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 December 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 FEBRUARY 18, 1999
- ------------------------------ -------------------------------
<S> <C>
Common Stock, $.0033 par value 8,299,904
---------
</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 - DECEMBER 31, 1999
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 and June 30, 1999................................ 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
For the three and six months ended December 31, 1999 and 1998...... 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31, 1999 and December 31, 1998... 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................. 4 - 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................12 - 14
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.... 14
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS............................................ 15
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS.................... 15
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.............................. 15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 15
ITEM 5 - OTHER INFORMATION............................................ 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K............................. 15
SIGNATURES............................................................... 16
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,734,416 $ 5,585,981
Marketable securities, available for sale,
at market value 149,500 606,000
Accounts receivable, net of allowance of $40,000 219,346 76,907
Inventories 273,878 118,354
Prepaid expenses and other current assets 172,431 153,099
----------- -----------
Total current assets 6,549,571 6,540,341
----------- -----------
Property and equipment, net 414,802 224,691
Intangible assets, net 5,020,101 6,024,121
Other assets 28,904 22,781
----------- -----------
$12,013,378 $12,811,934
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 594,043 $ 453,336
Deferred compensation 50,000 100,000
Loans and advances from TSG officer - 144,348
Current maturities of long-term debt 45,854 43,411
----------- -----------
Total current liabilities 689,897 741,095
Long term debt, net of current maturities 242,983 266,537
----------- -----------
Total liabilities 932,880 1,007,632
----------- -----------
Minority interest 671,281 704,500
Commitment and contingencies
Shareholders' equity
Common stock, $.0033 par value; 10,000,000 shares
authorized; issued and outstanding;
6,385,564 on December 31, 1999 21,072 20,011
and 6,063,870 on June 30, 1999
Additional paid-in capital 28,728,660 17,726,374
Unamortized value of warrant grants (2,141,043) -
Accumulated deficit (16,118,817) (7,022,428)
Accumulated other comprehensive income (80,655) 375,845
----------- -----------
Total shareholders' equity 10,409,217 11,099,802
----------- -----------
$12,013,378 $12,811,934
=========== ===========
<FN>
See notes to condensed consolidated financial statements 1
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------ ----------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 334,198 $ 35,961 $ 472,149 $ 80,714
Cost of sales 112,695 15,179 208,864 31,478
------------ ------------ ------------ ------------
Gross profit 221,503 20,782 263,285 49,236
------------ ------------ ------------ ------------
Operating expenses
General and administrative 5,431,889 1,000,772 8,300,697 1,836,471
Research and development 205,052 78,512 389,770 91,616
Sales and marketing 169,360 978,431 775,367 1,979,587
------------ ------------ ------------ ------------
5,806,301 2,057,715 9,465,834 3,907,674
------------ ------------ ------------ ------------
Loss before other income (expense) (5,584,798) (2,036,933) (9,202,549) (3,858,438)
Other income (expense)
Investment income 55,841 21,667 101,571 37,383
Loss on sale of marketable securities - (8,047) - (8,047)
Minority interest 15,791 - 23,219 -
Interest expense (8,139) - (18,630) -
------------ ------------ ------------ ------------
Net loss (5,521,305) (2,023,313) (9,096,389) (3,829,102)
Other comprehensive income (loss):
Marketable securities valuation
adjustment (378,000) 233,000 (456,500) 197,323
------------ ------------ ------------ ------------
Comprehensive income (loss) $ (5,899,305) $ (1,790,313) $ (9,552,889) $ (3,631,779)
============ ============ ============ ============
Basic and diluted net loss per
share $ (.88) $ (.47) $ (1.47) $ (.89)
============ ============ ============ ============
Weighted average common
shares outstanding 6,303,801 4,317,674 6,183,835 4,315,772
============ ============ ============ ============
<FN>
See notes to condensed consolidated financial statements 2
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
---------------
1999 1998
----- ------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
<S> <C> <C>
Cash flows from operating activities
