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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 September 30, 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 000-21909
PIRANHA INTERACTIVE PUBLISHING, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 86-0779928
- - ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1839 West Drake, Suite B, Tempe, Arizona 85283
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(Address of principal executive offices)
602-491-0500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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. [X] Yes [ ] No
As of November 12, 1998, the number of outstanding shares of the Registrant's
Common Stock was 3,200,000.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Balance Sheet as of September 30, 1998 .......................... 3
Statements of Operations for the three month and nine month
periods ended September 30, 1998 and 1997 ....................... 4
Statements of Cash Flows for the three month and nine month
periods ended September 30, 1998 and 1997 ....................... 5
Notes to Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................... 13
Item 6. Exhibits and Reports on Form 8-K............................. 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIRANHA INTERACTIVE PUBLISHING, INC.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 167,441
Accounts receivable, net of allowance
for returns of $434,350 and doubtful
accounts of $20,000 1,951,333
Inventories 452,771
Prepaid royalties 94,189
Other prepaid expenses 13,455
-----------
Total current assets 2,679,189
Property and equipment, net 105,830
Other assets 4,239
-----------
Total assets $ 2,789,258
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 431,873
Payroll related accruals 9,015
Other accrued liabilities 20,190
-----------
Total current liabilities 461,078
Notes payable - officers 43,299
Other liabilities 5,619
-----------
Total liabilities 509,996
Stockholders' equity:
Preferred stock, $.001 par value;
5,000,000 shares authorized; no
shares issued and outstanding Common
stock, $.001 par value; 20,000,000
shares authorized; 3,200,000 shares
issued and outstanding 3,200
Additional paid-in capital 5,901,339
Accumulated deficit (3,625,277)
-----------
Total stockholders' equity 2,279,262
-----------
Total liabilities and stockholders' equity $ 2,789,258
===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PIRANHA INTERACTIVE PUBLISHING, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 1,437,009 $ 8,896 $ 2,654,312 $ 76,553
Cost of goods sold 522,523 26,350 1,066,679 99,752
----------- ----------- ------------ -----------
Gross profit (loss) 914,486 (17,454) 1,587,633 (23,199)
Selling, general and
administrative expenses 940,483 490,654 2,676,286 1,211,223
----------- ----------- ------------ -----------
Loss from operations (25,997) (508,108) (1,088,653) (1,234,422)
Other income (expense):
Interest income 6,908 -- 56,281 --
Interest expense (1,056) (167,255) (3,092) (392,788)
----------- ----------- ------------ -----------
5,852 (167,255) 53,189 (392,788)
Net loss $ (20,145) $ (675,363) $ (1,035,464) $(1,627,210)
=========== =========== ============ ===========
Net loss per common share $ (0.01) $ (1.16) $ (0.52) $ (3.65)
=========== =========== ============ ===========
Shares used in computing
net loss per common share 1,975,000 583,696 1,975,000 445,330
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PIRANHA INTERACTIVE PUBLISHING, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (20,145) $ (675,363) $ (1,035,464) $(1,627,210)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 8,959 5,711 25,989 16,956
Amortization 54 115,692 161 255,120
Interest on notes payable - officers 1,056 957 3,092 2,801
Reserve for obsolescence -- 3,784 (45,986) 5,114
Issuance of stock options for services -- 3,000 -- 3,000
Net changes in current assets and liabilities:
Accounts receivable (938,264) (787) (1,914,433) (8,993)
Inventory (206,521) 4,333 (266,777) (46,198)
Prepaid expenses 190,964 423,941 252,976 246,873
Accounts payable 125,728 5,001 272,831 256,578
Accrued liabilities (12,322) 46,531 (23,415) 204,042
Other liabilities (949) (653) (2,849) (1,958)
----------- ----------- ------------ -----------
Net cash used in operating activities (851,440) (67,853) (2,733,875) (693,875)
----------- ----------- ------------ -----------
Cash flow used in investing activities:
Purchase of property and equipment (13,395) -- (32,436) (10,749)
----------- ----------- ------------ -----------
Net cash used in investing activities (13,395) -- (32,436) (10,749)
----------- ----------- ------------ -----------
Cash flows from financing activities:
Proceeds from accounts and notes payable -
officers -- -- -- 6,000
Proceeds from notes payable -- 195,000 -- 605,000
Proceeds from initial public offering -- 6,402,110 -- 6,402,110
Payments related to initial public offering -- (49,563) -- (49,563)
Principal payments on notes payable -- (2,105,000) -- (2,105,000)
----------- ----------- ------------ -----------
