<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 25, 1999
eSOFT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 00-23527 84-0938960
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
295 INTERLOCKEN BOULEVARD, SUITE 500
BROOMFIELD, COLORADO 80021
(303) 444-1600
(Address and Telephone Number of Registrant's Principal Executive Office)
<PAGE> 2
ITEM 5. OTHER EVENTS
Effective May 25, 1999, eSoft, Inc. ("eSoft" or the "Company")
completed the merger (the "Merger") with Apexx Technology, Inc. ("Apexx")
located in Boise, Idaho which provided for the issuance of 1,591,365 shares of
eSoft common stock in exchange for all of the outstanding common stock of Apexx
and for the conversion of all Apexx stock options into eSoft stock options to
acquire 1,356,003 shares of eSoft common stock. The Merger has been accounted
for as a pooling of interests.
The Company's financial statements have been retroactively restated as
of March 31, 1999 and December 31, 1998 and for the three months ended March
31, 1999 and 1998 and for each of the two years in the period ended December
31, 1998 to reflect the consummation of the Merger. The supplemental
consolidated financial statements give retroactive effect to the Merger, which
has been accounted for using the pooling of interests method and, as a result,
the financial position, results of operations and cash flows are presented as
if Apexx had been consolidated with eSoft for all periods presented. As
required by generally accepted accounting principles, the supplemental
consolidated financial statements will become the historical financial
statements upon issuance of the financial statements for the period that
include the date of the Merger. The supplemental consolidated statements of
stockholders' equity reflect the accounts of eSoft as if the additional common
stock issued in connection with the Merger had been issued for all periods
presented. The supplemental consolidated financial statements, including the
notes thereto, should be read in conjunction with the historical financial
statements of eSoft included in eSoft's 1998 annual report on Form 10-KSB and
the March 31, 1999 10-QSB and the financial statements of Apexx included in
Form 8-K/A dated August 9, 1999, and included in eSoft's S-4/A Registration
Statement dated April 20, 1999.
The following is the Company's Management's Discussion and Analysis of Financial
Condition and Results of Operation relating to the Company's supplemental
consolidated financial statements set forth in Item 7 below.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Some combined marketing of the Company's products has begun in the
first quarter of 1999 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
eSoft, Inc.
OVERVIEW
In the past year, the Company's growth has been achieved through the
Merger with Apexx, which was accounted for as a pooling of interests and closed
on May 25, 1999. Upon completion of the Merger, Apexx stockholders received
1,591,365 shares of eSoft common stock in exchange for all of the outstanding
common stock of Apexx. Apexx optionholders exchanged their options for options
to purchase 1,356,003 shares of eSoft common stock. The accompanying financial
statements have been restated to include the accounts and operations of Apexx
for all periods presented.
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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.
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 completed a merger with Apexx of Boise, Idaho, on May
25, 1999. As a result of the transaction, the Company issued 1,591,365 shares
of the Company's common stock for all of the issued and outstanding shares of
Apexx. Additionally, the Company extended Apexx a working capital line of
credit of $500,000. 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 on January 25, 1999, 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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As part of the Definitive Merger Agreement, the Company conducted a
joint marketing program. 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 of 1999. 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. 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 has 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 of the Company. This
plan leverages the existing Internet and Linux software strengths of the
Company, 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 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
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reductions in prices at which the Company can sell its products and thus
adversely affect its margins and potential for profits.
THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Total revenue for the year ended December 31, 1998 was $7,676,000
compared to $3,237,000 for the year ended December 31, 1997. The additional
revenue is related to the expansion of the product line. In addition, in June
of 1998 the Company transitioned to a two-tier distribution strategy in order
to provide additional access to Value Added Resellers (VARs), resellers, and
network consultants.
The gross profit margin in 1998 was 56% ($4,322,000) of revenue
compared to 54% ($1,744,000) in 1997. The margins remained flat due to the
continued vigilance of the Company in outsourcing production of the TEAM
Internet 2500 product to a contract manufacturer. The outsourcing of the
manufacturing permitted the Company to maintain its cost of the product without
the addition of more assembly labor, as volumes continued to grow during the
year.
Selling, General and Administrative, Engineering and R&D Expenses
increased $6,370,000 or 306% from $2,079,000 in 1997 to $8,449,000 in 1998
primarily due to headcount increases related to the 1998 activities of building
the Company's distribution, marketing and sales network in an emerging
marketplace for the all-in-one appliance. General and Administrative expenses
increased from $826,000 in 1997 to $3,155,000 in 1998. The increases relate to
the continued expansion and the additional costs associated with being a public
company. In 1998, general and administrative salaries increased $788,000,
consulting and legal expenses increased $637,000 in part due to merger costs,
travel expenses increased $133,000, bad debts increased $162,000, stockholders'
relations expenses increased $97,000, filing fees increased $51,000, and rent
expense increased $68,000. Selling and Marketing expenditures increased from
$793,000 in 1997 to $4,006,000 in 1998. Salaries and related costs increased
$1,290,000, travel expenses increased $382,000, consulting expenses increased
$574,000, and advertising and promotions increased $444,000. Engineering and
technical support increased from $111,000 in 1997 to $716,000 in 1998. Salaries
and related costs increased $450,000, consulting expenses increased $161,000.
Other income (expense) increased from ($57,000) in 1997 to $139,000 in
1998. Net interest income(expense) increased from ($43,000) in 1997 to $140,000
in 1998 as a result of the fund raising activities which occurred in 1998 and
the investment income related to investing of those funds.
Net loss from operations was ($3,827,000) for the year ended December
31, 1998, compared to ($553,000) for the year ended December 31, 1997, an
increase in the loss of ($3,274,000) over the same period. The net losses are
associated with the aggressive expansion of our product line, marketing
efforts, and the hiring of a professional management team to grow the Company
in an emerging market.
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THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Total revenue for the three months ended March 31, 1999 was $1,163,000
compared to $1,479,000 for the three months ended March 31, 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 of 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.
Four distributors have been added in the first quarter of 1999.
The gross profit margin in the current quarter was 39% of revenue
($457,000) compared to 53% ($787,000) 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. 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 $2,730,000 or 222% from $1,228,000 for the quarter ending March 31,
1998 to $3,958,000 for the quarter ending March 31, 1999. Sales and marketing
expenses increased $1,711,000 from $558,000 in 1998 to $2,269,000 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 $898,000
from $457,000 in 1998 compared to $1,355,000 for the current quarter. The
majority of the increase can be attributed to merger costs, salaries, and
consultants. Engineering and tech support expenses increased $81,000 from
$91,000 in 1998 compared to $172,000 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.
Interest expense increased $15,000 in the three months ended March 31,
1999 from $2,000 in 1998 to $17,000 in 1999. The increase is related to the
additional $275,000 of short term debt incurred 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 ($3,487,000) for the three months ended
March 31, 1999, compared to ($443,000) for the same period in 1998, an increase
in the loss of ($3,044,000) 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position on March 31, 1999 was $788,000, an
increase of $110,000 from year end due to the maturing of investments. The
Company's working capital at March 31, 1999 was $1,482,000 a decrease of
$3,052,000. Investments of $2,000,000 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
primarily from improved inventory management with respect to sales volume. TEAM
Internet 2500 accounted for $513,000 or 42% of the total inventory at March 31,
1999. The Company has expended $45,000 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 discussed below will be sufficient to meet its working
capital needs for the foreseeable future.
The Company retained A.G. Edwards & Sons, Inc. to assist it in raising
$3,000,000 through the sale of convertible debentures. Net proceeds were
approximately $2,600,000, after estimated offering expenses and were 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
Net cash used in operating activities for the three months ended March
31, 1999 was $2,459,000 compared with $897,000 for the three months ended March
31, 1998. The increase of $1,562,000 for the 1999 period compared to the 1998
period was primarily due to an increase in the net loss. This resulted from
additional employees hired in the sales department and the intensive marketing
efforts of the newly formed marketing department. There were also merger
related costs of about $193,000 incurred during the quarter. The Company
expects to expend another $705,000 for legal, accounting and consulting fees,
relocation costs and integration of the companies related to the Merger. The
loss was offset by non-cash items such as the provision for inventory
obsolescence of $34,000, the provision for losses on accounts receivable of
$81,000, and the amortization of warrants in the amount of $52,000. Collections
of receivables also improved.
For the years ended December 31, 1998 and December 31, 1997, cash
increased $379,000 and $278,000, respectively. Net cash used in operating
activities was $5,198,000 and $343,000. The increase in cash used in operating
activities is primarily due to an increased net loss after adding back non-cash
charges, increased accounts receivable, and increased inventories in
anticipation of projected sales.
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Net cash provided by investing activities for the three months ended
March 31, 1999 was $1,954,000 compared with $205,000 used by investing
activities for the three months ended March 31, 1998. The increase of
$2,159,000 for the 1999 period compared to the 1998 period was primarily due to
$2,000,000 of investments maturing during the quarter. In addition, purchases
of property and equipment decreased about $56,000 due to operations being more
established at that point in time.
Net cash used in investing activities for the year ended December 31,
1998 was $2,497,000 compared to $369,000 for the year ended December 31, 1997.
The $2,128,000 increase is primarily a result of the purchase of investments
with the proceeds from fund raising activities in June 1998, where 1,468,941
shares were issued at $4.25 per share pursuant to a private placement.
Net cash provided by financing activities for the three months ended
March 31, 1999 was $615,000 compared with $2,000,000 for the three months ended
March 31, 1998. The decrease of $1,385,000 for the 1999 period compared to the
1998 period was primarily due to $1,400,000 received from the proceeds of the
1998 public offering of 1,550,000 shares, net of offering costs. Additional
financing activities during the three months ended March 31, 1998 included
private transactions with officers, directors, and consultants, and the
exercise of 250,000 warrants and 60,000 employee options, proceeds from the
line of credit, conversion of promissory notes, and deferred offering costs.
Additional financing activities during the three months ended March 31, 1999
included exercise of options and warrants, and payments and proceeds from the
line of credit, short term debt, and long term debt.
Net cash provided by financing activities was $8,073,000 and $989,000
for the years ended December 31, 1998 and 1997, respectively. The $7,085,000
increase is primarily due to proceeds from the public offering of 1,550,000
shares, net of offering costs, and also the private placement of 1,468,941
shares. Financing activities also include various other private placements,
option conversions, and borrowings and repayments of long and short term debt.
