U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 000-29869
EACCELERATION CORP.
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-2006409
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1223 NW FINN HILL ROAD, POULSBO, WASHINGTON 98730
(Address of principal executive offices)
(360) 697-9260
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 34,300,000 shares of Common Stock, as
of September 27, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
INDEX
Pages
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed consolidated balance sheet as of
December 31, 1999 and June 30, 2000 (unaudited) . . . . . . . . . . . . . 3
Condensed consolidated statements of income for
the three and six months ended June 30, 1999 and 2000 (unaudited) . . . . 4
Condensed consolidated statements of cash flows
for the six months ended June 30, 1999 and 2000 (unaudited) . . . . . . . 5
Consolidated notes to condensed financial statements (unaudited). . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . 17
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . 17
Item 4. Submissions of Matters to a Vote of Security Holders . . . . . . . 17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 17
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EACCELERATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 329,483 $ 605,831
Accounts receivable, net of allowance for doubtful
accounts of $46,750 and $75,000 . . . . . . . . . . . . 857,490 900,366
Other current assets. . . . . . . . . . . . . . . . . . . . 108,891 44,264
------------ -----------
Total current assets. . . . . . . . . . . . . . . . . . . 1,295,864 1,550,461
Property and equipment, net . . . . . . . . . . . . . . . . . 102,141 122,861
Patents and trademarks, net . . . . . . . . . . . . . . . . . 80,216 73,884
Deferred offering costs . . . . . . . . . . . . . . . . . . . 333,546 580,063
Long-term receivable. . . . . . . . . . . . . . . . . . . . . 52,415 83,830
------------ -----------
$ 1,864,182 $ 2,411,099
============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities. . . . . . . . . . $ 879,833 $ 1,171,982
------------ -----------
Stockholders' equity:
Common stock, par value $.0001; 100,000,000 shares
authorized; 34,300,000 shares issued and outstanding
at December 31, 1999 and June 30, 2000 (unaudited). . . . 3,430 3,430
Additional paid-in capital. . . . . . . . . . . . . . . . . . 350,205 467,375
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 630,714 768,312
------------ -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 984,349 1,239,117
------------ -----------
$ 1,864,182 $ 2,411,099
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
EACCELERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License $ 491,421 $ 700,775 $ 847,729 $ 1,015,453
Internet 579,273 1,205,188 789,025 2,821,628
----------- ------------ ------------ ------------
1,070,694 1,905,963 1,636,754 3,837,081
----------- ------------ ------------ ------------
Cost and expenses:
Software development
and products 291,562 352,895 491,718 683,535
Sales and marketing 615,213 1,214,756 871,446 2,482,177
General and administrative 116,076 302,018 223,741 535,785
----------- ------------ ------------ ------------
1,022,851 1,869,669 1,586,905 3,701,497
----------- ------------ ------------ ------------
Income from operations 47,843 36,294 49,849 135,584
----------- ------------ ------------ ------------
Other income 1,238 1,365 2,560 2,140
----------- ------------ ------------ ------------
Net income $ 49,081 $ 37,659 $ 52,409 $ 137,724
=========== ============ ============ ============
Earnings per common share --
Basic and Diluted $ 0.001 $ 0.001 $ 0.002 $ 0.004
=========== ============ ============ ============
Weighted average shares outstanding --
Basic 34,300,000 34,300,000
============ ============
Diluted 34,434,319 34,434,319
============ ============
Pro forma financial data (unaudited):
Pro forma income before tax $ 78,159 $ 178,224
============ ============
Pro forma net income $ 51,585 $ 117,628
============ ============
Pro forma earnings per common share --
Basic $ 0.002 $ 0.003
============ ============
Diluted $ 0.001 $ 0.003
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
EACCELERATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 52,409 $ 137,724
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amoritization 12,078 28,268
Provision for bad debt 15,000 28,250
Value of stock options issued - 65,170
Fair value of officer services 52,000 52,000
Changes in operating assets and liabilities:
Accounts receivable (79,320) (71,126)
Other current assets - 64,627
Accounts payable and accrued liabilities 433,309 292,149
------------ ------------
Net cash provided by operating activities 485,476 597,062
------------ ------------
Cash flows from investing activities:
Purchases of equipment (67,378) (42,656)
Long term receivable - (31,415)
------------ ------------
Net cash used in investing activities (67,378) (74,071)
------------ ------------
Cash flows from financing activities:
Deferred offering costs - (246,517)
Payments on capital lease obligations (5,833) -
Distribution to shareholders (345,988) (126)
------------ ------------
Net cash used in financing activities (351,821) (246,643)
------------ ------------
Net increase in cash and cash equivalents 66,277 276,348
Cash and cash equivalents at beginning of period 239,193 329,483
------------ ------------
Cash and cash equivalents at end of period $ 305,470 $ 605,831
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
EACCELERATION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
eAcceleration Corp. (the "Company") and its wholly-owned subsidiary have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Registration Statement on Form SB-2, as amended, as declared effective
by the Securities and Exchange Commission on August 14, 2000 (the "Registration
Statement").
