<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB / A No. 1
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Period Ended June 30, 1998
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[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 00-23527
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eSoft, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0938960
------------------------ ------------------------
(State of Incorporation) (IRS Employer ID Number)
5335 Sterling Dr., Suite C Boulder, CO 80301
- ---------------------------------------- -------------------------------
(Address of principle executive offices) (city) (state) (zip code)
(303) 444-1600
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Registrant's telephone number including area code
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 NO X
------ ------
Transitional Small Business Disclosure format (check one):
YES NO X
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The number of shares outstanding of the Registrant's $0.01 par value common
stock on July 20, 1998 was 6,658,002.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ESOFT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 102,837 $ 5,946,399
Receivables:
Trade, net of allowance for doubtful accounts 199,832 1,398,108
Subscription Receivable 200,000 -
Inventories 94,607 214,401
Prepaid expense and other 24,799 135,526
Note Receivables 20,000 21,377
Deferred income taxes 18,000 18,000
------------- ------------
Total current assets 660,075 7,733,811
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment 119,544 173,110
Furniture and equipment 143,157 207,327
------------- ------------
262,701 380,437
Less accumulated depreciation (147,881) (175,861)
------------- ------------
Net property and equipment 114,820 204,576
CAPITALIZED SOFTWARE COSTS, NET OF AMORTIZATION 651,470 609,378
OTHER ASSETS
Deferred offering costs 280,896 -
Other assets 17,539 7,689
------------- ------------
TOTAL ASSETS $ 1,724,800 $ 8,555,454
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 3
ESOFT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note Payable - bank $ 75,757 $ 57,423
Accounts payable 174,754 508,954
Deferred revenue 46,622 90,194
Accrued expenses and other 91,949 183,773
Due to related party - 100,000
Note Payable - related party - current 20,000 -
--------------- --------------
Total current liabilities 409,082 940,344
Deferred tax liability - net 180,000 180,000
Convertible notes payable - related parties 355,903 -
--------------- --------------
Total liabilities 944,985 1,120,344
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
authorized 50,000,000 shares; 2,433,158 and
6,658,002 issued and outstanding December 31,
1997 and June 30, 1998, respectively 24,332 66,581
Additional paid-in capital 1,135,432 8,576,399
Accumulated deficit (379,949) (1,207,870)
--------------- --------------
Total stockholders' equity 779,815 7,435,110
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,724,800 $ 8,555,454
=============== ==============
</TABLE>
- ------------------------------- ------------------------------
PHILIP BECKER REGIS A. FRANK
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
ESOFT, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES: $ 272,981 $ 1,121,008 $ 482,263 $ 1,854,940
COST OF GOODS SOLD: 117,513 424,796 180,890 698,540
------------ ------------ ------------- ------------
GROSS PROFIT 155,468 696,212 301,373 1,156,400
EXPENSES
Sales and marketing expense 43,203 560,144 67,117 877,270
General & administrative expense 48,936 492,480 178,814 799,207
Engineering expense 17,614 136,102 17,614 204,725
Software amortization costs 32,151 53,220 61,381 102,093
Research and development - 2,286 - 15,658
------------ ------------ ------------- ------------
141,904 1,244,232 324,926 1,998,953
OTHER INCOME (EXPENSE):
Interest income 24 19,892 668 19,896
Interest expense (10,413) (4,551) (16,718) (5,263)
------------ ------------ ------------- ------------
(10,389) 15,341 (16,050) 14,633
NET INCOME (LOSS) $ 3,175 $ (532,679) $ (39,603) $ (827,920)
============ ============ ============= ============
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE: $ (0.00) $ (0.10) $ (0.03) $ (0.19)
============ ============ ============= ============
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING 1,263,158 5,374,930 1,263,158 4,249,592
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