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.
INCOME TAXES
At December 31, 1998, a valuation allowance of approximately
$1,526,000 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 Year 2000 ("Y2K") computer problem refers to the potential for
system and processing failures of date-related data as a result of
computer-controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize a date represented as "00" as the year 1900 rather than
the year 2000. This could result in
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a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
All new products and upgrades introduced by eSoft will be Y2K
compliant. eSoft has tested the remainder of the IPAD and TEAM Internet system
and connections of the IPAD and TEAM Internet product line to other systems
utilizing standard Internet protocols. The testing completed on the product
line to date has lead eSoft to believe that the products will not be affected
by a connection to a non-compliant Y2K system. eSoft has been testing its
existing products for use in the Year 2000 and beyond, and all products
produced after November 1, 1997 are Y2K compliant until 2036. The results of
eSoft's testing suggest that version 2.03 and each later version of each of its
products are Y2K compliant.
However, eSoft'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. For instance, eSoft's customers
may be operating on older versions of hardware platform utilizing eSoft's
products software. Early models of the TEAM Internet 2500 and 4500 products
shipped before November 1, 1997 may include a BIOS in the computer hardware
that is not Y2K compliant. The number of units affected is estimated to be a
small percentage of the installed base. In February 1999 a software upgrade was
released to correct the specific issues caused by use of the non-compliant
BIOS. In addition, there is a plan to replace the non-compliant BIOS with a Y2K
compliant BIOS if the customer prefers a hardware fix.
eSoft has tested the discontinued TBBS products that it no longer
markets for Y2K compliance, some of which might still be in use. eSoft's TBBS
product had one deficiency associated with Y2K, which was corrected with a free
update released in October 1998. eSoft expects that any customers that
materially rely on such discontinued products will test them for Y2K compliance
and notify eSoft if there are problems. eSoft's experience in developing Y2K
compliant versions of its existing products suggests that if it is required to
correct Y2K problems in such discontinued products, it could do so without
incurring material expenses. There will be another free update released in the
third quarter of 1999 to correct a similar deficiency in TBBS add-on modules.
eSoft also may be affected by Y2K issues related to non-compliant
internal systems developed by eSoft or by third-party vendors. eSoft has
reviewed its internal systems, including its accounting system, and have found
them to be Y2K compliant. eSoft is not currently aware of any Y2K problem
relating to any of its internal, material systems and does not believe that it
has any material systems that contain embedded chips that are not Y2K
compliant.
eSoft'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 systemic failure outside
the control of eSoft, such as a prolonged loss of electrical or telephone
service, Y2K problems at such third parties will not have a material impact on
eSoft. eSoft has no contingency plan for systemic failures such as loss of
electrical or telephone services. eSoft'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. Other than the previously
described testing, and remedying problems identified by testing or from external
sources, eSoft has no other contingency
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plans or intention to create other contingency plans.
Any failure by eSoft to make its products Y2K compliant could result in
a decrease in sales of its products, an increase in allocation of resources to
address Y2K problems of its customers without additional revenue commensurate
with such dedication of resources, or litigation costs relating to losses
suffered by eSoft's customers due to such year 2000 problems. Failures of
eSoft's internal systems could temporarily prevent it from processing orders,
issuing invoices, and developing products, and could require it to devote
significant resources to correcting such problems. But to eSoft's knowledge, the
internal accounting systems have been attested by the supplier as Y2K compliant.
Due to the general uncertainty inherent in the year 2000 computer problem,
resulting from the uncertainty of the year 2000 readiness of third-party
suppliers and vendors, eSoft is unable to determine at this time whether the
consequences of Y2K failures will have a material impact on its business,
results of operations, and financial condition.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following are the supplemental consolidated financial statements
and exhibits of eSoft, Inc. and subsidiary which are filed as part of this
report.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Supplemental Consolidated Condensed
Financial Statements:
Balance Sheet as of March 31, 1999 (Unaudited) F-2
Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (Unaudited) F-4
Statement of Stockholders' Equity for the Three
Months Ended March 31, 1999 (Unaudited) F-5
Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (Unaudited) F-6
Notes to Supplemental Consolidated Condensed
Financial Statements (Unaudited) F-8
Supplemental Consolidated Financial Statements:
Report of Independent Certified Public Accountants F-13
Independent Auditors' Report F-14
Balance Sheet as of December 31, 1998 F-15
Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-17
Statements of Stockholders' Equity for the
Years Ended December 31, 1998 and 1997 F-18
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 F-19
Summary of Accounting Policies F-21
Notes to Supplemental Consolidated Financial
Statements F-28
All other schedules are omitted because the required
information is either inapplicable or is included in the
supplemental consolidated financial statements or the notes
thereto.
Exhibit 23.1 Consent of Independent Certified Public
Accountants
Exhibit 23.2 Consent of Independent Certified Public
Accountants
</TABLE>
F-1
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eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED CONDENSED
BALANCE SHEET
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
March 31, 1999
------------
<S> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 787,894
Accounts receivable, less allowance of $334,452
for possible losses 2,435,027
Inventories 1,229,968
Prepaid expenses and other
241,091
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Total current assets 4,693,980
------------
PROPERTY AND EQUIPMENT:
Computer equipment 361,152
Furniture and equipment 278,699
Manufacturing tool and equipment 26,424
------------
666,275
Less accumulated depreciation 358,039
------------
Net property and equipment 308,236
------------
OTHER ASSETS:
Capitalized software development costs, net of
accumulated amortization of $356,279 827,895
Other 22,039
------------
Total other assets 849,934
------------
$ 5,852,150
============
</TABLE>
See accompanying notes to supplemental consolidated
condensed financial statements.
F-2
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eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED CONDENSED
BALANCE SHEET (CONTINUED)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
March 31, 1999
------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 1,753,276
Revolving line of credit 165,000
Note payable - bank 97,098
Marketing loan agreement 473,855
Deferred revenue 29,175
Accrued expenses:
Payroll and payroll expenses 280,533
Other 412,785
------------
Total current liabilities 3,211,722
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none outstanding --
Common stock, $.01 par value, 50,000,000 shares authorized,
8,936,883 shares issued and outstanding 89,369
Additional paid-in capital 10,710,058
Notes receivable (131,898)
Accumulated deficit (8,027,101)
------------
Total stockholders' equity 2,640,428
------------
$ 5,852,150
============
</TABLE>
See accompanying notes to supplemental
consolidated condensed financial statements.
F-3
<PAGE> 14
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
----------- -----------
<S> <C> <C>
REVENUES $ 1,163,108 $ 1,478,544
COST OF GOODS SOLD
706,131 691,926
----------- -----------
Gross profit 456,977 786,618
----------- -----------
EXPENSES:
Selling and marketing 2,268,708 558,137
General and administrative 1,355,277 456,950
Engineering 172,232 91,031
Research and development 120,186 72,762
Amortization of software costs 41,826 48,872
----------- -----------
Total costs and expenses 3,958,229 1,227,752
----------- -----------
Loss from operations (3,501,252) (441,134)
----------- -----------
OTHER (INCOME) EXPENSE:
Interest (income) expense, net (16,003) 2,120
Loss on sale of assets 1,897 --
----------- -----------
Total other (income) expense (14,106) 2,120
----------- -----------
NET LOSS $(3,487,146) $ (443,254)
----------- -----------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.41) $ (.09)
----------- -----------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC AND DILUTED 8,595,361 4,936,587
=========== ===========
</TABLE>
See accompanying notes to supplemental
consolidated condensed financial statements.
F-4
<PAGE> 15
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED CONDENSED
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Notes Accumulated Stockholders'
Three Months Ended March 31, 1999 Shares Amount Capital Receivable Deficit Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1999 8,454,867 $ 84,549 $10,160,063 $ -- $(4,539,955) $ 5,704,657
Issuance of compensatory options -- -- 21,409 -- -- 21,409
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 -- -- -- -- (3,487,146) (3,487,146)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 1999 8,936,883 $ 89,369 $10,710,058 $ (131,898) $(8,027,101) $ 2,640,428
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to supplemental
consolidated condensed financial statements.
F-5
<PAGE> 16
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,487,146) $ (443,254)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 71,633 73,312
Loss on sale of assets 1,897 --
Amortization of discount on investments (8,459) --
Amortization of warrants 52,469 --
Provision for losses on accounts receivable 80,726 15,570
Provision for inventory obsolescence 34,267 24,401
Issuance of compensatory options 21,409 --
Changes in operating assets and liabilities:
Accounts receivable 164,153 (641,111)
Inventories 313,431 (71,713)
Other assets (58,428) (74,525)
Accounts payable 395,195 201,191
Accrued expenses and other (43,152) 22,135
Deferred revenue 3,083 (3,129)
----------- -----------
Net cash used in operating activities (2,458,922) (897,123)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 2,000,000 --
Proceeds from sale of assets 1,380 --
Purchase of property and equipment (44,901) (100,865)
Additions to capitalized software (2,650) (60,000)
Advances on non-operating notes receivable -- (44,400)
----------- -----------
Net cash provided by (used) in investing activities 1,953,829 (205,265)
=========== ===========
</TABLE>
See accompanying notes to supplemental
consolidated condensed financial statements.
F-6
<PAGE> 17
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED CONDENSED
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock, warrants and options $ 339,459 $ 1,912,682
Offering costs paid -- 150,000
Proceeds from short-term debt 118,286 --
Payments on short-term debt (491) --
Proceeds from line of credit 356,679 50,000
Payments on line of credit (191,679) (7,586)
Payments on long-term debt (7,211) (2,551)
Conversion of promissory notes -- (355,903)
Deferred offering costs -- 253,408
----------- -----------
Net cash provided by financing activities 615,043 2,000,050
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 109,950 897,662
CASH AND CASH EQUIVALENTS, beginning of period 677,944 299,232
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 787,894 $ 1,196,894
=========== ===========
</TABLE>
See accompanying notes to supplemental
consolidated condensed financial statements.
F-7
<PAGE> 18
eSOFT, INCORPORATED AND
SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
1. BASIS OF The supplemental consolidated condensed interim
PRESENTATION financial statements included herein have been
prepared by eSoft, Incorporated ("eSoft" or the
"Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange
Commission. Certain information and footnote
disclosures normally included in financial
statements prepared in accordance with generally
accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures
are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting
of normal recurring adjustments which, in the
opinion of management, are necessary for fair
presentation of the information contained therein.
