UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
Commission file number 000-25831
NetWolves Corporation
(Exact name of registrant as specified in its charter)
New York 11-3439392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Broadhollow Road, Melville, New York 11747
(Address of principal executive offices)
(516) 393-5016
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark 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 issuer's classes of common
stock as of the latest practicable date:
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING ON
TITLE OF CLASS JUNE 18, 1999
- ------------------------------ --------------------------------
<S> <C>
Common Stock, $.0033 par value 5,307,203
---------
</TABLE>
Registrant became subject to the filing requirements of the Securities Exchange
Act of 1934 on April 20, 1999, when it filed a Registration Statement on Form
10.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
FORM 10-Q - MARCH 31, 1999
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 and June 30, 1998................................. 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 1999 and the period
from February 13, 1998 (inception) to March 31, 1998 and
the nine months ended March 31, 1999............................ 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31, 1999 and the period
from February 13, 1998 (inception) to March 31, 1998............ 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................ 4 - 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 10 - 12
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 12
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS......................................... 13
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.................. 13
ITEM 3 DEFAULTS UPON SENIOR SECURITIES............................ 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 13
ITEM 5 OTHER INFORMATION.......................................... 13
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.......................... 13
SIGNATURES............................................................ 14
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 414,038 $1,118,416
Marketable securities, available for sale, at market value 701,000 1,063,828
Accounts receivable 1,376,669 6,803
Net assets held for sale 166,670 720,000
Inventories 200,676 22,410
Prepaid expenses and other current assets 81,356 18,318
---------- ----------
Total current assets 2,940,409 2,949,775
Property and equipment, net 63,258 4,949
Other assets 34,575 4,727
---------- ----------
$3,038,242 $2,959,451
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 735,265 $ 31,448
---------- ----------
Total current liabilities 735,265 31,448
---------- ----------
Commitments and contingencies
Shareholders' equity
Common stock, $.0033 par value; 10,000,000 shares authorized;
issued and outstanding: 5,023,870 March 31, 1999
and 4,313,870 June 30, 1998 16,579 14,236
Additional paid-in capital 7,647,566 3,012,159
Accumulated deficit (5,797,013) (99,414)
Accumulated other comprehensive income 435,845 1,022
---------- ----------
Total shareholders' equity 2,302,977 2,928,003
---------- ----------
$3,038,242 $2,959,451
========= ==========
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
For the
period from
For the February 13, For the
three months 1998 nine months
ended (inception) to ended
March 31, 1999 March 31, 1998 March 31, 1999
------------- -------------- --------------
<S> <C> <C> <C>
Sales $1,518,045 $ - $1,598,759
Cost of goods sold 499,001 - 530,479
---------- ---------- ----------
Gross profit from sales 1,019,044 - 1,068,280
---------- ---------- ----------
Operating expenses
General and administrative 2,472,528 - 4,308,999
Research and development 158,527 - 250,143
Sales and marketing 260,703 - 2,240,290
---------- ---------- ----------
2,891,758 - 6,799,432
---------- ---------- ----------
Loss before other income (expense) (1,872,714) - (5,731,152)
Other income 4,217 33,553
---------- ---------- ----------
Net loss (1,868,497) - (5,697,599)
Other comprehensive income
Marketable securities valuation adjustment 237,500 - 434,823
---------- ---------- ----------
Comprehensive income (loss) $(1,630,997) $ - $(5,262,776)
=========== ========== ===========
Basic and diluted net loss per share $ (.37) $ - $ (1.25)
=========== ========== ===========
Weighted average common
shares outstanding 4,999,870 2,640,322 4,540,475
=========== ========== ===========
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the period
from February 13,
For the nine 1998
months ended (inception)
March 31, to March 31,
1999 1998
------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C>
Cash flows from operating activities
Net loss $(5,697,599) $ --
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 6,496 --
Realized loss on sale of marketable securities 8,047 --
Common stock and warrants issued for services 4,337,750 --
Provision for doubtful accounts 15,000 --
Changes in operating assets and liabilities
Accounts receivable (1,384,866) --
Inventories (178,266) --
Prepaid expenses and other current assets (63,038) --
Accounts payable and accrued expenses 703,817 --
----------- ----------
Net cash used in operating activities (2,252,659) --
----------- ----------
Cash flows from investing activities
Proceeds from the sale of marketable securities 789,604 --
Proceeds from assets held for sale, net 553,330 --
Purchases of property and equipment (64,805) --
Payments of security deposits (4,848) --
----------- ----------
Net cash provided by investing activities 1,273,281 --
----------- ----------
Cash flows from financing activities
Financing costs paid (25,000) --
Proceeds from initial capital contribution -- 64,245
Cash proceeds from sale of warrants 300,000 --
----------- ----------
Net cash provided by financing activities 275,000 64,245
----------- ----------
Net (decrease) increase in cash and cash equivalents (704,378) 64,245
Cash and cash equivalents, beginning of period 1,118,416 --
----------- ----------
Cash and cash equivalents, end of period $ 414,038 $ 64,245
=========== ==========
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 Interim financial information
The summary financial information contained herein is unaudited; however,
in the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of such financial
information have been included. The accompanying consolidated financial
statements, footnotes and discussions of the NetWolves Corporation (the
"Company") should be read in conjunction with the Company's consolidated
financial statements, and notes thereto, for the period from February 13,
1998 (inception) to June 30, 1998. The results of operations for the nine
months ended March 31, 1999 are not necessarily indicative of the results
to be expected for the full year.