ESOFT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ---------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 2,433,158 $24,332 $1,135,432 $ (379,949) $ 779,815
Issuance of warrants pursuant to
private placement, January 1998 - - 438 - 438
Issuance of stock pursuant to
private placement net, of offering costs,
February 1998 290,000 2,900 184,082 - 186,982
Issuance of stock pursuant to option
conversion 60,000 600 29,400 - 30,000
Issuance of stock pursuant to stock
grant 90,000 900 (900) - -
Issuance of stock pursuant to IPO
net of offering costs, March 1998 1,550,000 15,500 993,650 - 1,009,150
Issuance of stock for IPO fee shares,
March 1998 110,000 1,100 (1,100) - -
Issuance of stock for note conversion,
March 1998 355,903 3,560 352,343 - 355,903
Issuance of stock pursuant to private
placement, March 1998 50,000 500 49,500 - 50,000
Issuance of stock pursuant to exercise
of agents' warrants, April 1998 250,000 2,500 247,500 - 250,000
Issuance of compensatory warrants,
April 1998 - - 69,600 - 69,600
Issuance of stock pursuant to private
placement, net of offering costs, June
1998 1,468,941 14,689 5,516,454 - 5,531,143
Net loss for the six months ended June
30, 1998 - - - (827,921) (827,921)
----------- ---------- ------------- ------------- --------------
BALANCE, June 30, 1998 6,658,002 $66,581 $8,576,399 $(1,207,870) $7,435,110
=========== ========== ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
ESOFT, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
1997 1998
--------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss from operations $ (39,603) $ (827,920)
Adjustments to reconcile net cash provided by (used in) operating
activities
Depreciation & software amortization 79,830 129,966
Provision for losses on accounts receivables - 27,930
Issuance of compensatory options - 23,200
Changes in operating assets and liabilities: (increase) decrease in:
Accounts receivable - trade (13,429) (1,225,276)
Inventories 11,346 (119,794)
Other assets - 9,850
Prepaid expenses - (110,728)
Increase (decrease) in:
Accounts payable 20,695 334,200
Accrued expenses 1,078 91,824
Deferred revenue (28,042) 43,572
--------- -----------
Net cash provided by (used in) operating activities 31,875 (1,623,176)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment (440) (117,736)
Capitalized software costs (131,196) (60,000)
Notes receivable - related parties - (2,200)
--------- -----------
Net cash used in investing activities (131,636) (179,936)
CASH FLOW FROM FINANCING ACTIVITIES
Principal (payments) on borrowings (11,845) (18,334)
Proceeds from subscription receivable - 200,000
Due to related party - 100,000
Proceeds (payment) from related party borrowings 20,000 (20,000)
Proceeds (payment) from issuance of promissory notes 100,000 -
Net proceeds sale of stock, conversion of note and warrants - 7,385,008
--------- -----------
Net cash provided by financing activities 108,155 7,646,674
INCREASE (DECREASE) IN CASH 8,394 5,843,562
CASH: BEGINNING OF PERIOD 20,750 102,837
--------- -----------
CASH: END OF PERIOD $ 29,144 $ 5,946,399
========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
ESOFT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
financial position as of June 30, 1998 and the results of operations and
statement of cash flows for the periods presented. The results of
operations for the six month periods ending June 30, 1998 and 1997 are not
necessarily indicative of results to be expected for the full year.
2. TRADE RECEIVABLES
The following information summarizes trade receivables:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
<S> <C> <C>
Accounts Receivable 247,832 1,473,108
Less allowance for doubtful accounts (48,000) (75,000)
----------- ----------
$ 199,832 $1,398,108
=========== ==========
</TABLE>
The Company has six distributors which accounted for 61% of the Company's
sales through the six months ending June 30, 1998 and 72% of the second
quarter sales. Sales for the second quarter were composed of 58% for
international destinations and 42% for the domestic market. Sales
composition through June 1998 include 41% for international destinations
and 59% for the domestic market. The six distributors that make up the
majority of the Company's six months sales represent 73% of the total
accounts receivable, with one customer representing 19% of our total
accounts receivable on June 30, 1998.
The Company has three distributors which each comprise 10% or more of the
sales through the six months ending June 30, 1998. The three distributors
represent 15%, 14% and 11% of the sales revenue.
