<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
Commission File number 000-23547
E.COM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Oregon 91-1600822
- --------------------------------------------------------------------------------
(State of Incorporation) (Federal I.R.S. No.)
7737 S.W. Cirrus Drive, Beaverton, Oregon 97008
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: 503-671-9900
- --------------------------------------------------------------------------------
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 ( )
- --------------------------------------------------------------------------------
As of August 7, 1998, the Registrant had 2,375,577 shares of Common
Stock outstanding.
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE: None
- --------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E.COM INTERNATIONAL, INC.
FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Balance Sheets as of June 30, 1998 and December 31, 1997. . . . . . 3
Statements of Operations for the Quarters Ended
June 30, 1998 and June 30, 1997. . . . . . . . . . . . . . . . . 4
Statements of Cash Flows for the Quarters Ended
June 30, 1998 and June 30, 1997. . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 6
</TABLE>
-2-
<PAGE>
E.COM INTERNATIONAL, INC.
(A Company in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 590,333 $ 1,839,281
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 2,800 -
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 338,590 315,023
Prepaid expenses and other assets. . . . . . . . . . . . . . . 31,189 19,156
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . . 962,912 2,173,460
----------- -----------
Property and equipment, net. . . . . . . . . . . . . . . . . . . 393,515 380,206
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . 13,950 19,833
Prepaid software royalties, net. . . . . . . . . . . . . . . . . 42,373 40,750
---------- -----------
$ 1,412,750 $ 2,614,249
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 164,664 237,245
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . 58,282 95,558
Notes payable to shareholder . . . . . . . . . . . . . . . . . - 195,000
Current portion of capital lease obligations . . . . . . . . . 4,158 2,144
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . 227,104 529,947
----------- -----------
Capital lease obligations, less current portion. . . . . . . . . 13,307 11,087
Commitments
Shareholders' equity:
Common stock, no par value, authorized 10,000,000 shares;
2,375,577 issued and outstanding at June 30,
1998 and December 31, 1997. . . . . . . . . . . . . . . . . 3,293,359 3,386,025
Warrants outstanding . . . . . . . . . . . . . . . . . . . . . 1,268,146 1,268,146
Deficit accumulated during the development stage . . . . . . . (3,389,166) (2,580,956)
----------- -----------
Total shareholders' equity. . . . . . . . . . . . . . . . . 1,172,339 2,073,215
----------- -----------
$ 1,412,750 $ 2,614,249
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
E.COM INTERNATIONAL, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
April 4, 1996
(date of
Three months ended Six months ended inception)
June 30, June 30, to June 30,
1998 1997 1998 1997 1998
------------------------- ------------------------- -----------
<S> <C> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . $ 26,795 - $ 49,325 - $ 74,562
Cost of sales . . . . . . . . . . . . . . . . . . 22,718 - 30,850 - 52,647
------------------------- ------------------------- -----------
Gross profit . . . . . . . . . . . . . . . . 4,077 - 18,475 - 21,915
------------------------- ------------------------- -----------
Operating expenses:
Research and development. . . . . . . . . . . . 175,595 280,977 318,836 632,833 1,662,335
Sales and marketing . . . . . . . . . . . . . . 62,547 69,044 123,010 116,975 451,126
General and administrative. . . . . . . . . . . 219,267 127,653 405,748 255,101 1,304,362
------------------------- ------------------------- -----------
457,409 477,674 847,594 1,004,909 3,417,823
------------------------- ------------------------- -----------
Loss from operations . . . . . . . . . . . . (453,332) (477,674) (829,119) (1,004,909) (3,395,908)
Other income (expense):
Interest income . . . . . . . . . . . . . . . . 9,313 993 24,494 4,004 43,633
Interest expense. . . . . . . . . . . . . . . . 53 (5,446) (3,585) (16,780) (36,891)
------------------------- ------------------------- -----------
Loss before provision for income taxes . . . (443,966) (482,127) (808,210) (1,017,685) (3,389,166)
Provision for income taxes. . . . . . . . . . . . - - - -
------------------------- ------------------------- -----------
Net loss . . . . . . . . . . . . . . . . . . $(443,966) (482,127) $(808,210) (1,017,685) $(3,389,166)
------------------------- ------------------------- -----------
------------------------- ------------------------- -----------
Basic loss per share. . . . . . . . . . . . . . . $(0.19) (0.39) $(0.34) (0.90) $(2.34)
------------------------- ------------------------- -----------
------------------------- ------------------------- -----------
Shares used in calculation. . . . . . . . . . . . 2,375,577 1,231,856 2,375,577 1,135,308 1,449,928
------------------------- ------------------------- -----------
------------------------- ------------------------- -----------
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
E.COM INTERNATIONAL, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
April 4, 1996
Six months Six months (date of
ended ended inception)
June 30, June 30, to June 30,
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (808,210) $(1,017,685) $(3,389,166)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 32,373 29,856 159,454