Net loss $(9,096,389) $(3,829,102)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 1,038,398 3,541
Realized loss on sale of marketable securities - 8,047
Noncash charge to operations with respect to common
stock and warrants issued for services 4,880,629 2,492,750
Minority interest (33,219) -
Changes in operating assets and liabilities
Accounts receivable (142,439) (71,095)
Inventories (155,524) (172,143)
Prepaid expenses and other current assets 30,668 (81,153)
Accounts payable and accrued expenses 140,707 156,022
Deferred compensation (50,000) -
----------- -----------
Net cash used in operating activities (3,387,169) (1,493,133)
----------- -----------
Cash flows from investing activities
Proceeds from sale of marketable securities - 789,604
Proceeds from assets held for sale, net - 445,000
Issuance of note receivable (50,000) -
Purchases of property and equipment (224,489) (47,397)
Payments of security deposits (6,123) (4,211)
----------- -----------
Net cash (used in) provided by investing activities (280,612) 1,182,996
----------- -----------
Cash flows from financing activities
Repayment of advances from TSG officer (144,348) -
Repayment of long term debt (21,111) -
Cash proceeds from private sale of common stock, net 3,981,675 -
----------- -----------
Net cash provided by financing activities 3,816,216 -
----------- -----------
Net increase (decrease) in cash and cash equivalents 148,435 (310,137)
Cash and cash equivalents, beginning of period 5,585,981 1,118,416
----------- -----------
Cash and cash equivalents, end of period $ 5,734,416 $ 808,279
=========== ===========
<FN>
See notes to condensed consolidated financial statements 3
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
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
year ended June 30, 1999 and the period from February 13, 1998 (inception)
to June 30, 1998. The results of operations for the six months ended
December 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, Watchdog changed its
name to NetWolves Corporation.
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.
Additionally, in conjunction with the acquisition of Sales and Management
Consulting, Inc. (d/b/a The Sullivan Group, see Note 4), the Company
provides consulting, educational and training services primarily to the oil
and gas and automotive industries throughout the United States.
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.
Risks and other factors
As a company that has developed a software product for use as a
multi-functional Internet communications device, NetWolves faces certain
risks. These include, among other items, the ability to continue to
implement its business plan, dependence on proprietary technology, rapid
technological change, challenges in recruiting personal and a highly
competitive market place.
4
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
3 Significant accounting policies (continued)
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 consolidation. The separate ownership of
one of the Company's subsidiaries is reflected in the Company's condensed
consolidated financial statements as minority interest (Note 4).
The subsidiary had issued 250,000 shares of non-voting Series A Cumulative
Convertible Preferred Stock with a $1 par value. The preferred stockholder
was entitled to preferential liquidation rights and was also entitled to
cumulative dividends (included in minority interest expense) that were
accrued at the rate of 8% per annum commencing on June 30, 1999. During
January 2000, the preferred stockholder elected to convert the preferred
stock into 13,888 shares of NetWolves common stock (at fair market value at
the time of conversion).
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.
The Company recognizes revenue from consulting and training fees when the
services are provided.
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.
5
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
3 Significant accounting policies (continued)
Basic and diluted net loss per share (continued)
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.
Intangible assets
Intangible assets at December 31, 1999 consist of $6,024,121 of intangible
assets acquired in connection with the Company's purchase business
combination effective June 30, 1999 (Note 4). These assets consist of
training content (including a training library, industry benchmarking data
and the Profit Coach profitability analysis module) with a fair value of
$1,000,000. The remaining portion of the intangible asset (approximately
$5,024,000) is allocated to goodwill. The training content and goodwill
will be amortized over their estimated useful lives of 3 years.
4 Purchase acquisition
On July 7, 1999, NetWolves and Sales and Management Consulting, Inc. (d/b/a
The Sullivan Group) ("SMCI") executed a merger agreement (the "Merger")
pursuant to which NetWolves acquired the outstanding capital stock of SMCI.