2 The Company
NetWolves, LLC was an Ohio limited liability company formed on February 13,
1998, which was merged into Watchdog Patrols, Inc. ("Watchdog") on June 17,
1998. Watchdog, the legal surviving entity of the merger was incorporated
under the laws of the State of New York on January 5, 1970. As a result of
the merger and subsequent sale of Watchdog's business (Note 5), Watchdog
changed its name to NetWolves Corporation.
The Company has designed and developed a multi-functional product that is a
secure, integrated, modular Internet gateway. The primary product, the
FoxBox, supports secure access to the Internet for multiple users through a
single connection and, among other things, provides electronic mail,
firewall security and web site hosting and also contains a network file
server. Since inception, the Company has been developing its business plan
and building its infrastructure in order to effectively market its products
and shipped its first significant order in March 1999. Accordingly, it is
no longer reporting as a development stage company.
3 Reverse acquisition
On June 17, 1998, Watchdog acquired all of the outstanding common stock of
NetWolves, LLC (the "Merger"). For accounting purposes, the acquisition has
been treated as an acquisition of Watchdog by NetWolves, LLC and as a
recapitalization of NetWolves, LLC. The historical financial statements
prior to June 17, 1998 are those of NetWolves, LLC. The acquisition of
Watchdog has been recorded based on the fair value of Watchdog's net
tangible assets, which consist primarily of cash, marketable securities and
certain assets held for sale (Note 5), with an aggregate value of
$2,962,150 (net of transaction costs of $261,022). Since this transaction
is in substance, a recapitalization of NetWolves, LLC and not a business
combination, pro forma information is not presented.
As part of the Merger, the NetWolves, LLC membership interests were
converted into 2,640,322 shares of Watchdog common stock and warrants to
purchase an aggregate of 620,000 shares of Watchdog common stock at an
exercise price of $1.63 per share. Immediately prior to the Merger, there
were 1,673,548 shares of Watchdog common stock issued and outstanding. In
addition, certain pre-Merger shareholders of Watchdog received warrants to
purchase 500,000 shares of Watchdog common stock at an exercise price of
$1.63 per share. Additionally, two individuals, who provided consulting
services with respect to the Merger, received warrants to purchase an
aggregate of 87,500 shares of Watchdog common stock at an exercise price of
$2.00 per share.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4 Significant accounting policies
Fiscal year-end The Company operates on a fiscal-year end of June 30.
Risks and other factors
As a company that has developed a software product for use as a
multi-functional Internet communications device, NetWolves Corporation
faces certain risks. These include, among other items, the ability to
implement its business plan, dependence on proprietary technology, rapid
technological change, challenges in recruiting personnel and a highly
competitive market place.
Revenue recognition
The Company records revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"), issued by the American
Institute of Certified Public Accountants (as modified by Statement of
Position 98-9). SOP 97-2 provides additional guidance with respect to
multiple element arrangements; returns, exchanges, and platform transfer
rights; resellers; services; funded software development arrangements; and
contract accounting. Accordingly, revenue from the sale of perpetual and
term software licenses are recognized, net of provisions for returns, at
the time of delivery and acceptance of software products by the customer,
when the fee is fixed and determinable and collectibility is probable.
Maintenance revenue that is bundled with an initial license fee is deferred
and recognized ratably over the maintenance period. Amounts deferred for
maintenance are based on the fair value of equivalent maintenance services
sold separately.