Write-off of acquired products in development: . . . . . . . . . . . 39,098
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . (2,800) -- (2,800)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . (23,567) (264,083) (336,664)
Prepaid expenses and other assets. . . . . . . . . . . . . . . . (13,656) (88,468) (104,039)
Accounts payable and accrued liabilities . . . . . . . . . . . . (104,466) 420,068 228,337
---------- ---------- -----------
Net cash used in operating activities. . . . . . . . . . . . . . (920,326) (920,312) (3,405,780)
---------- ---------- -----------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . (39,799) (109,968) (499,415)
Acquisition of EnBloc assets
-- -- (31,543)
---------- ---------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . (39,799) (109,968) (530,958)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds (expenses) from sale of common stock and
warrants, net. . . . . . . . . . . . . . . . . . . . . . . . . . (92,666) 1,026,694 4,455,709
Proceeds from issuance of notes payable
to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . -- 175,000 420,000
Principal payments under capital lease obligation. . . . . . . . (1,157) (309) (2,434)
Repayment of notes payable to shareholders . . . . . . . . . . . (195,000) (125,000) (320,000)
Repayment of contract payable
-- (32,000) (32,000)
Advance payment by shareholders for common
stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Payments received on subscriptions receivable from
sale of stock. . . . . . . . . . . . . . . . . . . . . . . . . . -- 4,796 5,796
---------- ---------- -----------
Net cash provided by (used in) financing activities. . . . . . . (288,823) 1,049,181 4,527,071
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . (1,248,948) 18,901 590,333
Cash and cash equivalents at beginning of period. . . . . . . . . . . 1,839,281 16,190 --
---------- ---------- -----------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . $ 590,333 $ 35,091 $ 590,333
---------- ---------- -----------
---------- ---------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest. . . . . . . . . . . . . . $ 2,372 $ 13,525 $ 20,560
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
-5-
<PAGE>
ITEM 1. NOTES TO FINANCIAL STATEMENTS
NOTE 1
The unaudited financial information furnished herein reflects all
adjustments that in the opinion of management are necessary to fairly state
the Company's financial position, the changes in its financial position and
the results of its operations for the periods presented. This report on Form
10-Q should be read in conjunction with the Company's financial statements
and notes thereto included on Form 10-K for the year ended December 31, 1997.
The Company assumes that users of the interim financial information herein
have read or have access to the audited financial statements for the
preceding fiscal year and that the adequacy of additional disclosure needed
for a fair presentation may be determined in that context. Accordingly,
footnote disclosure which would substantially duplicate the disclosure
contained in the Company's financial statements for the year ended December
31, 1997 has been omitted. The results of operations for the six month
period ended June 30, 1998 are not necessarily indicative of results for the
entire year ended December 31, 1998.
NOTE 2 - INVENTORIES
Inventories are comprised of the following as of June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Raw Materials $204,214 $315,023
Work in Process 134,376 --
-------- --------
$338,590 $315,023
-------- --------
-------- --------
</TABLE>
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and Notes thereto included elsewhere in
this Form 10-Q. This Form 10-Q contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as
those discussed in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission.
OVERVIEW
Since its formation, the Company has been in the development stage with
its principal activities consisting of assembling a qualified technical and
executive management team, continuing the development of its products,
commencing pre-introduction marketing activities and raising capital. The
Company operates in a rapidly changing market and technology. The Company
has generated no significant revenues and has incurred substantial losses
since its inception. The Company expects to continue to incur significant
losses in 1998.
The Company expects revenues to be derived primarily from the sale of
its wireless mobile computing products. The Company does not expect to have
any significant revenues until the third quarter of 1998 at the earliest.
Sales are expected to be through purchase order contracts with each customer
and will vary in profitability.
The Company's primary product is the Discovery I-TM-, a fully integrated
smart handheld device for wireless data communications. The Company
commenced commercial production and shipment of the Discovery I-TM- late in
the first quarter of 1998. The Company purchased certain manufacturing,
tooling and test equipment to support its move to commercial production. In
addition, the Company expects to add to its engineering, marketing and sales
staff to support its shift into commercial product sales. During 1998, the
Company expects to invest in continuing development of enhancements, upgrades
and software for its current products as well as limited development of
additional new products, including both applications software, wireless
gateway servers, and other network interfaces for the Discovery I-TM-,
subject to the amount and timing of the Company's achieving additional new
funding or significant revenues.