NOTE 2 - EARNINGS PER SHARE
The table set forth below reconciles the components of the basic net income per
share calculation to the diluted net income per share.
<TABLE>
<CAPTION>
June 30,
--------
1999 2000
---- ----
<S> <C> <C>
Weighted average shares outstanding -
Basic 34,300,000 34,300,000
Effect of dilutive stock options - 134,319
---------- ----------
Weighted average shares outstanding -
Diluted 34,300,000 34,434,319
========== ==========
</TABLE>
NOTE 3 - DEFERRED OFFERING COSTS
The Company is engaged in an initial public offering (the "Offering") of its
common stock pursuant to the Registration Statement. In connection with the
Offering, the Company has incurred various costs, both direct and deferred.
The Company capitalizes its direct Offering costs. At June 30, 2000, deferred
Offering costs consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses $ 380,698
Accounting fees and expenses 105,680
Blue Sky fees and expenses 48,466
Printing and engraving 10,470
Other 34,749
------------
Total $ 580,063
============
</TABLE>
At June 30, 2000, amounts due for direct costs incurred in connection with the
Offering were $344,480.
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<PAGE>
EACCELERATION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - SEGMENT AND OTHER INFORMATION
During the three and six months ended June 30, 1999 and 2000, revenues from
licensing were derived in Asia, and Internet advertising revenues were derived
from customers located in the United States. Revenues by geographic region are
as follows for the three and six months ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Asia $ 491,421 $ 700,775 $ 847,729 $ 1,015,453
U.S. 579,273 1,205,188 789,025 2,821,628
------------ ------------ ------------ ------------
Total revenue $ 1,070,694 $ 1,905,963 $ 1,636,754 $ 3,837,081
------------ ------------ ------------ ------------
</TABLE>
During the three months ended June 30, 1999 and 2000, revenues from one
unaffiliated customer, Pointe Control, accounted for 46% and 16%, respectively,
of the Company's total revenues; this customer also accounted for 100% and 42%,
respectively of the Company's licensing revenues in those same periods.
During the six months ended June 30, 1999 and 2000, revenues from Pointe Control
accounted for 52% and 16%, respectively, of the Company's total revenues; they
also accounted for 100% and 60%, respectively, of the Company's licensing
revenues in those same periods.
During the three months ended June 30, 2000, another unaffiliated company,
Sourcenext Corporation, accounted for 21% of total revenues, and 58% of the
Company's licensing revenues. This customer began purchasing from the Company in
May 2000.
NOTE 5 - CONTRACTS
POINTE CONTROL
On May 26, 2000, the Company's distribution agreement with Pointe Control was
terminated with no further obligations. Revenues generated under the Pointe
Control agreement for the three and six month periods ended June 30, 1999 were
$491,421 and $847,729, respectively, and for the three and six month periods
ended June 30, 2000 were $295,775 and $610,453 respectively. No bonus payments
were received in connection with this contract.
SOURCENEXT CORPORATION
On May 26, 2000, the Company replaced the Pointe Control agreement with a
distribution agreement with Sourcenext Corporation, the beneficiary of the
Pointe Control agreement. The Sourcenext agreement provides for 24 consecutive
monthly payments of $75,000 beginning in June 2000. Under the Sourcenext
agreement, the Company will also receive an additional $75,000 per product for a
total of 24 products that the Company delivers under the terms of the agreement,
during the same 24-month period. Additionally, the Sourcenext agreement provides
for up to five bonus payments of $400,000 each if sales of certain of the
Company's software products reach "top product" status. "Top product" status is
based on sales totals as determined by a weekly Japanese online industry report
set forth in the agreement. Under the Sourcenext agreement, a product receives
two points for being in the top ten on the industry report's best seller's list,
and one point for being ranked eleven through twenty on this list. Once a
product has accumulated 18 points, it has achieved "top product" status.
The Company records revenue using the percentage-of-completion method for each
software product deliverable. Based on the percentage-of-completion method, the
Company recorded $405,000 in revenues for the three month period ended June 30,
2000.
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<PAGE>
EACCELERATION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements" providing the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. For companies such
as the Company with fiscal years that begin between December 16, 1999 and March
15, 2000, portions of SAB No. 101 become effective for the fourth quarter of
2000. The Company believes that adopting these portions of SAB No. 101 will not
have a material effect on the Company's financial position or overall trends in
results of operations.