It is suggested that these supplemental consolidated
condensed financial statements be read in
conjunction with the supplemental consolidated
financial statements and notes thereto included
elsewhere in this report. The Company follows the
same accounting policies in preparation of interim
financial statements.
Results of operations for the interim periods may
not be indicative of annual results.
2. BUSINESS Effective May 25, 1999, the Company completed the
COMBINATION merger ("the "Merger") with Apexx Technology, Inc.
("Apexx") located in Boise, Idaho which provided for
the exchange of all of the outstanding stock of
Apexx for shares of eSoft common stock and for the
conversion of all Apexx stock options into eSoft
stock options to acquire 1,356,003 shares of eSoft
common stock. The Merger has been accounted for as a
pooling of interests.
F-8
<PAGE> 19
eSOFT, INCORPORATED AND
SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Number of
eSoft Shares
Pooled Company Nature of Operations Merger Date Issued
-------------- -------------------- ----------- ------------
<S> <C> <C> <C>
Apexx Technology, Inc. Internet connectivity May 25, 1999 1,591,365
solutions
</TABLE>
The supplemental consolidated condensed financial
statements give retroactive effect to the Merger,
which has been accounted for using the pooling of
interests method, and, as a result, the financial
position, results of operations and cash flows are
presented as if Apexx had been consolidated with
eSoft for all periods presented. As required by
generally accepted accounting principles, the
supplemental consolidated condensed financial
statements will become the historical financial
statements upon issuance of the financial statements
for the period that includes the date of the Merger.
The supplemental consolidated condensed statements
of stockholders' equity reflect the accounts of
eSoft as if the additional common stock issued in
connection with the Merger had been issued for all
periods presented.
The supplemental consolidated condensed financial
statements, including the notes thereto, should be
read in conjunction with the historical financial
statements of eSoft included in eSoft's 1998 annual
report on Form 10-KSB and the March 31, 1999 Form
10-QSB and the financial statements of Apexx
included in Form 8-K/A dated August 9, 1999, and
included in eSoft's S-4/A Registration Statement
dated April 20, 1999.
The supplemental consolidated condensed balance
sheet of eSoft as of March 31, 1999 has been
combined with that of Apexx as of March 31, 1999.
For the three months ended March 31, 1999 and 1998,
the results of eSoft have been combined with those
of Apexx for the same periods.
F-9
<PAGE> 20
eSOFT, INCORPORATED AND
SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
Revenue, net loss and net loss per common share of
eSoft and Apexx for the three months ended March 31,
are as follows:
REVENUE:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
----------- -----------
<S> <C> <C>
eSoft, as previously reported $ 553,067 $ 733,932
Apexx 610,041 744,612
----------- -----------
eSoft, as restated $ 1,163,108 $ 1,478,544
=========== ===========
</TABLE>
NET LOSS:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
----------- -----------
<S> <C> <C>
eSoft, as previously reported $(2,729,323) $ (295,240)
Apexx (757,823) (148,014)
----------- -----------
eSoft, as restated $(3,487,146) $ (443,254)
=========== ===========
</TABLE>
NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
----------- -----------
<S> <C> <C>
As previously reported:
Basic and diluted $ (.39) $ (.09)
As restated:
Basic and diluted $ (.41) $ (.09)
----------- -----------
</TABLE>
F-10
<PAGE> 21
eSOFT, INCORPORATED AND
SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
3. MERGER Effective May 25, 1999, the Company completed
COSTS the merger of Apexx, which is being accounted for
as a pooling of interests. (See Note 2) In
connection with this merger, the Company expensed
merger related costs of $193,000 consisting
primarily of legal, accounting and consulting fees
and the costs incurred for the subsequent
registration of shares issued in the merger, and
expects to incur an additional $605,000 in the
second quarter of 1999. The Company also expects to
incur approximately $100,000 related to integration
of the companies' systems, estimated severance for
terminated employees, costs associated with
employees transferred to the Company's headquarters
and other related costs in the second quarter of
1999.
4. SUBSEQUENT On July 8, 1999, the Company signed a letter of
EVENTS intent with Technologic, Inc., a privately held
company located in Norcross, Georgia. The Company
will exchange approximately 1.5 million shares of
its common stock for all of the shares, options and
warrants of Technologic. The anticipated completion
date of the merger is August 31, 1999.
In June 1999, the Company completed the private
placement of $3,000,000 convertible subordinated
debentures. Under the debenture agreement, the
investor has the option to invest up to an
additional $5 million in convertible debentures in
two additional tranches. Under certain
circumstances, the Company may require the investor
to purchase $2 million of additional debentures.
F-11
<PAGE> 22
eSOFT, INCORPORATED AND
SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
The debenture financing consisted of an initial $3
million of 5% convertible subordinated debentures
due in June 2002. Interest is payable in cash or, at
the Company's option, in shares of common stock. The
debentures are convertible at any time at the
investor's option into a fixed number of shares of
eSoft common stock at $3.9125 per share, subject to
certain anti-dilution provisions and adjustments.
The investor also received warrants to purchase
766,773 shares of common stock with an exercise
price of $4.4994 per common share. The warrants have
a three year term. The Company has the ability,
under certain circumstances, to obligate the
investor to convert the debentures into common stock
and to exercise the warrants.
As part of the debenture financing, the investor has
the option to purchase an additional $5 million of
debentures with warrants in two subsequent tranches.
Under certain circumstances, the Company may require
the investor to purchase $2 million of additional
debentures, which would be convertible at $3.9125
per share, together with warrants to purchase
511,182 shares of common stock with an exercise
price of $4.4994 per common share. The third tranche
of $3 million of debentures would be convertible at
the lower of (i) the Company's then current market
price or (ii) $5.50, but in no event less than
$3.9125 per share. The third tranche of debentures
would be accompanied by warrants with an exercise
price of 115% of the third tranche debenture
conversion price.
F-12
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
eSoft, Incorporated
Broomfield, Colorado
We have audited the accompanying supplemental consolidated balance sheet of
eSoft, Incorporated and Subsidiary as of December 31, 1998, and the related
supplemental consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1998. The
supplemental consolidated financial statements give retroactive effect to the
merger of eSoft, Incorporated and Apexx Technology, Inc. on May 25, 1999, which
has been accounted for as a pooling of interests as described in the Summary of
Accounting Policies and Note 14 to the supplemental consolidated financial
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Apexx Technology, Inc. which financial statements reflect total assets of
approximately $1,168,000 as of December 31, 1998 and total revenues of
approximately $2,003,000 and $3,808,000 for each of the two years in the period
ended December 31, 1998, respectively. Those financial statements were audited
by another auditor whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Apexx Technology, Inc., is
based solely on the report of the other auditor.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditor provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eSoft, Incorporated
as of December 31, 1998 and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1998, after
giving retroactive effect to the merger referred to above, in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Denver, Colorado
July 16, 1999
F-13
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
Board of Directors
Apexx Technology, Inc.
Boise, Idaho
We have audited the balance sheet of Apexx Technology, Inc. as of December 31,
1998 and the related statements of operations, changes in stockholders'
deficit, and cash flows for each of the two years in the period ended December
31, 1998. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Apexx Technology, Inc. as of
December 31, 1998 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The Company's financial statements have been prepared assuming that it will
continue as a going concern. The Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Balukoff, Lindstrom & Co., P.A.
Boise, Idaho
February 4, 1999
F-14
<PAGE> 25
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED
BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
December 31, 1998
----------
<S> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 677,944
Investment securities 1,991,541
Accounts receivable, less allowance of $267,241
for possible losses 2,679,906
Inventories 1,577,666
Prepaid expenses and other 188,084
----------
Total current assets 7,115,141
----------
PROPERTY AND EQUIPMENT:
Computer equipment 350,178
Furniture and equipment 248,299
Manufacturing tool and equipment 26,424
----------
624,901
Less accumulated depreciation 328,484
----------
Net property and equipment 296,417
----------
OTHER ASSETS:
Capitalized software development costs, net of accumulated
amortization of $314,453 867,072
Other 7,039
----------
Total other assets 874,111
----------
$8,285,669
==========
</TABLE>
See accompanying summary of accounting policies and
notes to supplemental consolidated financial statements.
F-15
<PAGE> 26
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED
BALANCE SHEET (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
December 31, 1998
------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 1,358,081
Note payable - bank 104,309
Marketing loan agreement 356,060
Deferred revenue 23,910
Customer deposits 248,287
Accrued expenses:
Payroll and payroll expenses 256,033
Other 234,332
------------
Total current liabilities 2,581,012
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none outstanding --
Common stock, $.01 par value, 50,000,000 shares authorized,
8,454,867 shares issued and outstanding 84,549
Additional paid-in capital 10,160,063
Accumulated deficit (4,539,955)
------------
Total stockholders' equity 5,704,657
------------
$ 8,285,669
============
</TABLE>
See accompanying summary of accounting policies and
notes to supplemental consolidated financial statements.
F-16
<PAGE> 27
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
----------- -----------
<S> <C> <C>
REVENUES $ 7,675,706 $ 3,236,563
COST OF GOODS SOLD 3,353,846 1,492,119
----------- -----------
Gross profit 4,321,860 1,744,444
----------- -----------
EXPENSES:
Selling and marketing 4,006,067 793,397
General and administrative 3,154,864 826,239
Engineering 715,951 110,724
Research and development 382,792 231,251
Amortization of software costs 189,399 116,912
----------- -----------
Total costs and expenses 8,449,073 2,078,523
----------- -----------
Loss from operations (4,127,213) (334,079)
----------- -----------
OTHER (INCOME) EXPENSE:
Interest (income) expense, net (139,611) 43,209
Loss on sale of assets 1,013 13,624
----------- -----------
Total other (income) expense (138,598) 56,833
----------- -----------
Loss before income tax (benefit) expense (3,988,615) (390,912)
Income tax (benefit) expense (162,000) 162,000
----------- -----------
NET LOSS $(3,826,615) $ (552,912)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (.54) $ (.21)
=========== ===========
WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING BASIC AND DILUTED 7,089,382 2,688,563
=========== ===========
</TABLE>
See accompanying summary of accounting policies
and notes to supplemental consolidated financial statements.