Basic and diluted net loss per share
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards No.128, "Earnings Per Share" ("SFAS 128").
SFAS 128 requires dual presentation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share includes the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock.
The effect of the recapitalization on the NetWolves, LLC members has been
given retroactive application in the earnings per share calculation. The
common stock issued and outstanding with respect to the pre-Merger Watchdog
shareholders has been included since the effective date of the Merger.
Outstanding stock options and warrants have not been considered in the
computation of diluted per share amounts, since the effect of their
inclusion would be antidilutive. Accordingly, basic and diluted earnings
per share amounts are identical.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5 Net assets held for sale
In November 1998, the Company sold substantially all of the business assets
related to Watchdog's uniformed security guard services operations to W
Acquisition Corp. (the "Purchaser") for $600,000. The Purchaser acquired
all inventory, furniture and equipment, customer lists, trade rights,
contracts, goodwill and rights to the name Watchdog Patrols, Inc. (the
Assets). The Company retained responsibility for all remaining accounts
receivable, other current assets, accounts payable and accrued expenses.
The net assets held for sale are classified as a current asset and are
reflected at net realizable value based on the selling price of the Assets,
the net estimated liquidation value of the assets and liabilities retained,
and the net negative cash flows from the operations of the security guard
business during the period from June 17, 1998 (the date of acquisition) to
the date of disposal in November 1998. Net assets held for sale consist of
the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- --------
<S> <C> <C>
Sale of Assets $ - $600,000
Retained assets and liabilities
Accounts receivable 110,000 500,000
Other current assets 94,000 140,000
Accounts payable and accrued expenses (37,330) (460,000)
Cash out-flows from operations during holding period - (60,000)
-------- --------
Net assets held for sale $166,670 $720,000
======== ========
</TABLE>
6 Shareholders' equity
Common stock issuances
During the nine months ended March 31, 1999, the Company issued 710,000
shares of its common stock as follows:
. 150,000 shares were issued to the Company's Vice President of Sales
and Marketing (who is also a Director of the Company) for services
rendered during the six months ended December 31, 1998, which resulted
in a charge to operations of approximately $769,000. Management
determined the fair value of the common stock based on its quoted
market price at the time of issuance.
. 200,000 shares were issued to Internet Technologies, Inc., a
consultant to the Company ("Internet Technologies"), for services
rendered during the six months ended December 31, 1998, which resulted
in a charge to operations of $1,025,000. Management determined the
fair value of the common stock based on its quoted market price at the
time of issuance. Internet Technologies has demand registration rights
on these 200,000 shares.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6 Shareholders' equity (continued)
Common stock issuances (continued)
. 60,000 shares were issued to Internet Technologies for services to be
rendered during the three months ending March 31, 1999, which resulted
in a charge to operations of approximately $308,000. Management
determined the fair value of the common stock based on its quoted
market price at the time of issuance. Additionally, Internet
Technologies has the right to receive up to 60,000 shares upon
completion of a $6,000,000 private placement (Note 7e) and an
additional 60,000 shares upon completion of a second private
placement, if any.
. 100,000 shares were issued to a financial consultant for services
rendered during the three months ending March 31, 1999, which resulted
in a charge to operations of approximately $513,000. Management
determined the fair value of the common stock based on its quoted
market price at the time of issuance.
. 100,000 shares were issued in conjunction with the appointment of two
new Directors of the Company effective February 1, 1999 (50,000 shares
each), which resulted in an aggregate charge to operations of
approximately $513,000. Management determined the fair value of the
common stock based on its quoted market price at the time of issuance.
. 100,000 shares were issued to the Company's legal counsel for services
rendered during the three months ending March 31, 1999, which resulted
in a charge to operations of approximately $513,000. Management
determined the fair value of the common stock based on its quoted
market price at the time of issuance.
Another shareholder, Greenleaf Capital Partners, LLC (a pre-Merger
shareholder of Watchdog), has demand registration rights on its 1,141,360
shares of common stock.
Stock options
In January 1999, the Company granted options to purchase 165,500 shares of
common stock under the 1998 Long Term Incentive Plan to key employees at an
exercise price of $5.00 per share that vest in equal installments over
three years commencing January 2000. The exercise price represents the
closing quoted price of common stock on the day immediately prior to the
grants. All options expire in ten years from the grant date.