NOTE 7 - SUBSEQUENT EVENTS
The Registration Statement became effective on August 14, 2000. Pursuant to the
Registration Statement, 3,000,000 shares of common stock were registered for
sale and the Company, through its officers and directors, is offering a minimum
of 400,000 shares and a maximum of 3,000,000 of its shares in a direct
participation offering. Until the Company has sold at least 400,000 shares, it
will not accept subscriptions for any shares. Subscription funds are deposited
in an interest-bearing escrow account. If the Company is unable to sell the
minimum number of shares in accordance with the Registration Statement, it will
return all funds, with interest, to subscribers. The offering will remain open
until all shares offered are sold or nine months after the date of the Company's
prospectus, except that the Company will have only 180 days to sell at least the
first 400,000 shares. As of September 28, 2000, the Company has not yet sold the
required minimum number of shares and, thus, it has not yet accepted
subscriptions or realized any proceeds from the Offering.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-QSB includes "forward-looking statements".
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which could cause the actual results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements not to occur or be realized. Such forward-looking statements
generally are based upon our best estimates of future results, performance or
achievement, based upon current conditions and the most recent results of
operations. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "believe,"
"estimate," "anticipate," "continue" or similar terms, variations of those terms
or the negative of those terms. Potential risks and uncertainties include, among
other things, those factors set forth below under "Factors Affecting Future
Operating Results" and in our other filings with the Securities and Exchange
Commission.
Investors should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. We undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, WE REFER TO
EACCELERATION CORP. AS "WE," "US" OR "OUR".
The following discussion should be read with the historical condensed
consolidated financial statements, and accompanying notes, which are included
herein, and the consolidated financial statements included in our registration
statement on Form SB-2, as amended, as declared effective to the SEC on August
14, 2000.
GENERAL
We are a provider of online direct marketing services, advertising
solutions and proprietary software. We combine Internet-based direct marketing
and advertising services with programs that reward consumers with free software
when they use our designated homepage as their Internet browser's starting page.
We provide flexible marketing solutions for our Internet advertising and
marketing clients. We intend to leverage our developing homepage subscriber base
and our targeting capabilities to offer our internet advertising and marketing
clients customized, targeted advertising solutions designed to improve
advertisement response rates and reduce their cost of acquiring new customers.
We also license localized versions of our software products for distribution in
Asia to software customers who cannot obtain our software for free on our
websites.
In 1999, our revenues were derived primarily from our software development
and licensing contracts with Pointe Control for distribution in Asia. In 1999,
we diversified our revenue stream to include Internet advertising from our
websites. In 2000, our Internet advertising fees continued to increase to enable
us to be less dependent on software licensing. We intend to increase our future
revenues by concentrating on increasing our Internet revenues.
Under the terms of our former distribution agreement with Pointe Control
and current distribution agreement with Sourcenext, we granted an unlimited
license to sell the software in Japan as specified under such agreements. This
does not materially affect our operations attributed to offering software free
on our websites. This license only applies to localized, Japanese versions of
the software, and not the English versions which are available for free on our
websites. Additionally, users in Japan generally cannot run the free
English-language versions on their operating systems.
THREE MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUES
Our revenues increased $835,269 or 78% from $1,070,694 during the three
months ended June 30, 1999, to $1,905,963 during the three months ended June 30,
2000, primarily due to an increase of $625,915 or 108% in our Internet
advertising and marketing revenues to $1,205,188 in the June 2000 three-month
period from $579,273 in the
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<PAGE>
June 1999 three-month period. This increase is due to our efforts to expand
our customer base by marketing a wide variety of advertising options available
on the Internet. Revenues from software licensing also increased $209,354 or 43%
from $491,421 during the June 1999 three-month period, to $700,775 during the
June 2000 three- month period. Software license revenues were derived from a
license agreement with Pointe Control in Asia during the June 1999 three-month
period and the period between April 1, 2000 and May 26, 2000. Between May 26,
2000 and June 30, 2000, software license revenues were derived from another
contract as explained below. Both contracts were accounted for using the
percentage-of-completion method. We had no domestic revenues from software
licensing during the June 1999 or June 2000 three-month periods.
During the June 2000 three-month period, we also recognized software
license revenues in Asia from a distribution agreement that we entered into with
Sourcenext Corporation as of May 26, 2000, that replaced our distribution
agreement with Pointe Control. Sourcenext is a Japanese company that was the
beneficiary of our previous distribution agreement with Pointe Control. The
agreement with Sourcenext provides for the production and license of 24
specified new software products and 24 consecutive monthly payments of $75,000
beginning in June 2000. Additionally, we are entitled to receive $75,000 for
each of the 24 products that we deliver under the terms of this agreement during
this 24-month period.
During 1999, we commenced Internet revenue sharing programs with several
other companies, under which we were to receive a portion of such other
companies' sales originating from our websites ranging from 3% to 50%. No
significant revenue sharing programs have been commenced in the current year.
Our revenues derived from revenue sharing programs during the three months ended
June 30, 1999 and 2000 have been inconsequential.
