<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 March 31, 1999
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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)
295 Interlocken Blvd, #500 Broomfield, CO 80021
- ---------------------------------------- --------------------------------
(Address of principle executive offices) (city) (state) (zip code)
(303) 444-1600
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Registrant's telephone number including area code
(5335 Sterling Drive, Boulder, CO 80301)
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
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Transitional Small Business Disclosure format (check one):
YES NO X
--- ---
The number of shares outstanding of the Registrant's $0.01 par value common
stock on April 27, 1999 was 7,345,518.
<PAGE> 2
ESOFT, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements 3 - 10
Item 2. Management's Discussion and Analysis of Financial Condition 11 - 17
and Results of Operations
PART II OTHER INFORMATION 18 - 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ESOFT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 655,650 $ 763,485
Investment securities 1,991,541 --
Accounts receivable, net of allowance for doubtful accounts 1,965,085 1,983,128
Note receivable 300,000 500,000
Inventories 1,254,696 1,013,060
Prepaid expenses and other 177,416 224,204
----------- -----------
Total current assets 6,344,388 4,483,877
----------- -----------
PROPERTY AND EQUIPMENT
Computer equipment 217,176 225,754
Furniture and equipment 187,464 217,864
----------- -----------
404,640 443,618
Accumulated depreciation (205,688) (222,970)
----------- -----------
Net property and equipment 198,952 220,648
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OTHER ASSETS
Capitalized software costs, net of accumulated amortization 867,072 827,895
Other 7,039 22,039
----------- -----------
Total other assets 874,111 849,934
----------- -----------
TOTAL ASSETS $ 7,417,451 $ 5,554,459
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
ESOFT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 968,533 $ 1,420,391
Deferred revenue 23,910 26,994
Customer deposits 248,287 --
Accrued expenses:
Payroll and payroll taxes 256,033 280,533
Other 140,184 364,941
----------- -----------
Total current liabilities 1,636,947 2,092,859
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
authorized 50,000,000 shares; 6,863,502 and
7,345,518 issued and outstanding December 31,
1998 and March 31, 1999, respectively 68,635 73,455
Additional paid-in capital 9,032,480 9,569,977
Accumulated deficit (3,320,611) (6,049,934)
Notes receivable -- (131,898)
----------- -----------
Total stockholders' equity 5,780,504 3,461,600
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 7,417,451 $ 5,554,459
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
ESOFT, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1998 1999
---- ----
<S> <C> <C>
REVENUES $ 733,932 $ 553,067
COST OF GOODS SOLD 273,744 359,215
----------- -----------
GROSS PROFIT 460,188 193,852
EXPENSES
Sales and marketing expense 317,126 1,679,608
General & administrative expense 306,727 1,111,899
Engineering expense 68,623 122,562
Software amortization costs 48,872 41,826
Research and development 13,372 --
----------- -----------
754,720 2,955,895
----------- -----------
Loss from operations (294,532) (2,762,043)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 4 32,761
Interest expense (712) (41)
----------- -----------
(708) 32,720
----------- -----------
NET LOSS $ (295,240) $(2,729,323)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.09) $ (0.39)
=========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,108,234 7,006,044
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
ESOFT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN NOTES ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January, 1999 6,863,502 $ 68,635 $ 9,032,480 -- ($3,320,611) $ 5,780,504
Issuance of compensatory options -- -- 8,911 -- -- 8,911
Exercise of warrants and options 482,016 4,820 528,586 -- -- 533,406
Issuance of notes receivable for
exercise of warrants -- -- -- (131,898) -- (131,898)
Net loss for the three months ended
March 31, 1999 -- -- -- -- (2,729,323) (2,729,323)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 1999 7,345,518 $ 73,455 $ 9,569,977 (131,898) ($6,049,934) $ 3,461,600
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
ESOFT, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1998 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss from operations $ (295,240) $(2,729,323)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation & software amortization 58,473 59,109
Provision for losses on accounts receivable 14,070 --
Amortization of discount on investments -- (8,459)