F-17
<PAGE> 28
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------------- Paid-in Accumulated Stockholders'
Years Ended December 31, 1998 and 1997 Shares Amount Capital Deficit Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 2,369,020 $ 23,691 $ 779,398 $ (160,428) $ 642,661
Issuance of common stock pursuant to private
placements, net of offering costs of $80,841 1,227,015 12,270 970,839 -- 983,109
Common stock subscribed 350,000 3,500 346,500 -- 350,000
Net loss for the year -- -- -- (552,912) (552,912)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 3,946,035 39,461 2,096,737 (713,340) 1,422,858
Issuance of compensatory options -- -- 106,413 -- 106,413
Issuance of warrants for prepaid consulting services -- -- 214,649 -- 214,649
Exercise of warrants and options 442,372 4,424 396,076 -- 400,500
Issuance of common stock pursuant to initial public
offering, net of offering costs of $540,850 1,550,000 15,500 993,650 -- 1,009,150
Issuance of common stock pursuant to private
placements, net of offering costs of $866,449 1,960,557 19,605 5,912,194 -- 5,931,799
Issuance of common stock to employees 90,000 900 89,100 -- 90,000
Issuance of common stock for offering fees 110,000 1,100 (1,100) -- --
Issuance of common stock pursuant to conversion
of notes payable 355,903 3,559 352,344 -- 355,903
Net loss for the year -- -- -- (3,826,615) (3,826,615)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 8,454,867 $ 84,549 $ 10,160,063 $ (4,539,955) $ 5,704,657
============ ============ ============ ============ ============
</TABLE>
See accompanying summary of accounting policies and
notes to supplemental consolidated financial statements.
F-18
<PAGE> 29
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED
STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,826,615) $ (552,912)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 402,781 172,560
Loss on sale of assets 1,013 13,624
Amortization of discount on investments (71,624) --
Issuance of common stock for compensation 90,000 --
Provision for losses on accounts receivable 212,981 51,465
Provision for inventory obsolescence 59,440 --
Deferred tax expense (benefit) (162,000) 162,000
Consulting expense incurred for note payable -- 41,000
Issuance of compensatory options 106,413 --
Non-cash additions to notes payable 47,189 --
Changes in operating assets and liabilities:
Accounts receivable (2,436,249) (379,650)
Inventories (1,147,833) (225,594)
Other assets (15,953) (43,241)
Accounts payable 945,996 323,207
Accrued expenses and other 619,296 105,930
Deferred revenue (22,712) (11,348)
----------- -----------
Net cash used in operating activities (5,197,877) (342,959)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (1,919,917) --
Proceeds from sale of assets 2,722 --
Purchase of property and equipment (179,859) (127,575)
Advances on non-operating notes receivable - employee (15,000) (20,000)
Payments received from non-operating notes receivable - employee 20,443 --
Additions to capitalized software (405,000) (221,139)
----------- -----------
Net cash used in investing activities (2,496,611) (368,714)
----------- -----------
</TABLE>
See accompanying summary of accounting policies
and notes to supplemental consolidated financial statements.
F-19
<PAGE> 30
eSOFT, INCORPORATED AND
SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED
STATEMENTS OF CASH FLOWS
(CONTINUED)
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock, warrants and options 8,748,748 1,213,950
Offering costs paid (1,126,405) (80,841)
Proceeds from stock subscription receivable 200,000 --
Proceeds from short-term debt 668,872 370,000
Payments on short-term debt (390,000) (395,000)
Proceeds from long-term debt 93,323 --
Payments on long-term debt (25,581) (8,793)
Proceeds from borrowings -- 100,000
Payments on borrowings (75,757) (24,243)
Proceeds (payments) from related party borrowings (20,000) 20,000
Deferred offering costs -- (205,896)
----------- -----------
Net cash provided by financing activities 8,073,200 989,177
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 378,712 277,504
CASH AND CASH EQUIVALENTS, beginning of year 299,232 21,728
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 677,944 $ 299,232
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 19,952 $ 47,070
Cash paid for taxes -- 21
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued for conversion of debt 355,903 --
Common stock issued for offering costs 1,100 --
Warrants issued for prepaid consulting services 214,649 --
Convertible notes payable issued for consulting
services and deferred offering costs -- 116,000
Common stock issued for subscription receivable -- 200,000
Short-term debt converted to long-term debt -- 40,200
=========== ===========
</TABLE>
See accompanying summary of accounting policies and
notes to supplemental consolidated financial statements.
F-20
<PAGE> 31
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
BUSINESS eSoft, Incorporated (the "Company" or "eSoft"), a
Delaware corporation, develops and markets internet
connectivity solutions. The Company has developed
software, which is integrated with a hardware
component, that allows local area networks to
connect with the internet. The software also
contains full access control for its remote access
features. The Company also resells related
connectivity accessories. The Company previously had
developed and sold software for the bulletin board
market. The majority of the Company's products are
manufactured by external sources. In 1998, 60% of
the Company's product was purchased from two
suppliers.
The Company was previously a Colorado corporation
and was merged into a newly formed Delaware
corporation as of February 17, 1998 of the same name
with the Colorado corporation ceasing to exist. The
transaction was accounted for on a basis similar to
a pooling of interests with no change in the
historical financial statements of eSoft. The newly
formed corporation had no operations prior to the
merger.
Effective May 25, 1999, the Company completed the
merger (the "Merger") with Apexx Technology, Inc.
("Apexx") located in Boise, Idaho which provided for
the exchange of all of the outstanding stock of
Apexx for shares of eSoft common stock and for the
conversion of all Apexx stock options into eSoft
stock options to acquire 1,356,003 shares of eSoft
common stock. The Merger has been accounted for as a
pooling of interests.
<TABLE>
<CAPTION>
Number of
eSoft Shares
Pooled Company Nature of Operations Merger Date Issued
-------------- -------------------- ----------- ------------
<S> <C> <C> <C>
Apexx Technology, Inc. Internet connectivity May 25, 1999 1,591,365
solutions
</TABLE>
F-21
<PAGE> 32
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
The supplemental consolidated financial statements
give retroactive effect to the Merger, which has
been accounted for using the pooling of interests
method and, as a result, the financial position,
results of operations and cash flows are presented
as if Apexx had been consolidated with eSoft for all
years presented. As required by generally accepted
accounting principles, the supplemental consolidated
financial statements will become the historical
financial statements upon issuance of the financial
statements for the period that includes the date of
the Merger. The supplemental consolidated statements
of stockholders' equity reflect the accounts of
eSoft as if the additional common stock issued in
connection with the Merger had been issued for all
periods presented.
The supplemental consolidated financial statements,
including the notes thereto, should be read in
conjunction with the historical financial statements
of eSoft included in eSoft's 1998 annual report on
Form 10-KSB and the March 31, 1999 Form 10-QSB and
the financial statements of Apexx included in Form
8-K/A dated August 9, 1999, and included in eSoft's
S-4 Registration Statement dated April 20, 1999.
The supplemental consolidated balance sheet of eSoft
as of December 31, 1998 has been combined with that
of Apexx as of December 31, 1998. For the years
ended December 31, 1998 and 1997, the results of
eSoft have been combined with those of Apexx for the
same years.
PRINCIPLES OF The supplemental consolidated financial statements
CONSOLIDATION include the accounts of the Company and its
wholly-owned subsidiary, Apexx. All significant
intercompany accounts and transactions have been
eliminated in consolidation.
CASH The Company considers cash and all highly liquid
EQUIVALENTS investments purchased with an original maturity of
three months or less to be cash equivalents.
F-22
<PAGE> 33
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
INVESTMENT Investment securities are classified as either
SECURITIES held-to-maturity, available-for-sale or trading.
Investment securities classified as held-to-maturity
are stated at cost, adjusted for amortization of
premiums and accretion of discounts. It is
management's intention and it has the ability to
hold investment securities classified as
held-to-maturity and, accordingly, adjustments are
not made for temporary declines in their market
value below amortized cost. Investment securities
classified as available-for-sale are carried at
their estimated market value with unrealized holding
gains and losses, net of tax, reported as a separate
component of stockholders' equity until realized.
Investment securities classified as trading are
carried at estimated market value. Unrealized
holding gains and losses for trading securities are
included in the statements of income. Gains and
losses on securities sold are determined based on
the specific identification of the securities sold.
At December 31, 1998, all investments are classified
as held-to-maturity.
INVENTORIES Inventories, consisting of purchased goods, are
valued at the lower of cost (weighted-average) or
market.
PROPERTY AND Property and equipment are stated at cost.
EQUIPMENT Depreciation is computed using the straight-line
method over the estimated useful lives (generally
five years) of the assets.
Depreciation expense for the years ended
December 31, 1998 and 1997, was $106,228 and $55,648.
CAPITALIZED Costs incurred internally in creating software
SOFTWARE COSTS products for resale are charged to expense until
technological feasibility has been established upon
completion of a detail program design. Thereafter,
all software development costs are capitalized until
the point that the product is ready for sale and
subsequently reported at the lower of amortized cost
or net realizable value.
F-23
<PAGE> 34
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
In accordance with Statement of Financial Accounting
Standard ("SFAS") No. 86, the Company recognizes the
greater amount of annual amortization of capitalized
software costs under 1) the ratio of current year
revenues by product, to the product's total
estimated revenues method or 2) over the products
estimated economic useful life by the straight-line
method.
LONG-TERM The Company applies SFAS No. 121, "Accounting for
ASSETS the Impairment of Long-Lived Assets." Under SFAS
No. 121, long-lived assets and certain intangibles
are evaluated for impairment when events or changes
in circumstances indicate that the carrying value of
the assets may not be recoverable through the
estimated undiscounted future cash flows resulting
from the use of these assets. When any such
impairment exists, the related assets will be
written down to fair value.
REVENUE The Company recognizes certain revenue at the time
RECOGNITION products are shipped to its customers. Provision is
made currently for estimated product returns which
may occur. 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.
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.
Software Revenue Recognition
The Company follows the guidance of Statement of
Position ("SOP") 97-2, "Software Revenue
Recognition." SOP 97-2 provides guidance on when
revenue should be recognized and in what amounts for
licensing, selling, leasing or otherwise marketing
computer software.