Net cash provided by financing activities -- 4,442,547 -- 4,858,547
----------- ----------- ------------ -----------
Net increase (decrease) in cash and cash
equivalent (864,835) 4,374,694 (2,766,311) 4,153,923
Cash and cash equivalents, beginning of period 1,032,276 25,961 2,933,752 246,732
----------- ----------- ------------ -----------
Cash and cash equivalents, end of period $ 167,411 $ 4,400,655 $ 167,441 $ 4,400,655
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PIRANHA INTERACTIVE PUBLISHING, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
Interim Financial Information
The unaudited interim financial statements of Piranha Interactive Publishing,
Inc., a Nevada corporation (the "Company"), include all adjustments, consisting
of only normal recurring adjustments which, in the opinion of management, are
necessary for their fair presentation. The results of operations for the interim
periods are not necessarily indicative of the operating results for the full
year. These financial statements have been prepared in accordance with the
instructions to Form 10-QSB and do not contain certain information required by
generally accepted accounting principles. These statements should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 1997 included in the Company's Form 10-KSB on file with the
Securities and Exchange Commission.
LOSS PER SHARE DISCLOSURES
Basic loss per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted loss per share is computed giving effect to all potentially
dilutive common shares that were outstanding during the period. Potentially
dilutive common shares consist of the incremental common shares issuable upon
exercise of stock options, warrants and the unit purchase option.
A reconciliation of the numerator and denominator of basic loss per share is
provided as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator - Basic and Diluted loss per share:
Net loss $ (20,145) $ (675,363) $ (1,035,464) $(1,627,210)
=========== =========== ============ ===========
Denominator - Basic and Diluted loss per share:
Weighted average common shares outstanding 3,200,000 1,808,696 3,200,000 1,670,330
Less shares of common stock in escrow (1,225,000) (1,225,000) (1,225,000) (1,225,000)
1,975,000 583,696 1,975,000 445,330
=========== =========== ============ ===========
Basic and Diluted loss per share $ (0.01) $ (1.16) $ (0.52) $ (3.65)
=========== =========== ============ ===========
</TABLE>
Outstanding warrants, unit purchase options, and stock options totaling
2,717,500 in 1998 and 976,500 in 1997 are not included in the computations of
diluted loss per share as their effect would be antidilutive. An aggregate of
1,225,000 shares of outstanding common stock are currently held in escrow. As
the conditions for release of the escrowed shares have not been met nor will
they be met upon the mere passage of time, the escrowed shares have been
considered to be contingently issuable and, accordingly, have been excluded from
the weighted average number of common shares outstanding used for the
calculation of the basic and dilutive net loss per share.
6
<PAGE>
REVENUE RECOGNITION
The Company sells its products to original equipment manufacturers,
distributors, and retailers. Revenues are recognized upon delivery. The
Company's agreements with distributors and retailers allow for stock rotation.
Reserves are provided for stock rotation and returns based on industry and past
experience. These reserves are established at the time of shipment and reduce
gross sales to arrive at net sales as presented in the accompanying statement of
operations. These reserves are reflected as an allowance for returns. It is the
policy of the Company's customers to offset any returns as reductions against
payments on accounts receivable.
Prior to the second quarter of 1998, the Company had a distribution agreement
with a distributor which permitted the distributor to delay payment until the
product was sold by its retail customers. Consequently, the Company's revenue
recognition for such sales was deferred until receipt of payment from the
distributor. During the second quarter of 1998, the Company entered into a new
agreement with this distributor and as a result, the Company's revenue
recognition for such sales is recognized upon product delivery. This resulted in
the recognition of approximately $200,000 in additional revenue, net of
estimated sales returns and allowances, for the Company during the second
quarter related to product shipped in prior quarters. Additionally, during the
second quarter of 1998, the Company recognized approximately $160,000 in net
sales on shipments made in the second quarter under the new distribution
agreement which would not have been recognized under the previous agreement.
EQUITY
On September 18, 1998, the Company's Board of Directors resolved to increase the
number of shares of common stock available under the 1996 Stock Option Plan from
300,000 shares to 700,000 shares. This resolution was subsequently approved by
the Company's stockholders on October 15, 1998.