SOFTWARE DEVELOPMENT AND PRODUCT EXPENSES
Software development and product costs increased $61,333 or 21% from
$291,562 during the June 1999 three-month period to $352,895 in the June 2000
three-month period, primarily due to our expansion during the June 2000 three
month period, including an increase in employees as compared to this prior year
period. We expect our Internet development activities to continue to increase
significantly as we increase our emphasis on generating Internet advertising and
marketing revenues.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased by $599,543 or 97% from $615,213
during the June 1999 three-month period to 1,214,756 during the June 2000
three-month period primarily due to an increase in Internet advertising expenses
in order to generate traffic to our websites, which in turn generated increased
Internet advertising and marketing revenues. Internet advertising expenses
incurred in the June 1999 three-month period were $510,882, and such expenses
increased by $501,227 or 98% to $1,012,109 in the June 2000 three-month period.
We do not have any material commitments to purchase banner space or other
advertising space from any of our vendors. We typically enter into short-term
purchase agreements with our suppliers, and such agreements are cancelable by
either party at short notice.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $185,942 or 160% from
$116,076 during the June 1999 three-month period to $302,018 in the June 2000
three-month period, largely due to increases in Internet communications-related
expenses and salaries and wages. We anticipate that legal and professional fees,
salaries and wages, and general office expenses, will increase significantly to
provide for infrastructure necessary to administer a growing public company.
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<PAGE>
FUTURE RESULTS
As we continue to increase our emphasis on Internet advertising and
marketing revenue and focus on significantly increasing the flow of traffic to
our websites, we may experience operating losses as we develop, produce and
distribute additional products and services, de-emphasize other products and
services and continue to develop our business. As a result, we may not be able
to maintain our historical profitability.
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUES
Our revenues increased $2,200,327 or 134% from $1,636,754 during the six
months ended June 30, 1999, to $3,837,081 during the six months ended June 30,
2000, primarily due to an increase of $2,032,603 or 258% in our Internet
advertising and marketing revenues to $2,821,628 in the June 2000 six-month
period from $789,025 in the June 1999 six-month period. This increase is due to
our efforts to expand our customer base by marketing a wide variety of
advertising options available on the Internet. Revenues from software licensing
also increased $167,724 or 20% from $847,729 during the June 1999 six-month
period, to $1,015,453 during the June 2000 six-month period. Software license
revenues were derived from a license agreement with Pointe Control in Asia
during the June 1999 and part of the June 2000 six-month periods, and were
recognized using the percentage-of-completion method. During the three months
ended June 30, 2000, we also recognized software license revenues in Asia from
our agreement with Sourcenext Corporation. We had no domestic revenues from
software licensing during the June 1999 or June 2000 six-month periods. Our
revenues derived from revenue sharing programs during the six months ended June
30, 1999 and 2000 have been inconsequential.
SOFTWARE DEVELOPMENT AND PRODUCT EXPENSES
Software development and product costs increased $191,817 or 39% from
$491,718 during the June 1999 six- month period to $683,535 in the June 2000
six-month period, due to our expansion during the June 2000 six month period,
including an increase in employees as compared to the prior year period. We
expect our Internet development activities to continue to increase significantly
as we increase our emphasis on generating Internet advertising and marketing
revenues.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased by $1,610,731 or 185% from
$871,446 during the June 1999 six month period to 2,482,177 during the June 2000
six-month period primarily due to an increase in Internet advertising expenses
in order to generate traffic to our websites, which in turn generated increased
Internet advertising and marketing revenues. Internet advertising expenses
incurred in the June 1999 six-month period were $725,683, and such expenses
increased by $1,375,887 or 190% to $2,101,570 in the June 2000 six-month period.
We do not have any material commitments to purchase banner space or other
advertising space from any of our vendors. We typically enter into short-term
purchase agreements with our suppliers, and such agreements are cancelable by
either party at short notice.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $312,044 or 139% from
$223,741 during the June 1999 six-month period to $535,785 in the June 2000
six-month period, largely due to increases in Internet communications-related
expenses and salaries and wages. We anticipate that legal and professional fees,
salaries and wages, and general office expenses will increase significantly to
provide for infrastructure necessary to administer a growing public company.
We record compensation expense for options granted to employees if the
exercise price is less than the fair market value of the underlying common
stock. Because options issued to employees were granted at the estimated fair
value, no compensation expense relating to these options was charged to
operations in the six months ended June 30,
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<PAGE>
1999. Options issued to non-employees are valued based on the
"Black-Scholes" valuation model that considers volatility, among other factors.
Accordingly, we recorded $0 and $65,170 of compensation expense during the first
six months of 1999 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES.
During the periods reported, we generated sufficient cash flows from
operations to support our business. During the six months ended June 30, 1999
and 2000, we generated cash flows from operations of $485,476 and $597,062,
respectively. The increase in net income was partially offset by increases in
accounts receivable which required the use of additional operating cash flows in
1999 and 2000.
