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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 000-26039
eSAT, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 95-0344604
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16520 HARBOR BLVD, FOUNTAIN VALLEY, CA 92708
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(Address of principal executive offices, including zip code)
(714) 418-3200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
PAR VALUE $.001 18,324,381
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(Class of Common Stock) (Outstanding at December 20, 1999)
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eSAT, INC.
TABLE OF CONTENTS
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PAGE NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets as of September 30, 1999
and December 31, 1998 3
Condensed Statements of Operations for the three and
nine-month periods ended September 30, 1999 and 1998 4
Condensed Statements of Cash Flows for the three and
nine-month periods ended September 30, 1999 and 1998 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 20
SIGNATURE 21
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eSAT, INC.
CONDENSED BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31,
1999 1998
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(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 12,276 $ 2,567,697
Accounts receivable 27,677 48,964
Inventories 389,269 289,260
Other current assets 40,094 15,000
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TOTAL CURRENT ASSETS 469,316 2,920,921
Property and equipment, net 704,023 293,251
Note receivable 250,000 --
Other assets, net 76,586 47,215
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$ 1,499,925 $ 3,261,387
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,455,551 $ 246,667
Payroll taxes payable 36,246 168,891
Deferred revenue 76,836 117,070
Notes payable and current portion on long term debt 54,309 6,414
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TOTAL CURRENT LIABILITIES 1,622,942 539,042
Note payable, net of current portion 26,405 --
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock,
10,000,000 shares authorized; 2,000,000 shares
subscribed and unissued at September 30, 1999 4,000,000 --
Common stock - $.001 par value,
40,000,000 shares authorized; 18,234,566 shares issued
and outstanding at September 30, 1999 and 16,085,936 at
December 31, 1998 18,235 16,086
Additional paid in capital 9,115,025 6,051,235
Treasury stock (364,370) --
Subscription receivable (3,250,000) --
Accumulated deficit (9,668,312) (3,344,976)
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TOTAL STOCKHOLDERS' EQUITY (149,422) 2,722,345
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$ 1,499,925 $ 3,261,387
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</TABLE>
See accompanying notes.
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eSAT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenue $ 20,711 $ (455,888) $ 1,187,770 $ 237,758
Cost of goods sales 259,197 76,688 767,167 450,545
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Gross profit (238,486) (532,576) 420,603 (212,787)
Selling, general and administrative expenses 1,739,565 403,403 5,718,146 1,190,420
Write off uncollectible accounts 96,264 236,666 1,064,986 236,666
----------- ----------- ----------- -----------
1,835,829 640,069 6,783,132 1,427,086
Operating loss (2,074,315) (1,172,645) (6,362,529) (1,639,873)
Interest (income) (3,038) -- (55,384)
Interest expense 8,601 897 16,191 11,397
----------- ----------- ----------- -----------
Net loss before extraordinary item (2,079,878) (1,173,542) (6,323,366) (1,651,270)
Extraordinary gain on extinguishment
of debt, net of tax effect -- 242,990 -- 242,990
----------- ----------- ----------- -----------
Net loss $(2,079,878) $ (930,552) $(6,323,336) $(1,408,280)
=========== =========== =========== ===========
Basic and fully-diluted loss per common share $ (0.12) $ (0.08) $ (0.37) $ (0.12)
=========== =========== =========== ===========
Shares used in computing net loss per share 17,902,396 12,361,747 17,296,909 12,043,667
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
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eSAT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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NINE MONTHS ENDED
SEPTEMBER 30,
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1999 1998
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OPERATING ACTIVITIES
Net loss $(6,323,336) $(1,408,280)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 133,199 27,694
Issuance of stock options for services 1,226,800 --
Decrease in accounts receivable, net 21,287 208,435
(Increase) in inventory (100,009) (92,819)
(Increase) decrease in note receivable (250,000) 20,082
(Increase) in other current assets (25,094) (4,190)
(Increase) in other noncurrent assets (29,371) (48,508)
Increase (decrease) in other accounts payable
and accrued expenses 1,208,884 (298,604)
Increase (decrease) in deferred revenue (40,234) 91,951
Increase (decrease) in note payable and current
portion of debt 50,000 (281,533)
Increase (decrease) in payroll taxes payable (132,645) 155,422
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NET CASH USED IN OPERATING ACTIVITIES (4,260,519) (1,630,350)
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INVESTING ACTIVITIES
Purchase of property and equipment (543,971) (96,339)
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NET PROVIDED BY (CASH USED) IN INVESTING ACTIVITIES (543,971) (96,339)
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FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 1,839,139 1,814,329
Net cash proceeds from issuance of preferred stock 750,000 --
Net cash used to acquire treasury stock (364,370) 12,000
Cash proceeds from notes payable 24,300 --
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,249,069 1,826,329
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,555,421) 99,640
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,567,697 (11,827)
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,276 $ 87,813
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 9,941 $ 10,500
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</TABLE>
See accompanying notes.