Warrants
During the nine months ended March 31, 1999, the Company granted warrants
to purchase 600,000 shares of its common stock as follows:
. 200,000 ten-year warrants issued to the Company's Vice President of
Sales and Marketing (who is also a Director of the Company) at an
exercise price of $1.63 per share. The warrants vest in 5 years
subject to acceleration pursuant to specified performance criteria.
These warrants were issued for services rendered during the six months
ended December 31, 1998 and resulted in a charge to operations of
approximately $699,000 based upon the intrinsic value of the warrants
on the date of grant.
. 100,000 two-year warrants were issued to two terminated employees
(50,000 warrants each) at an exercise price of $5.00 per share (also
see Note 7a). The warrants vest only upon the independent contractors'
submission of valid, legally binding purchase orders totaling
$10,000,000 for the period from January 1, 1999 to December 31, 1999.
The potential charge to operations upon achieving specified
performance criteria is approximately $200,000. The value of the
warrants has been calculated using the Black-Scholes option- pricing
model with the following assumptions: no dividend yield, expected
volatility of 65%, risk-free interest rate of 4.62% and an expected
term of two years.
. 300,000 warrants were issued to Anicom, Inc. for cash consideration of
$300,000 (see Note 7d).
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7 Commitments and contingencies
a. Employment agreements
In conjunction with the consummation of the Merger, the Company entered
into employment agreements with 5 executives who were the principal
pre-Merger owners of NetWolves, LLC. In January 1999, two of the five
executives were terminated pursuant to a Settlement Agreement and Mutual
Release. In exchange for terminating the employment agreements and
cancellation of each terminated executives' 200,000 warrants previously
issued, the Company is paying each terminated executive an aggregate of
$50,000 in cash, payable in monthly installments, and the Company has
entered into a Manufacturer's Representation Agreement. Additionally, each
of the terminated executives received 50,000 performance based warrants.
b. Legal matters
Certain claims, suits and complaints arising in the normal course with
respect to the Company's uniformed security guard services operations have
been filed or are pending against the Company. Generally, these matters are
all covered by a general liability insurance policy. In the opinion of
management, all such matters are without merit or are of such kind, or
involve such matters, as would not have a significant effect on the
financial position or results of operations of the Company, if disposed of
unfavorably.
c. The Sullivan Group
In January 1999, the Company entered into an agreement with The Sullivan
Group ("Sullivan") whereby Sullivan appointed the Company as its exclusive
provider of the Company's multi- service Internet delivery system (known as
"FoxBox") to be used in conjunction with Sullivan's proprietary interactive
distance learning training programs. The period of the agreement is for a
term of five years and shall be automatically renewed for an additional
five-year term unless six months notice of termination is provided by
either party.
Although there are no minimum order requirements, it is expected that
delivery will commence in June 1999, and in most instances, the FoxBox
units will be subject to 48-month rental contracts at a rate of $200 per
unit, per month. The lease obligations will be paid for by the end user
retail site (or its corporate parent, the "Site"). One year of maintenance
is to be included with each leasing agreement. Beginning in the second
year, each Site may agree to pay the Company an additional fee in order to
extend the maintenance period.
d. Anicom, Inc.
In January 1999, the Company entered into a five-year exclusive master
distribution agreement with Anicom, Inc. ("Anicom") to distribute the
FoxBox throughout North America. Additionally, Anicom is entitled to
receive a commission on any sales or leases of the FoxBox unit made
directly by the Company that Anicom was not involved with and a commission
on certain technical support revenue earned by the Company. The agreement
may be terminated by the Company with payment of a specified termination
fee or it may be terminated should Anicom fail to meet minimum order
requirements. In accordance with the terms of the agreement, the Company
shipped $1,515,000 of product to Anicom in March 1999.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7 Commitments and contingencies (continued)
d. Anicom, Inc. (continued)
For cash consideration paid to the Company of $300,000, the Company issued
Anicom 300,000 warrants to purchase common stock of the Company at an
exercise price of $5 per share. The warrants issued to Anicom shall vest in
equal installments over three years, commencing on the first anniversary of
the agreement and shall expire in January 2004. Anicom also obtained
piggyback registration rights with respect to the issuable shares of common
stock.
e. Private placement memorandum
On March 23, 1999, the Company completed preparation of a Private Placement
Memorandum. The Company is offering to sell up to 800,000 shares of
restricted common stock at $7.50 per share (a total of $6,000,000) on a
"best efforts, no minimum, maximum basis." As of May 27, 1999, the Company
has closed on 283,333 shares (gross proceeds of $2,125,000 less $276,250 of
commissions and expenses). This represents the first of two closings.