F-24
<PAGE> 35
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
ADVERTISING The Company records advertising expense in the
period the expense is incurred. In 1998 and 1997,
the Company recorded $682,147 and $255,584 in
advertising expense.
INCOME TAXES The Company with consent of its stockholder,
through September 4, 1997, elected under the
Internal Revenue Code to be an S-corporation.
Subsequent to September 4, 1997, the Company is
taxed as a U.S. C-corporation. Philip L. Becker,
Ltd. elected to be taxed as a partnership. In lieu
of corporation income taxes, the stockholder and
partners were taxed on their proportional share of
the Company's or partnership's taxable income.
Therefore through September 4, 1997, no provision
for income taxes has been made in the accompanying
financial statements.
The Company follows the provisions of SFAS No. 109,
"Accounting for Income Taxes," which requires use of
the "liability method" Accordingly, deferred tax
liabilities and assets are determined based on the
temporary differences between the financial
statement and tax bases of assets and liabilities,
using the enacted tax rates in effect for the year
in which the differences are expected to reverse.
The provisions of SFAS No. 109 did not have an
impact until after September 4, 1997.
F-25
<PAGE> 36
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
NET INCOME The Company follows the provisions of SFAS No. 128,
(LOSS) PER SHARE "Earnings Per Share." SFAS No. 128 provides for the
calculation of "Basic" and "Diluted" earnings per
share. Basic earnings per share includes no dilution
and is computed by dividing income or loss available
to common stockholders by the weighted average
number of common shares outstanding for the period.
Diluted earnings per share reflects the potential
dilution of securities that could share in the
earnings of an entity, similar to fully diluted
earnings per share. In loss periods, dilutive common
equivalent shares are excluded as the effect would
be anti-dilutive. Basic and diluted earnings per
share are the same for all periods presented.
For the years ended December 31, 1998 and 1997,
total stock options and stock warrants of 3,322,083,
and 1,850,271 were not included in the computation
of diluted earnings per share because their effect
was anti-dilutive.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial
statements and revenues and expenses during the
reporting period. Actual results could differ from
those estimates and assumptions.
CONCENTRATIONS Credit risk represents the accounting loss that
OF CREDIT RISK would be recognized at the reporting date if
counterparties failed to completely perform as
contracted. Concentrations of credit risk, whether
on or off the balance sheet, that arise from
financial instruments exist for groups of customers
or groups of counterparties when they have similar
economic characteristics that would cause their
ability to meet contractual obligations to be
similarly effected by changes in economic or other
conditions.
F-26
<PAGE> 37
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
Concentrations of credit risk with respect to trade
accounts receivable are generally limited due to
customers are dispersed across geographic areas.
On-going credit evaluations of customers' financial
condition are performed and, generally no collateral
is required. The Company maintains an allowance for
potential losses based on management's analysis of
possible uncollectible accounts (See Note 14).
FAIR VALUE OF Unless otherwise specified, the Company believes the
FINANCIAL book value of financial instruments approximates
INSTRUMENTS their fair value.
STOCK OPTIONS The Company applies Accounting Principles Board
AND WARRANTS Opinion ("APB") 25, "Accounting for Stock Issued to
Employees," and related Interpretations in
accounting for all stock option plans. Under APB 25,
compensation cost is recognized for stock options
granted at prices below the market price of the
underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the Company to provide pro
forma information regarding net income as if
compensation cost for the Company's stock option
plans had been determined in accordance with the
fair value based method prescribed in SFAS No. 123.
COMPREHENSIVE The Company has adopted SFAS No. 130, "Reporting
INCOME Comprehensive Income". Comprehensive income is
comprised of net income and all changes to the
statements of stockholders' equity, except those
due to investment by stockholders, changes in paid
in capital and distributions to stockholders. The
adoption of SFAS No. 130 does not impact the
Company's financial statements for 1998 and 1997.
F-27
<PAGE> 38
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
IMPACT OF SFAS No. 133, "Accounting for Derivative Instruments
RECENTLY ISSUED and Hedging Activities" requires companies to record
ACCOUNTING derivatives on the balance sheet as assets or
PRONOUNCEMENTS liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those
derivatives are accounted for depending on the use
of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting
is that the hedging relationship must be highly
effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000.
Management believes that the adoption of SFAS No.
133 will have no material effect on its financial
statements.
SOP 98-5, "Reporting on the Costs of Start-Up
Activities," requires that the costs of start-up
activities, including organization costs, be
expensed as incurred. This Statement is effective
for financial statements issued for fiscal years
beginning after December 15, 1998. Management
believes that the adoption of SOP 98-5 will have no
material effect on its financial statements.
F-28
<PAGE> 39
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
1. BUSINESS Revenue, net loss and net loss per common share of
COMBINATION eSoft and Apexx for the two years ending
December 31, are as follows:
REVENUE:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
----------- -----------
<S> <C> <C>
eSoft, as previously reported $ 3,867,600 $ 1,233,137
Apexx 3,808,106 2,003,426
----------- -----------
eSoft, as restated $ 7,675,706 $ 3,236,563
=========== ===========
</TABLE>
NET LOSS:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
----------- -----------
<S> <C> <C>
eSoft, as previously reported $(2,940,662) $ (355,252)
Apexx (885,953) (197,660)
----------- -----------
eSoft, as restated $(3,826,615) $ (552,912)
=========== ===========
</TABLE>
NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
----------- -----------
<S> <C> <C>
As previously reported:
Basic and diluted $ (.54) $ (.23)
As restated:
Basic and diluted $ (.54) $ (.21)
----------- -----------
</TABLE>
F-29
<PAGE> 40
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
2. INVESTMENT A summary of the amortized cost and estimated market
SECURITIES value of investment securities which mature in six
months is as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
December 31, 1998 Amortized Cost Gains Losses Market Value
----------------- -------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Short-term zero
coupon notes $ 1,991,541 $ -- $ -- $ 1,991,541
=========== ======== ======= ===========
</TABLE>
There were no investment securities at December 31,
1997.
3. INVENTORIES Inventories at December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Finished goods $1,351,773
Raw materials 285,333
----------
1,637,106
Less reserve for obsolescence 59,440
----------
$1,577,666
==========
</TABLE>
4. REVOLVING The Company has an unused bank line of credit of
LINE OF CREDIT $500,000. The line bears interest at prime plus 1.5%.
The line expired in May 1999, and is secured by
accounts receivable, inventory, equipment, and other
assets. Two of the Company's primary stockholders
have personally guaranteed the bank line of credit.
F-30
<PAGE> 41
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
The line-of-credit has certain debt covenants. These
debt covenants are as follows:
o Ratio of current assets to current
liabilities of at least 1.5 to 1
o Ratio of total liabilities to tangible net
worth that does not exceed 2.5 to 1
o Minimum working capital of $150,000
At December 31, 1998, the Company was not in
compliance with the above covenants and the Company
has not obtained a waiver for such violations.
5. NOTE PAYABLE - Note payable - bank consists of the following:
BANK
<TABLE>
<CAPTION>
December 31, 1998
--------
<S> <C>
Note payable to bank, payable in monthly
installments of $3,171, including interest
at prime plus 1.5% (9.25% at December 31,
1998), equipment, inventory and accounts
receivable are provided as collateral $104,309
</TABLE>
The Note Payable - Bank agreement contains a
provision that upon an occurrence of change in
control of the company (Apexx) the note is due
immediately.
F-31
<PAGE> 42
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
6. RESEARCH AND During the years ended December 31, 1998 and 1997,
DEVELOPMENT the Company capitalized $405,000 and $221,139 of
software development costs. Amortization expense of
capitalized software development costs included in
depreciation and amortization for the years ended
December 31, 1998 and 1997 amounted to $189,399 and
$116,912. Research and development costs were
$382,792 and $231,251 for the years ended December
31, 1998 and 1997.
Research and development expenditures during the
following periods were comprised as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
-------- --------
<S> <C> <C>
Payroll and related costs $266,494 $279,162
Officer payroll -- 50,000
Internet and telephone expenses -- 30,056
Occupancy costs -- 34,860
Purchased services 410,820 2,320
Other 110,478 55,992
-------- --------
787,792 452,390
Less capitalized software costs 405,000 221,139
-------- --------
$382,792 $231,251
======== ========
</TABLE>
7. INCOME TAXES The provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
--------- ---------
<S> <C> <C>
DEFERRED EXPENSE (BENEFIT):
Federal $(148,000) $ 148,000
State (14,000) 14,000
--------- ---------
$(162,000) $ 162,000
========= =========
</TABLE>
F-32
<PAGE> 43
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
A reconciliation of the effective tax rate and the
statutory U.S. federal income tax rates are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
----------- -----------
<S> <C> <C>
Federal tax benefit at the federal
statutory rate $(1,357,000) $ (133,000)
State income tax benefit, net of
federal tax amount (153,000) (17,000)
Permanent differences (110,000) 2,000
Other 62,000 (20,000)
Deferred tax expense due to S. Corp
termination -- 243,000
Increase in valuation allowance 1,396,000 87,000
----------- -----------
Income tax (benefit) expense $ (162,000) $ 162,000
=========== ===========
</TABLE>
Temporary differences that give rise to a significant
portion of the deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------
<S> <C>
Net operating loss carryforwards $ 1,442,121
Tax credit carryforward 37,038
Accounts receivable 100,646
Inventory 22,000
Accruals 194,200
Options and warrants 66,000
-----------
Total deferred tax asset 1,862,005
-----------
Capitalized software costs (325,000)
Property and equipment (1,588)
Other (9,000)
-----------
Total deferred tax liability (335,588)
-----------
Total 1,526,417
Less valuation allowance 1,526,417
-----------
Net deferred tax asset (liability) $ --
===========
</TABLE>
F-33
<PAGE> 44
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
The valuation allowance of $1,526,417 at December 31,
1998, was established because the Company has not
been able to determine that it is more likely than
not that the deferred tax assets will be realized.
At December 31, 1998, the Company had net operating
loss carryforwards of approximately $3,798,000 with
expirations through 2018. The utilization of certain
of the loss carryforwards are limited under Section
382 of the Internal Revenue Code.
