapidly and industry standards change
frequently. To remain competitive and achieve profitability, we must
continually enhance our existing products and services and promptly introduce
new products, services and technologies to meet the changing demands of our
customers. Our failure to respond to technological changes quickly will
adversely affect our financial performance.
Market Overhang
Future sales of our Common Stock could depress the market price of our Common
Stock. In addition, the perception that such sales will occur could also
adversely effect the price. Upon the effectiveness of certain registration
statements which have been filed with the SEC, the selling stockholders under
those registration statements may sell up to 8,212,004 shares which were
privately issued and are otherwise subject to restrictions on resale under
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securities laws. Any such sales, or even the market perception that such sales
could be made, may depress the price of the Common Stock.
Volatility of Stock Price
Our Common Stock has experienced substantial price volatility and such
volatility may continue to occur in the future. Additionally, the stock market
from time to time experiences significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. These broad
market fluctuations may also adversely effect the market price of our Common
Stock. In addition to such broad market fluctuations, factors such as the
following may have a significant effect on the market price of our Common Stock:
. Fluctuations in our operating results.
. The perception by others of our ability to obtain any necessary new
financing.
. Limited trading market for our Common Stock.
. Announcements of new ventures or products and services by us or our
competitors.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
PART II - OTHER INFORMATION
Item 6: Exhibits
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
October 31, 1998.
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.
12
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Dated: December 10, 1998
/s/ JERRELL M. BAIRD
-------------------------------------
Jerrell M. Baird
Chief Executive Officer
and Chairman of the Board
(Duly Authorized Officer)
Dated: December 10, 1998
/s/ KIMBERLY V. JOHNSTON
-------------------------------------
Kimberly V. Johnston
Chief Financial Officer
(Principal Financial Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 932,511
<SECURITIES> 0
<RECEIVABLES> 2,084,602
<ALLOWANCES> 221,104
<INVENTORY> 0
<CURRENT-ASSETS> 3,987,713
<PP&E> 7,685,190
<DEPRECIATION> 2,261,103
<TOTAL-ASSETS> 9,035,230
<CURRENT-LIABILITIES> 2,805,024
<BONDS> 0
0
0
<COMMON> 11,750
<OTHER-SE> 3,861,175
<TOTAL-LIABILITY-AND-EQUITY> 9,035,230
<SALES> 2,009,029
<TOTAL-REVENUES> 2,009,029
<CGS> 0
<TOTAL-COSTS> 2,626,509
<OTHER-EXPENSES> 2,333,930
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,280
<INCOME-PRETAX> (2,961,691)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,961,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,961,691)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