Additionally, the placement agent is to receive 80,000 warrants,
exercisable at $9.375 each. The warrants vest one year after the closing of
the private placement and expire four years after vesting. The placement
agent is entitled to receive 42,500 warrants based on the first closing.
These and any additional proceeds are expected to be used for working
capital purposes and will be subject to sales commissions and other
expenses including legal, accounting and filing fees. There can be no
assurances that the Company will be successful in completing the offering.
8 Restatement of condensed consolidated financial statements
The Company has restated previously issued financial results for the three
and nine months ended March 31, 1999. The restated financial results
primarily reflect an adjustment made to the values assigned to equity
instruments issued in fiscal 1999 as compensation to employees and
consultants. Management originally determined the fair value of the equity
instruments using the quoted market price on the day of issuance less a
discount due to its restricted nature. Subsequently, management determined
that it would be more objectively verifiable to use the undiscounted quoted
market price. As a result of this adjustment, the net loss for the three
months ended March 31, 1999 was increased from $1,407,248 to $1,868,497 and
the net loss for the nine months ended March 31, 1999 was increased from
$4,787,912 to $5,697,599.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements
This Form 10-Q includes, without limitation, certain statements containing the
words "believes", "anticipates", "estimates", and words of a similar nature,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward looking and provide meaningful, cautionary statements identifying
important factors that could cause actual results to differ from the projected
results. All statements other than statements of historical fact made in this
Form 10-Q are forward-looking. In particular, the statements herein regarding
industry prospects and future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect management's
current expectations and are inherently uncertain. The Company's actual results
may differ significantly from management's expectations.
Overview
The Company is a corporation with a limited operating history, formed in
February 1998. The Company has commenced field trial and limited sales of its
primary product, "The FoxBox". Additionally, efforts were made to obtain
operating capital and convert the Company to a public entity. This was
successfully accomplished through a reverse merger with Watchdog Patrols, Inc.,
a publicly traded (OTCBB) corporation. Operating expenses have increased
significantly since the Company's inception. This reflects the cost associated
with the formation of the Company as well as increased efforts to promote market
awareness for the FoxBox (Multi-services Internet communications gateway),
solicit new customers, recruit personnel, build operating infrastructure and
continued product development. The FoxBox is a multi-functional product that
connects business networks [Local Area Networks (LANs) and Wide Area Networks
(WANs)] to the Internet. It supports secure access to the Internet for 3 to 400
users through a single connection, provides advanced electronic mail functions
for unlimited users and delivers firewall security. The Company's initial target
markets are the end users in small and mid-size businesses and large
organizations with satellite offices. In January 1999 the Company was able to
secure two agreements which have the potential to generate significant revenues
over the term of the agreements. The first of which is The Sullivan Group
("Sullivan") agreement whereby Sullivan appointed the Company as its exclusive
provider of the Company's multi-service Internet delivery system (known as
"FoxBox") to be used in conjunction with Sullivan's proprietary interactive
distance learning training programs. The period of the agreement is for a term
of five years. The second agreement is with Anicom, Inc. ("Anicom"). The Company
entered into a five-year exclusive master distribution agreement with Anicom to
distribute the FoxBox through North America.
The Company has a limited operating history in which to base an evaluation of
the business and prospects. The Company's prospects must be considered in light
of the risks, frequently encountered by companies in their early stages of
operations, particularly for companies in the rapidly evolving Technology
Industry. Certain risks for the Company include, but are not limited to unproven
business model, capital requirements and growth management. To counter this
risk, the Company must, among other things, increase its customer base, develop
a distribution network, successfully execute its business and marketing plan,
and increase the operating infrastructure. There can be no assurance that the
Company will be successful in addressing such risk, and the failure to do so
could have a material adverse effect on the Company's financial condition and
results of operations. Since inception, the Company has been developing its
business plan and building its infrastructure in order to effectively market its
products and successfully shipped its first significant order in March 1999.
Accordingly, it is no longer reporting as a development stage company. The
Company believes that its success depends in large part on its ability to create
market awareness and acceptance for the FoxBox, raise additional operating
capital to grow operations, build technology and non-technology infrastructures,
expand the sales force and distribution network, and continue new product
development.