As stated in the summary of accounting policies,
eSoft had elected to be taxed as an S corporation. In
lieu of the corporation income taxes, the
stockholders and partners were taxed on their
proportional share of eSoft's taxable income. The pro
forma income (loss) per common share if eSoft was
subject to taxes (federal statutory rate of 34%)
would be as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------
<S> <C>
Loss before income taxes $(390,912)
Pro forma income tax benefit 66,000
---------
Pro forma net loss $(324,912)
=========
Pro forma loss per share $ (.12)
=========
</TABLE>
F-34
<PAGE> 45
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
8. COMMITMENTS The Company leases certain of its facilities and
AND equipment under noncancellable operating lease
CONTINGENCIES agreements which expire at various dates through
2004. Rent expense for the years ended December 31,
1998 and 1997 was $172,680 and $98,178.
Subsequent to December 31, 1998, the Company executed
a lease to relocate its corporate headquarters and
shipping and assembly facilities into one location.
The new facility lease expires in May 2004 and annual
rental payments are $173,000. The Company was fully
released from its lease on its prior corporate
headquarters. Future minimum lease payments under
noncancellable operating leases as adjusted for the
new corporate headquarters lease are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
1999 $147,000
2000 182,000
2001 185,000
2002 186,000
2003 187,000
Thereafter 78,000
--------
$965,000
========
</TABLE>
Software Development and License Agreements
The Company has entered into several software
development and license agreements related to
software utilized in certain of the Company's
products. The agreements require compensation or
royalty payments based on percentages (ranging from
2.5% to 33.3%) of applicable gross sales and subject
to certain maximum amounts per license as defined in
the agreements.
F-35
<PAGE> 46
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
During 1998, the Company entered into an agreement to
terminate the software development agreements. The
termination agreement required the Company to pay
$30,000 at the agreement's inception; $30,000 no
later than 15 days after the Company completes its
proposed public offering but not later than December
31, 1998 if the proposed public offering is not
completed by that date; and the issuance of stock
warrants entitling the warrant holder, for a period
of two years from January 29, 1998 to purchase up to
20,000 shares of the Company's common stock at a
price of $1.00 per share until one year after the
closing of the public offering and $1.15 per share
until the warrants expire. The required $60,000
payment was made in 1998.
In 1998, the Company entered into a software
development agreement with a company. The development
agreement required a payment of $150,000 for a
wireless product with VPN capabilities to be
integrated with the IPAD. Additionally, in
conjunction with its sales efforts in Japan, the
company was paid $195,000 to nationalize the
interface of the IPAD for the Japanese marketplace.
Marketing Agreement
In June 1998, the Company entered into an agreement
with Extended Systems, Inc. (ESI). Under the terms of
the agreement, ESI agreed to loan the Company up to
$500,000 to assist in marketing ESI's products. The
loan balance is reduced by $158 for each unit sold
through October 1999. The unpaid balance is due in
October 1999 and can be paid in cash, common stock of
the Company, or by another mutually agreed upon
payment method. The Company controls the choice of
payment options. As of December 31, 1998, ESI has
advanced the Company approximately $390,000,
including cash advances of $308,872 and noncash
advances of approximately $80,000 and the recorded
balance after accounting for the number of units sold
was $356,061. Interest on the note accrues at a rate
of 6% per year.
F-36
<PAGE> 47
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
Pacific Crest Securities, Inc. Agreement
On January 25, 1999, the Company entered into an
agreement with Pacific Crest Securities, Inc.
("Pacific") related to the Merger. Under the terms of
the agreement, eSoft pays Pacific $200,000 and the
Company's stockholders transfer 48,000 shares of
eSoft stock to Pacific.
Employment Agreements
On September 2, 1997 the Company entered into an
employment agreement with an officer and a director
that extends for a thirty-six month period commencing
on September 1, 1997. Under the terms of the
agreement, the Company is obligated to pay the sum of
$10,000 per month. In addition, the officer and
director was granted incentive stock options to
acquire 200,000 shares of common stock at a price of
$1.00 per share for a period of five years. The
options vest over a 36 month period as follows: 7/36
of the options vested in April 1998 and 1/36 of the
options will vest on the first day of each month
thereafter. A quarterly performance bonus equal to
10% of the Company's earnings, net of adjustments for
interest and taxes. In the event that the bonus
exceeds 50% of the gross annual salary, the bonus
will be capped at the amount of the salary for the
quarter.
F-37
<PAGE> 48
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
On November 6, 1998 the Company entered into an
employment agreement with an officer and director
that extends for a thirty-six month period commencing
on November 9, 1998. Under the terms of the
agreement, the Company is obligated to pay the sum of
$15,000 per month. In addition, the officer and
director was granted incentive stock options to
acquire 400,000 shares of eSoft common stock at a
price of $4.00 per share for a period of four years.
The options vest over a 36 month period as follows:
7/36 of the options will vest in June 1999 and 1/36
of the options will vest on the first day of each
month thereafter. The officer and director is also
eligible to receive incentive pay equal to 50% of his
annual salary paid quarterly based on objectives
agreed by officer and the Company's Board of
Directors. The incentive pay will be based as
follows: one-third on revenue, one-third on earnings
and one-third on mutually agreed quarterly
objectives.
The Company has entered into employment agreements
with four other executive officers with a range of
salary levels and benefits. The term of these
employment agreements is thirty-six months, at salary
levels ranging from $7,500 to $11,000 per month. The
agreements terminate from December 2000 through
December 2001. The employment agreements provide for
either a quarterly performance-based bonus ranging
from $5,000 to $12,500, or a 1% commission on gross
sales, paid on a monthly basis. In addition to
monthly compensation and quarterly bonuses,
executives under these agreements have received
incentive stock options to purchase between 20,000
and 60,000 shares of eSoft common stock at exercise
prices ranging from $1.00 to $6.15 per share.
Future commitments under the above employment
agreements are $695,000, for 1999, 2000 and 2001.
Effective March 30, 1999, the Company served its
former Vice President of Marketing with notice of
termination of services pursuant to his employment
agreement. The agreement requires payment of three
months salary totaling $31,250 and participation in
its employee benefit program as severance beginning
in April 1999.
F-38
<PAGE> 49
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
Effective March 30, 1999, the Company served its
former Chief Financial Officer with notice of
termination of services pursuant to his employment
agreement. The agreement requires payment of three
months salary totaling $22,500 and participation in
its employee benefit program as severance beginning
in April 1999.
Effective February 28, 1999, the Company served its
former President and Chief Operating Officer with
notice of termination of services pursuant to his
employment agreement. The employment agreement
required ninety days prior notice of termination of
services. The agreement requires payment of three
months salary totaling $30,000 and participation in
its employee benefits program as severance beginning
March 1, 1999
9. STOCKHOLDERS' Stock Split
EQUITY
On August 27, 1997, the Board of Directors authorized
a stock split of 63.1579 to 1. All references to
common share and per share amounts in the
accompanying financial statements have been
retroactively restated to reflect the effect of the
stock split.
Private Placements
On September 12, 1997, the Company sold 820,000
shares of common stock for $410,000 in a private
placement. Warrants to purchase 414,600 shares of
common stock were issued to consultants and investors
at an exercise price of $1.00 per share. The warrants
were modified in January 1998 changing the term to
one year and fifteen days after the Company's shares
are listed for trading. If the shares are not
exercised within a year, the exercise price increases
to $1.15 for fifteen days. The net proceeds to the
Company after stock issuance costs was $329,159.
F-39
<PAGE> 50
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
In December 1997, the Company sold 350,000 shares of
common stock for $350,000 in a private placement. The
Company granted the promoter of the private placement
warrants to purchase an additional 87,500 shares of
common stock at $1 per share. The warrants expire
December 22, 1999.
In 1997, the Company completed two private placements
totaling $653,950. In connection with these private
placements, the Company issued 190,228 and 216,787
shares at a price of $0.89 and $2.23 per share.
In January 1998, the Company granted 90,000 shares of
common stock to certain employees for past services
rendered to the Company. The Company recognized
$90,000 of compensation expense based on the fair
value of its common stock at that date.
During the first quarter of 1998, the Company
completed a $290,000 private placement of 290,000
shares of the Company's common stock, at a price of
$1.00 per share to officers, directors, and key
employees. The Company received $186,983 from the
offering net of offering costs.
During the first quarter of 1998, the Company
accepted stock subscriptions of $150,000 from
consultants and an officer of the Company at a price
of $1.00 per share. In March and April 1998, $150,000
of the stock subscription was collected. The
Vancouver Stock Exchange required stockholder
approval of the private placement to the officer
which was received in December 1998 at which time the
shares were issued to the officer.
F-40
<PAGE> 51
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
In June 1998, the Company 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 $5,479,568 after payment
of expenses of the offering of $255,607, and payment
of $507,825 commissions to the agent, sub-agents, and
finders, who in addition were issued warrants to
purchase 159,318 shares of the Company's common stock
at a price of $4.25 per share in the first year and
$4.90 per share in the second year
In 1998, the Company completed the private placement
of 51,616 shares of its common stock at a price of
$2.23 per share. The net cash proceeds to the Company
were $115,250.
Initial Public Offering
In March 1998, the Company completed its initial
public offering in Canada 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 net cash proceeds to the
Company from the IPO was approximately $1,009,000
after payment of expenses of approximately $541,000.
In April 1998, the agent exercised its warrants at a
price of $1.00 per share and the Company issued
250,000 shares of its common stock.
Exercise of Stock Options and Warrants
In February 1998, the Company issued 60,000 shares of
its common stock at $.50 per share upon exercise of
options previously granted.
F-41
<PAGE> 52
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
During the first quarter of 1998, the Company issued
15,676 shares of its common stock at a price of $1.00
and 11,196 shares of its common stock at a price of
$.10 per share for a total of $15,000 upon the
exercise of options previously granted.
In the third quarter of 1998, the Company issued
70,000 shares of its common stock at a price of $1.00
per share for a total of $70,000 upon the exercise of
options and warrants previously granted and are in
addition to issuances previously described.
In the fourth quarter of 1998, the Company issued
35,500 shares of its common stock at a price of $1.00
per share for a total of $35,500 upon the exercise of
options and warrants previously granted.
Conversion of Debt
Prior to January 1, 1996 the Company had entered into
an unsecured note agreement with the initial
stockholder in the amount of $125,000 with interest
at 9% per annum, maturing December 31, 1997. The
Company also had borrowed an additional $111,598 from
the stockholder under various unsecured demand note
agreements with interest at 7% per annum.