The Company with regard to its foreign sales does not take the risk of
foreign currency fluctuation. All sales are designated as payment in US
denominated funds at the time of sale.
7
<PAGE> 8
ESOFT, INC.
NOTES TO FINANCIAL STATEMENTS
3. NOTES PAYABLES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
<S> <C> <C>
Notes Payables:
On January 3, 1997, the Company borrowed $100,000
from a bank, bearing interest at 12% per annum and
was payable with monthly installments of $3,325 with
the balance due on April 3, 1998. On April 5, 1998,
the loan was extended to October 5, 1998 with
monthly installment payments of $3,325 and a final
payment of $51,924 due October 5, 1998. The loan is
collateralized by all assets of the Company. $ 75,757 $ 57,423
========= ==========
Related Party:
Two notes payable on demand to an officer, director
and stockholder of the Company, interest payable
monthly at 7% per annum, the note was paid in full in
May 1998. $ 20,000 $ -
========= ==========
</TABLE>
4. NET INCOME (LOSS) PER SHARE
Basic earnings (loss) per share is calculated by dividing the net
income(loss) by the weighted average common shares outstanding during the
period. For purposes of computing diluted earnings per share, dilutive
securities are not included when the effect is antidilutive.
Options and warrants to purchase 1,557,418 shares of common stock were not
included in the computation of diluted earnings per share because their
effect was anti-dilutive for the period ending June 30, 1998.
5. DUE TO - RELATED PARTY
The Company accepted subscription agreements for the private placement of
150,000 shares of the Company's common stock at $1.00 per share in March
1998. From the total private placement Philip Becker, the CEO & CTO of the
Company, subscribed to purchase 100,000 shares of the Company's common
stock. The private placement required the Company to seek the approval of
the Vancouver Stock Exchange for the transaction. Due to the ownership
level of the shareholder increasing to 20% of the outstanding shares in
March 1998 the issuance of the common stock was subsequently restricted by
the Vancouver Stock Exchange in May 1998. The Vancouver Stock Exchange
authorized the Company to issue the shares, subject to shareholder approval
of the private placement to Philip Becker. If shareholder approval is not
received, the funds will be required to be remitted to the subscriber
immediately. The Company has not yet scheduled a shareholders' meeting to
seek approval for the above referenced transaction.
8
<PAGE> 9
ESOFT, INC.
NOTES TO FINANCIAL STATEMENTS
6. PRIVATE PLACEMENT
On June 15, 1998, eSoft completed the private placement of 1,468,941 shares
of its common stock at a price of $4.25 per share for a total offering of
$6,243,000. The offering was placed through C.M. Oliver & Company Ltd. of
Vancouver, B.C. (the "Agent"), which acted as agent in the offering, with
the participation of other sub-agents and finders. The net cash proceeds to
the Company from the private placement were approximately $5,531,000 after
payment of expenses of the offering, estimated at $204,175, and payment of
$507,825 (8.13% of the offering price) commissions to the Agent,
sub-agents, and finders who will also be issued warrants to purchase
159,318 (10.85% of the offered shares) of eSoft's common stock at a price
of US $4.25 in the first year and US $4.90 in the second year. Shares were
sold in the offering to investors in Canada and Europe in reliance upon the
exemption from registration of the shares under Regulation S under the
Securities Act of 1933 (the "Act") (see Part II item 2, below), and to
accredited investors in the United States in reliance upon Regulation D
(Rule 505) under the Act. The shares issued in the private placement are
eligible for the shortened hold period of four months in British Columbia
pursuant to the requirements of BOR #97112 of the B.C. Securities
Commission. eSoft has agreed to register the shares as soon as practicable
under the U.S. Securities Act of 1933 for public sale in the United States.
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations page 15 for recently issued accounting standards.