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eSAT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BACKGROUND
eSat, Inc. ("eSat" or "Company") was incorporated on June 23, 1995, pursuant
to the laws of the State of Nevada, as U.S. Connect 1995, Inc., for the
purposes of marketing and servicing transaction processing services, prepaid
long distance cards, ATM machines and payment systems to small-to-medium
sized merchants. In October 1995, the Company consummated a public offering
of its securities from which it derived gross proceeds of approximately
$100,000. Prior to October 1998, the Company had not commenced operations
and was seeking to establish a new business. On October 8, 1998, the Company
consummated an Agreement and Plan of Merger ("Merger") with Technology
Guardian, Inc., a California corporation ("TGI"), whereby all the issued and
outstanding shares of TGI were exchanged for shares of the Company's Common
Stock. In connection with the Merger, the Company changed its name to
Technology Guardian, Inc., and succeeded to the business of TGI immediately
prior to the Merger. Prior to the Merger, Technology Guardian had been
engaged in providing computer network installation services and the related
sale of personal computers and telecommunications equipment necessary for
the configuration of a local area network (LAN), and in research and
development of the products currently offered by eSat, Inc. The Company
amended its certificate of incorporation to change it's name to "eSat, Inc."
on January 26,1999.
eSat's principle line of business consists of providing satellite Internet
access equipment and services to businesses, educational institutions and
government agencies. The Company's Internet access product line is based on
its Global Satellite Internet(TM) ("GSI") gateway, Nexstream(TM) Internet
gateway and Nexstreams Channel Casting(TM) which all provide existing LANs
with Internet access via a satellite based network. A "gateway" is a
specialized server that allows LAN users to share an Internet connection.
The Company's GSI product line consists of an Internet gateway server that
utilizes the Company's satellite network for downstream communications and a
telephone connection for upstream communications. The Nexstream product
line, which the Company anticipates launching in the first half of fiscal
2000, consists of an Internet gateway server that utilizes the same
satellite network for both upstream and downstream communications. The
Company's ChannelCasting(TM) product, which is currently in development,
will provide the simultaneous broadcast of video and data files to multiple
destinations through the use of the Company's existing and planned future
Internet gateway technology. The Company plans to be a geographically
diverse satellite Internet Service Provider through the establishment of
joint venture partners in various countries. The Company expects to finance
the expansion either through capital provided by the parties wishing to
provide the service internationally, or through capital generated by
issuing additional securities.
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eSAT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim financial information for the three and nine-month periods ended
September, 1999 and 1998 is unaudited but includes all adjustments
(consisting only of normal recurring entries) which the Company's management
believes to be necessary for the fair presentation of the financial
position, results of operations and cash flows for the periods presented.
The accompanying interim financial statements should be read in conjunction
with the financial statements and related notes included in the Company's
Form 10, as filed with the Securities and Exchange Commission on November 8,
1999. 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 Securities
and Exchange Commission rules and regulations. Interim results of operations
for the three and nine-month periods ended September 30, 1999, are not
necessarily indicative of operating results to be expected for the full
year.
REVENUE AND EXPENSE RECOGNITION
The Company recognizes revenue from hardware and software sales as products
are shipped. The Company, subject to certain limitations, permits its
customers to exchange products or receive credits against future purchases.
Individual accounts receivable are written-off as they are deemed to be
uncollectible. To date, the Company has had a history of a high level of
write offs of uncollectible accounts. See Item II,"Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company also generates revenue by selling high-speed internet access.
This service is purchased by customers on either a one, two or three year
service subscription contract. Revenue is recognized as the service is
provided using the straight-line method over the life of the contract. A
related liability is recorded for the unearned portion of service revenue
received. Costs that are directly related to the acquisition of the contract
are deferred and charged to expense also using the straight-line method over
the life of the contract. The Company reports income and expenses on the
accrual basis for both financial and income tax reporting purposes.
NET LOSS PER SHARE
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic net income per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period increased to include, if dilutive, the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of outstanding
stock options, warrants and convertible securities is reflected in diluted
net income per share by application of the treasury stock method. On the
accompanying income statements, the
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eSAT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
Company has excluded common equivalent shares from stock options, warrants
and convertible securities from the computation of diluted earnings per
share, as their effect would be antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year data to conform to
the current financial statement presentation.
3. 12% CONVERTIBLE PREFERRED STOCK
The Company has entered into an agreement with Vantage Capital for the
purpose of raising capital for the Company. Pursuant to this agreement,
Vantage Capital has arranged for the sale of 2.0 million shares of 12%
Convertible Preferred Stock (the "Series A and B Preferred Stock"), for a
total of $4.0 million, to itself and Corporate Financial Enterprises, in
equal subscriptions of $2.0 million apiece. The subscription is payable at
the rate of $500,000 per month. As of September 30, 1999, the Company had
received $750,000. Through December 21,1999, the Company had received a
total of $2,000,000.