MANAGEMENT'S PLANS
On September 23, 1997, the Company was successful in completing its initial
public offering (the "Offering") of 1,600,000 units, each consisting of one
share of common stock and one Class A warrant, at a price to the public of $5.00
per unit; however, the Company continues to experience difficulty in generating
sufficient cash flows from its operations. As a result of its working capital
deficiency prior to the Offering, the Company's net sales for 1997 were
materially hampered by its inability to acquire, launch and market new products.
The Company's revenues were substantially improved for the three month period
ended September 30, 1998 as compared to the comparable quarter of 1997.
Management expects, but cannot assure, cash flows to improve based on these
improved sales expectations and to continue operations through sales, marketing
and distribution of eight software titles it has licensed since the Offering,
one title licensed prior to the Offering, and other titles it is currently
pursuing
The Company's expenditures have continued to exceed its revenues. If cash flows
from operations do not improve significantly during the fourth quarter of 1998
as anticipated by management, the Company will need to seek additional debt or
equity financing to continue operations. In such case, there is no assurance
that such funds can be obtained on terms acceptable to the Company, or at all.
Any equity financing is expected to have a dilutive effect on the Company's
common stock outstanding.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY HISTORICAL ARE
"FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR
STRATEGIES REGARDING THE FUTURE GENERALLY, THE COMPANY'S GROWTH STRATEGY, FUTURE
SALES AND ANTICIPATED TRENDS IN THE COMPANY'S BUSINESS. ALL FORWARD LOOKING
STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION KNOWN TO THE
COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH FORWARD LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE THAT ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS AS A
RESULT OF A NUMBER OF FACTORS, MOST OF WHICH ARE OUT OF THE CONTROL OF THE
COMPANY, INCLUDING, BUT NOT LIMITED TO, THE COMPANY'S EARLY STAGE OF
DEVELOPMENT, INTENSE COMPETITION IN VARIOUS ASPECTS OF ITS BUSINESS, THE
SEASONAL NATURE OF ITS BUSINESS, ITS DEPENDENCE ON THIRD PARTY AUTHORS AND KEY
PERSONNEL, THE RISING COST OF ACQUIRING A TITLE WHICH CAN SUCCESSFULLY COMPETE
IN AN INCREASINGLY COMPETITIVE RECREATIONAL SOFTWARE MARKET AND THE RISKS
ASSOCIATED WITH BRINGING ITS SOFTWARE TITLES TO MARKET, INCLUDING BUT NOT
LIMITED TO, THE DIFFICULTY OF ACCURATELY FORECASTING FUTURE CONSUMER
PREFERENCES, FINDING REASONABLY PRICED AVAILABLE TITLES TO MEET THE FORECAST
PREFERENCES AND PUBLISHING THOSE TITLES IN A TIMELY MANNER IN ORDER TO TAKE
ADVANTAGE OF THE ANTICIPATED MARKET. ADDITIONAL FACTORS WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE COMPANY'S FORWARD LOOKING
STATEMENTS ARE DESCRIBED IN THE COMPANY'S DOCUMENTS FILED FROM TIME TO TIME WITH
THE U.S. SECURITIES AND EXCHANGE COMMISSION. IN LIGHT OF THESE AND OTHER RISKS
AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD LOOKING
INFORMATION CONTAINED IN THIS DOCUMENT WILL IN FACT TRANSPIRE OR PROVE TO BE
ACCURATE. READERS SHOULD REVIEW THE INFORMATION SET FORTH HEREIN IN THE CONTEXT
OF THE OTHER INFORMATION, INCLUDING, BUT NOT LIMITED TO, INFORMATION IDENTIFIED
AS "RISK FACTORS" AND THE COMPANY'S FINANCIAL INFORMATION MADE PUBLICLY
AVAILABLE BY THE COMPANY IN THE COMPANY'S REGISTRATION STATEMENT ON FORM SB-2,
AS WELL AS THE INFORMATION CONTAINED IN THE COMPANY'S REPORTS ON FORM 10-QSB,
8-K, 10-KSB, AND OTHER REPORTS PUBLICLY FILED FROM TIME TO TIME BY THE COMPANY
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
The Company publishes interactive multimedia software products for the home
personal computer ("PC") market with an emphasis on "edutainment" titles, which
combine entertainment and educational content, as well as games and other titles
which it determines to have market potential. The Company was founded in
November 1994 and has published titles in several categories, including
entertainment, early childhood education, reference and personal productivity.