Amortization of warrants -- 52,469
Issuance of compensatory options -- 8,911
Changes in operating assets and liabilities:
Accounts receivable - trade (439,706) (18,043)
Inventories (69,142) 241,636
Other assets 9,850 (15,000)
Prepaid expenses (91,192) (37,209)
Accounts payable 210,046 451,858
Accrued expenses 26,434 971
Deferred revenue (3,129) 3,083
----------- -----------
Net cash used in operating activities (579,536) (1,989,997)
----------- -----------
INVESTING ACTIVITIES
Proceeds from investments -- 2,000,000
Purchase of property and equipment (58,955) (38,977)
Additions to capitalized software (60,000) (2,650)
Notes receivable - related parties (44,400) --
Advances on non-operating notes receivable -- (200,000)
----------- -----------
Net cash (used in) provided by investing activities (163,355) 1,758,373
----------- -----------
FINANCING ACTIVITIES
Principal (payments) on borrowings (7,586) --
Proceeds from stock subscription 150,000 --
Deferred offering costs 253,408 --
Conversion of promissory notes (355,903) --
Proceeds from sale of stock and conversion of note 1,787,432 --
Proceeds from exercise of warrants and options -- 339,459
----------- -----------
Net cash provided by financing activities 1,827,351 339,459
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,084,460 107,835
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 102,837 655,650
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,187,297 $ 763,485
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common Stock issued for subscriptions receivable -- $ 193,947
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
ESOFT, INC.
NOTES TO FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
The accompanying financial statements should be read in conjunction
with the Company's audited financial statements for the year ended
December 31, 1998. In the opinion of management, the accompanying
unaudited financial statements contain all adjustments necessary to
present fairly the financial position as of March 31, 1999 and the
results of operations and statement of cash flows for the periods
presented. Management believes all such adjustments are of a normal
and recurring nature. The results of operations for the three month
periods ending March 31, 1999 and 1998 are not necessarily indicative
of results to be expected for the full year.
2. ACCOUNTS RECEIVABLE
The following information summarizes accounts receivable:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Accounts Receivable $2,215,085 $2,233,128
Less allowance for doubtful accounts 250,000 250,000
---------- ----------
$1,965,085 $1,983,128
========== ==========
</TABLE>
The Company had two customers which each accounted for 10% or more of
the sales through the three months ending March 31, 1999. These two
customers represented 31% and 11% of the Company's revenue for the
three months ended March 31, 1999. Additionally, these two customers
represented 81% of total accounts receivable at March 31, 1999. The
customer representing 11% of the revenue was a foreign customer with
an accounts receivable balance of $60,496 at March 31, 1999. The
Company has sixteen distributors which accounted for 27% of the
Company's sales through the three months ending March 31, 1999.
The Company, with regard to its foreign sales, does not take the risk
of foreign currency fluctuation. All sales are designated as payment
in U.S. denominated funds at the time of sale.
3. SUBSCRIPTION RECEIVABLE
The Company issued two promissory notes receivable in the amounts of
$56,487 and $75,411 on March 10, 1999 and March 24, 1999 resulting
from the exercise of 49,550 and 66,150 warrants with an exercise price
of $1.15, by Transition Partners Limited and Copeland Consulting
Group, Inc., respectively. At the time of exercise, $1,157 was paid in
cash. The notes are due in March 2000 without interest until due and
at 12% thereafter and are secured by the shares of common stock being
issued. The Company also has a note receivable in the amount of
$62,049 relating to a stock
8
<PAGE> 9
ESOFT, INC.
NOTES TO FINANCIAL STATEMENTS
issuance, which was collected April 1, 1999 and therefore classified
as a current asset at March 31, 1999.
4. NET LOSS PER SHARE
Basic loss per share is calculated by dividing the net 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.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1999
---- ----
<S> <C> <C>
Basic weighted average common shares
outstanding 3,108,234 7,006,044
Diluted weighted average common
shares outstanding 3,108,234 7,006,044
</TABLE>
Options and warrants to purchase 1,708,100 and 1,464,595 shares of
common stock were not included in the computation of diluted earnings
per share because their effect was anti-dilutive for the periods
ending March 31, 1998 and March 31, 1999, respectively.