The Series A and B Preferred Stock has a liquidation preference of $2.00 per
share and accrues interest at a 12% annual rate, payable in Common Stock of
the Company. The Series A and B Preferred Stock may be converted into shares
of Common Stock at the lower of $2.00 per share or 70% of the bid price of
the Common Stock on the date of a notice to convert as reported by the
exchange or the market on which the shares of Common Stock are traded. The
Series A and B Preferred Stock contains standard antidilution and price
protection provisions and standard piggy back rights. There is no firm
written agreement in place requiring the balance of the anticipated
investment to be made; however the Company expects that the full amount of
the anticipated investment will be made. Vantage Capital is owned by Michael
C. Palmer, the Chief Executive Officer of the Company.
4. SUBSEQUENT EVENTS
PRIVATE PLACEMENT OF PREFERRED STOCK AND EQUITY LINE OF CREDIT
On December 29, 1999, the Company entered into an agreement with a private
third-party investor that provides for the immediate purchase by the
investor of $5.0 million of Series C Convertible Preferred Stock ("Series C
Preferred") and the establishment of a $20.0 million equity line of credit
("Equity Line"). The Series C Preferred is convertible into Common Stock of
the Company at a price based on the market price of the Common Stock at the
time of conversion, subject to a maximum price of $4.30 per share, and bears
interest at 6% per annum. The Series C Preferred is convertible at the
investor's option, and becomes convertible in three equal installments,
commencing approximately 120 days after the purchase date and ending 90 days
thereafter.
Under the terms of the $20.0 million Equity Line, the Company has a right to
sell to the investor, and the investor has an obligation to buy from the
Company, up to an additional $20.0 million of convertible preferred stock.
The maximum amount of each such individual sale of preferred stock will be
determined by a formula based on the dollar-volume of trading of the
Company's Common Stock at the time of the sale, subject to an overall
maximum of $2.5 million per transaction. There must be at least 15 days
between such sales and no sales are allowed while the Company's Common Stock
is trading below $3.00 per share.
SALE OF I-XPOSURE COMMON STOCK
As of September 30, 1999, the Company's wholly owned subsidiary i-Xposure,
Inc. ("i-Xposure") was engaged in the development of a highly customizable
personal interactive desktop ("pid"). The pid includes a variety of personal
productivity modules (calendar, planner, contact list, etc.) as well as
serving as an Internet portal when users are online. Users of the pid can
download the software for free from sites that have licensed the pid from
i-Xposure. The pid allows licensees to include images, links to other web
sites and a variety of other interactive features on the users' desktops.
i-Xposure derives revenue from licensees when users download the pid and
also on other measures of Internet based activity.
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eSAT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
In order to fund i-Xposure's development without placing a burden on eSat's
limited financial resources, the Company has initiated a private placement
of up to 1.5 million shares of i-Xposure Common Stock at $2.00 per share. As
of December 22, 1999, the private placement had raised $240,000, before
selling commissions and other fees and expenses, from the sale of 120,000
shares of i-Xposure Common Stock. eSat will retain 4.0 million shares of
i-Xposure Common Stock. After sufficient funds have been received, i-Xposure
will operate as a separate, stand alone entity and maintain its own books
and records.
5. INVENTORIES
Inventories, net, are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
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Finished goods $157,046 $117,517
Raw materials and components 232,223 171,743
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$389,269 $289,260
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eSAT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed below and in the Company's Registration
Statement on Form 10.
OVERVIEW
eSat, Inc. ("eSat" or "Company") is a satellite Internet Service Provider,
or ISP, and satellite Internet access equipment and services developer for
businesses, educational institutions and government. The Company's product
line is based on its Global Satellite Internet ("GSI") gateway, Nexstreams
and Channel Casting which provide existing local area networks (LAN) with
Internet access. A gateway is a service that allows someone to access the
Internet. GSI refers to the Company's service of providing access to the
Internet through satellite transmissions around the world. "LAN" means local
area network, which usually consists of a network of computers within a
single workplace. Nexstreams uses very small aperture terminals ("VSAT"),
which allows for bi-directional data transfer for remote locations needing
Internet access or a private network. The Company's ChannelCasting (TM)
product provides the simultaneous broadcast of large video and data files to
multiple destinations through the use of eSat's GSI gateway as the means of
transmission of the data files. eSat's SAMS(TM) product (Satellite Accessed
Material for Schools) provides managed educational content of over 60,000
pre-screened web pages accessible to students through the use of eSat's GSI
gateway and as the means of transmission of the web pages. "Managed
Educational Content" means that the content available for school children
has been screened to assure propriety for school children. The Company plans
to be a geographically diverse satellite Internet Service Provider through
the establishment of joint venture partners in various countries. The
Company expects to finance the expansion either through financing provided
by the parties wishing to provide the service internationally, or through
capital generated by operations and/or issuing additional securities.
