<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Period Ended June 30. 1998
--------------------------------------------------------------
[ ] 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
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(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 23, 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>
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.
STATEMENT 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>
BALANCE, December 31, 1998 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 288,000 2,880 182,102 - 184,982
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 357,903 3,580 354,323 - 357,903
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) (1,025,276)
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 (1,423,176)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment (440) (117,736)
Capitalized software costs (131,196) (60,000)
Notes receivable - related parties - (2,192)
------------- -------------
Net cash used in investing activities (131,636) (179,928)
CASH FLOW FROM FINANCING ACTIVITIES
Principal (payments) on borrowings (11,845) (18,334)
Deferred offering costs - 280,896
Due to related party - 100,000
Proceeds (payment) from issuance of promissory notes 120,000 (20,000)
Conversion of promissory notes - (355,903)
Net proceeds sale of stock, conversion of note and warrants - 7,460,007
------------- -------------
Net cash provided by financing activities 108,155 7,446,666
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
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.
Annual 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 annual sales through the six months ending June 30, 1998. The three
distributors represent 15%, 14% and 11% of the annual 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 warrant 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 $5,467,000 after payment of expenses of the offering,
estimated at $267,000, 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
10
<PAGE> 11
a concentration on those distributors, VARs and resellers that focus on
the network and telecommunications 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
11
<PAGE> 12
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 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 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 $390,000 private
placement in February and March 1998 of 390,000 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 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 $353,903 into
353,903 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.
Net proceeds from the first quarter issuance by the Company for
the above listed offerings was approximately $1,401,000.
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 $5,467,000 after payment
of expenses of the offering, estimated at $267,000, 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.
12
<PAGE> 13
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.
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 anticipates 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
foreseeable future.
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
($1,423,000). 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
$1,256,000 were used to finance the $1,025,000 increase in accounts
receivable, $120,000 increases in inventories and $110,000 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 $7,447,000 of
cash proceeds and conversion of debt. Cash in the amount of $1,787,000
was received during the period from the Company's IPO and private
placements of 2,516,000 shares of the Company's common stock and
$5,673,000 from the June private placement and collection of
subscription receivable. Principal payments and debt conversion on the
Company's indebtedness reduced debt obligations by $374,000. Deferred
offering costs decrease by $281,000 from the completion of the
Company's fund raising from financing activities, and where offset
against the proceeds form the offering.
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.
13
<PAGE> 14
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.
Selling, General and Administrative 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
$50,000 in the 1997 period compared to $492,000 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-size to
medium-size business participation in the Internet growth. 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 of $536,000 loss 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 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
14
<PAGE> 15
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 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's requiring the addition of personnel. 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 $3,000 profit for the same period in
1997, an increase of $536,000 loss over the same period. The net loss
is associated with the increased SG&A necessary to ramp quarterly sales
growth rate. 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
effect 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
15
<PAGE> 16
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 these standard.
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.
16
<PAGE> 17
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.
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.
17
<PAGE> 18
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: July 23, 1998 /s/ Regis Frank
-------------------- ----------------
Regis A. Frank
President, Chief Operating Officer
Date: July 23, 1998 /s/ Thomas Tennessen
-------------------- ---------------------
Thomas Tennessen
Chief Financial Officer and
Principal Financial and Accounting
Officer
18
<PAGE> 19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,946,399
<SECURITIES> 0
<RECEIVABLES> 1,473,108
<ALLOWANCES> (75,000)
<INVENTORY> 214,401
<CURRENT-ASSETS> 7,733,811
<PP&E> 380,437
<DEPRECIATION> 175,861
<TOTAL-ASSETS> 8,555,454
<CURRENT-LIABILITIES> 940,344
<BONDS> 0
0
0
<COMMON> 66,581
<OTHER-SE> 7,368,529
<TOTAL-LIABILITY-AND-EQUITY> 8,555,454
<SALES> 1,854,940
<TOTAL-REVENUES> 1,854,940
<CGS> 698,540
<TOTAL-COSTS> 1,998,953
<OTHER-EXPENSES> 14,633
<LOSS-PROVISION> 12,930
<INTEREST-EXPENSE> 5,263
<INCOME-PRETAX> (827,920)
<INCOME-TAX> 0
<INCOME-CONTINUING> (827,920)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (827,920)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