The Company's management team has worked closely together for the past four to
seven years and all have prior software publishing experience. During its first
year of operations, the Company's primary focus was devoted to developing
infrastructure and obtaining titles for publication. The Company's first four
titles were published in the fall of 1995. Thereafter, the Company published
only one title in 1996 as a result of its working capital deficiency during
1996, which continued through the closing date of its initial public offering on
September 23, 1997. This deficiency prevented the Company from acquiring,
launching and marketing new products in time to realize significant sales in
1997 as well as the first quarter of 1998. Consequently, the Company believes
that the comparisons below in "Results of Operations" may not be meaningful or
representative of future results or trends.
On September 23, 1997, the Company completed a public offering of 1,600,000
units, each consisting of one share of common stock and one Class A warrant, at
a price to the public of $5.00 per unit. The net proceeds of the offering to the
Company, after deducting all associated costs, were approximately $6,400,000.
The home education and entertainment software business is highly seasonal.
Typically, net sales are highest during the third and fourth calendar quarters
(which includes the holiday buying season), decline in the first calendar
8
<PAGE>
quarter and are lowest in the second calendar quarter. This seasonal pattern is
due primarily to the increased demand for home education and entertainment
software titles during the year-end holiday buying season.
To date in 1998, the Company has released four educational software titles,
including REDSHIFT 3, the sequel to the popular REDSHIFT astronomy series, and
three entertainment titles. The adventure game title, MORPHEUS, and the 3-D
action game, DEAD RECKONING, were newly released titles for the third quarter of
1998. The Company additionally released the Macintosh platform of REDSHIFT 3
during the third quarter.
The Company sells its products to original equipment manufacturers,
distributors, and retailers. Revenues are recognized upon delivery. The
Company's agreements with distributors and retailers allow for stock rotation.
Reserves are provided for stock rotation and returns based on industry and past
experience. These reserves are established at the time of shipment and reduce
gross sales to arrive at net sales as presented in the accompanying statement of
operations. These reserves are reflected as an allowance for returns. It is the
policy of the Company's customers to offset any returns as reductions against
payments on accounts receivable.
Prior to the second quarter of 1998, the Company had a distribution agreement
with a distributor which permitted the distributor to delay payment until the
product was sold by its retail customers. Consequently, the Company's revenue
recognition for such sales was deferred until receipt of payment from the
distributor. During the second quarter of 1998, the Company entered into a new
agreement with this distributor and as a result, the Company's revenue
recognition for such sales is recognized upon product delivery. This resulted in
the recognition of approximately $200,000 in additional revenue, net of
estimated sales returns and allowances, for the Company during the second
quarter related to product shipped in prior quarters. Additionally, during the
second quarter of 1998, the Company recognized approximately $160,000 in net
sales on shipments made in the second quarter under the new distribution
agreement which would not have been recognized under the previous agreement.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES
The Company's net sales for the three month period ended September 30, 1998 were
$1,437,009, which represents a $1,428,113 increase from the comparable 1997
period. Net sales for 1997 were adversely affected by the Company's working
capital deficiency. This deficiency, which continued through September 23, 1997,
the date of the Company's initial public offering, prevented the Company from
acquiring, launching and marketing new products in time to begin realizing
significant net sales until the second quarter of 1998.
The third quarter of 1998 was the third consecutive quarter of substantial
revenue growth for the Company, with much of the sales for the quarter
attributable to the initial sales of two new game titles, DEAD RECKONING and
MORPHEUS, along with continued sales of the Company's high quality PC and
Macintosh "edutainment" titles, including the REDSHIFT 3 astronomy program. The
Company generally anticipates net sales each year to be the highest during the
third and fourth quarter holiday buying season; however, the Company is unable
to predict whether its existing products will continue to generate significant
sales through the fourth quarter of 1998. Currently, the Company has not
licensed any new titles for release in the fourth quarter of 1998 or the first
quarter of 1999.