<PAGE>
Liquidity and capital resources
On June 17, 1998 the Company executed a reverse merger with Watchdog Patrols,
Inc. a publicly traded company engaged in the activity of providing armed and
unarmed security guard services for the New York/Metropolitan Area. This merger
made available to the Company, approximately $2.3 million of cash, cash
equivalents and marketable securities to be used as operating capital.
Additionally, on November 22, 1998 the Company sold substantially all the assets
of the security guard business, consisting primarily of uniforms, vehicles,
computer systems and furniture to a third party. This generated an additional
$600,000 of cash flow to the Company.
As of March 31, 1999 the Company has $1,115,038 of cash, cash equivalent and
marketable securities available to fund operations. In April 1999, the Company
completed shipping of and received payment for an initial stocking order of
approximately $1.6 million pursuant to its master distribution agreement with
Anicom. Additionally, on May 27, 1999 the Company received initial gross
proceeds of $2,125,000 (exclusive of commissions and professional fees of
$276,250), from its private placement to raise up to $6 million. This represents
the first of two closings. Management believes that the Company has and will
have adequate capital resources to meet its working capital needs for at least
the next twelve months based upon its current plans. However, there can be no
assurance that the Company will have sufficient capital to finance its planned
growth, or will achieve the full funding of the private placement offering.
Results of operations
Net sales from operations for the third quarter of fiscal 1999 were $1,518,045.
Net sales for the nine months ended March 31, 1999 were $1,598,759. The increase
in net sales in the third quarter is primarily due to the first significant
delivery under the terms of Anicom master distribution agreement. Additionally,
$4,217 of dividend and interest income was generated during the third quarter of
fiscal 1999. The Company operates on a fiscal year end of June 30.
The Company's gross profit in the third quarter of fiscal 1999 was 67%. The
Company believes that improved gross profits are achievable at increased
production levels. These results will depend, in part, on the effects of
economies-of-scale, the use of third-party assemblers and the ability to
competitively purchase rapidly evolving commodity hardware, which is a
significant component of "cost of goods sold." The use of non-proprietary
hardware is one of many inherent design features of the FoxBox which facilitates
an efficient and cost effective production cycle. There can be no assurance that
the Company will be successful in increasing its margins due to one or more
factors. These factors include, but are not limited to, increases/decreases in
direct labor and material costs and general economic conditions in the future.
Operating expenses for the third quarter of fiscal 1999 were $2,891,758, which
consisted primarily of $2,472,528 of general and administrative costs relating
to the support of operations and the establishment of infrastructure. In
addition, $158,527 of costs were incurred relating to research and development,
and $260,703 relating to selling and marketing for the third quarter of fiscal
1999. Included in the above mentioned operating expenses are $1,845,000 of
non-cash compensation for services in the form of the Company's common stock and
options.
Operating expenses for the nine months ended March 31, 1999 were $6,799,432,
which consisted primarily of $4,308,999 of general and administrative cost
relating to the support of operations and the establishment of infrastructure.
In addition, $250,143 of cost were incurred relating to research and
development, and $2,240,290 relating to selling and marketing for the nine
months ended March 31, 1999. Included in the above-mentioned operating expenses
are approximately $4,337,750 of non-cash compensation for services in the form
of the Company's common stock and options.
Other comprehensive income increased for the quarter ended March 31, 1999 due to
an increase in the valuation of certain marketable securities available for
sale.
<PAGE>
Year 2000 implication
The Company has been assessing the impact of the Year 2000 issue on its current
and future products, vendors and customers, internal information technologies
and non-information technologies systems and expects to complete the process in
the fourth quarter of fiscal 1999. Currently, all products and information/
non-information technologies systems are Y2K compliant, due in part to the
limited operating history of the Company and the emphasis on compliance during
the planning and development stages of the Company. To date the Company has not
incurred material cost, and furthermore believes that any future actions taken
will not have a material effect on its operating results of financial condition.
The Company continues to assess whether third parties in its supply and
distribution chain are adequately addressing their Year 2000 compliance issues.
The Company has initiated formal communication with its significant suppliers
and service providers to determine the extent to which its systems may be
vulnerable. Failure of third-party equipment, software or content to operate
properly with regard to Year 2000 issues could require the Company to incur
unanticipated expenses to remedy problems, which could have a material adverse
effect on its business, operating results and financial condition.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BY: NETWOLVES CORPORATION
/s/ Walter M. Groteke
-----------------------
Walter M. Groteke
Chief Executive Officer
/s/ Peter C. Castle
-----------------------
Peter C. Castle
Controller
Date: March 9, 2000