5. REVENUE RECOGNITION
The Company recognizes certain revenue at the time products are
shipped to its customers. Provision is made currently for estimated
product returns which may occur. A portion of sales is made to
distributors under terms allowing certain rights of return and price
protection on unsold product held by the distributors. Revenue from
support and update service agreements is deferred at the time the
agreement is executed and recognized ratably over the contractual
period. The Company recognizes revenues from customer training and
consulting services when such services are provided. All costs
associated with licensing of software products, support and update
services, and training and consulting services are expensed as
incurred.
6. PLANNED PRIVATE PLACEMENT
The Company has retained A.G. Edwards & Sons, Inc. to assist it in
raising up to $5,000,000 through the sale of convertible preferred
stock. Net proceeds will be approximately $4,600,000, after estimated
offering expenses. Under the terms of the private placement, the
Company has agreed to pay the agent a placement fee of 6% of the gross
proceeds. The terms of the convertibility feature of the preferred
stock have not yet been determined, however, any conversion feature
with a discount to fair market value may result in a deemed dividend
that must be recognized by the Company at the date of issuance of the
preferred stock. The Company intends to use the proceeds of the
offering to fund the expanded sales and marketing program and for
working capital.
9
<PAGE> 10
ESOFT, INC.
NOTES TO FINANCIAL STATEMENTS
7. PLAN OF MERGER
In January 1999, the Company signed a Plan of Merger and Agreement
with Apexx Technology, Inc. ("Apexx"). The proposed merger requires
the vote of the shareholders of both companies to approve the merger,
which will take place in May 1999. The transaction proposes the
Company issue 2,947,368 shares of its common stock for all of the
issued and outstanding shares and options of Apexx. The Company also
extended a line of credit to Apexx in the amount of $500,000, of which
$500,000 was outstanding at March 31, 1999.
10
<PAGE> 11
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 statements often can be identified by the use of terms such as
"may," "will," "expect," "believe," "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 business and prospects include the
possibility that a competitor will develop a more comprehensive or
less expensive 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
Some combined marketing of the Company's and Apexx's products
has begun in the first quarter using the Apexx product identifying
trademark "TEAM Internet" and, therefore, the Company's IPAD products
are referred to using the product name TEAM Internet(TM). TEAM
Internet is a registered trademark of Apexx Technology, Inc.
The primary market being pursued by the Company consists of
small-to-medium sized 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 SMB segment 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. Internet penetration has been
estimated to increase from 54.9% of small business PC owners in 1998
to 68.5% in 2002. The number of small businesses online is expected to
increase from 3.2 million in 1998 to 4.6 million in 2002. Most
importantly for the SMB market, the Company's TEAM Internet 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 TEAM Internet 100 is a system
that can connect a business Local Area Network (LAN) up to 50 users to
the Internet using a single Internet address. It provides all of the
components an organization needs to develop, manage, and monitor its
Intranet or external web presence. The TEAM Internet 2500 can connect
up to 500 users on a LAN to the Internet. The Company has focused its
distribution strategy on Value Added Resellers (VARs) who offer Local
Area Network solutions to the SMB. In order to serve these VARs, the
Company enters into agreements with leading distributors.
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<PAGE> 12
During the first quarter the Company signed distribution
agreements with NTT Electronics Corp. ("NEL"), ASI Corp. and
Alternative Technology, Inc. The agreement with NEL provides exclusive
distribution rights in Japan and non-exclusive distribution rights in
other Asia-Pacific countries. The distribution agreement with ASI
Corp. will provide eSoft's products with access to integrators and
VARs throughout North America. Alternative Technology, Inc., located
in Denver, Colorado with sales revenues of $60 million, distributes
high-end, leading-edge, computer connectivity products in North
America. In conjunction with the proposed merger with Apexx
Technology, Inc. ("Apexx"), the Company extended like terms and
conditions as agreed to between Apexx and two distributors, EMJ Data
Systems and Nor-Tech, Inc. The Company anticipates the announcement of
other U.S. distributors of the product during the year.
