UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 000-25831
NetWolves Corporation
(Exact name of registrant as specified in its charter)
New York 11-2208052
(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)
(631) 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:
NUMBER OF SHARES OUTSTANDING ON
TITLE OF CLASS October 27, 2000
-------------- --------------------------------
Common Stock, $.0033 par value 8,742,613
---------
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
FORM 10-Q - SEPTEMBER 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, 2000 (unaudited) and June 30, 2000 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
For the three months ended September 30, 2000 (unaudited)
and September 30, 1999 (unaudited) 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30, 2000 (unaudited)
and September 30, 1999 (unaudited) 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 - 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9 - 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 13
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 14
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5 - OTHER INFORMATION 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 15,267,845 $ 20,204,309
Marketable securities, available for sale,
at market value 98,000 99,500
Accounts receivable, net 359,460 248,861
Inventories 729,781 633,453
Prepaid expenses and other current assets 278,005 284,614
------------ ------------
Total current assets 16,733,091 21,470,737
Property and equipment, net 752,465 590,906
Software, net 2,952,222 3,427,688
Intangible assets, net - -
Other assets 86,222 53,799
------------ ------------
$ 20,524,000 $ 25,543,130
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 670,919 $ 1,792,030
Deferred revenue 26,201 11,173
Settlement obligation 1,150,000 -
Current maturities of long-term debt 49,779 208,435
------------ ------------
Total current liabilities 1,896,899 2,011,638
Long term debt, net of current maturities 325,142 418,102
------------ ------------
Total liabilities 2,222,041 2,429,740
------------ ------------
Minority interest 297,617 305,761
Commitment and contingencies
Shareholders' equity
Common stock, $.0033 par value, shares authorized;
50,000,000 on September 30, 2000 and 10,000,000
on June 30, 2000; issued and outstanding;
8,742,613 on September 30, 2000
and 8,592,613 on June 30, 2000 28,851 28,356
Additional paid-in capital 56,076,702 56,076,197
Unamortized value of equity warrants (1,702,518) (1,851,893)
Accumulated deficit (36,301,538) (31,349,376)
Accumulated other comprehensive loss (97,155) (95,655)
------------ ------------
Total shareholders' equity 18,004,342 22,807,629
------------ ------------
$ 20,524,000 $ 25,543,130
============ ============
See notes to condensed consolidated financial statements
</TABLE>
1
<PAGE>
NETWOLVES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Revenue
Products $ 44,736 $ 13,200
Services 421,048 124,751
----------- -----------
465,784 137,951
----------- -----------
Cost of revenue
Products 12,315 8,844
Services 302,030 87,325
----------- -----------
314,345 96,169
----------- -----------
Gross profit 151,439 41,782
----------- -----------
Operating expenses
General and administrative 2,941,532 2,868,808
Engineering and development 468,313 184,718
Sales and marketing 1,966,476 606,007
----------- -----------
5,376,321 3,659,533
----------- -----------
Loss before other income (expense) (5,224,882) (3,617,751)
Other income (expense)
Investment income 271,800 45,730
Minority interest 8,144 7,428
Interest expense (7,224) (10,491)
----------- -----------
Net loss (4,952,162) (3,575,084)
Other comprehensive income (loss):
Marketable securities valuation adjustment (1,500) 78,500
----------- -----------
Comprehensive income (loss) $(4,953,662) $(3,496,584)
=========== ===========
Basic and diluted net loss per share $ (.57) $ (.59)
=========== ===========
Weighted average common
shares outstanding 8,667,613 6,068,218
=========== ===========
See notes to condensed consolidated finiancial statements
</TABLE>
2
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (4,952,162) $ (3,575,084)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 42,635 14,709
Amortization 534,836 502,010
Noncash charge to operations with respect to
stock and warrants issued for services and
amortization of previously issued warrants 855,375 1,553,583
Minority interest (8,144) (12,428)
Settlement obligation 445,000 -
Changes in operating assets and liabilities
Accounts receivable (110,599) (10,522)
Inventories (96,328) 53,564
Prepaid expenses and other current assets 6,609 (73,661)
Deferred revenue 15,028 -
Accounts payable and accrued expenses (1,121,111) 77,651
------------ ------------
Net cash used in operating activities (4,388,861) (1,470,178)
------------ ------------
Cash flows from investing activities
Capitalized software costs (59,370) -
Issuance of note receivable - (50,000)
Purchases of property and equipment (204,194) (68,578)
Payments of security deposits (32,423) (3,400)
------------ ------------
Net cash used in investing activities (295,987) (121,978)
------------ ------------
Cash flows from financing activities
Repayment of advances from TSG officer - (107,145)
Repayment of long term debt (251,616) (10,411)
Cash proceeds from private sale of common stock - 1,500,000
------------ ------------
Net cash (used in) provided by financing
activities (251,616) 1,382,444
------------ ------------
Net decrease in cash and cash equivalents (4,936,464) (209,712)
Cash and cash equivalents, beginning of period 20,204,309 5,585,981
------------ ------------
Cash and cash equivalents, end of period $ 15,267,845 $ 5,376,269
============ ============
Taxes paid $ (25,000) $ -
============ ============
Supplemental disclosures of non cash activity
Subsequent to the balance sheet date, the Company paid $1,150,000 in connection
with a litigation settlement. Of this settlement, $445,000 has been charged to
operations and $705,000 has been ascribed as a financing activity for the
purchase of outstanding warrants. This obligation has been accrued as of
September 30, 2000.