The Company has incurred significant losses since 1996. Furthermore, the
Company anticipates incurring additional losses in the foreseeable future as
the Company grows its business and completes the development of its
products. The Company operates in a highly competitive market and the
success of the business of the Company will depend on its ability to compete
in this marketplace.
RESULTS OF OPERATIONS
During fiscal years 1998 and 1999, the Company has experienced significant
difficulties selling its products and collecting its accounts receivable.
The Company's first product offering, the unidirectional GSI product line,
experienced technical difficulties due to its reliance on outbound telephone
lines, and other Internet Service Providers, for its upstream connection to
the Internet. During fiscal 1999, the Company has been working on a solution
to this technical problem with the GSI product line, as well as working to
develop and launch its bi-directional NextStreams product that utilizes a
satellite connection for both upstream and downstream communications.
In the third quarter of fiscal 1998, the Company had negative revenue of
$455,888 due primarily to a large customer return and an adjustment to
properly record deferred revenue. During the third quarter of fiscal 1999,
the Company recorded revenue of $20,711, primarily for Internet access time
billed to its customers.
For the first nine months of fiscal 1998, the Company recorded revenue of
$237,758, however, the Company wrote off accounts receivable of $236,666.
For the first nine months of fiscal 1998, the Company recorded revenue of
$1,187,770 and wrote off accounts receivable totaling $1,064,986.
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eSAT, INC.
The Company expects that shipments of new systems will increase as a result
of a solution for its GSI product line outbound ISP difficulities and the
launch its bi-directional NextStreams product.
For the three-month periods ended September 30, 1999 and 1998, cost of sales
were $259,197 and $76,688, respectively. For the nine-month periods ended
September 30, 1999 and 1998, cost of sales were $767,167 and $450,544,
respectively. Cost of sales includes the cost of hardware and software
shipped to customers, satellite access time purchased from a third party and
inventory write offs.
For the three-month periods ended September 30, 1999 and 1998, operating
expenses were $1,739,565 and $403,403, respectively. For the nine-month
periods ended September 30, 1999 and 1998, operating expenses were
$5,718,146 and $1,190,420, respectively. The increase in operating expenses
for fiscal 1999 when compared to fiscal 1998 for both the three and nine
month periods ended September 30, is due to higher levels of staffing and
compensation, increased marketing expenditures, increased R&D expenditures
and higher levels of professional fees paid to outside accountants and
attorneys.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been financed primarily from the sale of
preferred and common stock in 1999 and 1998 and, to a lesser extent, capital
equipment lease arrangements. At September 30, 1999, the Company had cash on
hand of $12,365 and negative working capital of $1,153,626, compared to cash
of $2,567,697 and positive working capital of $2,381,879 at December 31,
1998.
Net cash used in operating activities of $4,260,519 and $1,630,350 for the
nine months ended September 30, 1999, and 1998, respectively, was primarily
attributable to operating losses, partially offset in the first months of
fiscal 1999 by a decrease of $1,153,626 in working capital. During the first
nine months of fiscal 1998, net working capital increased by $194,959.
Net cash used in investing activities was $543,971 and $96,339 for the nine
months ended September 30, 1999 and 1998, respectively. These expenditures
were for the purchase of fixed assets.
Net cash provided by financing activities of $2,249,069 and $1,826,329, for
the nine months ended September 30, 1999 and 1998, respectively, resulted
primarily from the net proceeds of the sale of preferred and common stock.
To the extent the Company's revenues increase in the coming twelve months,
the Company anticipates significant increases in operating expenses, working
capital and capital expenditures. The cost to purchase additional fixed
assets, primarily satellite transmission and receiving equipment and to
finance working capital requirements is approximately $15,000,000. The
Company also anticipates the need to construct its own network of Network
Operations Centers (NOCs). The NOC is the location of the operations
equipment,
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eSAT, INC.
which receives and transmits data from and to a satellite. The construction
of a NOC costs approximately $2,000,000 per location.
The Company has entered into an agreement with Vantage Capital for the
purpose of raising capital for the Company. Vantage Capital has arranged for
the sale of 2.0 million shares of 12% Convertible Preferred Stock (the
"Series A and B Preferred Stock"), for a total of $4.0 million, to itself
and Corporate Financial Enterprises, in equal subscriptions of $2.0 million
apiece. The subscription is payable at the rate of $500,000 per month. As of
September 30, 1999, the Company had received $750,000. Through December
21,1999, the Company had received a total of $2,000,000.