While the Company is encouraged by initial product evaluations by
European companies, management was disappointed in its overall efforts
to expand its European sales through its original distributor,
Telindus SA. As a result the Company is exploring other avenues for
distribution and refocusing its efforts on telecommunication and
distribution companies in the European market.
The Company continues to add Channel Development Representatives
(CDRs) in key cities in the United States. The purpose of the CDRs is
to assist VARs with lead generation and market pull-through of
products to end-users. In the first quarter, the Company added nine
CDRs. The Company continues to make a concerted and aggressive effort
to market eSoft and educate the market as to the all-in-one appliance
alternatives for the SMB.
The Company has proposed a merger with Apexx of Boise, Idaho, and
signed a Definitive Merger Agreement, dated January 25, 1999. The
proposed merger requires the vote of the shareholders of both
companies to approve the merger. The transaction proposes the Company
issue 2,947,368 shares of the Company's common stock for all of the
issued and outstanding shares and options of Apexx. Additionally, the
Company extended Apexx a working capital line of credit of $500,000
with up to an additional $500,000 operating line of credit provided
both boards of the companies approve such increases. The transaction
required the Company to complete an S-4 registration statement, which
became effective April 20, 1999. In conjunction with the signing of
the Definitive Merger Agreement, the Company executed an agreement to
purchase products from Apexx to sell through its distribution
channels. The Company elected to utilize the Apexx TEAM Internet brand
name across the product lines of both companies. In the first quarter,
the Company has de-emphasized the sales of the IPAD 1200 and replaced
it with Apexx's TEAM Internet 100. The TEAM Internet 100 is a system
that can connect a business LAN of up to 50 users to the Internet
using a single Internet address. It provides all of the components an
organization needs to develop, manage, and monitor its Intranet or
external web presence. In the first quarter, the Company has
integrated the Apexx sales and marketing departments. The Company
intends to distribute the TEAM Internet products through direct sales,
VARs, network integrators, distributors, and overseas sales agents.
Management expects the new company to have greater opportunities
to expand market share for Internet access products, to have increased
research and product development ability, to have more leverage to
compete in its industry, to expand and diversify its distribution
channels, and to further its ability to raise capital in order to
finance the anticipated growth.
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<PAGE> 13
As part of the Definitive Merger Agreement, eSoft and Apexx are
conducting a joint marketing program for the benefit of both
companies. Under this combined marketing program, the products known
by the Company as IPAD are being re-branded utilizing the Apexx
product name of TEAM Internet. Under the marketing program the Company
has incurred $933,000 of marketing costs in the first quarter. Should
the proposed merger not occur, the Company under this combined
marketing program will have expended significant resources to promote
the TEAM Internet brand name rather than the "IPAD" brand. Under this
marketing plan the company will focus on selling the TEAM Internet 100
and TEAM Internet 2500 (formerly known as the IPAD 2500) products. The
proposed combined marketing program inaugurated a direct mail campaign
during February through May 1999 to focus on potential users and VARS
of the all-in-one appliance Internet connection. If the merger does
not occur, the several month lapses in marketing eSoft products under
the IPAD brand will make it somewhat difficult for eSoft to reenter
the market using the IPAD brand name. This marketing program comprised
a direct mail program of 710,000 pieces to potential end users of the
Company's and Apexx products. The Company, under the plan, also
targeted 238,000 free standing inserts in business journals focusing
on potential end users. Additionally, a 55,000 piece direct mail
campaign targeted at Value Added Resellers (VARS) and directed at
educating these entities to the all-in-one appliance was formulated
around this program. The Company and Apexx have generated 3,000 leads
from this program and anticipate generating 6,000 leads.