See notes to condensed consolidated financial statements
</TABLE>
3
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
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 condensed consolidated
financial statements, footnotes and discussions of NetWolves Corporation
("NetWolves" or the "Company") should be read in conjunction with the
Company's consolidated financial statements, and notes thereto, for the
years ended June 30, 2000 and 1999 and the period from February 13, 1998
(inception) to June 30, 1998. The results of operations for the three
months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
2 The Company
The condensed consolidated financial statements include the accounts of
NetWolves Corporation and its three subsidiaries, NetWolves Technologies
Corporation, ComputerCOP Corporation and its majority owned TSG Global
Education Web, Inc. ("TSG") (collectively "NetWolves" or 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, Watchdog changed its
name to NetWolves.
NetWolves is an Internet systems developer that 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.
TSG currently provides consulting, educational and training services
primarily to the oil and gas and automotive industries throughout the
United States. ComputerCOP Corporation sells software designed to provide
non computer literate owners the ability to identify threats as well as
objectionable material that may be viewed by users of the computer on the
Internet.
3 Significant accounting policies
Use of estimates
In preparing condensed consolidated financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
condensed consolidated financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of consolidation
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in 3 Significant accounting policies
(continued) Principles of consolidation (continued) consolidation. The
4
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
separate ownership of one of the Company's subsidiaries is reflected in the
Company's condensed consolidated financial statements as minority interest.
The minority interest includes common stock representing 1.7% of the
outstanding shares of TSG and preferred stock, until January 24, 2000, at
which time the preferred stockholder elected to convert the preferred stock
into shares of NetWolves common stock.
Inventories
Inventories consist of raw materials and finished goods. Inventories are
valued at the lower of cost or net realizable value using the first-in,
first-out method.
Reclassifications
Certain reclassifications have been made to the condensed consolidated
financial statements shown for the prior periods in order to have them
conform to the current period's classifications.
4 Balance sheet components
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- -------------
<S> <C> <C>
Property and equipment, net
Machinery and equipment $ 695,411 $ 510,849
Furniture and fixtures 163,903 145,839
Leasehold improvements 45,846 44,278
------------ ------------
905,160 700,966
Less: accumulated depreciation and amortization (152,695) (110,060)
------------ ------------
Property and equipment, net $ 752,465 $ 590,906
============ ============
Software, net
ComputerCOP technology $ 4,217,520 $ 4,217,520
Other capitalized software costs 230,283 170,913
------------ ------------
4,447,803 4,388,433
Less: accumulated amortization (1,495,581) (960,745)
------------ ------------
Software, net $ 2,952,222 $ 3,427,688
============ ============
Accounts payable and accrued expenses
Trade accounts payable $ 321,118 $ 1,083,526
Finders fee payable - 300,000
Other accrued operating expenses 183,749 153,794
Accrued advertising 59,089 106,172
Compensated absences 101,252 95,793
Commissions payable 806 32,410
Payroll/sales taxes payable 4,905 20,335
------------ ------------
$ 670,919 $ 1,792,030
============ ============
</TABLE>
5
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
5 Segment information
The Company reports segments in accordance with Financial Accounting
Standards Board Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information". The Company and its subsidiaries
operate in three separate business segments, the Technology segment, the
Training and Consulting segment and the Computer Software segment. These
operating segments are representative of the Company's management approach
to its evaluation of its operations. The accounting policies of the
reportable operating segments are the same as those described in the
summary of significant accounting policies. The Technology segment, which
operates principally domestically, is primarily engaged in the design,
development, marketing and support of information delivery hardware
products and software. The Training and Consulting segment, which operates
domestically, provides consulting, educational and training services
primarily to the oil and gas and automotive industries throughout the
United States. The Software segment, which operates principally
domestically, is primarily engaged in the design, development, marketing
and support of software products which are designed to provide non computer
literate owners the ability to identify threats as well as objectionable
material which may be viewed by users of the computer on the Internet.