The Series A and B Preferred Stock has a liquidation preference of $2.00 per
share and accrues interest at a 12% annual rate, payable in Common Stock of
the Company. The Series A and B Preferred Stock may be converted into shares
of Common Stock at the lower of $2.00 per share or 70% of the bid price of
the Common Stock on the date of a notice to convert as reported by the
exchange or the market on which the shares of Common Stock are traded. The
Series A and B Preferred Stock contains standard antidilution and price
protection provisions and standard piggy back rights. There is no firm
written agreement in place requiring the balance of the anticipated
investment to be made; however the Company expects that the full amount of
the anticipated investment will be made. Vantage Capital is owned by Michael
C. Palmer, the President of the Company.
On December 29, 1999, the Company entered into an agreement with a private
third-party investor that provides for the immediate purchase by the
investor of $5.0 million of Series C Convertible Preferred Stock ("Series C
Preferred") and the establishment of a $20.0 million equity line of credit
("Equity Line"). The Series C Preferred is convertible into Common Stock of
the Company at a price based on the market price of the Common Stock at the
time of conversion, subject to a maximum price of $4.30 per share, and bears
interest at 6 percent per annum. The Series C Preferred is convertible at
the investor's option, and becomes convertible in three equal installments,
commencing approximately 120 days after the purchase date and ending 90 days
thereafter.
Under the terms of the $20.0 million Equity Line, the Company has a right to
sell to the investor, and the investor has an obligation to buy from the
Company, up to an additional $20.0 million of convertible preferred stock.
The maximum amount of each such individual sale of preferred stock will be
determined by a formula based on the dollar-volume of trading of the
Company's Common Stock at the time of the sale, subject to an overall
maximum of $2.5 million per transaction. Furthermore, there must be at least
15 days between sales and no sales are allowed while the Company's Common
Stock is trading below $3.00 per share.
The Company believes that the receipt of the net proceeds from the preferred
stock described above plus cash generated internally from sales will be
sufficient to satisfy its future operating, working capital, and existing
lease commitment cash requirements for the next twelve months. The Company
believes that it has sufficient resources to fund current operations,
develop new or enhanced products and/or services, to respond to competitive
pressures and acquire complementary products, businesses or technologies.
IMPACT OF YEAR 2000
The Company has assessed its year 2000 readiness and believes its systems
are compliant. The Company has purchased or procured its essential
equipment, software, systems, and inventory within the past 18 months. The
Company has sought and received confirmation from its key third-party
suppliers and vendors that the hardware, software, products, and services
furnished by these vendors are year 2000 compliant. These vendors include
the manufacturer of the Company's proprietary computer boards and the
vendors of the servers used in the Company's products, the software
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eSAT, INC.
publisher of the software licensed by the Company, and satellite and
communications companies that transmit data on behalf of the Company. In
addition, the vendors of the Company's own internal network, computer,
accounting, and other systems have assured the Company that their products
are year 2000 compliant.
The worst case for the Company with respect to year 2000 compliance would be
the general failure of the country's communications infrastructure. The
Company relies on the general communications infrastructure maintained by
the established communications companies to transmit its data to it NOC
uplink site, to uplink to a satellite, and for rebroadcast by the satellite
to the Company's customers. Accordingly, if the communications companies and
satellite operators do not have their systems year 2000 compliant, then the
Company and its customers could suffer the consequences of the failure of
one or more components of the communications infrastructure in common with
other users. For the Company, the consequences could be that customers will
refuse to pay for the Company's services and products and the Company will
suffer a decline in revenues. Costs would go up as the Company would seek to
mitigate its problems. The Company could lose its good will, reputation for
reliability, and some or all of its customer base.
Total costs incurred in connection with the Company's year 2000 compliance
efforts have not been material and the Company expects minimal additional
costs in calendar year 1999 to assure year 2000 readiness. The Company will
conduct ongoing testing of new features, components, and systems as they are
added to the Company's products.
The Company has only generalized contingency plans for year 2000
contingencies. In general, the Company expects that any year 2000 problems
will occur in the communications infrastructure. If such problems occur
which interrupt the Company's services to its customers, the Company intends
to immediately seek to obtain such services from communications companies
that are able to continue offering services. Since the Company cannot know
which Companies will have year 2000 services interruptions, the Company has
not made specific plans for alternate service providers at this time.
RISK FACTORS
Some of the statements in this 10-Q are forward-looking statements. These
statements involve known and unknown risks, uncertainties, and other factors
that may cause the Company's results, level of activity, performance or
achievements to be materially different from any future results, level of
activity, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among others, those
discussed below and those set forth in the Company's Registration statement
Form 10 filed with the SEC.
In some cases, forward-looking statements can be identified by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the
negative of such terms or other comparable terminology.