9
<PAGE>
GROSS PROFIT
The Company experienced a gross profit of $914,486, or 64% of net sales during
the three month period ended September 30, 1998 as compared to a gross loss of
$(17,454), or (196%) of net sales during the three month period ended September
30, 1997. The gross loss during the three month period ended September 30, 1997
is primarily attributable to insufficient net sales to offset the cost of goods
sold. The Company anticipates, but cannot assure, that gross profits will remain
consistent as a percentage of sales in the future if net sales of current titles
remain consistent.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to approximately $940,000
during the three month period ended September 30, 1998, compared with
approximately $491,000 during the corresponding 1997 period. The increase was
primarily attributable to the Company's expanded marketing efforts related to
new products, additional administrative costs related to operating as a
publicly-traded company, and the hiring of additional personnel subsequent to
September 30, 1997. Selling, general and administrative expenses as a percentage
of net sales decreased from 5,515% during the three month period ended September
30, 1997 to 65% during the three months ended September 30, 1998.
Management expects, but cannot assure, that such expenses will not increase
significantly in the aggregate in the fourth quarter of 1998 or the first
quarter of 1999 if the Company's revenues from product sales maintain current
levels.
INTEREST EXPENSE
Interest expense decreased to approximately $1,000 during the three month period
ended September 30, 1998, compared to approximately $167,000 during the
corresponding 1997 period. Interest expense in the 1997 period was primarily
attributable to amortization of deferred financing costs, interest expense
related to the bridge notes issued in the fourth quarter of 1996, and various
short-term notes issued in the second and third quarter of 1997. These notes
were repaid in September of 1997 out of proceeds from the initial public
offering.
NET LOSS
Due primarily to the Company's inability to generate sufficient net sales to
offset selling, general and administrative expenses, the Company had a net loss
for the three month period ended September 30, 1998 of $(20,145) or $(0.01) per
share, compared to a net loss of $(675,363) or $(1.16) per share for the three
month period ended September 30, 1997.
In the event that net sales for the fourth quarter meet or exceed those of the
third quarter, the Company may recognize net income from operations; however,
there can be no assurance that the Company will achieve such net sales for the
quarter, or that expenses will not increase from the third quarter of 1998.
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES
The Company's net sales for the nine month period ended September 30, 1998 were
$2,654,312, which represents a $2,577,759 increase from the comparable 1997
period. Net sales for 1997 were adversely affected by the Company's working
capital deficiency during such period. This deficiency, which continued through
September 23, 1997, the closing date of the Company's initial public offering,
prevented the Company from acquiring, launching and marketing new products in
time to begin realizing significant net sales until the second quarter of 1998.
10
<PAGE>
Much of the sales for the nine month period ended September 30, 1998 are
attributable to the initial sales of two new game titles, DEAD RECKONING and
MORPHEUS, along with continued sales of the Company's high quality PC and
Macintosh "edutainment" titles, including the REDSHIFT 3 astronomy program. The
Company generally anticipates net sales each year to be the highest during the
third and fourth quarter holiday buying season; however, the Company is unable
to predict whether its existing products will continue to generate significant
sales through the fourth quarter of 1998. Currently, the Company has not
licensed any new titles for release in the fourth quarter of 1998 or the first
quarter of 1999.
GROSS PROFIT
The Company experienced a gross profit of $1,587,633, or 60% of net sales during
the nine month period ended September 30, 1998 as compared to a gross loss of
$(23,199), or (30%) of net sales during the nine month period ended September
30, 1997. The gross loss during the nine month period ended September 30, 1997
is primarily attributable to insufficient net sales to offset the cost of goods
sold.
The Company anticipates, but cannot assure, that gross profits will remain
consistent as a percentage of sales in the future if net sales of current titles
remain consistent.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to approximately
$2,676,286 during the nine month period ended September 30, 1998, compared with
approximately $1,211,000 during the corresponding 1997 period. The increase was
primarily attributable to the Company's expanded marketing efforts related to
new products, additional administrative costs related to operating as a
publicly-traded company, and the hiring of additional personnel subsequent to
September 30, 1997. Selling, general and administrative expenses as a percentage
of net sales decreased from 1,582% during the nine month period ended September
30, 1997 to 101% during the nine months ended September 30, 1998.
Management expects, but cannot assure, that such expenses will decrease as a
percentage of net sales for the year if the Company's revenues from product
sales maintain current levels.