9
<PAGE> 10
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933 ("The ACT") and
Section 21E of the Securities Exchange Act of 1934. These statement often
can be identified by the use of terms such as "may," "will," "expect,"
"believes," "anticipate," "estimate," "approximate" or "continue," or the
negative thereof. The Company intends that such forward-looking statements
be subject to the safe harbors for such statements. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. Any forward-looking
statements represent management's best judgment as to what may occur in the
future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond the control of the Company that
could cause actual results and events to differ materially from historical
results of operations and events and those presently anticipated or
projected. These factors include adverse economic conditions, entry of new
and stronger competitors, inadequate capital, unexpected costs, failure to
gain product approval in foreign countries and failure to capitalize upon
access to new markets. Additional risks and uncertainties which may affect
forward-looking statements about the Company's IPAD business and prospects
include the possibility that a competitor will develop a more comprehensive
or less expensive IPAD solution, delays in market awareness of eSoft and
its products, possible delays in eSoft's marketing strategy, which could
have an immediate and material adverse effect by placing eSoft behind its
competitors. The Company disclaims any obligation subsequently to revise
any forward-looking statements to reflect events or circumstances after the
date of such statement or to reflect the occurrence of anticipated or
unanticipated events.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The primary market being pursued by the Company consists of
small-to-medium size businesses ("SMB") that wish to initiate, or expand,
their connection and presence on the Internet. The Company believes that
the SMB market is not only expanding exponentially into the Internet arena,
but also requires a solution that is more cost effective and easier to
install and maintain than systems typically available for the Fortune 1000
companies. The Company further believes that, for reasons of internal
control and additional cost reduction, the SMB segment finds it beneficial
to host their own hardware and software systems rather than rely upon a
remote Internet service provider. For the higher end IPAD model 5000, a
secondary target market includes Internet service providers, enterprise
level operations and special applications. The Company believes that a
significant portion of the expansion in Internet usage--now doubling every
100 days with an estimated 62,000,000 U.S. Internet users at the end of
1997--is from the SMB segment that comprises the largest portion of the
installed local area networks, and increasingly recognizes the importance
of the Internet to grow their business and improve productivity. Up until
the introduction of the Company's IPAD products, the only alternatives for
Internet connection and presence were either complete reliance on a remote
Internet service provider, or the installation and support of a complex,
expensive in-house system configuration. With the IPAD, system and
advancements in the telecommunications and Internet technologies,
businesses can now assume most of the responsibilities and functions which
heretofore have been provided on their behalf by Internet service
providers. Most importantly for the SMB market, the IPAD system is a
complete, plug-and-play solution that can be installed and maintained by
non-technical personnel and at a fraction of the cost of the typical large
system solution. The IPAD functionality includes an integrated router,
firewall, domain name server, worldwide web server, remote access server
and e-mail server for both Intranet and Internet.
The Company's primary distribution strategy is the classical two-tier
distribution channel, but with a concentration on those distributors, VARs
and resellers that focus on the network and telecommunications
10
<PAGE> 11
segments. During the second quarter the Company added four more
distributors, two in the international market and two domestically. The
Company added a regional distributor located in Texas, with a network of
over 750 resellers that primarily sell to telecommunications companies.
Most noteworthy however, is the agreement with COMSTOR Corporation, a major
distributor that is part of the General Electric family of companies, and
is one of the nation's fastest growing microcomputer distributors. COMSTOR
has three large sales and distribution offices in the U.S. and a network of
7,000 resellers who are focused in the computer and network arenas. COMSTOR
offers customer service, technical support and training to its resellers.
Lead generation and pull-through support for the distribution channel
is provided through a combination of classical marketing programs, such as
seminars and public relations, establishing a channel development sales
force and implementing an SMB marketing program into telecommunications
companies. Significant additions to the eSoft sales team are planned for
the third quarter and will include incremental sales managers and
distribution sales reps, plus several channel development reps located in
high-density cities throughout the U.S., Canada, Europe, South America. The
distribution sales representatives will focus on the recruitment,
management, support and productivity of the distributors. The channel
development representatives will focus on assisting the VARs to develop
market awareness in their respective geographic area. The SMB marketing
program is now being introduced into many top telecommunications companies
in the U.S. The expectation is to launch at least two of these programs in
the third quarter with significant revenue contribution visible in the
fourth quarter.