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<PAGE> 14
eSAT, INC.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee
future results, level of activity, performance or achievements. The Company
does not assume responsibility for the accuracy and completeness of the
forward-looking statements. The Company does not intend to update this 10-Q
after it is filed so that the forward-looking statements conform to actual
results.
THE COMPANY DEPENDS ON SATELLITE TRANSMISSION AND IS SUBJECT TO THE RISK OF
SATELLITE FAILURE.
The Company currently uses a single satellite to provide its satellite
Internet services. There is risk associated with this dependence. There are
two types of possible failures to the satellite: a failure of the individual
transponder that is used and a failure of the entire satellite. The Company
has purchased transponder protected service. This means that if there is a
failure of a transponder, the satellite operator will move the Company to
another transponder. This would create a minimum interruption to customers,
likely less than 24 hours. If the satellite itself completely fails, the
Company will move its services to another satellite. The Company's
transmissions conform to industry standards so there are several possible
alternative satellites. The Company's current uplink provider engages in
quarterly reviews of available like-satellite space and is ready to contract
for that space if needed. If the entire satellite were to fail, a one to
five day outage of services might occur depending on the availability of
other satellites. Additionally, a repointing of the receiving dishes on the
ground would likely be required. The repointing of the receiving dishes on
the ground would cost the Company $300 per customer. In the event of any
service disruption due to satellite failure, the Company's customers would
be credited for the dollar value of the amount of time they are without the
satellite Internet service. Based on a standard contract paying $495 per
month for the use of the equipment and related satellite Internet service,
this would be equal to $16.50 per day per customer. In the event of a
satellite failure, the Company could be subject to loss-of-business claims,
due to the reliance by business customers on the satellite Internet services
the Company provides. A sustained disruption in satellite service could
materially impact the ability of the Company to continue operations.
THE COMPANY INCURRED SIGNIFICANT OPERATING LOSSES.
For the nine months ended September 30, 1999 and 1998, the Company incurred
losses of $6,323,366 and $1,408,280, respectively, including all research
and development costs. The losses were primarily due to: (i) employee
compensation which increased because of additional sales and operations
staff hired by the Company in 1999 in anticipation of future growth of the
Company's operations; (ii) expenses related to marketing; and (iii) lack of
product sales. In addition, the Company incurred significant research and
development costs associated with its new products. There can be no
assurance that the Company will be able to generate sufficient revenues to
operate profitably in the future or to pay the Company's debts as they
become due. The Company is dependent upon successful completion of future
capital infusions to continue operations. See "Management's Discussion and
Analysis of Financial Condition."
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<PAGE> 15
eSAT, INC.
THE COMPANY MIGHT NOT BE SUCCESSFUL IN IMPLEMENTING ITS DOMESTIC AND
WORLDWIDE PROPOSED EXPANSION.
The Company intends to expand its operations domestically and
internationally, and will seek to expand the range of its services and
penetrate new geographic markets; however, the Company has no experience in
effectuating rapid expansion or in managing operations which are
geographically dispersed. There can be no assurance the Company's current
management, personnel and other corporate infrastructure will be adequate to
manage the Company's growth. Expansion internationally might require joint
venture partners outside the United States who will provide capital and
personnel to fund the operations internationally. The Company has very
limited experience in international joint venture transactions. The Company
has no joint venture partners at this time. There can be no assurance that
the Company will be able to successfully joint venture with entities in
other parts of the world, or that joint venture partners will be able to
raise the capital and employ the personnel required to successfully
implement worldwide operations. Accordingly, there is significant risk that
the Company will not be able to meet its goal of substantial international
expansion within the next twenty-four months.
THE COMPANY LACKS A LONG OPERATING HISTORY.
The Company has a limited operating history upon which an evaluation of the
Company can be based. The Company's prospects are subject to the risks,
expenses and uncertainties frequently encountered by companies in the new
and rapidly evolving markets for Internet and interactive media products and
services. In addition, the Company will be subject to all of the risks,
uncertainties, expenses, delays, problems and difficulties typically
encountered in the growth of an emerging business and the development and
commercialization of new products. There can be no assurance that
unanticipated expenses, problems or technical difficulties will not occur
which would result in material delays in product commercialization or that
the Company's efforts will result in successful product commercialization.
15
<PAGE> 16
eSAT, INC.
THE COMPANY'S FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION
The Audit Report accompanying the Company's Financial Statements for the
year ended December 31, 1998, contains a qualification that certain
conditions indicate that the Company might not be able to continue as a
going concern. Recurring operating losses, working capital deficiencies and
significant bad debts from accounts receivable account for this uncertainty.