Under the terms of the Merger, TSG Global Education Web, Inc. ("TSG") (a
subsidiary of NetWolves), with 4,150,000 shares of common stock
outstanding, purchased all of the outstanding shares of SMCI's common stock
in exchange for 180,000 shares of NetWolves' restricted common stock. The
shareholders are restricted from selling, transferring or pledging such
shares for an eighteen-month period. Upon consummation of the Merger SMCI
merged into TSG and TSG was the surviving entity.
Concurrent with the Merger, the shareholders of SMCI purchased 70,000
shares of TSG common stock at $.35 per share for aggregate cash proceeds of
$24,500. This represents 1.7% of the outstanding common stock of TSG.
Additionally, TSG issued 250,000 shares of TSG Series A Cumulative (8%)
Convertible Preferred Stock to one of the SMCI shareholders, which was
issued in partial settlement of outstanding liabilities owed to the
shareholder. This TSG common and preferred stock has been reflected as
minority interest in the accompanying consolidated financial statements.
The purchase price approximated $4,095,000 (exclusive of acquisition costs
of $82,875), which consisted of 180,000 shares of NetWolves restricted
common stock valued at $22.75 per share (fair value of the common stock was
based on its quoted market price on the effective date of the acquisition).
The acquisition has been accounted for with an effective date of June 30,
1999 using the purchase method of accounting. Accordingly, assets and
liabilities were recorded at their fair values as of June 30, 1999, and
operations of SMCI have been included in the Company's condensed
consolidated statements of operations commencing July 1, 1999.
6
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
4 Purchase acquisition (continued)
An allocation of the fair value of the assets acquired and liabilities
assumed at June 30, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price
NetWolves common stock issued $4,095,000
Acquisition costs 82,875
----------
$4,177,875
==========
Allocation of purchase price
Fair value of tangible assets and liabilities
Current assets $ 70,221
Non-current assets 35,255
Current liabilities (443,909)
Non-current liabilities (266,537)
Advances to TSG, net of cash acquired of $412,224 (536,776)
----------
(1,141,746)
----------
Minority interest
Common stock and additional paid-in capital (454,500)
Preferred stock (250,000)
----------
(704,500)
----------
Intangible assets acquired 6,024,121
----------
$4,177,875
==========
</TABLE>
At the time of the Merger and in accordance with TSG's newly formed stock
option plan, the SMCI shareholders (who are all employees of TSG) received
605,000 five-year options to purchase TSG common stock at an exercise price
of $.35 per share. The options were issued in proportion to the SMCI
shareholders' ownership interest. The intrinsic value of these options
(plus the 70,000 shares of the TSG common stock) totalled $430,000, which
has been reflected in the allocation of the purchase price. Additionally,
the SMCI shareholders are entitled to an additional 175,000 options to
purchase TSG common stock (with an exercise price at fair value at the time
of grant), subject to TSG meeting specific earnings targets over the three
years ending June 30, 2000, 2001 and 2002. These options will be accounted
for as compensation expense in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" in such future
periods. All of the shareholders of SMCI entered into 3-year employment
agreements with TSG.
In accordance with the Merger, NetWolves made $4,750,000 of non-interest
bearing open account working capital advances to TSG.
7
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
4 Purchase acquisition (continued)
In accordance with the Merger, the Board of Directors of TSG consists of
three members designated by NetWolves and two members designated by the
SMCI shareholders. A four-fifths majority of the TSG Board is required for
specified significant actions including: sale or merger of the business,
changes to the TSG capital structure, declaration of dividends and
repayment of the working capital advances made by NetWolves. A simple
majority of the TSG Board is required for all general operating matters.
Included in the consolidated entity's cash and cash equivalents balance at
December 31, 1999 is approximately $2,500,000 of cash held by TSG to be
used for working capital purposes.