In the second quarter the Company hired J. Rex Bell as VP of Marketing
and James Love as VP of Sales. Rex Bell brings over eighteen years of
direct telecommunications operations and marketing management experience.
Jim Love has over thirteen years' involvement in building successful
two-tier distribution businesses. In the third and fourth quarter, the
Company plans to add two sales managers and eight to twelve channel
distribution representatives. The success in achieving the revenue goals
for the quarter is reliant heavily upon being able to locate and recruit
the quantity and quality of sales talent as defined above.
The Company completed the quarter ended June 30, 1998 with revenues of
$1,121,000 or 311% growth over the comparable quarter in 1997. The average
quarter-on-quarter growth rate over the last five (5) quarters has been
42%. To continue this steep-ramped growth rate, the Company will continue
to be focused through 1998, on expanding the distribution channels with the
addition of other large and regional distributors. The Company will
significantly increase its sales and marketing expenditures to support the
channel expansion and telecommunications marketing strategies.
The Company, in the second quarter, implemented an export credit
insurance policy to reduce the Company's exposure to foreign credit sales.
This policy was implemented to expedite the sales cycle and reduce the
costs of the typical foreign sales utilizing letters of credit, sight
drafts or cash in advance. The policy permits the Company to utilize a
large established organization to assess credit risk and establish credit
limits. The policy calls for a 10% co-insurance with terms of 60 days. The
Company does not insure all of its foreign sales. Specifically, Canadian
sales which involve risks similar to domestic credit issues and/or which
information can be garnered from sources similar to D & B Credit reporting
agency, are not insured.
Management believes its aggressive pursuit of its distribution
channels will have both short-term and long-term effects on its operations.
Cash flow from operations is anticipated to be utilized for the continued
expansion of its sales and marketing efforts as well as support of its
extended receivable terms to its new distributors. In addition to these
near-term effects, the Company expects that these efforts will
11
<PAGE> 12
expand its installed base of IPADs and continue its growth path. However,
with the aggressive market expansion, the Company anticipates consuming
working capital to meet this continued growth curve for the near term.
Additionally, the Company anticipates future losses as a result of expenses
incurred in support of the overt expansion of the sales force to accomplish
the proposed growth curve. The Company anticipates turning profitable in
the fourth quarter 1998.
The Company, hopes to establish one or more strategic alliance
relationships with synergistic companies such as computer or network
product manufacturers, large system integration companies or
telecommunications companies which will permit the IPAD products to be sold
in conjunction with other products and telecommunications services. No such
relationships have been established to date and there is no assurance that
the negotiations of such a relationship will be successfully completed. If
the Company establishes such relationships it may become heavily dependent
upon such strategic alliance partners to maintain and expand its presence
in the marketplace and the greater economic resources of the other parties
to such relationships may force significant reductions in prices at which
the Company can sell its products and thus adversely affect its margins and
potential for profits.
The Company, in the quarter, received through its contract
manufacturer in Holland, "CE" approval for its IPAD product. The "CE"
product approval is required for products to be marketed in the European
Union.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter the Company completed a $340,000 private
placement in February and March 1998 of 340,000 shares of the Company's
common stock, all at a price of $1.00 per share to officers, directors, key
employees and consultants of the Company. The Company accepted
subscriptions for an additional 50,000 shares, included in above, at a
price of $1.00 which was collected in April 1998.
In the first quarter the Company converted the non-interest bearing
Note payable to related parties in the amount of $355,903 into 355,903
shares of the Company's common stock at a price of $1.00 per share.
In March 1998, the Company completed its initial public offering of
1,550,000 shares of the Company's common stock at an offering price of
$1.00 per share. Additionally, the Agent was issued 110,000 shares of the
Company's common stock in the Canadian Offering along with warrants to
purchase 250,000 shares of the Company's common stock at a price of $1.00
for the first 12 months and at a price of $1.15 for the next 12 months. The
agent, subsequent to March 31, 1998, exercised its right to purchase
250,000 shares of common stock.