RESULTS OF OPERATIONS
REVENUES
The Company had revenues of $26,795 and $49,325 for the second quarter
and first half of 1998, respectively, compared to no revenues in the second
quarter and first half of 1997. Revenues were derived from sales of
commercial units of the Company's Discovery I-TM-. Sales were made to three
(3) customers in the first half of 1998, which the Company believes are
evaluating the Discovery I-TM-product. Operating expenses decreased by 4% to
$457,409 in the second quarter of 1998 and by 15% to $847,594 for the first
half of 1998, as compared to $477,674 and $1,004,909 in the corresponding
periods of 1997,
-7-
<PAGE>
primarily reflecting the Company's shift from research and development
efforts to other areas of the Company in preparation for ongoing production
and sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses since inception have consisted
primarily of payments to engineering consultants, payments of salaries and
fringe benefits of employees and purchase of engineering parts and materials.
To date, the Company has expensed all such costs as incurred. Engineering
consulting projects have for the most part been completed, and expenses for
such projects have been substantially reduced to $70,220 in the first half of
1998, compared with $357,250 in the first half of 1997, with most continued
engineering work now being performed by employees of the Company. The
Company expects product development expenses associated with the Discovery
I-TM- to remain at current levels in the near-term, however, the Company
expects additional costs to be incurred for production support as the Company
continues to begin commercial manufacturing of its initial products. The
Company anticipates that it will also devote substantial resources to
additional product enhancements, application support, application software
development and development of E.Com's planned back-end wireless gateway
server.
SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Sales, marketing, general and administrative expenses include payroll
and related costs for the Company's administrative and executive personnel,
costs related to the Company's marketing and promotional efforts, office
lease expenses and other overhead costs, and legal and accounting costs and
fees of consultants and professionals. Sales, marketing, general and
administrative expenses for the quarter ended June 30, 1998 were $281,814, as
compared to $196,697 for the quarter ended June 30, 1997. For the six months
ended June 30, 1998, and the six months ended June 30, 1997, these expenses
were $528,758 and $372,076, respectively, reflecting primarily increased
introduction activities for the Discovery I-TM-. The Company expects sales,
marketing, general and administrative expenses to continue to increase
substantially in future periods as the Company invests in marketing
activities to promote its products. In addition, the Company continued to
incur significant accounting and legal expenses associated with the
registration of its securities for public trading on the OTC Bulletin Board
as required by the terms of the most recent private offering as well as the
increased statutory reporting requirements that such registration dictates.
Legal and accounting expenses resulting from this registration for the six
month period ended June 30, 1998 were $44,865 and $15,000 respectively. The
Company expects ongoing legal and accounting expenses to remain above those
of 1997 levels due to its ongoing business development activities.
NET LOSS
Net cumulative loss from corporate inception through June 30, 1998 was
approximately $3.4 million or $2.34 per share. For the quarter ended June 30,
1998, the Company recorded a net loss of $443,966 or $0.19 per share, versus
a net loss of $482,127 or $0.39 per share for the quarter ended June 30, 1997.
For the six month period ended June 30, 1998, the Company recorded a net
loss of $808,210 or $0.34 per share, versus a net loss of $1,017,685 or $0.90
per share for the six month period ended June 30, 1997, primarily reflecting
ongoing operating expenses prior to establishment of a significant revenue
stream.
-8-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through
private placements of common stock. At December 31, 1997, the Company had
shareholders' equity of approximately $2.1 million, although from inception
through December 31, 1997, the Company had incurred an accumulated deficit of
approximately $2.6 million. The Company had cash and cash equivalents of
$1.8 million at December 31, 1997. As of June 30, 1998, the Company had
shareholders' equity of approximately $1.2 million and cash and cash
equivalents of $0.6 million.
The Company applied the proceeds from the most recent private offering
to payment of outstanding accounts payable, tooling costs, retirement of a
shareholder loan, and salaries, benefits and other regular monthly expenses.
The Company also expects that its operating costs will increase as the
Company hires additional staff to expand its marketing, engineering support
and production capabilities. If and when higher volume sales of the Company's
products occur, working capital needs will also increase to finance inventory
and accounts receivable.