INTEREST EXPENSE
Interest expense decreased to approximately $3,000 during the nine month period
ended September 30, 1998, compared to approximately $393,000 during the
corresponding 1997 period. Interest expense in the 1997 period was primarily
attributable to amortization of deferred financing costs, interest expense
related to the bridge notes issued in the fourth quarter of 1996, and various
short-term notes issued in the second and third quarter of 1997. These notes
were repaid in September of 1997 out of proceeds from the initial public
offering.
NET LOSS
Due primarily to the Company's inability to generate sufficient net sales to
offset selling, general and administrative expenses, the Company had a net loss
for the nine month period ended September 30, 1998 of $(1,035,464) or $(0.52)
per share, compared to a net loss of $(1,627,210) or $(3.65) per share for the
nine month period ended September 30, 1997.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity during 1997 was the sale of securities
in connection with the Company's initial public offering and cash generated from
the issuance of various notes payable.
The Company's cash and cash equivalent balance totaling $167,441 as of September
30, 1998, is invested primarily in an investment grade money market fund which
is available to fund immediate cash needs.
The Company's long-term debt consists primarily of notes payable to officers in
the aggregate amount of $43,299, including interest at 10% accrued through
September 30, 1998, which are due August 1, 1999.
The Company's expenditures have continued to exceed its revenues. The Company's
cash used in operating activities was $2,733,875 during the nine month period
ended September 30, 1998, while revenues for the same period were $2,654,312.
The Company anticipates that its actual expenditures will remain consistent in
the aggregate as it attempts to continue expansion of its business by acquiring
new products and continuing sales and marketing efforts and other operations.
The Company expects to continue to incur losses until such time as it is able to
sell a sufficient volume of products at prices that provide adequate gross
profit to cover operating costs. The Company's working capital requirements will
depend upon numerous factors, including payment cycles for its shipped products,
credit arrangements with suppliers, the scale-up of its sales and marketing
resources, acquisition of new products and the terms upon which such products
are acquired, competitive factors including costs associated with obtaining
adequate levels of retail shelf space, and marketing activities.
Generally, the Company is obligated to pay its vendors within 30 days of
shipment, although the Company's customers' payment terms are often much longer,
generally from between 45 to 60 days. This discrepancy in payment cycles has
resulted in inconsistent cash flows and reduced working capital for the Company.
In the event that the Company does not realize anticipated revenues during the
fourth quarter of 1998 or collect its existing accounts receivable in a timely
manner, the Company will require additional debt and/or equity financing to
continue operations, to further expand its product offerings, or to make
strategic acquisitions. The Company does not currently have a credit facility or
other commitment for additional financing. There can be no assurance that such
additional financing will be available, or that, if available, such financing
will be obtainable on terms favorable to the Company or its stockholders. Any
equity financing is expected to have a dilutive effect on the Company's common
stock outstanding.
The Company is currently pursuing a strategy of supplementing its internal
growth by acquiring one or more small software companies that either expand or
complement its business. The Company will evaluate specific acquisition
opportunities based on prevailing market and economic conditions. Acquisitions
could require integration of dissimilar operations or assets, assimilation of
new employees, diversion of management time and resources, increases in
administrative costs, potential loss of key employees of an acquired company and
additional costs associated with debt or equity financing. While the Company
believes that opportunities exist and is beginning to actively pursue such
opportunities, the Company has not yet entered into formal negotiations, binding
letters of intent, or agreements with any specific companies. There is no
assurance that the Company will be able to identify suitable acquisition
candidates at acceptable valuations or succeed in integrating any acquired
business into the Company's existing business or in retaining key customers of
acquired businesses. Unless the Company can make an acquisition solely in
exchange for its capital stock (the issuance of which may dilute the interests
of existing stockholders), the Company will need to obtain additional equity or
debt financing. There is no assurance that the Company will be able to obtain
such financing on terms acceptable to it, or at all.
12
<PAGE>
YEAR 2000 RISKS
Some computer applications were originally designed to recognize calendar years
by their last two digits. As a result, calculations performed using these
truncated fields will not work properly with dates from the year 2000 and
beyond. The Company has determined that the sensitivity of its internal computer
applications and software products to the Year 2000 issue will not have a
material impact on its business, operations or financial condition; however, in
the event the Company does incur business interruption or delays as a result of
the Year 2000 issue, the Company has not developed contingency plans to address
the causes or results of such delays or interruptions. Amounts spent to date,
and to be spent in the future, in connection with the Year 2000 issue are not
expected to be material. As required by an interpretive release recently issued
by the Securities and Exchange Commission, the Company has undertaken to confirm
in writing whether the internal business operations of third parties with whom
it has it has a material relationship will be affected by the Year 2000 issue.