On June 21, 1996, the stockholder converted $130,555
of the above notes into 341,454 shares of common
stock. The remaining amounts outstanding and
additional advances from the stockholder during 1996
were combined into a $239,903 unsecured demand note
payable. The note bears interest at 7% per annum and
requires monthly interest payments of $1,399. In
October 1997, the note was amended which provides the
Company the option to convert the note into equity at
the price of the Company's contemplated initial
public offering. The note is payable in full on
January 2, 1999.
F-42
<PAGE> 53
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
During 1997, the Company entered into an agreement
with a business consulting firm to provide services
through May 31, 1998 in exchange for convertible
notes payable totaling $116,000. The convertible
notes payable bear interest at a rate of 12% per
annum and are payable on January 2, 1999. The notes
are convertible into common stock, at the Company's
option, at the price of the Company's contemplated
initial public offering.
In the first quarter of 1998, the holders of the
above convertible notes totaling $355,903 converted
the notes into 355,903 shares of common stock at a
price of $1.00 per share.
10. STOCK In September 1998, the Board of Directors, and on
OPTION December 4, 1998, the stockholders, of the Company
PLANS approved an amended Equity Compensation Plan,
originally adopted in August 1997 (the "Plan"), which
provides for incentive stock options and
non-statutory options to be granted to officers,
employees, directors and consultants to the Company.
Options to purchase up to 1,700,000 shares of the
Company's Common Stock may be granted under the Plan.
Terms of exercise and expiration of options granted
under the Plan may be established at the discretion
of an administrative committee appointed to
administer the Plan or by the Board of Directors if
no committee is appointed, but no option may be
exercisable for more than five years. As of December
31, 1998, options to purchase 1,516,500 shares of the
Company's common stock had been granted under the
Plan.
In September 1997, the Company granted options to
purchase an aggregate of 260,000 shares of its common
stock to employees. Terms of the employee options are
200,000 shares at $1 per share and $60,000 at $.50
per share which expire September 2002.
In 1997, the Company granted options to purchase
86,285 shares of common stock at $1.00 per share to
employees and directors. The shares vest over various
periods from 0 months to 60 months. The options
expire through December 2007. No options were issued
at a price below fair market value at date of grant.
F-43
<PAGE> 54
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
In 1998, the Company granted options to purchase
1,156,500 shares of common stock ranging from $1.00 -
$6.85 per share to employees and directors. The
shares vest over various periods from 2 months to 36
months. The options expire through February 2003. Of
the 1,156,500 options, 60,000 were issued at a price
below fair market value at date of grant and,
accordingly, the Company recognized compensation
expense of $69,600 based on the difference between
the exercise price and the fair market value at the
grant date.
In 1998, the Company granted 100,000 options to
consultants at $1 per share, of which 65,000 options
vest at date of grant, 35,000 options vest ratably
over a 36 month period, with 25,000 of these options
being canceled in 1998. The options expire through
March 2002.
In 1998, the Company granted options to purchase
207,024 shares of common stock ranging from $.10 to
$2.50 per share to employees and directors. The
shares vest over various periods from 0 months to 60
months. The options expire through January 2008. Of
the 207,023 options, 136,461 were issued at a price
below fair market value at date of grant and,
accordingly, the Company recognized compensation
expense of $36,813 in 1998 based on the difference
between the exercise price and the fair market value
at the grant date.
11. STOCK OPTIONS The disclosures below include options issued by
AND WARRANTS Apexx, as if such options were issued for the
purchase of eSoft's common stock, and are based on
the exchange ratio of eSoft's common stock for
Apexx's stock options pursuant to the related merger
agreement.
The Company applies APB 25 in accounting for stock
options and stock purchase warrants granted to
employees. Had compensation expense been determined
based upon the fair value of the awards at the grant
date and consistent with the method under SFAS 123,
the Company's net loss and basic and diluted loss per
share would have been increased to the pro forma
amounts indicated in the following table.
F-44
<PAGE> 55
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------- -------------
<S> <C> <C>
Net loss as reported $ (3,826,615) $ (552,912)
Net loss pro forma (3,895,479) (603,944)
Basic and diluted loss per share
as reported (.54) (.21)
Basic and diluted loss per share
pro forma (.55) (.22)
============= =============
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------- -------------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 6 TO 56.75% 0 to 56.75%
Risk free interest rates 4.12 TO 6.20% 6%
Expected lives in years 1.17 TO 5 YEARS 0.25 to 1.94 years
=============== ==================
</TABLE>
A summary of the status of the Company's stock option
plans as of December 31, 1998 and 1997 is presented
below:
<TABLE>
<CAPTION>
Options Warrants
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding,
January 1, 1997 1,004,058 $ .32 -- $ --
Granted 346,285 .91 502,100 1.00
Canceled (2,172) (.50) -- --
--------- ------ ---------- ------
Outstanding,
December 31, 1997 1,348,171 .48 502,100 1.00
Granted 1,463,524 2.70 554,318 3.20
Canceled (103,658) (1.40) -- --
Exercised (147,372) (.73) (295,000) (1.00)
--------- ------ ---------- ------
Outstanding
December 31, 1998 2,560,665 $ 1.68 761,418 $ 2.61
========= ====== ========== ======
Exercisable
December 31, 1997 1,038,612 $ .32 87,500 $ 1.00
========= ====== ========== ======
Exercisable
December 31, 1998 1,308,877 $ .56 761,418 $ 2.61
========= ====== ========== ======
</TABLE>
F-45
<PAGE> 56
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
<TABLE>
<CAPTION>
Options Warrants
--------------- ---------------
<S> <C> <C>
Weighted average fair value of options
and warrants granted during 1997 $ .91 $ 1.00
Weighted average fair value of options
and warrants granted during 1998 $ .80 $ 1.20
=============== ===============
</TABLE>
The following table summarizes information about
exercisable stock options and warrants at December
31, 1998.
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
--------------------------------------------------------------------------------------
December 31, 1998
======================================================================================
OPTIONS:
<S> <C> <C> <C> <C> <C>
$ .10 - .50 920,445 4.38 $ .26 918,093 $ .26
1.00 - 1.10 773,933 4.25 1.00 353,727 1.00
2.50 159,787 4.36 2.50 20,557 2.50
3.06 - 4.00 581,500 3.55 3.74 1,500 4.00
5.34 - 6.85 125,000 3.61 5.96 15,000 5.34
------------- ------------ ----------- ------------- ----------
$ 1.00 - 6.98 2,560,665 4.11 $ 1.68 1,308,877 $ .56
============= ============ =========== ============= ==========
WARRANTS:
$ 1.00 - 1.10 477,100 .44 $ 1.02 477,100 $ 1.02
4.25 - 4.68 169,318 1.66 4.28 169,318 4.28
5.34 - 6.98 115,000 4.39 6.77 115,000 6.77
------------- ------------ ----------- ------------- ----------
$ 1.00 - 6.98 761,418 1.30 $ 2.61 761,418 $ 2.61
============= ============ =========== ============= ==========
</TABLE>
F-46
<PAGE> 57
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
The weighted average grant date fair value of stock
options granted is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------ ------------
<S> <C> <C>
Market value equal to exercise price $ .73 $ 1.00
Market value greater than exercise price .55 --
Market value less than exercise price 1.15 .88
============ ============
</TABLE>
The weighted average grant date fair value of
warrants granted is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------ ------------
<S> <C> <C>
Market value equal to exercise price $ .11 $ 1.00
Market value greater than exercise price -- --
Market value less than exercise price 2.24 --
============ ============
</TABLE>
F-47
<PAGE> 58
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
During 1998, the Company granted warrants to purchase
145,000 shares of common stock ranging from $1.00 to
$6.98 per share to consultants. The warrants vest
immediately and expire at various dates through
November 2003. Certain of the consulting agreements
are for twelve-month periods and, therefore, the
Company recorded an asset of $214,649 that is being
amortized over twelve months. In 1998, the Company
recognized approximately $108,000 of expense in
conjunction with the above warrants.
12. RETIREMENT The Company has a Simple SEP pension plan which
PLAN includes all employees who have attained the age of
21 and have been employed by the Company for one
year. To be eligible to participate in the plan, the
employee must be reasonably expected to receive
compensation in the plan year of at least $5,000. The
Company matches employee contributions dollar for
dollar up to 3% of the employee's gross wages. For
the years ended December 31, 1998 and 1997, the
Company contributed $16,668 and $9,733, respectively,
on behalf of employees to the retirement plan.
13. RELATED A director of the Company is also the President,
PARTY Chief Executive Officer and a director of CANnect
TRANSACTIONS Communications, Inc., which is a distributor of the
Company's products in Canada. CANnect purchased
$47,000 of the Company's products in 1998. There were
no such purchases in 1997.
14. BUSINESS In 1998, the Company adopted SFAS No. 131,
SEGMENTS "Disclosures About Segments of an Enterprise and
Related Information." Disclosures required by SFAS
No. 131 are as follows:
The Company is engaged in one business segment -
Internet Connectivity Solutions.
The following table presents information by
geographic area:
F-48
<PAGE> 59
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
<TABLE>
<CAPTION>
Long-Lived
Year Ended December 31, 1998 Revenues(1) Assets
---------------------------- ------------ -------------
<S> <C> <C>
United States $ 6,417,000 $ 1,163,000
Foreign countries 1,259,000 --
------------ ------------
$ 7,676,000 $ 1,163,000
============ ============
</TABLE>
For the year ended December 31, 1997, there were no
foreign sales.
(1) Revenues are attributed to countries based on
location of customer.
During 1998, sales to two domestic customers
represented $2,162,000 of the Company's total sales.
At December 31, 1998, accounts receivable from these
customers was $1,770,000. For the year end December
31, 1997, there were no such concentrations in sales
or accounts receivable.
For the year ended December 31, 1998 revenues from
significant customers consisted of the following:
<TABLE>
<CAPTION>
Customer:
<S> <C>
A 23%
B 11%
</TABLE>
15. SUBSEQUENT
EVENTS On July 8, 1999, the Company signed a letter of
intent with Technologic, Inc., a privately held
company located in Norcross, Georgia. The Company
will exchange approximately 1.5 million shares of its
common stock for all of the shares, options and
warrants of Technologic. The anticipated completion
date of the merger is August 31, 1999.
