Form 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-9129
EPICEDGE, INC.
Exact name of Registrant as specified in its charter
TEXAS 75-1657943
State or other jurisdiction of IRS Employer Identification Number
Incorporation or organization
3200 Wilcrest
Suite 370
Houston, Texas 77042-3366
713-784-2374
Address and telephone number of principal executive offices
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to filing
requirements for the past 90 days.
X Yes No
--- ---
The number of shares of common stock of the Registrant outstanding at August 15,
2000 was 27,477,223.
<PAGE>
<TABLE>
<CAPTION>
EPICEDGE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
EPICEDGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
------------------- ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $2,042,633 $1,517,065
Trade receivable, less allowance for doubtful accounts of 9,381,337 4,551,736
$79,396 and $37,000, respectively
Unbilled revenue 793,307 -
Inventory 505,289 16,931
Other current assets 350,131 230,686
------------------- ------------------
Total current assets 13,072,697 6,316,418
Property and equipment, net 3,212,992 485,261
Goodwill, net 47,570,558 8,508,128
Discontinued operations, net 383,885 365,878
Restricted cash and other assets 1,438,880 -
------------------- ------------------
$65,679,012 $15,675,685
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit $5,481,060 $1,866,471
Notes payable 1,989,301 1,375,000
Accounts payable 4,415,912 5,096,439
Accrued expenses and other current liabilities 4,572,123 1,316,866
------------------- ------------------
Total current liabilities 16,458,396 9,654,776
Notes payable 4,495,833 -
Other long term liabilities 187,513 -
------------------- ------------------
Total liabilities 21,141,742 9,654,776
------------------- ------------------
Shareholders' Equity:
Preferred stock, par value $0.01; 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, par value $0.01; 50,000,000 shares authorized;
27,185,989 and 23,081,486 shares issued and outstanding,
respectively 271,860 230,815
Additional paid-in capital 73,890,821 12,353,567
Treasury stock (372,946) -
Accumulated deficit (19,138,003) (6,563,473)
Unearned ESOP shares (9,445,240) -
Unearned compensation (669,222) -
------------------- ------------------
Total shareholders' equity 44,537,270 6,020,909
------------------- ------------------
$65,679,012 $15,675,685
=================== ==================
</TABLE>
The accompanying notes are an
integral part of these condensed
consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
EPICEDGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Professional services $ 4,554,813 $ 734,305 $ 6,399,187 $ 734,305
Technology integration 6,938,034 5,962,113 11,882,957 13,637,422
------------------- ---------------- ---------------- ----------------
11,492,847 6,696,418 18,282,144 14,371,727
------------------- ---------------- ---------------- ----------------
COST OF REVENUES:
Professional services 2,618,859 561,199 3,832,717 561,199
Technology integration 5,756,883 5,320,630 10,082,803 12,214,706
------------------- ---------------- ---------------- ----------------
8,375,742 5,881,829 13,915,520 12,775,905
------------------- ---------------- ---------------- ----------------
Gross margin 3,117,105 814,589 4,366,624 1,595,822
------------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative 5,278,882 887,744 8,642,382 1,626,831
Depreciation and amortization 978,690 104,828 1,384,958 109,988
Stock-based compensation and costs 6,343,968 -- 6,945,634 --
------------------- ---------------- ---------------- ----------------
12,601,540 992,572 16,972,974 1,736,819
Loss from operations (9,484,435) (177,983) (12,606,350) (140,997)
Other income, net 96,469 27,841 13,813 69,084
------------------- ---------------- ---------------- ----------------
Loss from continuing operations
before income taxes (9,387,966) (150,142) (12,592,537) (71,913)
Benefit (Provision) for income taxes -- 15,260 -- (11,040)
------------------- ---------------- ---------------- ----------------
Net loss from continuing operations (9,387,966) (134,882) (12,592,537) (82,953)
Income (loss) from discontinued
operations 16,908 (22,267) 18,007 (49,243)
------------------- ---------------- ---------------- ----------------
Net loss $ (9,371,058) $ (157,149) $(12,574,530) $ (132,196)
=================== ================ ================ ================
Basic and diluted loss per share:
Continuing operations $ (0.36) $ (0.01) $ (0.50) $ (0.01)
Discontinued operations -- -- -- --
------------------- ---------------- ---------------- ----------------
$ (0.36) $ (0.01) $ (0.50) $ (0.01)
=================== ================ ================ ================
Basic and diluted weighted average
shares outstanding 26,127,363 20,451,933 25,185,562 20,451,933
=================== ================ ================ ================
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
EPICEDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
2000 1999
--------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (12,592,537) $ (82,953)