The Company has recently announced a new business strategy with
three primary areas of focus: Internet Access Products, Internet
Services, and Software Engineering Services. The Internet Access
Products effort will build on the Company's core business of
developing, marketing and selling the Company's market-leading TEAM
Internet product line of Internet access products. Internet Services
will focus on creating value by aggregating resellers and customers
into a virtual community for the delivery of products and services by
e-commerce and other Internet-based offerings. The Software
Engineering Services activities will concentrate on the growing
domestic and international demand for Linux-based software, leveraging
the professional Linux engineering and development competencies and
skills the Company is acquiring through Apexx. This plan leverages the
existing Internet and Linux software strengths of eSoft and Apexx,
while addressing the demands and requirements of the marketplace.
Management believes its aggressive pursuit of this strategy will
have both short-term and long-term effects on its operations. Outside
financing will 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. Some personnel additions are also
anticipated in the technical support and engineering departments. The
Company also expects to expand its customer support organization. With
the increase in headquarters staff, the Company relocated to a larger
facility in early 1999. In addition to these near-term effects, the
Company expects that the use of e-commerce and the online community to
complement eSoft's traditional reseller and distribution channels will
enable the Company to develop a larger marketplace more rapidly and
efficiently. However, with the aggressive market expansion, the
Company anticipates consuming working capital to meet this continued
growth curve for the near term. As a result of expenses incurred in
support of the expansion, the Company anticipates future losses. The
Company expects to turn profitable in 2000.
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 TEAM Internet
products to be sold in conjunction with other products and
telecommunications services. No such relationships have been
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<PAGE> 14
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position on March 31, 1999 was $763,000, an
increase of $107,800 from year end due to the maturing of investments.
The Company's working capital at March 31, 1999 was $2,391,000 a
decrease of $2,316,000. Investments of $1,992,000 matured during the
first quarter, from which the proceeds were utilized to support
operations. Management anticipates continuing losses in support of the
growth curve, and thus its cash position will continue to decrease.
Additionally, in the near term, with new distributors being added to
continue market development, the Company anticipates its accounts
receivable to increase. The Company is increasing efforts to reduce
the present accounts receivable balance through more stringent
collection efforts of the current customer base in an attempt to
reduce days outstanding. The decrease in inventories from year end
resulted from improved inventory management with respect to sales
volume. TEAM Internet 2500 accounted for $513,000 or 51% of the total
inventory at March 31, 1999. The Company has expended $39,000 in the
first quarter in capital expenditures, of which $30,000 was related to
furniture for the new headquarters. Management believes that its
current cash position, the anticipated cash receipts from receivables,
and the anticipated private placement funding will be sufficient to
meet its working capital needs for the foreseeable future.
The Company has retained A.G. Edwards & Sons, Inc. to assist it
in raising up to $5,000,000 through the sale of convertible preferred
stock. Net proceeds will be approximately $4,600,000, after estimated
offering expenses and are anticipated to be received during the second
quarter. Under the terms of the private placement agreement, the
Company has agreed to pay the agent a placement fee of 6% of the gross
proceeds. The Company intends to use the proceeds of the offering to
fund the expanded sales and marketing program and for working capital.
Cash Flow
During the three months ended March 31, 1999, cash increased by
$107,800. Adjustments to reconcile net loss ($2,729,000) resulted in
adjustments of the use of funds of $112,000 from depreciation,
amortization of software costs, amortization of discount on
investments, amortization of warrants, and issuance of compensatory
options and warrants. Funds used in operating activities were
($1,990,000). Funds of $697,000 were provided from operating
activities from an increase of $242,000 in inventories, $452,000 from
an increase in accounts payable, $1,000 from an increase in accrued
expenses, and an increase in deferred revenue of $3,000. Operating
funds of ($70,000) were used to finance the ($18,000) increase in
accounts receivable, ($15,000) increase in other assets, and the
($37,000) increase in prepaid expenses. Investment activities came
from a decrease in investments of $2,000,000, investments in capital
equipment of ($39,000), capitalized software development costs
($3,000) and an increase in notes receivable of ($200,000) for total
funds provided by investment activities of $1,758,000. Financing
activities provided a net $339,000 of cash proceeds from option and
warrant conversion of 482,000 shares of the Company's common stock.