<TABLE>
<CAPTION>
Three months ended
September 30,
----------------------
2000 1999
---- ----
<S> <C> <C>
Revenue
Technology $ 32,483 $ 13,200
Training and consulting 421,048 124,751
Software 12,253 -
----------- -----------
Total $ 465,784 $ 137,951
=========== ===========
Operating loss
Technology $(3,877,353) $(2,692,352)
Training and consulting (493,631) (925,399)
Software (853,898) -
----------- -----------
Total $(5,224,882) $(3,617,751)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
September, 30 June 30,
2000 2000
------------- ------------
<S> <C> <C>
Identifiable assets
Technology $16,431,123 $21,231,907
Training and consulting 781,297 708,678
Computer software 3,311,580 3,602,545
----------- -----------
Total $20,524,000 $25,543,130
=========== ===========
</TABLE>
The Company had two customers, both included in the Training and Consulting
segment, which accounted for 60% and 11% of consolidated revenue for the
three months ended September 30, 2000 and 57% and 24% for the three months
ended September 30, 1999, respectively. Additionally, the Company had two
customers that accounted for 48% and 11% of consolidated accounts
receivable at September 30, 2000 and one customer that accounted for 40% of
consolidated accounts receivable at June 30, 2000.
6
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
6 Commitments and contingencies
Anicom, Inc.
On April 19, 2000, Anicom, Inc. had commenced an action against the Company
in the U.S. District Court for the Northern District of Illinois. The
action was based upon NetWolves' alleged failure to deliver approximately
74,842 shares of its common stock to Anicom, upon exercise by Anicom of the
Company's warrants. The action sought specific performance as well as any
damages that may have resulted from a diminution in value of NetWolves
common stock.
On November 16, 2000, and in connection with the litigation, the Company
and Anicom reached a settlement (the "Settlement Agreement"). Under the
Settlement Agreement the allegations for the breach of the warrant
agreement by the Company and unasserted claims for the breach of the
distribution agreement by Anicom and the Company were settled. The Company
paid $1,150,000 to Anicom pursuant to the Settlement Agreement, which
included $950,000 for the repurchase of all unvested warrants.
As of September 30, 2000, the Company has reduced additional paid in
capital in the amount of $705,000, representing the fair value of the
warrants, calculated using the Black-Scholes option pricing model with the
following assumptions: dividend yield of none, expected volatility of 65%,
risk free interest rate of 5.85% and an expected term of 3.17 years - the
remaining life to the maturity date. The remaining portion of the
settlement, in the amount of $445,000, has been charged to operations.
Employment agreements
In August 2000 the Company entered in to employment agreements with four
employees. One of the agreements is for a period of three years and grants
the employee warrants to purchase 250,000 shares of common stock of the
Company at a purchase price of $5.25 per share, subject to a vesting
schedule as specified in such agreement. Another agreement is for a
thirty-month period and provides for a monthly salary of $12,000, plus
reimbursement of certain expenses of $3,000 per month. In addition, the
agreement also grants the employee warrants to purchase 350,000 shares of
common stock of the Company at a purchase price of $5.00 per share, subject
to a vesting schedule as specified in such agreement. In July 2000 and
before commencement of employment, this individual received $250,000 in
consulting fees relating to the Company's agreement with General Electric
Company. Another agreement is for a period of three years and grants the
employee/stockholder, who is affiliated with a law firm who provided legal
services to the Company, warrants to purchase 275,000 shares of common
stock of the Company at a purchase price of $5.125 per share, subject to a
vesting schedule as specified in such agreement; and the last agreement is
for a period of three years and provides for a monthly salary of $5,000,
and the agreement also grants the employee warrants to purchase 200,000
shares of common stock of the Company at a purchase price of $5.25 per
share, subject to a vesting schedule as specified in such agreement.