The following unaudited pro forma financial information for the three and
six months ended December 31, 1998 has been prepared assuming that the
acquisition of SMCI had taken place at the beginning of such periods
presented. The pro forma information is not necessarily indicative of the
combined results that would have occurred had the acquisition taken place
at the beginning of the periods, nor is it necessarily indicative of the
results that may occur in the future. Pro forma information for the three
and six months ended December 31, 1999 are not presented, since the results
of SMCI are reflected in the Company's consolidated results for the entire
periods.
<TABLE>
<CAPTION>
Three months Six months
ended ended
December 31, December 31,
1998 1998
------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $ 400,000 $ 806,000
Net loss $(2,571,000) $(4,908,000)
Basic and diluted net loss per share $ (.57) $ (1.09)
</TABLE>
5 Shareholders' equity
Common stock issuances
. On September 29, 1999, the Company sold 100,000 shares of unregistered
common stock to an accredited investor at $15 per share (a total of
$1,500,000) exclusive of commissions totaling $105,000.
. In November 1999, the Company sold 187,500 shares of unregistered
common stock to a group of accredited investors at $15 per share (a
total of $2,812,500) exclusive of commissions and fees of
approximately 7%.
. On November 20, 1999, 12,500 shares were issued to a financial
consultant for services rendered during the three months ending
December 31, 1999, which resulted in a charge to operations of
$275,000. Management determined the fair value of the common stock
based on its quoted market price at the time of the issuance.
8
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
5 Shareholders' equity (continued)
Warrants
. On July 26, 1999 and in connection with the Company entering into an
agreement with Comdisco, Inc. ("Comdisco"), Comdisco was granted a
five-year warrant to purchase 125,000 shares of the Company's
unregistered common stock, at an exercise price of $10 per share. The
warrants are immediately exercisable. The value of the warrants of
$2,390,000 will be amortized over the initial term of the agreement
(four years) and 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 5.84%,
and an expected term of five years.
. For services rendered, on July 31, 1999, a financial consultant of the
Company was granted a five-year warrant to purchase 100,000 shares of
common stock, at an exercise price of $12 per share. The warrants are
immediately exercisable and the shares issuable pursuant to the
warrants have piggyback registration rights. The value of the warrants
of $1,704,000 are being amortized over a period of three months and
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 5.84%, and an expected term of five
years.
. On November 1, 1999, the Company's granted a five-year warrant to
purchase 24,000 shares of common stock, at an exercise price of $18
per share to a public relations firm. The warrants vest ratably over
twelve months and resulted in a charge to operations of approximately
$60,000 for the three months ended December 31, 1999. The total value
of the warrants of approximately $351,000 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 5.97%, and an expected term of five years.
. In November 1999, a consultant was granted a five-year warrant to
purchase 60,000 shares of common stock, at an exercise price of $18
per share.
. During December 1999, the Company granted 65,000 ten-year warrants to
the Company's Vice President of Finance at an exercise price of $12
per share. The warrants vest immediately and accordingly resulted in a
charge to operations of $422,500, based upon the intrinsic value of
the warrants on the date of grant.
. During December 1999, a consultant was granted a ten-year warrant to
purchase 100,000 shares of common stock, at an exercise price of $12
per share. The warrants are immediately exercisable. The value of the
warrants resulted in a charge to operations of approximately
$1,536,000 during the three months ended December 31, 1999 and 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 5.97%, and an expected term of ten years.