Funds have
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<PAGE> 15
been used in the first quarter of 1999 primarily for the
expansion of market share and the joint marketing program with Apexx.
Funds used in connection with the Apexx merger were $193,000.
The Company anticipates expending an additional $200,000 for
capital expenditures this fiscal year. eSoft will continue to
capitalize software development costs consistent with its strategy of
the development of TEAM Internet software for the marketplace.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1998
Quarterly revenues totaled $553,000 versus revenue of $734,000
for the comparable quarter in 1998. This represents a decrease of
$181,000 or 25% over the comparable quarter in 1998. The decrease is
partly associated with a price decrease of the TEAM Internet 2500,
which was necessary in order to remain competitive in the market
place. In addition, most of the distributors in place during the first
quarter 1998 signed agreements in mid to late 1998 containing
termination clauses, which preclude the Company from recognizing
revenue until the product has been sold through to resellers. During
the first quarter, in connection with the proposed Apexx merger the
Company de-emphasized the sales of the IPAD 1200 and replaced it with
Apexx's TEAM Internet 100. Four distributors have been added in the
first quarter, two of which were in conjunction with the proposed
Apexx merger. For the quarter ending March 31, 1999, the Company
experienced sales growth of $21,000 or 4% revenue growth over the 1998
fourth quarter results.
Gross profit margin in the current quarter was 35% of revenue
($194,000) compared to 63% ($460,000) for the three months ended March
31, 1998. The decrease is associated with the price decrease of the
TEAM Internet 2500 with no corresponding decrease in the Company's
cost. In addition, the replacement of the IPAD 1200 with Apexx's TEAM
Internet 100 caused margins to decrease. Once the merger with Apexx
has been consummated and as the TEAM Internet 100 inventory is
replenished, margins are expected to increase. Furthermore,
approximately 36% of the first quarter sales of 1999 were comprised of
network interface cards sold to eNetCo, in which the gross profit
margin was 36%. The sales of these cards in 1999 were made in relation
to sales of TEAM Internet products to eNetco at the end of 1998.
Selling, General and Administrative, Engineering and R&D Expenses
increased $2,201,000 or 292% from $755,000 for the quarter ending
March 31, 1998 to $2,956,000 for the quarter ending March 31, 1999.
Sales and marketing expenses increased $1,363,000 from $317,000 in
1998 to $1,680,000 in 1999. The significant increases in expenditures
are attributed to the addition of the marketing department late in
December 1998 and the marketing campaign regarding the re-branding of
the Company's IPAD products to Apexx's product name of TEAM Internet.
During the quarter the Company added six employees in the Marketing
Department, and nine CDRs and a Vice President of Sales in the Sales
Department. The hiring of new CDRs is anticipated to continue through
the end of the fiscal year end. General and administrative expense
increased $805,000 from $307,000 in 1998 compared to $1,112,000 for
the current quarter. The majority of the increase can be attributed to
merger costs, salaries, and consultants. Engineering and tech support
expenses increased $54,000 from $69,000 in 1998 compared to $123,000
in 1999. The SG&A will continue to grow with the anticipated addition
of new hires to augment the Company in all departments as growth in
revenues dictates. Amortized software development costs total $42,000
for the quarter.
15
<PAGE> 16
Interest expense decreased $671 in the three months ended March
31, 1999 from $712 in 1998 to $41 in 1999. Interest income increased
$33,000 in the quarter. This increase is associated with funds
received from the completion of the private placement at the end of
the second quarter in 1998.
Net loss from operations was ($2,729,000) for the three months
ended March 31, 1999, compared to ($295,000) for the same period in
1998, an increase in the loss of ($2,434,000) over the same period.
The net losses are associated with the increased SG&A necessary to
maintain a continued quarterly sales growth rate in expanding into
this market. Losses are anticipated to continue through the current
fiscal year due to expenditures in support of continued growth and
additions of new hires.
INCOME TAXES
At March 31, 1999, a valuation allowance of approximately
$2,046,000 has been recorded, as Management of the Company is not able
to determine that it is more likely than not that its deferred tax
assets will be realized. The Company has recorded a valuation
allowance primarily related to the uncertainty of realizing operating
loss carryforwards subject to limitations under Section 382 of the
Internal Revenue Code.