Although the Company believes that the computer applications of these third
parties are Year 2000 compliant, the Company's assessment is not yet complete.
The Company anticipates that such assessment will be completed during the first
quarter of 1999.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 18, 1997, the Company's Registration Statement on Form SB-2 (File
No. 333-18605) (the "Form SB-2"), was declared effective by the U.S. Securities
and Exchange Commission. The Form SB-2 was prepared in connection with an
initial public offering by the Company of 1,600,000 units, each consisting of
one share of common stock and one Class A Warrant. The units and the components
thereof were each separately tradable upon issuance. Each Class A Warrant
entitles the holder to purchase one share of the Company's Common Stock at an
exercise price of $6.50 at any time prior to September 18, 2002. The offering of
units pursuant to the Form SB-2 commenced on September 18, 1997 and terminated
September 23, 1997, the date on which all of the units were sold. The offering
was underwritten by D.H. Blair Investment Banking Corp. on a firm commitment
basis. The units were offered to the public at a price of $5.00 per unit, or
$8,000,000 in the aggregate for all 1,600,000 units offered, all of which were
sold as of the date the offering terminated.
The Company's actual expenses incurred in connection with the issuance and
distribution of the units registered pursuant to the Form SB-2 equaled
approximately $1,600,000 in the aggregate, which consisted of the following: (i)
$760,000 in aggregate underwriting discounts and commissions, (ii) $240,000 in
expenses paid to or for the underwriter and (iii) $600,000 in other expenses.
None of the $600,000 in other expenses consisted of direct or indirect payments
to the Company's officers, directors, holders of at least 10% of any class of
the Company's outstanding securities or other affiliates (collectively
"Affiliates").
After deducting the foregoing expenses, the offering resulted in approximately
$6,400,000 in net proceeds to the Company. Since the offering, the Company used
approximately $2,245,000 of the net proceeds for the repayment of indebtedness,
approximately $580,000 toward acquisition of software programs, approximately
$1,615,000 toward marketing and sales and approximately $1,618,000 for working
capital. Approximately $60,000 was paid to affiliates for payment of accrued
salaries. The preceding discussion of the Company's use of net proceeds reflects
reasonable estimates of amounts paid by the Company. The Company's use of
proceeds from the offering toward acquisition of software programs and toward
marketing and sales was estimated at $1,702,000 and $750,000, respectively, in
the prospectus included in the Form SB-2. The decrease in actual proceeds used
toward acquisition of software programs is primarily a result of the Company's
ability to obtain software programs with lower up-front advances to developers,
allowing additional proceeds available for marketing and sales activities, which
13
<PAGE>
is higher than originally estimated. The Company's use of proceeds from the
offering for other items, as described herein, does not represent a material
change from that described in the prospectus included in the Form SB-2.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit
Number Description
------- -----------
27.1 -- Financial Data Schedule
(B) REPORTS ON FORM 8-K.
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PIRANHA INTERACTIVE PUBLISHING, INC.
Date: November 16, 1998 /s/ Timothy M. Brannan
----------------------- -------------------------------------------
Timothy M. Brannan, Chief Executive Officer
Date: November 16, 1998 /s/ Keith P. Higginson
----------------------- -------------------------------------------
Keith P. Higginson, Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 167,441
<SECURITIES> 0
<RECEIVABLES> 1,951,333
<ALLOWANCES> 454,350
<INVENTORY> 452,771
<CURRENT-ASSETS> 2,679,189
<PP&E> 177,470
<DEPRECIATION> 71,640
<TOTAL-ASSETS> 2,789,258
<CURRENT-LIABILITIES> 461,078
<BONDS> 0
0
0
<COMMON> 3,200
<OTHER-SE> 2,276,062
<TOTAL-LIABILITY-AND-EQUITY> 2,789,258
<SALES> 2,654,312
<TOTAL-REVENUES> 2,654,312
<CGS> 1,066,679
<TOTAL-COSTS> 1,066,679
<OTHER-EXPENSES> 2,676,286
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,092
<INCOME-PRETAX> (1,035,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,035,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (1,035,464)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
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