Adjustments to reconcile net loss to net cash provided by
(used in) in operating activities:
Depreciation and amortization 1,384,958 109,988
Provision for doubtful accounts 42,396 -
Stock-based compensation 6,945,634 -
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable (1,891,654) 46,388
Unbilled receivable (793,307) -
Inventory (488,358) -
Prepaid expenses and other 352,761 -
Accounts payable (1,073,335) 131,791
Accrued expenses and other current liabilities 635,875 636,490
Other, net - (208,831)
--------------------- -------------------
Net cash provided by (used in) operating
activities (7,477,567) 632,873
--------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (2,081,188) (86,405)
Net cash used in business acquisitions (2,820,936) (171,195)
Increase in other assets (477,131) -
--------------------- -------------------
Net cash used in investing activities (5,379,255) (257,600)
--------------------- -------------------
Cash flows from financing activities:
Net payments on notes payable (223,199) (1,056,483)
Proceeds from revolving line of credit 2,699,589 -
Net proceeds from private placement of stock and warrants 10,906,000 -
--------------------- -------------------
Net cash provided by (used in) financing
activities 13,382,390 (1,056,483)
--------------------- -------------------
Net increase(decrease) in cash and cash equivalents 525,568 (681,210)
Cash and cash equivalents, beginning of period 1,517,065 850,925
--------------------- -------------------
Cash and cash equivalents, end of period $ 2,042,633 $ 169,715
===================== ===================
</TABLE>
The accompanying notes are an
integral part of these condensed
consolidated financial statements.
3
<PAGE>
EPICEDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by EpicEdge, Inc. (the "Company" or "EpicEdge") pursuant to
the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 1999 included in the Company's Annual
Report on Form 10-K/A. The accompanying condensed consolidated financial
statements reflect all adjustments (consisting solely of normal, recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. The results of
operations for the three and six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for any future period
or the full fiscal year.
2. Business Combinations
In March 2000, the Company acquired all of the issued and outstanding stock
of The Growth Strategy Group, Inc. (Growth Strategy), an e-marketing and
strategy consulting firm, for 277,000 unregistered shares of the Company's
common stock valued at $6,076,800 and $375,000 in cash. The three
stockholders of Growth Strategy entered into employment agreements with the
Company. These employment agreements terminate in February 2003 and include
a non-compete provision for the term of the agreement and one year
thereafter.
In June 2000, the Company acquired all of the issued and outstanding stock
of IPS Associates, Inc. (IPS), a project management firm, for $3,000,000 in
cash, 1,472,585 unregistered shares of Company's common stock and options
to purchase 1,082,060 shares of the Company's common stock and the
assumption of net liabilities of $2,242,000. The aggregate value of the
shares and stock options issued in connection with the transaction was
$36,405,139. The Company also assumed an employee stock ownership plan
(ESOP) from IPS. The Company recorded unearned compensation of $9,445,240
related to 493,224 shares of common stock issued to the ESOP in connection
with the transaction that will be amortized over a period of approximately
three to five years. These shares will be periodically revalued in
accordance with Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans." In connection with the assumption of the
ESOP, the Company assumed a note payable to a financial institution for
ESOP financing of approximately $4.5 million. The note bears annual
interest of 8.02% and is due in monthly installments of principal and
interest as detailed in the agreements payable through July 2005. The note
is secured by the accounts receivable, investments, and property and
equipment of IPS.
Certain key employees of IPS entered into employment agreements with the
Company. These employment agreements terminate in June 2003 and include a
non-compete provision for the term of the agreement and one year
thereafter. In connection with the transaction, the Company paid a
commission to an individual who facilitated the execution of the
transaction that consisted of a cash payment of $300,000 and the issuance
of 25,065 unregistered shares of the Company's common stock valued at
$576,495 and recorded as part of the cost of the IPS acquisition.
The acquisitions of Growth Strategy and IPS were accounted for under the
purchase method of accounting and resulted in the Company recording
goodwill of $40,248,229, subject to final purchase price adjustments, which
will be amortized over a period of eight years. The selling shareholders
may request registration rights for the shares received in the transactions
under certain circumstances at the Company's expense.