At June 30, 2000, we had cash and cash equivalents of $605,831 and working
capital of $378,479. We intend to continue to utilize our resources in 2000 for
software development; developing, marketing and advertising our Internet
presence; to finance the higher level of accounts receivable necessary to
support our anticipated increase in revenues; and for capital expenditures,
including the purchase of computer equipment and software. However, our working
capital requirements may change depending upon numerous factors, including,
among others, the need to expand our website traffic through increased amounts
of free software downloads and Internet advertising. We believe that our
existing cash and cash equivalents and cash generated from operations, if any,
should be sufficient to meet our currently anticipated liquidity and capital
expenditure requirements for at least the next twelve months. There can be no
assurance, however, that we will be successful in attaining our revenue goals,
nor that attaining such goals will have the desired effect on our cash
resources. We have no long-term debt; however, we believe that credit facilities
may be available to us.
We are engaged in an initial public offering of our common stock and there
can be no assurance that we will be able to sell the minimum number of shares
offered in the offering, in which case we will be unable to accept any funds
from the offering. Further, even if we complete this offering, we may be
required to raise additional funds after the offering, especially if we only
sell the minimum number of shares and, as a result, do not have the proceeds
necessary to implement our business plans to the extent we most desire. There
can be no assurance that we will be able to raise funds in our initial public
offering or that any additional financing will be available when needed or that
if available, such financing will include terms favorable to us or our
stockholders. If we are unable to complete our initial public offering and if
alternative financing is not available when required or is not available on
acceptable terms, we may be unable to develop or enhance our services, take
advantage of business opportunities or respond to competitive pressures, any of
which could have a material adverse effect on our business, financial condition
and results of operations.
Under our distribution agreement with Sourcenext, in addition to 24
consecutive monthly payments of $75,000, we will receive during such 24-month
period $75,000 for each of the 24 products that we deliver under the terms of
the agreement. Based on our historical success in producing new software
products under the Pointe Control agreement, we believe that it is likely that
we will continue to produce and deliver the products as required by the
Sourcenext agreement. We cannot make any assurances that we will be successful,
however, and in the event we do not produce new products in a timely manner, we
will not receive, or continue to receive the conditional $75,000 payments per
product. Failure to receive a significant amount of the payments from Sourcenext
would have a materially adverse effect on our financial position, operations and
cash flows.
CUSTOMER CONCENTRATION
During the six months ended June 30, 1999, MediaRing, Inc., an Internet
advertising and marketing client, accounted for 13% of our total revenue and 27%
of our Internet advertising and marketing revenue. MediaRing did not account for
any of our revenue in 2000 because it began to be more economically beneficial
for us to enter into agreements with other advertisers instead. During the six
months ended June 30, 2000, another customer, CoolSavings, accounted for 18% of
our total revenue and 24% of our Internet advertising revenue. If one or more of
our large customers ceases operations or otherwise abruptly ceases or reduces
their business with us, our results of operations, cash flows and liquidity
could be adversely affected.
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SUPPLIER CONCENTRATION
We are dependent on products and services provided by a variety of Internet
suppliers, most of which have month-to month agreements with us. For the six
months ended June 30, 1999, four advertising vendors, BURST! Media, Flycast,
Adauction.com, and Skyline Network Technologies, accounted for 23%, 17%, 7%, and
7%, respectively, of our total Internet media purchases. For the six months
ended June 30, 2000, five advertising vendors, Adsmart, Adauction.com, Double
Click, One Media Place and Global Market Ltd., accounted for 27%, 11%, 9%, 8%
and 8%, respectively, of our total Internet media purchases. Many of these
suppliers have reported significant financial losses and may not continue
operations in the long term. Although we have established redundant
relationships with our suppliers in order to mitigate our exposure, the
unavailability of adequate advertising space through the termination of our
agreements with suppliers or the significant increase in the cost of supplies
would likely hinder our ability to attract users to our websites and as a
result, would have an adverse effect on our results of operations, cash flows
and liquidity.
INCOME TAXES AND S-CORPORATION DISTRIBUTION
During the periods presented, we were not subject to federal and state
income taxes since we elected to be taxed as an S-corporation. Accordingly, we
reported income on our stockholders' personal income tax return. Immediately
prior to the initial closing of our initial public offering, we will begin to be
taxed as a separate legal entity under C-corporation status. The estimated
federal income tax rate for our company is approximately 34%. At present,
the State of Washington does not impose income taxes on corporations but does
impose a business and occupation tax on corporations conducting business in the
State of Washington.
In connection with the Sourcenext Corporation agreement, we are subject to
a 10% withholding tax in Japan on software licenses sold in that country.
Payments are received net of the withheld tax from Sourcenext, our Japanese
customer. Currently, under our S-corporation status, these payments are not
considered deductible expenses, and flow through to our stockholders'
personal returns, as we are not subject to income tax. We are currently
reporting these amounts as "general and administrative" expenses.
After we become a C-corporation, all future tax payments will then become
tax credits on our federal tax return. The withholding tax will produce a
deferred tax asset and may be offset against future taxable income. For the
three and six-month periods ended June 30, 2000, the income tax expense on a pro
forma basis would be approximately $27,000 and $61,000, respectively.