On June 15, 1998, eSoft completed the private placement of 1,468,941
shares of its common stock at a price of $4.25 per share for a total
offering of $6,243,000. The net cash proceeds to the Company from the
private placement were approximately $5,531,000 after payment of expenses
of the offering, estimated at $204,175, and payment of $507,825 (8.13% of
the offering price) commissions to the Agent, sub-agents, and finders who
will also be issued warrants to purchase 159,318 (10.85% of the offered
shares) shares of the Company's common stock at a price of US $4.25 in the
first year and US $4.90 in the second year.
In April 1998, eSoft issued 250,000 shares of its common stock at a
price of $1.00 per share for a total of $250,000, upon the exercise of
agent warrants issued in conjunction with the Company's March 1998 Initial
Public Offering to its Canadian agents.
12
<PAGE> 13
As a result of this transaction, the February and March private
placement, and the Company's IPO in March 1998, the Company's cash position
increased by $5,844,000 since December 31, 1997 and its working capital
increased from $251,000 at December 31, 1997 to $6,794,000 at June 30,
1998. Management expects the Company to continue to incur losses and to
increase its accounts receivable as the current steep growth of sales is
expected to continue to accelerate. Management believes that its current
cash position and the anticipated receipts will be sufficient to meet its
working capital needs for the current fiscal year.
Cash Flow
During the six months ended June 30, 1998, cash increased by
$5,844,000. Adjustments to reconcile net loss resulted in an adjustment of
the use of funds by $181,000 from depreciation, amortization of software
costs, provision for loss on accounts receivables and issuance of
compensatory options. Funds used in operating activities were ($1,623,000).
Funds of $479,000 were provided from operating activities from an increase
of $334,000 in accounts payable, $92,000 from an increase in accrued
expenses, an increase in deferred revenue of $44,000 and a decrease of
other assets of $10,000. Operating funds of $1,456,000 were used to finance
the $1,225,000 increase in accounts receivable, $120,000 increases in
inventories and $111,000 increase in prepaids. Investments were made in
capital equipment of ($118,000), capitalized software development costs
($60,000), an increase in notes receivable of ($2,200) for a total use of
funds for investment activities of ($180,000). Financing activities
provided $7,647,000 of cash proceeds and conversion of debt. Net cash in
the amount of $1,527,000 was received during the period from the Company's
IPO, warrant and option conversions, and private placements of 2,310,000
shares of the Company's common stock and $5,531,000 from the June private
placement. $200,000 from the collection of subscription receivable and
$100,000 from a stock subscription agreement accepted but restricted as
explained in related party transaction Note 5. Principal payments and debt
repayments of ($38,000) and debt conversion of ($356,000) on the Company's
indebtedness reduced debt obligations by ($394,000). Deferred offering
costs from the completion of the Company's fund raising from financing
activities and compensatory warrant compensation totaling $327,000 in non
cash items.
The Company anticipates expending $350,000 for external capital
expenditures. eSoft will continue to capitalize software development costs
consistent with its strategy of the development of IPAD software for the
marketplace.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 1998
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997
Quarterly revenues totaled $1,121,000 versus revenue of $273,000 for
the comparable quarter in 1997. This represents an increase of $848,000 or
311% over the comparable quarter in 1997. The increase is associated with
the continued expansion of the Company's sales effort of IPAD products both
domestically and in the international market. The Company completed the
rollout in the first quarter of 1997 of the IPAD 2500 and in the fourth
quarter of 1997 the IPAD 1200. Contribution to the increase in sales
include the addition of one large distributor and a regional distributor in
the second quarter. This broadened product line, along with the expanded
sales and marketing efforts both domestically and abroad, resulted in the
Company posting significant sales growth. The Company experienced a growth
rate of 42% per quarter since the release of the IPAD 1200 and 2500. For
the quarter ending June 1998 the Company experienced sales growth of
$387,000 or 53% revenue growth over the first quarter results.
Gross profit margin in the current quarter was 62% of revenue
($696,000) compared to 57% ($156,000) for the three months ended June 30,
1997. It is anticipated that the margins will be maintained at this level
through the remainder of the fiscal year with the present distribution
strategy.