The results of operations of Growth Strategy and IPS have been included in
the Company's financial statements commencing on April 1, 2000 and June 1,
2000, respectively, the effective dates of the transactions for accounting
purposes. The unaudited pro forma consolidated results of operations for
the current year up to June 30, 2000 (and for the corresponding period in
the preceding year) as though the companies had combined at the beginning
of the period being reported on are as follows:
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
(unaudited)
2000 1999
<S> <C> <C>
Revenues $24,357,961 $22,068,155
Net loss from continuing operations (13,631,720) (1,593,045)
Loss per share (.51) (.07)
Weighted average shares outstanding 26,506,732 23,523,585
</TABLE>
4
<PAGE>
3. Inventory
The Company's inventory at June 30, 2000 and December 31, 1999 consists of
hardware and software products related to the Company's value added
reseller (VAR) operations which are being phased out.
4. Earnings per share
The Company reports earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Under
SFAS No. 128, basic earnings per share is based on the weighted effect of
all common shares issued and outstanding during the period and is
calculated by dividing net income available to common stockholders by the
weighted average shares of common stock outstanding during the period.
Diluted earnings per share is calculated by dividing net income available
to common stockholders by the weighted average number of common shares used
in the basic earnings per share calculation plus the number of common
shares that would be issued assuming conversion of all potentially dilutive
shares outstanding. Stock options and warrants of approximately 2,287,000
and 2,212,000 for the three and six months ended June 30, 2000 and
approximately 150,000 and 53,000 for the three and six months ended June
30, 1999 were excluded from the calculation of loss per share for these
periods because the effect of these shares would have been anti-dilutive.
5. Other Stock Transactions
In February 2000, the Company sold 2,260,000 unregistered shares of its
common stock to a group of private equity investors for $11.3 million
($5.00 per share). The transaction resulted in certain shareholder rights
being granted to the investors including a right to request registration of
the shares at the Company's expense. In August 2000, the investor group
exercised its right to request registration of the shares. In connection
with the transaction, the Company paid a commission to an individual who
facilitated the execution of the transaction that consisted of a cash
payment of $395,000 and a warrant to purchase 22,000 shares of the
Company's common stock at an exercise price of $15.00 per share. The
warrants are exercisable for a period of five years from the date of
issuance.
In November 1999, the Company granted 190,000 unregistered shares of the
Company's common stock to two of its board members as compensation for
their participation on the Company's Board of Directors. The shares are
issued to each board member in equal installments at the end of each
quarter through the quarter ended September 30, 2000. The Company records
the value of the shares issued each quarter by multiplying the quoted
market price of the stock on the issuance date times the number of shares
issued for that period. The Company recorded stock-based compensation
related to the shares issued of $874,792 and $1,476,458, respectively, for
the three and six months ended June 30, 2000. The Company issued 47,500
shares to these advisory board members during the six months ended June 30,
2000.
In March 2000, the Company issued warrants for the purchase of 40,000
shares of the Company's common stock to two advisory board members for
services to be rendered from April 2000 to March 2002. The warrants have an
exercise price of $21.88 and are exercisable for five years from the date
of grant. One third of the warrants vest upon grant, and the remaining
two-thirds vest in one half increments on the first and second anniversary
of the grant date. The Company recorded the initial value of these warrants
based on the Black-Scholes model, totaling $346,465, as unearned
compensation on the date of grant. The Company is amortizing this amount as
compensation expense over the consulting period, and will revalue the
warrants over the consulting period. The Company recorded stock-based
compensation of $158,793 for the three months ended June 30, 2000.
In April 2000, the Company issued a client a warrant to purchase 500,000
shares of the Company's common stock at an exercise price of $22.00 per
share. The warrant is exercisable at any time after the earlier of (i) 60
days after the consummation of a registered public offering and (ii)
October 3, 2001 (such earlier date being the vesting date), through the
third anniversary of the vesting date. The warrant was issued
contemporaneously with the negotiation of a consulting contract between the
Company and the client. The Company has determined the value of the warrant
to be $4,843,195 based on the Black-Scholes model. As there is no assurance
that the Company and its client will engage in future contracts, the
Company recorded the customer acquisition cost as a stock-based
compensation and costs charge of $4,843,195 during the three months ended
June 30, 2000.
In June 2000, the Company entered into a severance agreement with one of
its employees that provided, among other things, for the modification of
the employee's stock options allowing a cashless exercise of vested and
unexercised stock options. As a result, the Company accounted for the stock
options as variable options and recorded a stock-based compensation charge
on the measurement date during the three months ended June 30, 2000 of
$467,188 based on the difference between the exercise price and the quoted
market price of the underlying stock. The Company issued 22,353 shares of
its common stock to the former employee as a result of the cashless
exercise.