Many investment bankers and investors view companies with a "going concern"
qualification as less desirable for investment. Accordingly, the Company
might have a more difficult time raising equity capital or borrowing capital
at all or on favorable terms. Suppliers to the Company might be less willing
to extend credit. Potential customers of the Company might be less willing
to purchase the Company's products if they believe that the Company will not
be viable enough to provide service, support, back-up, and follow-on
products when needed. Furthermore, the Company might be disadvantaged in
recruiting employees who might be concerned about the stability of
employment with the Company. Therefore, the "going concern" qualification
can have severe adverse consequences on the Company.
THE COMPANY HAS NO ASSURANCE OF MARKET ACCEPTANCE OF ITS PRODUCTS.
The Company is at an early stage of development and its earnings growth
depends primarily upon market acceptance of its products and services,
including the Global Satellite Internet gateway, DigiNXT gateway,
Nexstreams, SAMS programs offered to school systems, and ChannelCasting.
There can be no assurance that the Company's product development efforts
will progress further with respect to any potential new products or that
they will be successfully completed. In addition, there can be no assurance
that the Company's potential new products will be capable of being produced
in commercial quantities at reasonable costs or that they will achieve
customer acceptance.
THE COMPANY HAS NO ASSURANCE THAT ITS MARKETING AND DISTRIBUTION METHODS
WILL BE SUCCESSFUL.
There can be no assurance that the Company's products will be successfully
marketed. The Company is dependent on value-added resellers, VARs and
distributors in addition to its direct sales force to market its products.
There is no assurance that any VAR will be successful in marketing the
Company's products. The Company's success is dependent in part on its
ability to sell its products to governmental agencies, including public
school districts, and large business organizations. Selling to governmental
agencies and larger companies generally requires a long sales process, with
multiple layers of review and approval. Often nonbusiness factors enter into
the decision to purchase products. Such factors might include the residence
and origin of the supplier of the products, the nature of the supplier and
the distributor, the ethnic and gender characteristics of personnel and
owners of the Company selling or distributing the products, political and
other contacts, and other peculiar factors. Accordingly, the success of
selling to these potential customers is uncertain. The Company does not have
sufficient experience in marketing its products to determine the optimum
distribution methods. It is unclear whether marketing through VARs or mass
retailers will result in acceptable sales levels. Accordingly, the Company
might be in a position requiring change in its sales, distribution, and
marketing strategies and implementation.
16
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eSAT, INC.
THE COMPANY IS DEPENDENT ON SUCCESSFUL NEW PRODUCTS AND PRODUCT ENHANCEMENTS
INTRODUCTIONS AND MAY SUFFER PRODUCT DELAYS.
The Company's success in the Internet access business depends on, among
other things, the timely introduction of successful new products or
enhancements of existing products to replace declining revenues from
products at the latter stage of a product cycle. Consumer preferences for
software products are difficult to predict, and few consumer software
products achieve sustained market acceptance. If revenues from new products
or enhancements do not replace declining revenues from existing products,
the Company's business, operating results and financial condition could be
materially adversely affected. The process of developing Internet access
products such as those offered by the Company is extremely complex and is
expected to become more complex. A significant delay in the introduction of
one or more new products or enhancements could have a material adverse
effect on the ultimate success of such products and on the Company's
business, operating results and financial condition.
THE COMPANY MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS.
The market for Internet products and computer software is rapidly evolving
and is characterized by an increasing number of market entrants who have
introduced or developed products and services. The diverse segments of the
Internet market might not provide opportunities for more than one supplier
of products and services similar to those of the Company. It is possible
that a single supplier may dominate one or more market segments.
THE COMPANY FACES FORMIDABLE COMPETITION
The Company competes with many other Internet access providers. The Company
will face competition from numerous sources, online and Internet service
providers and others with the technical capabilities and expertise which
would encourage them to develop and commercialize competitive products and
services. Certain of such competitors have substantially greater financial,
technical, marketing, distribution, personnel and other resources than the
Company. Increased competition, resulting from, among other things, the
timing of competitive product releases and the similarity of such products
to those of the Company, may result in significant price competition, any of
which could have a material adverse effect on the Company's business,
operating results or financial condition. Current and future competitors
with greater financial resources than the Company may be able to carry
larger inventories, undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and make higher offers or guarantees to software
developers and co-development partners than the Company. There can be no
assurance that the Company will have the resources required to respond
effectively to the market or technological changes or to compete
successfully with current or future competitors or that competitive
pressures faced by the Company will not materially and adversely affect the
Company's business, operating results or financial condition.
17
<PAGE> 18
eSAT, INC.
THE COMPANY MIGHT BE SUBJECT TO GOVERNMENT REGULATION WHICH COULD HARM THE
COMPANY'S PROSPECTS.
The Company is not currently subject to direct regulation by any government
agency in the United States, other than regulations applicable to businesses
generally, and there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. Due to the increasing
popularity and use of the Internet, it is possible that laws and regulations
maybe adopted with respect to the Internet, covering issues such as user
privacy, pricing and characteristics and quality of products and services.