YEAR 2000 EFFECT
The TEAM Internet and IPAD product lines have no known
susceptibility to the year 2000 issues. The testing completed on the
product lines to date has lead the Company to believe that the
products will not be affected by a connection to a non-compliant Y2K
system. However the Company's testing does not cover every possible
computing environment. Accordingly, some customers may have Y2K
problems with products that the Company believes are Y2K compliant.
All new products and upgrades introduced by the Company will be Y2K
compliant. The Company has reviewed its internal systems, including
its accounting system, and has found them to be Y2K compliant. The
Company's internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers,
customers and service providers. Management believes that absent a
systematic failure outside the control of the Company, such as a
prolonged loss of electrical or telephone service, Y2K problems at
such third parties will not have a material impact on the Company. The
Company has no contingency plan for systemic failures such as loss of
electrical or telephone service. The Company's contingency plan in the
event of a non-systemic failure is to establish relationships with
alternative suppliers or vendors to replace failed suppliers or
vendors. Spending by the Company on compliance to date has not been
material. Other year 2000 items are not anticipated to be material.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
None.
16
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
(c) During the quarter ended March 31, 1999, the Company
issued shares of Common Stock on the exercise of warrants by four
consultants of the Company, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Date Title of Securities No. of Shares Purchase Price Per Share
---- ------------------- ------------- ------------------------
--------------------- ---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
January 14, 1999 Pantheon Capital, Inc. 27,000 $1.00
--------------------- ---------------------------- --------------------------- ----------------------------
January 15, 1999 John P. McMillan 20,000 $1.00
--------------------- ---------------------------- --------------------------- ----------------------------
February 19, 1999 Pantheon Capital, Inc. 35,000 $1.15
--------------------- ---------------------------- --------------------------- ----------------------------
March 1, 1999 Pantheon Capital, Inc. 100,300 $1.15
--------------------- ---------------------------- --------------------------- ----------------------------
March 4, 1999 Transition Partners, Ltd. 66,150 $1.15
--------------------- ---------------------------- --------------------------- ----------------------------
March 18, 1999 Transition Partners, Ltd. 37,500 $1.15
--------------------- ---------------------------- --------------------------- ----------------------------
Copeland Consulting Group,
March 24, 1999 Inc. 103,650 $1.15
-----------------------------------------------------------------------------------------------------------
</TABLE>
The warrants were issued to the consultants in connection with their
consulting agreements entered into prior to the initial public
offering of the Company's stock. All of the shares were issued
pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933. All of the shares had been registered under a
registration statement on Form SB-2 for sale by the shareholders who
acquired the shares in private transactions. No underwriter was
involved in the transaction and no fees or commissions were paid in
connection with the purchases.
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
17
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule.
b) Reports on Form 8-K.
none
18
<PAGE> 19
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: May 14, 1999 /s/ Jeffrey Finn
------------ -----------------
Jeffrey Finn
President, Chief Operating Officer
Date: May 14, 1999 /s/ Amy Beth Hansman
------------ ---------------------
Amy Beth Hansman
Chief Accounting Officer
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 763,485
<SECURITIES> 0
<RECEIVABLES> 2,233,128
<ALLOWANCES> (250,000)
<INVENTORY> 1,013,060
<CURRENT-ASSETS> 4,483,877
<PP&E> 443,618
<DEPRECIATION> (222,970)
<TOTAL-ASSETS> 5,554,459
<CURRENT-LIABILITIES> 2,092,859
<BONDS> 0
0
0
<COMMON> 73,455
<OTHER-SE> 7,345,518
<TOTAL-LIABILITY-AND-EQUITY> 5,554,459
<SALES> 553,067
<TOTAL-REVENUES> 553,067
<CGS> 359,215
<TOTAL-COSTS> 2,955,895
<OTHER-EXPENSES> (32,720)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> (2,729,323)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,729,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,729,323)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