7
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
6 Commitments and contingencies (continued)
Lease agreement
In September 2000, the Company entered into a five-year lease agreement in
Tampa, Florida covering approximately 20,000 sq. ft. of space with annual
lease payments approximating $390,000, to which it intends to relocate its
corporate headquarters and research and development facilities in Tampa in
or about December 2000. The Company believes that combining its Tampa
operations into one facility will increase efficiency of operations. The
Company intends to sublease its other facilities in Tampa, Florida.
7 Related party transaction
On August 16, 2000, 150,000 shares were issued to a consulting firm who is
also a shareholder of the Company for services rendered during the three
months ending September 30, 2000, which resulted in a charge to operations
of $807,000. Management determined the fair value of the common stock based
on its quoted market price at the time of the issuance.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements
The 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
NetWolves Corporation ("NetWolves" or the "Company") designs,
develops, manufactures and sells Internet infrastructure security
products designed to provide secure, manageable Internet access. The
Company was founded to introduce a new innovative Internet security
and access device called the "FoxBox?". NetWolves' state-of-the-art
enabling technology for the Internet connects people and computer
networks securely to the Internet. NetWolves designs Internet
solutions that provide the services that companies desire without
confusion, complication, limitation and the exorbitant cost associated
with traditional offerings.
NetWolves' multi-services internet communications gateway products are
designed to meet all business needs packaged together, (e-mail,
firewall security, router, Web hosting, Intranet, FTP, etc.), complete
with advanced integrated hardware and software, a simple to use
interface, and room for expansion. As companies combine data and
communications to reduce costs, NetWolves' value-added expansion
technologies such as Virtual Private Networking ("VPN"), a process for
encrypting data for secure transmission over public networks, will
provide significant cost-efficient services in an all-in-one,
enterprise-wide gateway solution.
NetWolves differentiates itself from its competitors through its
proprietary patent pending technology, which provides a centralized,
remote network monitoring, managing and security software ("Mother").
Mother allows the secure, remote management and monitoring of multiple
all-in-one gateway servers located worldwide. This monitoring can be
performed in real-time, and from one or numerous central sites. This
advanced new technology also allows a network administrator to create
a configuration template with all the configuration information and
changes required for all-in-one units. This template can be applied to
each unit, all via a secure configuration mechanism from the central
monitoring location, without compromising network security. It is this
Mother system which forms the basis of the Company's recent agreement
with the General Electric Company.
NetWolves products are designed for our partners' present and future
needs. The Company's initial target markets are the end users in the
small and mid-sized businesses and large organizations with satellite
offices. Larger end users to whom the product is intended to be
marketed are companies with multi-state locations, government agencies
and educational markets. NetWolves products are designed to service
numerous markets, including the financial, medical, legal, travel,
hospitality, entertainment, hotel and auto and petroleum industries.
9
<PAGE>
The Company's strategy is to establish the FoxBox as the standard for
enterprise-wide network connectivity worldwide. To achieve its
objectives worldwide, NetWolves seeks to form relationships with
leading companies in their respective areas to deliver
application-specific Internet solutions to organizations worldwide.
In January 1999, the Company entered into an agreement with Sales &
Management Consulting, Inc. (d/b/a The Sullivan Group), a leading
consulting organization serving the needs of the automobile
aftermarket, convenience stores and oil industry. It maintains an
extensive library of training modules available to its client base of
Amoco Oil, British Petroleum, ExxonMobil, Tosco and Unocal. Pursuant
to its agreement, The Sullivan Group appointed NetWolves as its
exclusive provider in the United States of a delivery system whereby
The Sullivan Group intends to sell its proprietary training programs
that enhance profitability to retail locations throughout the United
States. NetWolves is customizing an Internet solution specifically to
deliver distance learning to these locations utilizing its FoxBox
technology. In July 1999, the Company acquired The Sullivan Group and
the five principal officers and employees of The Sullivan Group were
retained under long-term employment contracts.
In February 2000, and in exchange for 1,775,000 restricted shares of
the Company's common stock, NetWolves acquired ComputerCOP
Corporation, whose assets included ComputerCOP technology, inventory
and $20.5 million in cash intended to fund future growth. The shares
issued by the Company in connection with the acquisition are subject
to a Voting Trust Agreement, wherein the Company's chief executive
officer has been granted the right to vote all Trust Shares for two
years, subject to earlier termination on the sale of the shares based
on certain parameters.