For example, although the Communications Decency Act was held to be
unconstitutional, there can be no assurance that similar legislation will
not be enacted in the future. Such laws or regulations could also limit the
growth of the Internet, which could in turn decrease the demand for the
Company's proposed products and services and increase the Company's cost of
doing business. Inasmuch as the applicability to the Internet of the
existing laws governing issues such as property ownership, libel and
personal privacy is uncertain, any such new legislation or regulation or the
application of existing laws and regulations to the Internet could have an
adverse effect on the Company's business and prospects.
THE SUCCESS OF THE COMPANY IS DEPENDENT ON MICHAEL C. PALMER, CHESTER L.
NOBLETT, AND OTHER SENIOR MANAGERS.
The success of the Company will be dependent largely upon the personal
efforts of its Chief Executive Officer, Michael C. Palmer, its Chairman,
Chester L. Noblett, and other senior managers. The loss of their services
could have a material adverse effect on the Company's business and
prospects. The success of the Company is also dependent upon its ability to
hire and retain additional qualified management, marketing, technical,
financial and other personnel. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to hire
or retain qualified personnel. Any inability to attract and retain qualified
management and other personnel could have a material adverse effect on the
Company.
THE COMPANY MIGHT FACE LIABILITY FOR INFORMATION SERVICES.
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company and may be subsequently distributed
to others, there is a potential that claims will be made against the Company
for defamation, negligence, copyright or trademark infringement, personal
injury or other theories based on the nature and content of such materials.
Such claims have been brought, and sometimes successfully pressed, against
online service providers in the past. The Company's general liability
insurance might not cover potential claims of this type or might not be
adequate to indemnify the Company for all liability that may be imposed. Any
imposition of liability or legal defense expenses that are not covered by
insurance or in excess of insurance coverage could have a material adverse
effect on the Company's business, operating results and financial condition.
18
<PAGE> 19
eSAT, INC.
AUTHORIZATION OF PREFERRED STOCK ALLOWS THE COMPANY TO ISSUE PREFERRED
STOCKWITHOUT THE INVESTORS' CONSENT.
The Company's Board of Directors is authorized to issue up to 10,000,000
shares of preferred stock without the approval of shareholders. The Board of
Directors has the power to establish the dividend rates, liquidation
preferences and voting rights of any series of preferred stock and these
rights may be superior to the rights of holders of the Common Stock. The
Board also may establish redemption and conversion terms and privileges with
respect to any shares of preferred stock. The issuance of any shares of
preferred stock having rights superior to those of the Common Stock may
result in a decrease in the value or market price of the Common Stock,
should such a market develop, and could be used by the Board as a device to
prevent a change in control of the Company.
THE COMPANY WILL PAY NO DIVIDENDS ON ITS COMMON STOCK.
The Company has not paid and does not expect to pay any dividends to
holders of its Common Stock in the foreseeable future.
ANTI-TAKEOVER PROVISIONS MAY THWART TAKE-OVER OR ACQUISITION OFFERS WHICH
INVESTORS MIGHT OTHERWISE WISH TO ACCEPT.
The Company's Board of Directors can, without obtaining shareholder
approval, issue shares of Preferred Stock having rights that could adversely
affect the voting power of the Common Stock. The possible issuance of shares
of Preferred Stock can be used to oppose hostile takeover attempts.
19
<PAGE> 20
eSAT, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
The Company did not file any current reports on Form 8-K for the quarterly
period ended September 30, 1999. Subsequent to quarter end, the Company
filed the following document:
(i) The Company filed a current report on Form 8-K, dated December 3, 1999,
and amended December 17, 1999, reporting that it has dismissed Lichter &
Associates as its independent accountant and, effective November 30,
1999, has appointed Carpenter Kuhen & Sprayberry.
20
<PAGE> 21
eSAT, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
eSAT, INC.
Date: December 29, 1999 By: /s/ Michael C. Palmer
----------------- -------------------------------
Michael C. Palmer
Chief Executive Officer
21
<PAGE> 22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,276
<SECURITIES> 0
<RECEIVABLES> 27,677
<ALLOWANCES> 0
<INVENTORY> 389,269
<CURRENT-ASSETS> 469,316
<PP&E> 879,187
<DEPRECIATION> (175,164)
<TOTAL-ASSETS> 1,499,925
<CURRENT-LIABILITIES> 1,622,942
<BONDS> 0
0
750,000
<COMMON> 9,133,260
<OTHER-SE> (10,032,682)
<TOTAL-LIABILITY-AND-EQUITY> 1,499,925
<SALES> 1,187,770
<TOTAL-REVENUES> 1,187,770
<CGS> 767,167
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,718,146
<LOSS-PROVISION> 1,064,986
<INTEREST-EXPENSE> 16,191
<INCOME-PRETAX> (6,323,366)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,323,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,323,366)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