9
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
6 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 two separate business segments, the Technology segment and the
Training and consulting 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Technology $ 25,929 $ 35,961 $ 39,129 $ 80,714
Training and consulting 308,269 - 433,020 -
----------- ----------- ----------- -----------
Total $ 334,198 $ 35,961 $ 472,149 $ 80,714
=========== =========== =========== ===========
Operating income (loss)
Technology $(4,507,041) $(2,036,933) $(7,199,393) $(3,858,438)
Training and consulting (1,077,757) - (2,003,156) -
----------- ----------- ----------- -----------
Total $(5,584,798) $(2,036,933) $(9,202,549) $(3,858,438)
=========== =========== =========== ===========
December 31, June 30,
1999 1999
----------- -----------
Identifiable assets
Technology $ 4,068,201 $ 6,270,113
Training and consulting 7,945,177 6,541,821
----------- -----------
Total $12,013,378 $12,811,934
=========== ===========
</TABLE>
The Company had two major customers, both included in the Training and
consulting segment, which accounted for 40% and 28% of consolidated sales for
the six months ended December 31, 1999.
10
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
7 Commitments and contingencies
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.
Comdisco, Inc. agreement
On July 26, 1999 the Company entered into an agreement with Comdisco
whereby Comdisco will provide management, installation and technology
services to the Company's proprietary Internet distribution system. In
addition, the agreement provides for the creation of a credit facility to
be utilized in connection with the sale and installation of the FoxBox in
up to 40,000 locations over a four-year period. However, there can be no
assurances that the Company will actually require the use of the credit
facility.
Under the agreement, the Company intends to lease the FoxBox to its
customers for 48 months at a monthly fee estimated under the agreement at
$200. Comdisco will then acquire all of the rights, title and interest in
the equipment with the exception of intellectual rights, software upgrades
and software application and content and take an assignment of the lease
from the Company, without recourse. At the time of assignment, Comdisco
will pay the Company 95% of the present value of the rental stream using an
interest rate commensurate with each customer's credit rating and
prevailing market rates.
In connection with the agreement, Comdisco was granted a five-year warrant
to purchase 125,000 shares of the Company's unregistered common stock, at
an exercise price of $10 per share (Note 5).
8 Subsequent events
Pursuant to an agreement dated as of February 10, 2000, the Company
acquired all of the outstanding capital stock of Computercop Corp., a
subsidiary of Computer Concepts Corp., in exchange for 1,775,000 restricted
shares of the Company's common stock. Computercop Corp.'s assets consist of
the Computercop technology, inventory and $20.5 million in cash. In
connection with the transaction, the Company paid finder and consulting
fees of $600,000 and issued 125,000 restricted shares of the Company's
common stock and five year warrants to purchase an aggregate of 900,000
shares of common stock. The warrants are exercisable at $25 per share on or
before September 30, 2002 and thereafter until the expiration date at $30
per share.
11
<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
The Company is a corporation with a limited operating history, formed in
February 1998, when it 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), non-reporting 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 sales of the FoxBox (Multi- services Internet
communications gateway), 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 revenue the terms of the agreements. The
first of which would be the TSG ("Sullivan") agreements 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.
In July 1999, the Company acquired TSG and in July 1999 secured a credit
facility with Comdisco, Inc. to finance the anticipated sales to be
generated from the application of the FoxBox technology to TSG's client
base. Comdisco also has agreed to provide management, installation and
technology services for FoxBoxes sold to this client base. The second
agreement is with Anicom, Inc. ("Anicom"). The Company entered into a
five-year exclusive master distribution agreement with Anicom, Inc. to
distribute the FoxBox throughout North America. Additionally, in February
of 2000, NetWolves Corporation acquired all the outstanding capital stock
of Computercop Corp., a subsidiary of Computer Concepts Corp., in exchange
for 1,775,000 restricted shares of common stock. The assets of Computercop
were 20.5 Million in cash, the Computercop technology and existing
inventory.
12
<PAGE>
Overview (continued)
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 December 31, 1999 had an accumulated deficit
of approximately $(16,118,817) 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.