The condensed consolidated statements of income for the six months ended
June 30, 2000, included in the financial statements included in this quarterly
report on Form 10-QSB include pro forma income before tax, net income, and basic
and diluted earnings per share, assuming we were taxed as a C-corporation at the
34% federal income tax rate at the beginning of such reporting periods. We
anticipate that immediately prior to the first closing of our initial public
offering, we will make a distribution to our existing stockholders equal to the
amount that our total stockholders' equity exceeds $578,750 on the date of such
distribution.
FACTORS AFFECTING FUTURE OPERATING RESULTS
THE MAJORITY OF OUR CONTRACTS WITH OUR INTERNET ADVERTISING CUSTOMERS HAVE
MONTH-TO-MONTH TERMS, AND THE LOSS OF A SIGNIFICANT NUMBER OF THESE CONTRACTS IN
A SHORT PERIOD OF TIME COULD HARM OUR BUSINESS.
As of June 30, 2000, over 90% of our Internet advertising contracts could
be terminated by either party with several days notice. The loss of a
significant number of these contracts in any period could result in an immediate
and significant decline in our revenues and cause our business to suffer.
A SIGNIFICANT PERCENTAGE OF OUR INTERNET ADVERTISING AND MARKETING REVENUES
ARE DERIVED FROM ONLY A SMALL NUMBER OF INTERNET ADVERTISING AND MARKETING
CUSTOMERS, AND THE INABILITY TO CONTINUE OUR RELATIONSHIP WITH ANY OF THEM COULD
ADVERSELY AFFECT US.
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During the first six months of 1999, one Internet advertising and marketing
client, MediaRing, Inc., accounted for 13% of our total revenues. By late 1999
and continuing into 2000, we substantially reduced our volumes with MediaRing,
Inc. During the six months ended June 30, 2000, MediaRing did not account for
any of our revenues. During such period, another company, CoolSavings, accounted
for 18% of our total revenues. The loss of any of our other major Internet
advertising or marketing clients, a significant decrease in products or services
sold to them, or an inability to collect receivables from one or more of them,
could adversely affect our business, operating results and financial condition.
WE ARE DEPENDENT ON PURCHASING INTERNET ADVERTISING SPACE CURRENTLY
PROVIDED BY ONLY A SMALL NUMBER OF INTERNET ADVERTISING SUPPLIERS, MOST OF WHICH
HAVE MONTH-TO-MONTH AGREEMENTS WITH US. MANY OF THESE SUPPLIERS HAVE REPORTED
SIGNIFICANT FINANCIAL LOSSES, AND MAY NOT CONTINUE OPERATIONS. THE LOSS OF A
SIGNIFICANT NUMBER OF THESE SUPPLIERS COULD ADVERSELY AFFECT US.
We are dependent on products and services provided by a variety of Internet
suppliers, most of which have month-to month agreements with us. For the six
months ended June 30, 1999, four advertising vendors, BURST! Media, Flycast,
Adauction.com and Skyline Network Technologies, accounted for 23%, 17%, 7% and
7%, respectively, of our total Internet media purchases. For the six months
ended June 30, 2000, five advertising vendors, Adsmart, Adauction.com, Double
Click, One Media Place and Global Market Ltd. accounted for 27%, 11%, 9%, 8% and
8%, respectively, of our total Internet media purchases. Although we have
established redundant relationships with our suppliers in order to mitigate our
exposure, the unavailability of adequate supplies could adversely affect us.
Additionally, many of these suppliers have reported significant financial losses
and may not continue operations in the long term. If there are fewer suppliers
available, prices of advertising space could increase significantly, which could
have a materially adverse effect on our operations.
WE MIGHT ONLY SELL THE MINIMUM NUMBER OF SHARES IN OUR INITIAL PUBLIC
OFFERING, IN WHICH CASE THE GROWTH OF OUR BUSINESS WOULD BE GREATLY LIMITED, OR
LESS THAN THE MINIMUM NUMBER OF SHARES, IN WHICH CASE WE WOULD BE UNABLE TO
ACCEPT ANY SUBSCRIPTIONS.
We can have a closing and accept subscriptions for the sale of shares to
investors if at least 400,000 shares have been sold, which is the minimum number
of shares that may be sold in our initial public offering. In the event such
minimum amount, or any amount which is significantly less than the maximum
amount of 3,000,000 shares offered in the offering are sold, we may not be able
to develop and market our products and services and increase our market share in
markets in which we compete as aggressively as if more shares were sold. We
would also not be able to take advantage of acquisition or investment
opportunities as aggressively. Additionally, we would not be able to expand our
operations, build a new facility or significantly increase the size of our work
force and infrastructure to the extent we could if we sold more shares.
We may also be unsuccessful in selling at least 400,000 shares in the
offering, particularly because our officers and directors are selling the shares
in a direct participation offering, without the use of an underwriter. If we
fail to sell at least 400,000 shares, we will be unable to accept any
subscriptions in the offering. We could also decide, in our discretion, to not
have a closing.