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Selling, General and Administrative, Engineering and R & D Expenses
(SG&A) increased $1,102,000 or 777% from $142,000 in 1997 to $1,244,000 for
the quarter ending June 1998. Sales and marketing expenses increased
$517,000 from $43,000 in 1997 to $560,000 in 1998. The significant
increases in expenditures are attributed to the addition of sales and
marketing personnel, consultants and outside services, travel expenses,
commission and marketing programs required to accomplish the ramp of the
Company's anticipated sales growth rates. These expenditures represent 56%
of the total quarterly sales and marketing expenditures. General and
administrative expense increased $444,000 or 906%, from $49,000 in the 1997
period compared to $493,000 for the current quarter. The increase in SG&A
is attributed to the Company's overt plan to add sales, management and
administrative personnel to support the anticipated rapid expansion of the
Company's sales volume. The Company was reliant on only IPAD sales for the
first time in 1997 with extensive expansion of its operations to capitalize
on small-to-medium size business participation in the Internet growth.
Engineering expenses increased to $118,000 for the three months ending June
1998 with the majority of work being performed on system sales support
training and engineering upgrades and updates to the system. The Company
sales growth rate was 53% over the first quarter while expenditures in the
SG & A areas increased 65% over the previous quarter.
Amortized software development costs total $53,000 for the period.
Interest expense decreased $5,900 in the three months ended June 30,
1998 from $10,400 in 1997 to $4,600 in 1998. This decrease in interest
expense is attributed to the conversion of a significant portion of debt to
equity in the first quarter of 1998.
Net Losses from operations was ($533,000) for the three months ended
June 30, 1998, compared to $3,000 profit for the same period in 1997, an
increase in the loss of ($536,000) over the same period. The net losses are
associated with the increased SG&A necessary to maintain a continued
quarterly sales growth rate. Losses are anticipated to continue through the
current fiscal year due to expenditures leading sales growth rates.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Revenues for six months of operations totaled $1,855,000 compared to
revenues of $482,000 for the same period in 1997. This represents an
increase of $1,373,000 or 285% over the comparable six month period in
1997. The increase is associated with the continued expansion of the
Company's sales effort of IPAD product both domestically and in the
international marketplace. The Company added three large domestic
distributors and/or VARs and four international distributors and/or VAR's
in the first six months of the year contributing 65% of the total sales for
the year.
Gross profit margin was 62% of revenue ($1,156,000) compared to 63%
($301,000) for the six months ended June 30, 1997. It is anticipated that
the margins will be maintained at this level through the remainder of the
fiscal year with the current two-tier distribution approach.
Selling, General and Administrative, Engineering and R & D Expenses
(SG&A) increased $1,674,000 or 515% from $325,000 for the first six months
in 1997 to $1,999,000 for the same six months in the 1998 period. Sales and
marketing expenses increased $810,000 from $67,000 in 1997 to $877,000 in
1998. The increases in expenditures are attributed to the addition of sales
and marketing personnel, consultants and outside services, travel expenses,
commission and marketing programs required to meet the ramp of the
Company's anticipated sales growth rates. The afore mentioned expenditures
represented 60% of the total year to date expenditures for sales and
marketing. General and administrative expense increased $620,000
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<PAGE> 15
from $179,000 in the 1997 period compared to total expenses of $799,000
year to date. The increase in SG&A is attributed to the Company's
intentional plan to expand the sales volume of the Company requiring the
addition of personnel in all departments. Engineering expenses increased to
$205,000 for the six months ending June 1998 with the majority of work
being performed on system sales support training and engineering upgrades
and updates to the system. The Company has maintained an average of 42%
quarter-on-quarter sales growth rate over the last five quarters. To
accomplish this sales ramp, the Company's SG & A increased an average of
70% quarter-on-quarter over the last five quarters.
Amortized software development costs total $102,000 for the period.