Results of Operations
As a result of the July 1999 acquisition of TSG, NetWolves and its
subsidiaries operated in two business segments, the Technology segment and
the Training and consulting segment. The net sales from operations were
$472,149 and $80,714 for the six months ended December 31, 1999 and
December 31, 1998, respectively. Sales for the second quarter of fiscal
2000 were primarily attributable to the training and consulting business
segment. Although training and consulting revenue is currently derived from
traditional leader-lead training and benchmark studies, the Company's
strategic focus is on distance learning. The Company is currently "beta
testing" products utilizing the FoxBox technology to deliver distance
learning to existing clients in the petroleum industry. $101,571 of
investment income was generated through December 31, 1999 as compared to
$29,336 for the period ended December 31, 1998. The increase is primarily
attributable to the additional amounts of securities held with respect to
the prior period.
NetWolves had gross profit of 56% for the period ended December 31, 1999.
As of yet, the Company has not had a full year of production in order to
have a basis of comparison. However, the Company believes that gross
profits of 56% are maintainable 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. Additionally, this allows the Company to
focus its core R&D efforts on developing cutting edge Software. 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 cost, as well
as increased competition and general economic conditions in the future.
Operating expenses were $9,465,834 and $3,907,674 for the six months ended
December 31, 1999 and December 31, 1998, respectively. The increase in
operating expense is primarily due to the continued growth of the Company,
the addition of the training and consulting business segment and expenses
related to non-cash compensation for services. The operating expenses for
13
<PAGE>
Results of Operations (continued)
December 31, 1999 consisted primarily of $8,300,697 of general and
administrative costs relating to the establishment of the infrastructure
and the continued operations of the business. $389,770 of costs were
incurred relating to research and development, and $775,367 related to
selling and marketing. Included in the above mentioned operating expenses
are $4,880,629 of non-cash compensation for services in the form of the
Company's common stock, options and warrants.
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 which generated $5.4 million (net of $.6 million of
expenses). On September 29, 1999 the Company completed a private placement
of 100,000 shares of common stock to one accredited investor for $1.4
million (net of $100,000 of expenses) to be used in operations. In November
1999, the Company completed a private sale of an additional 182,500 shares
of common stock to accredited investors for $2.6 million (net of expenses
of approximately 7%). Additionally, in February 2000, the Company acquired
all of the outstanding capital stock of Computercop Corp., a subsidiary of
Computer Concepts Corp., in exchange for 1,775,000 restricted shares of the
Company's common stock. Computercop Corp.'s assets consist of the
Computercop technology, inventory and $19.6 million in cash (net of
expenses of approximately 4%).
NetWolves had cash and cash equivalents of $5,734,416 million at December
31, 1999. 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. However, there can be no
assurance that the Company will have sufficient capital to finance its
planned growth. The Company may need to raise additional monies from the
sale of its capital stock to fund its growth over the next 24 to 36 months.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In November 1999, the Company sold 187,500 shares of unregistered common
stock to accredited investors at $15 per share.
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
27 -- Financial Data Schedule (for electronic submission only)
15
<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
Secretary-Treasurer
Date: February 22, 2000
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the six months ended December 31, 1999 and is qualified
in its entirety by reference to such financial statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 5,734,416
<SECURITIES> 149,500
<RECEIVABLES> 219,346
<ALLOWANCES> 40,000
<INVENTORY> 273,878
<CURRENT-ASSETS> 6,549,571
<PP&E> 465,477
<DEPRECIATION> 50,675
<TOTAL-ASSETS> 12,013,378
<CURRENT-LIABILITIES> 689,897
<BONDS> 0
0
0
<COMMON> 21,072
<OTHER-SE> 10,388,145
<TOTAL-LIABILITY-AND-EQUITY> 12,013,378
<SALES> 472,149
<TOTAL-REVENUES> 472,149
<CGS> 208,864
<TOTAL-COSTS> 208,864
<OTHER-EXPENSES> 9,465,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,630
<INCOME-PRETAX> (9,096,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,096,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,096,389)
<EPS-BASIC> (1.47)
<EPS-DILUTED> (1.47)
</TABLE>