IF AND WHEN WE COMPLETE OUR INITIAL PUBLIC OFFERING, OUR TWO EXISTING
STOCKHOLDERS WILL IN THE AGGREGATE BENEFICIALLY OWN 92.0% OF THE
OUTSTANDING SHARES OF OUR COMMON STOCK IN THE EVENT THE MAXIMUM NUMBER OF SHARES
OFFERED IN OUR INITIAL PUBLIC OFFERING ARE SOLD, OR 98.9% OF THE OUTSTANDING
SHARES OF OUR COMMON STOCK IN THE EVENT THE MINIMUM NUMBER OF SHARES OFFERED IN
OUR INITIAL PUBLIC OFFERING ARE SOLD AND WILL CONTINUE TO BE ABLE TO EXERCISE
CONTROL OF OUR COMMON STOCK AND MAY MAKE DECISIONS THAT ARE NOT IN THE BEST
INTEREST OF ALL STOCKHOLDERS.
If and when we complete our initial public offering, Clint Ballard, our
president and chief executive officer, and Diana T. Ballard, our chairman of the
board, will in the aggregate beneficially own 92.0% of the outstanding shares of
our common stock in the event the maximum number of shares offered in the
offering are sold, or 98.9% of the outstanding shares of our common stock in the
event the minimum number of shares offered in the offering are sold.
Accordingly, Clint and Diana Ballard will be able to control the election of
directors and all other matters subject to stockholder votes. This concentration
of ownership may have the effect of delaying or preventing a change of control
of eAcceleration, even if this change of control would benefit shareholders.
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<PAGE>
IF OUR CUSTOMERS REQUEST PRODUCTS AND SERVICES DIRECTLY FROM OUR MARKETER
CLIENTS INSTEAD OF REQUESTING THE PRODUCT OR SERVICE FROM US, OUR BUSINESS COULD
SUFFER.
Our Internet advertiser and marketer clients may offer similar free
products or services on their own websites that we offer on our websites. Our
customers may choose to request products or services directly from our Internet
advertiser and marketer clients instead of requesting the product or service
from us, which would result in lower revenues to us and cause our business to
suffer.
OUR QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND
MAY CONTINUE TO DO SO IN THE FUTURE AS WE CONTINUE TO INCREASE OUR DEPENDENCE ON
INTERNET ADVERTISING AND MARKETING REVENUE AND AS A RESULT, THE MARKET PRICE OF
OUR COMMON STOCK MAY DECLINE.
Our quarterly results of operations have varied in the past and are likely
to continue to vary significantly from quarter to quarter in the future as we
increase our emphasis on Internet advertising and marketing revenue. As a
result, we believe that quarter-to-quarter comparisons of our operating results
may not be meaningful and you should not rely upon them as an indication of our
future performance. Our operating expenses are based on expected future revenues
and are relatively fixed in the short term. If our revenues are lower than
expected, we could be adversely affected. In addition, during some future
periods our operating results likely will fall below the expectations of public
market analysts and investors. In this event, the market price of our common
stock likely would decline.
BECAUSE WE ARE UNDERGOING A SIGNIFICANT SHIFT IN OUR EMPHASIS FROM SOFTWARE
DISTRIBUTION TO INTERNET ADVERTISING AND MARKETING, OUR OPERATING HISTORY MAY
NOT BE INDICATIVE OF FUTURE PERFORMANCE.
Our operating history makes predicting our future performance difficult and
does not necessarily provide investors with a meaningful basis for evaluating an
investment in our common stock. Although we began operations in 1987, we did not
begin generating any significant revenue from Internet advertising and marketing
until 1999. As a result, our performance since January 1999 is not comparable to
prior periods.
WE DO NOT HOLD COLLATERAL TO SECURE PAYMENT FROM OUR ONLY SOFTWARE LICENSING
CUSTOMER FROM WHOM WE DERIVE A SIGNIFICANT PERCENTAGE OF OUR TOTAL REVENUE, AND
IF WE FAIL TO RECEIVE PAYMENT FROM THIS CUSTOMER, OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
We do not hold collateral to secure payment on our software licensing
agreement with Sourcenext Corporation, our Asian distributor. Under this
agreement, Sourcenext is obligated to pay us up to $3.6 million through May
2002. Therefore, a default in payment on a significant scale could materially
adversely affect our results of operations and financial condition.
IF WE ARE UNABLE TO CONTINUE TO DELIVER AND DESIGN SOFTWARE PRODUCTS TO OUR
SOFTWARE DISTRIBUTION CUSTOMER AS REQUIRED BY OUR AGREEMENT WITH THIS CUSTOMER,
OUR REVENUES WILL BE SIGNIFICANTLY DECREASED.
Under our distribution agreement with Sourcenext, our software distribution
customer, in addition to other payments, Sourcenext is obligated to pay us
$75,000 per product delivered, for up to 24 products within two years. If we are
unable to design, complete and deliver such products, we could fail to receive a
significant amount of our software distribution revenue.