On June 29, 2000, NetWolves and General Electric Company ("GE")
entered into a six year agreement for the master purchase, license and
support services of NetWolves' security, remote monitoring and
configuration management system. GE, after extensive due diligence in
looking for the all-in-one small office solution for network
management, interconnectivity and security management, chose the
FoxBox for deployment throughout their enterprise. In addition to
agreeing to sell the FoxBox to GE, NetWolves will receive (a) a
one-time installation fee for each FoxBox unit installed and (b) a
monthly service and maintenance fee for which GE pays NetWolves upon
installation for the first twelve months. GE will be using the FoxBox
for interconnectivity of worldwide offices. The FoxBox will enable
GE's offices to interact with each other, utilizing NetWolves advanced
firewall security. NetWolves believes that this agreement further
validates the Company's technology and innovations within the firewall
and network security markets. Network security is one of the most
formidable challenges facing Fortune 500 companies, and with its new
"Mother System," NetWolves can offer the appropriate solutions.
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, particularly for companies in the
rapidly evolving technology industry. Certain risks for the Company
include, but are not limited to an unproven business model, capital
requirements and growth management. To counter this risk, the Company
must, among other things, increase its customer base, continue to
develop its distribution network and product offerings, successfully
execute its business and marketing plan, and expand the operating
infrastructure. There can be no assurance that the Company will be
successful in addressing such risks, 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 incurred
significant losses and as of September 30, 2000 had an accumulated
deficit of approximately $36.3 million. 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 R&D.
10
<PAGE>
Results of Operations
The Company currently operates in three business segments, the
Technology segment, the Training and Consulting segment and the
Computer software segment.
Three months ended September 30, 2000 and 1999
Revenue
Revenue increased to $465,784 for the three months September 30, 2000
as compared to $137,951 for the same period in the prior year. The
increase in revenue was primarily the result of an increase in revenue
from the Company's training and consulting segment. The increase in
consulting revenue is primarily attributable to the Company entering
into an agreement to provide management and consulting services to
certain franchisees of BP Amoco which commenced in December 1999.
While the Company expects to generate revenue from its management and
consulting services in the future, it expects to significantly
increase its revenue derived from the sale of its core product, the
FoxBox. Through September 30, 2000 the Company has not generated any
significant revenue from its ComputerCOP technology.
Cost of revenue and gross profit
Cost of revenue for sale of the Company's FoxBox includes
manufacturing costs, which we have outsourced, packaging and shipping
costs and warranty expenses. Cost of revenue in connection with
management and consulting services include direct expenses of
employees and consultants utilized in the generation of management and
consulting revenue. Cost of revenue increased to $314,345 for the
three months ended September 30, 2000 as compared to $96,169 for the
same period in the prior year.
Overall gross profit increased to 32.5% for the three months September
30, 2000 as compared to 30.2% for the same period in the prior year.
This was primarily attributable to revenue from the training and
consulting segment.
Engineering and development
Engineering and development expenses, which are expensed as incurred,
consist primarily of salaries and related expenses for personnel
utilized in designing, maintaining and enhancing our products as well
as material costs for test units and prototypes. Costs associated with
the development of software products are generally capitalized once
technological feasibility is reached. Engineering and development
expenses increased to $468,313 for the three months September 30, 2000
as compared to $184,718 for the same period in the prior year. In
addition, the company capitalized approximately $59,000 in software
development costs for the three months September 30, 2000. The
increase in engineering and development costs was primarily the result
of the employment of additional engineering and development personnel.
We expect to incur significant engineering and development costs in
the future as we continue to maintain our existing product line as
well as develop new products and features, as evidenced by the
development of Mother.
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Sales and marketing
Sales and marketing expenses consist primarily of salaries,
commissions and related expenses for personnel engaged in marketing,
sales and customer support functions, as well as costs associated with
trade shows, promotional activities, advertising and public relations.
Sales and marketing expenses increased to $1,966,476 for the three
months September 30, 2000 as compared to $606,007 for the same period
in the prior year. The increase in sales and marketing expenses was
primarily the result of the employment of additional sales personnel,
common stock issuances and cash payments to sales and marketing
consultants, and an increase in marketing efforts to effectuate brand
awareness designed for future growth. Included in sales and marketing
expenses for the three months ended September 30, 2000 is $706,000 of
non-cash compensation for services in the form of the Company's common
stock, options and warrants as compared to none in the prior period.