F-49
<PAGE> 60
eSOFT, INCORPORATED AND
SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
================================================================================
In June 1999, the Company completed the private
placement of $3,000,000 convertible subordinated
debentures. Under the debenture agreement, the
investor has the option to invest up to an additional
$5 million in convertible debentures in two
additional tranches. Under certain circumstances, the
Company may require the investor to purchase $2
million of additional debentures.
The debenture financing consists of an initial $3
million of 5% convertible subordinated debentures due
in June 2002. Interest is payable in cash or, at the
Company's option, in shares of common stock. The
debentures are convertible at any time at the
investor's option into a fixed number of shares of
eSoft common stock at $3.9125 per share, subject to
certain anti-dilution provisions and adjustments. The
investor also received warrants to purchase 766,773
shares of common stock with an exercise price of
$4.4994 per common share. The warrants have a three
year term. The Company has the ability, under certain
circumstances, to obligate the investor to convert
the debentures into common stock and to exercise the
warrants.
As part of the debenture financing, the investor has
the option to purchase an additional $5 million of
debentures with warrants in two subsequent tranches.
Under certain circumstances, the Company may require
the investor to purchase $2 million of additional
debentures, which would be convertible at $3.9125 per
share, together with warrants to purchase 511,182
shares of common stock with an exercise price of
$4.4994 per common share. The third tranche of $3
million of debentures would be convertible at the
lower of (i) the Company's then current market price
or (ii) $5.50, but in no event less than $3.9125 per
share. The third tranche of debentures would be
accompanied by warrants with an exercise price of
115% of the third tranche debenture conversion price.
F-50
<PAGE> 61
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1 Amended and Restated Agreement and Plan Merger dated January 25,
1999 between eSoft, Inc., eSoft Acquisition Corporation and Apexx
Technology, Inc. (filed with Registration Statement on Form S-4/A
on April 20, 1999 and incorporated herein by reference).
2.2 Form of Stockholders Agreement executed by Apexx Technology, Inc.
stockholders in connection with the merger (filed with Registration
Statement on Form S-4 on April 20, 1999 and incorporated herein by
reference).
2.3 Form of Escrow Agreement executed by eSoft, Inc. Thomas
Loutzenheiser and The Trust Company of The Bank of Montreal (filed
with Registration Statement on Form S-4/A on April 20, 1999 and
incorporated herein by reference).
2.5 Employment Agreement by and between eSoft, Inc. and Thomas
Loutzenheiser (filed with Registration Statement on Form S-4/A on
April 20, 1999 and incorporated herein by reference).
9.1 Voting Agreement by and between eSoft, Inc and Tom Loutzenheiser,
Gayl Loutzenheiser and David Dahms (filed with Registration
Statement on Form S-4/A on April 20, 1999 and incorporated herein
by reference).
9.2 Voting Agreement by and between eSoft, Inc and Albert Youngwerth,
Heather Youngwerth, Lawrence Lynch, George Minow, Chris Minow,
William Rivers, Ray Jenks (filed with Registration Statement on
Form S-4/A on April 20, 1999 and incorporated herein by reference).
23.1* Consent of BDO Seidman, LLP
23.2* Consent of Balukoff, Lindstrom & Co., P.A.
27.1* Restated Financial Data Schedule
27.2* Restated Financial Data Schedule
27.3* Restated Financial Data Schedule
27.4* Restated Financial Data Schedule
* Filed herewith
<PAGE> 62
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 hereunto duly authorized.
eSoft, Inc.
Date: August 9, 1999 By: /s/ Jeffrey Finn
----------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive Officer
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan Merger dated January 25,
1999 between eSoft, Inc., eSoft Acquisition Corporation and Apexx
Technology, Inc. (filed with Registration Statement on Form S-4/A
on April 20, 1999 and incorporated herein by reference).
2.2 Form of Stockholders Agreement executed by Apexx Technology, Inc.
stockholders in connection with the merger (filed with Registration
Statement on Form S-4/A on April 20, 1999 and incorporated herein
by reference).
2.3 Form of Escrow Agreement executed by eSoft, Inc. Thomas
Loutzenheiser and The Trust Company of The Bank of Montreal (filed
with Registration Statement on Form S-4/A on April 20, 1999 and
incorporated herein by reference).
2.5 Employment Agreement by and between eSoft, Inc. and Thomas
Loutzenheiser (filed with Registration Statement on Form S-4/A on
April 20, 1999 and incorporated herein by reference).
9.1 Voting Agreement by and between eSoft, Inc and Tom Loutzenheiser,
Gayl Loutzenheiser and David Dahms (filed with Registration
Statement on Form S-4/A on April 20, 1999 and incorporated herein
by reference).
9.2 Voting Agreement by and between eSoft, Inc and Albert Youngwerth,
Heather Youngwerth, Lawrence Lynch, George Minow, Chris Minow,
William Rivers, Ray Jenks (filed with Registration Statement on
Form S-4/A on April 20, 1999 and incorporated herein by reference).
23.1* Consent of BDO Seidman, LLP
23.2* Consent of Balukoff, Lindstrom & Co., P.A.
27.1* Restated Financial Data Schedule
27.2* Restated Financial Data Schedule
27.3* Restated Financial Data Schedule
27.4* Restated Financial Data Schedule
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
eSoft, Inc.
Broomfield, Colorado
We hereby consent to the incorporation by reference in the previously filed
Registration Statements on Form S-3 (Registration # 333-82619 and # 333-82247)
and Form S-8 (Registration # 333-80151) of eSoft, Inc. of our report dated
July 16, 1999 relating to the supplemental consolidated financial statements of
eSoft, Inc. appearing in the Company's Form 8-K dated August 9, 1999.
/s/ BDO SEIDMAN, LLP
Denver, Colorado
August 9, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Apexx Technology, Inc.
Boise, Idaho
We hereby consent to the incorporation by reference in the previously filed
Registration Statements on Form S-3 (Registration # 333-82619 and # 333-82247)
and Form S-8 (Registration # 333-80151) of eSoft, Inc. of our report dated
February 4, 1999, relating to the balance sheet of Apexx Technology, Inc. as of
December 31, 1998 and the statements of operations, stockholders' deficit and
cash flows for each of the two years in the period ended December 31, 1998
appearing in eSoft's 8-K dated August 9, 1999. Our report contains an
explanatory paragraph regarding Apexx Technology, Inc.'s ability to continue as
a going concern.
/s/ Balukoff, Lindstrom & Co., P.A.
Boise, Idaho
August 9,1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET AND CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 787,894
<SECURITIES> 0
<RECEIVABLES> 2,769,479
<ALLOWANCES> (334,452)
<INVENTORY> 1,229,968
<CURRENT-ASSETS> 4,693,980
<PP&E> 666,275
<DEPRECIATION> (358,039)
<TOTAL-ASSETS> 5,852,150
<CURRENT-LIABILITIES> 3,211,722
<BONDS> 0
0
0
<COMMON> 89,369
<OTHER-SE> 2,551,059
<TOTAL-LIABILITY-AND-EQUITY> 5,852,150
<SALES> 1,163,108
<TOTAL-REVENUES> 1,163,108
<CGS> 706,131
<TOTAL-COSTS> 3,958,229
<OTHER-EXPENSES> (14,106)
<LOSS-PROVISION> 80,726
<INTEREST-EXPENSE> (16,003)
<INCOME-PRETAX> (3,487,146)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,487,146)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,487,146)
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 677,944
<SECURITIES> 1,991,541
<RECEIVABLES> 2,947,147
<ALLOWANCES> (267,241)
<INVENTORY> 1,577,666
<CURRENT-ASSETS> 7,115,141
<PP&E> 624,901
<DEPRECIATION> (328,484)
<TOTAL-ASSETS> 8,285,669
<CURRENT-LIABILITIES> 2,581,012
<BONDS> 0
0
0
<COMMON> 84,549
<OTHER-SE> 5,620,108
<TOTAL-LIABILITY-AND-EQUITY> 8,285,669
<SALES> 7,675,706
<TOTAL-REVENUES> 7,675,706
<CGS> 3,353,846
<TOTAL-COSTS> 8,449,073
<OTHER-EXPENSES> (138,598)
<LOSS-PROVISION> 212,981
<INTEREST-EXPENSE> (139,611)
<INCOME-PRETAX> (3,988,615)
<INCOME-TAX> (162,000)
<INCOME-CONTINUING> (3,826,615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,826,615)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET AND CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,196,894
<SECURITIES> 0
<RECEIVABLES> 1,161,844
<ALLOWANCES> (79,665)
<INVENTORY> 536,585
<CURRENT-ASSETS> 3,072,010
<PP&E> 549,243
<DEPRECIATION> (246,294)
<TOTAL-ASSETS> 4,072,735
<CURRENT-LIABILITIES> 954,501
<BONDS> 0
0
0
<COMMON> 66,149
<OTHER-SE> 2,826,137
<TOTAL-LIABILITY-AND-EQUITY> 4,052,735
<SALES> 1,478,544
<TOTAL-REVENUES> 1,478,544
<CGS> 691,926
<TOTAL-COSTS> 1,227,752
<OTHER-EXPENSES> 2,120
<LOSS-PROVISION> 15,570
<INTEREST-EXPENSE> 2,120
<INCOME-PRETAX> (443,254)
<INCOME-TAX> 0
<INCOME-CONTINUING> (443,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (443,254)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 299,232
<SECURITIES> 0
<RECEIVABLES> 509,464
<ALLOWANCES> (52,826)
<INVENTORY> 498,273
<CURRENT-ASSETS> 1,522,720
<PP&E> 448,378
<DEPRECIATION> (221,855)
<TOTAL-ASSETS> 2,699,148
<CURRENT-LIABILITIES> 714,439
<BONDS> 0
0
0
<COMMON> 39,461
<OTHER-SE> 1,383,397
<TOTAL-LIABILITY-AND-EQUITY> 2,699,148
<SALES> 3,236,563
<TOTAL-REVENUES> 3,236,563
<CGS> 1,492,119
<TOTAL-COSTS> 2,078,523
<OTHER-EXPENSES> 56,833
<LOSS-PROVISION> 51,465
<INTEREST-EXPENSE> 43,209
<INCOME-PRETAX> (390,912)
<INCOME-TAX> 162,000
<INCOME-CONTINUING> (522,912)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (522,912)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