WE WILL HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS, IF ANY, FROM OUR
INITIAL PUBLIC OFFERING, AND WE MIGHT USE THEM INEFFECTIVELY.
We will have broad discretion over how we use the net offering proceeds, if
any, from our initial public offering, and we could spend the proceeds in ways
with which you might not agree. Our business strategy includes possible growth
through acquisitions or significant investments, and we may use a substantial
portion of the offering proceeds to buy or invest in businesses we have not yet
identified. We cannot assure you that we will use these proceeds effectively.
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IF WE ESTABLISH A BROKER-DEALER SUBSIDIARY, WE WILL BE SUBJECT TO SUBSTANTIALLY
INCREASED POTENTIAL REGULATORY AND ECONOMIC LIABILITY.
Our proposed broker-dealer subsidiary may be restricted by the NASD, other
regulatory bodies and its clearing firm with respect to its ability to
participate in underwritings, and we have no present intention to underwrite any
securities offerings. If we decide to start underwriting offerings, we would
face numerous challenges and restrictions. The broker-dealer subsidiary may
incur losses if it is unable to resell any securities it is committed to
purchase or if it is forced to liquidate its commitments at less than the agreed
purchase price. In addition, we would be subject to substantial potential
liability for material misstatements or omissions in prospectuses and other
communications with respect to any underwritten offerings. We do not expect that
any potential liabilities relating to our proposed broker-dealer subsidiary's
role as an underwriter would be covered by insurance.
IF WE ESTABLISH A BROKER-DEALER SUBSIDIARY, WE WILL BECOME SUBJECT TO CAPITAL
MAINTENANCE REQUIREMENTS WHICH COULD HINDER OUR ABILITY TO CARRY OUT OUR
BUSINESS EFFICIENTLY.
If we create a broker-dealer subsidiary, we will be subject to, among other
requirements, the financial capital minimums requirements of Rule 15c3-1 under
the Exchange Act, which is known as the "net capital rule". The net capital rule
is designed to monitor the general financial integrity and liquidity of a
broker-dealer by imposing strict requirements on the amount of indebtedness
which a broker-dealer may incur relative to its equity capital. In computing net
capital, various adjustments are made to net worth which exclude assets which
are not readily convertible into cash, and take a conservative perspective of
other assets such as a broker-dealer's position in securities. The requirements
provide that the broker-dealer shall maintain a minimum level of net capital and
a minimum ratio of net capital to aggregate indebtedness. The particular levels
vary in application depending upon the nature of the activity undertaken by the
broker-dealer and the length of time it has been in business.
The net capital rule would impose restrictions on our proposed
broker-dealer subsidiary's operations and it could, in turn, impose restrictions
on our operations. Compliance with the net capital rule may limit our operations
and those of our proposed broker-dealer subsidiary, which require the intensive
use of capital, such as underwriting commitments and principal trading
activities, and will limit our ability to pay dividends. We will also have to
enter into a membership agreement with the NASD that may similarly limit our
activities.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Our registration statement (Registration No. 333-90867) under the Securities Act
of 1933, in connection with our initial public offering, became effective on
August 14, 2000. A total of up to 3,000,000 shares of common stock were
registered for sale and, through our officers and directors, we are offering a
minimum of 400,000 and a maximum of 3,000,000 of our shares in a direct
participation offering. Until we have sold at least 400,000 shares, we will not
accept subscriptions for any shares. All proceeds of this offering will be
deposited in an interest-bearing escrow account. If we are unable to sell the
minimum number of shares, we will return all funds, with interest, to
subscribers. The offering will remain open until all shares offered are sold or
nine months after the date of this prospectus, except that we will have only 180
days to sell at least the first 400,000 shares. As of September 28, 2000, we
have not yet sold the required minimum number of shares and, thus, we have not
yet accepted subscriptions or realized any proceeds from this offering. As of
June 30, 2000, we have incurred expenses of $580,063 in connection with the
offering.
If we sell the required minimum of 400,000 shares in the offering, we intend to
accept subscriptions and the proceeds from the escrow account will be available
to us. We intend to use the net proceeds of the offering (total offering
proceeds net of aggregate offering expenses, which expenses will not exceed 20%
of the total offering proceeds) for new product development, marketing and
advertising, improvements and upgrades to our existing facilities and equipment
and development of additional facilities to house our operations, personnel,
computer equipment and working capital and general corporate purposes, including
costs associated with future acquisitions and various other costs necessary for
our ongoing operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Set forth below are all exhibits to this Quarterly Report on Form 10-QSB.
Number Description
----- -----------
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three-month period
ended June 30, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EACCELERATION CORP.
Dated: September 28, 2000 By: /s/ Clint Ballard
-------------------------------------
Clint Ballard
President and Chief Executive Officer
(Principal Executive Officer)
Dated: September 28, 2000 By: /s/ E. Edward Ahrens
-------------------------------------
E. Edward Ahrens
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EACCELERATION CORP.
INDEX TO EXHIBITS
Number Description
------ -----------
27 Financial Data Schedule.
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