The Company intends to continue to aggressively promote its current
and future products and, therefore, expects sales and marketing costs
to increase in absolute dollars in the future.
General and administrative
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, facilities and human
resources personnel, recruiting expenses and professional fees.
General and administrative expenses increased to $2,941,532 for the
three months ended September 30, 2000 as compared to $2,868,808 for
the same period in the prior year. The increase was primarily the
result of the addition of the Company's computer software segment, a
settlement with Anicom, Inc., as well as the employment of additional
administrative personnel and payment of professional fees for services
rendered, partially offset by no executive and consulting compensation
in the form of the Company's common stock, options and warrants
(excluding the amortization of previously issued warrants) during for
the three months September 30, 2000. On November 16, 2000, the Company
and Anicom, Inc. reached a settlement (the "Settlement Agreement").
Under the Settlement Agreement the allegations for the breach of the
warrant agreement by the Company and unasserted claims for the breach
of the distribution agreement by Anicom and the Company were settled.
The Settlement Agreement resulted in a charge to operations of
$445,000 for the three months ended September 30, 2000. The Company
expects general and administrative costs to increase in absolute
dollars in the future.
Other income (expenses)
Other income (expenses) consists primarily of portfolio income and
increased to $272,720 for the three months September 30, 2000 as
compared to $42,667 for the same period in the prior year. The
increase was primarily due to an increase in interest income the three
months September 30, 2000 due to the increase average cash balance
from the ComputerCOP Corporation transaction.
Liquidity and Capital Resources
On June 17, 1998 the Company executed a reverse merger with Watchdog
Patrols, Inc. a publicly traded non-reporting 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. 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. On June 29, 1999 NetWolves
concluded a private offering of 800,000 shares of common stock that
generated $5.4 million (net of $.6 million of expenses).
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From September 29, 1999 through November 4, 1999, an aggregate of
287,500 shares of the Company's common stock were issued to 17
accredited investors at a price of $15 per share for an aggregate sum
of approximately $4.2 million. In February 2000, NetWolves acquired
ComputerCOP Corporation, whose assets included ComputerCOP technology,
inventory and $20.5 million in cash.
NetWolves had cash and cash equivalents of $15.2 million and $20.2
million at September 30, 2000 and June 30, 2000, respectively.
Management believes that the Company has adequate capital resources to
meet its working capital needs for at least the next twelve months
based upon its current operating level. To the extent necessary, the
Company intends to raise additional monies from the sale of its
capital stock to fund its growth over the next 24 to 36 months,
however, there can be no assurance that the Company will have
sufficient capital to finance its planned growth.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 19, 2000, Anicom, Inc. had commenced an action against the
Company in the U.S. District Court for the Northern District of
Illinois. The action was based upon NetWolves' alleged failure to
deliver approximately 74,842 shares of its common stock to Anicom,
upon exercise by Anicom of the Company's warrants. The action sought
specific performance as well as any damages that may have resulted
from a diminution in value of NetWolves common stock.
On November 16, 2000, and in connection with the litigation, the
Company and Anicom reached a settlement (the "Settlement Agreement").
Under the Settlement Agreement the allegations for the breach of the
warrant agreement by the Company and unasserted claims for the breach
of the distribution agreement by Anicom and the Company were settled.
The Company paid $1,150,000 to Anicom pursuant to the Settlement
Agreement, which included $950,000 for the repurchase of all unvested
warrants.
As of September 30, 2000, the Company has reduced additional paid in
capital in the amount of $705,000, representing the fair value of the
warrants, calculated using the Black-Scholes option pricing model with
the following assumptions: dividend yield of none, expected volatility
of 65%, risk free interest rate of 5.85% and an expected term of 3.17
years - the remaining life to the maturity date. The remaining portion
of the settlement, in the amount of $445,000, has been charged to
operations.
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: Exhibit 27 - Financial Data Schedule (for electronic
submission only).
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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
Chairman of the Board and President
/s/ Peter C. Castle
Peter C. Castle
Secretary and Treasurer
Principal Financial Officer and
Principal Accounting Officer
Date: November 17, 2000
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