The Company's future expenditures and capital requirements will depend
on numerous factors, including the progress of its product development,
manufacturing, sales and marketing programs and sales growth. The Company
expects its cash requirements to increase significantly each year as it
expands its activities and operations to finance increased personnel costs,
inventory and accounts receivable. Additionally, the Company will continue to
evaluate possible acquisitions of, or investments in businesses, products,
and technologies that are complementary to those of the Company, which may
require the use of cash. The Company currently expects that its cash and
cash equivalents will satisfy its working capital needs for approximately
four months, assuming that the Company generates no unanticipated revenues
and makes no acquisitions of assets or companies during such period. The
Company anticipates needing to raise additional capital, debt or equity, in
public or private offerings or loan transactions to finance its continued
growth. As of August 7, 1998, the Company has held discussions with various
investors and investment bankers concerning additional financing, but has not
reached any agreement concerning additional financing. There is no guarantee
that additional funding will occur in the required time frame. Failure of
the Company to obtain additional financing could have a material adverse
impact on the Company, including its ability to continue as a going concern.
-9-
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the Company's shareholders was held on June 12,
1998. The shareholders of 55.18 percent of the Company's outstanding shares
were present in person or represented by proxy. The following individuals
were elected by the margins indicated to serve as directors of the Company
until the next annual meeting of shareholders or until their successors are
elected:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Number of Shares
- ---------------------------------------------------------------------------------------
Name For Withheld
- ---------------------------------------------------------------------------------------
<S> <C> <C>
William F. Stephens 1,310,958 0
- ---------------------------------------------------------------------------------------
Steven A. Larson 1,308,458 2,500
- ---------------------------------------------------------------------------------------
Lawrence C. Neitling 1,310,958 0
- ---------------------------------------------------------------------------------------
Merrill A. McPeak 1,310,958 0
- ---------------------------------------------------------------------------------------
</TABLE>
The appointment of KPMG Peat Marwick LLP as the Company's accountants was
also approved by a unanimous vote.
ITEM 6(a). EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------
<C> <S>
3.1+ Articles of Incorporation of the Company
3.2+ Bylaws of the Company
4.1+ Form of Warrant Number One for Purchase of Common Stock
4.2+ Form of Warrant Number Two for Purchase of Common Stock
4.3+ Warrant Agreement including Form of Warrant
4.4+ Form of Warrant for Purchase of Units
10.1+ Employment Agreement between the Company and William F. Stephens
10.2+ Employment Agreement between the Company and Jonathan D. Birck
10.3+ Contract between Company and Motorola Wireless Data Group
10.4+ Agreement between Company and L.G. Zangani, Inc.
10.5+ 1997 Incentive Compensation Plan
10.6+ Lease with Gateway Columbia Properties
27 Financial Data Schedule
</TABLE>
- ------------------
+ Filed previously with the Company's Registration Statement on Form 10 (No.
000-23547) filed with the Securities and Exchange Commission on December
24, 1997.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ William F. Stephens Date: August 11, 1998
-----------------------------------
William F. Stephens
Principal Executive Officer and
Principal Financial Officer
-11-
<PAGE>
EXHIBIT INDEX
FORM 10-Q
E.COM INTERNATIONAL, INC.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------------------------------------------------------- ----
<C> <S> <C>
3.1+ Articles of Incorporation of the Company
3.2+ Bylaws of the Company
4.1+ Form of Warrant Number One for Purchase of Common Stock
4.2+ Form of Warrant Number Two for Purchase of Common Stock
4.3+ Warrant Agreement including Form of Warrant
4.4+ Form of Warrant for Purchase of Units
10.1+ Employment Agreement between the Company and William F. Stephens
10.2+ Employment Agreement between the Company and Jonathan D. Birck
10.3+ Contract between Company and Motorola Wireless Data Group
10.4+ Agreement between Company and L.G. Zangani, Inc.
10.5+ 1997 Incentive Compensation Plan
10.6+ Lease with Gateway Columbia Properties
27 Financial Data Schedule
</TABLE>
- -----------------
+ Filed previously with the Company's Registration Statement on Form 10 (No.
000-23547) filed with the Securities and Exchange Commission on December
24, 1997.
(i)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF E. COM INTERNATIONAL, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 590,333
<SECURITIES> 0
<RECEIVABLES> 2,800
<ALLOWANCES> 0
<INVENTORY> 338,590
<CURRENT-ASSETS> 962,912
<PP&E> 393,515
<DEPRECIATION> 82,127
<TOTAL-ASSETS> 1,412,750
<CURRENT-LIABILITIES> 227,104
<BONDS> 0
0
0
<COMMON> 3,293,359
<OTHER-SE> 1,268,146
<TOTAL-LIABILITY-AND-EQUITY> 1,412,750
<SALES> 26,795
<TOTAL-REVENUES> 26,795
<CGS> 22,718
<TOTAL-COSTS> 457,409
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> (443,966)
<INCOME-TAX> 0
<INCOME-CONTINUING> (453,332)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (443,966)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