Interest expense decreased $11,500 in the six months ended June 30,
1998 from $16,700 in 1997 to $5,300 in 1998. This decrease in interest
expense is attributed to the conversion of a significant portion of debt to
equity in the first quarter of 1998. The Company additionally continues to
pay down its term loan with the bank reducing interest expense.
Net losses from operations totaled ($828,000) for the three months
ended June 30, 1998, compared to ($40,000) loss for the same period in
1997, an increase in the loss of ($788,000) loss over the same period. The
net loss is associated with the increased SG&A necessary to ramp quarterly
sales growth rates. Losses are anticipated to continue through the current
fiscal year due to expenditures leading sales growth rates.
YEAR 2000 EFFECT
The Company's TBBS product line has one deficiency associated with
year 2000 for which a correction is scheduled for a revision release in
October 1998. The IPAD product line has no known susceptibility to year
2000 issues. The cost of the revision to the TBBS product is not expected
to be material. Other year 2000 items are not anticipated to be material.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued
Statements of Financial Accounting Standards that may affect the Company's
financial statements as follows:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.130, Reporting Comprehensive
Income (SFAS 130), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 has been
adopted and there was no affect on the financial statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS
No. 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. SFAS No. 131 defines operating segments as components
of a company about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Because of the recent issuance of the standard, management has been unable
to fully evaluate the impact, if any, the standards may have on future
financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
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In October 1997, Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2) was issued. The SOP provides guidance on when
revenue should be recognized and in what amounts licensing, selling,
leasing, or otherwise marketing computer software. SOP 97-2 is effective
for transactions entered into in fiscal years after December 15, 1997. In
March 1998, SOP 98-4 was issued to defer for one year the application of
certain provisions of SOP 97-2. Because of the recent issuance of these
SOP's, management has been unable to fully evaluate the impact, if any,
these SOP's may have on future financial statement disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits" which
standardizes the disclosure requirements for pensions and other
postretirement benefits and requires additional information on changes in
the benefit obligations and fair values of plan assets that will facilitate
financial analysis. SFAS No. 132 is effective for years beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated, unless such information is not readily available. Management
believes the adoption of this statement will have no material impact on the
Company's financial statements.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S.
On June 15, 1998, eSoft completed a private placement of
Common Stock (as more fully described in Note 6 of the
financials). A portion of the shares sold in the private placement
were not registered under the Act in reliance upon Regulation S
under the Securities Act of 1933, as follows:
On June 15, 1998, 692,000 shares (the "Reg S Shares") of
Common Stock were sold for $2,941,000 to investors in Canada and
Europe who were not U.S. Persons in reliance upon Regulation S.
The total offering price of the Reg S Shares was $2,941,000.
Commissions totaling $260,175 were paid to the Agent and a finder
who assisted the Agent, and they will also be issued warrants to
purchase 81,624 shares of eSoft Common Stock at a price of U.S.
$4.25 in the first year and U.S. $4.90 in the second year.
ISSUANCE OF EQUITY SECURITIES PURSUANT TO REGULATION S.
In April 1998, eSoft issued Common Stock for $250,000 pursuant
to the exercise of agent warrants issued in the March 1998 Initial
Public Offering. These shares were issued in reliance upon
Regulation S under the Securities Act of 1933, as follows:
In April 1998, 250,000 shares of Common Stock were issued upon
the exercise of agent warrants to two investors in Canada who were
not U.S. Persons in reliance upon Regulation S.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule. (Previously filed)
b) Reports on Form 8-K.
During the quarter covered by this report, the Company filed
the following reports on Form 8-K.
Form 8-K dated June 19, 1998 reporting the completion of the
Private Placement of 1,468,941 common shares of the Company's
common stock. No financial statements were required.
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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.
eSoft, Inc.
(Registrant)
Date: September 3, 1998 /s/ Regis Frank
----------------- --------------------------------------
Regis A. Frank
President, Chief Operating Officer
Date: September 3 1998 /s/ Thomas Tennessen
----------------- --------------------------------------
Thomas Tennessen
Chief Financial Officer and Principal Financial
and Accounting Officer
18