5
<PAGE>
6. Subsequent Events
In July 2000, the Company completed a $5.0 million convertible debt
offering with certain private investors. The convertible debt bears annual
interest of 9.5%. Principal and interest are due at maturity on December
30, 2000, if not converted earlier. The principal and accrued and unpaid
interest is convertible at the option of the holder into common stock of
the Company at a 25% discount from the per share price of a Qualified
Financing consummated prior to the maturity date. A Qualified Financing is
defined as an equity financing in which the Company raises at least $7.0
million. If a Qualified Financing is not consummated prior to the maturity
date, then the principal and accrued and unpaid interest is convertible at
the option of the holder into common stock of the Company at a conversion
price of $5.00 per share. During the remainder of fiscal 2000, the Company
will record a non-cash charge of approximately $5.0 million as incremental
interest expense related to the beneficial conversion feature in accordance
with EITF Issue No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios."
In July 2000, the Company acquired substantially all of the assets of
Tumble Interactive Media, Inc. (Tumble), a creative and design firm, for
250,000 unregistered shares of the Company's common stock valued at
$4,937,500, and $325,000 in cash. The principal selling shareholder entered
into an employment agreement with the Company. The agreement terminates in
July 2003 and includes a non-compete provision for the term of the
agreement and one year thereafter. The transaction will be accounted for
under the purchase method of accounting.
7. New Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of Accounting Principles Board (APB) Opinion No.
25 and among other issues clarifies the following: the definition of an
employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the
accounting consequences of various modifications to the terms of previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The Company does not
expect the application of FIN 44 to have a material impact on the Company's
financial position or results of operations.
* * *
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following analysis of the results of operations and financial condition of
the Company should be read in conjunction with the condensed financial
statements, including the notes thereto, of the Company contained elsewhere in
this Form 10-QSB.
EpicEdge, Inc., (the "Company") engages in the business of enabling clients to
advance their competitive edge by transforming their internet vision into an
effective e-business solution. The Company's professional services support
customers through the phases of an e-business implementation including strategy
development and creative services, information architecture and design,
e-commerce application development, legacy system integration, project
management and training, and site hosting services. In conjunction with certain
strategic partnerships, the Company offers flexible consulting and technology
solutions that address emerging needs and help clients to focus on performance
improvement through measurement and assessment.
Business Combinations
In March 2000, the Company acquired all of the issued and outstanding stock of
The Growth Strategy Group, Inc. (Growth Strategy), an e-marketing and strategy
consulting firm, for 277,000 unregistered shares of the Company's common stock
valued at $6,076,800 and $375,000 in cash. The three stockholders of Growth
Strategy entered into employment agreements with the Company. These employment
agreements terminate in February 2003 and include a non-compete provision for
the term of the agreement and one year thereafter.
In June 2000, the Company acquired all of the issued and outstanding stock of
IPS Associates, Inc. (IPS), a project management firm, for $3,000,000 in cash,
1,472,585 unregistered shares of Company's common stock and options to purchase
1,082,060 shares of the Company's common stock and the assumption of net
liabilities of $2,242,000. The aggregate value of the shares and stock options
issued in connection with the transaction was $36,405,139. The Company also
assumed an employee stock ownership plan (ESOP) from IPS. The Company recorded
unearned compensation of $9,445,240 related to 493,224 shares of common stock
issued to the ESOP in connection with the transaction that will be amortized
over a period of approximately 3 to 5 years. These shares will be periodically
revalued in accordance with Statement of Position 93-6, "Employers' Accounting
for Employee Stock Ownership Plans." In connection with the assumption of the
ESOP, the Company assumed a note payable to a financial institution for ESOP
financing of approximately $4.5 million. The note bears annual interest of 8.02%
and is due in monthly installments of principal and interest as detailed in the
agreements payable through July 2005. The note is secured by the accounts
receivable, investments, and property and equipment of IPS.
Certain key employees of IPS entered into employment agreements with the
Company. These employment agreements terminate in June 2003 and include a
non-compete provision for the term of the agreement and one year thereafter. In
connection with the transaction, the Company paid a commission to an individual
who facilitated the execution of the transaction that consisted of a cash
payment of $300,000 and the issuance of 25,065 unregistered shares of the
Company's common stock valued at $576,495 and recorded as part of the cost of
the IPS acquisition.
The acquisitions of Growth Strategy and IPS were accounted for under the
purchase method of accounting and resulted in the Company recording goodwill of
$40,248,229, subject to final purchase price adjustments, which will be
amortized over a period of eight years. The selling shareholders may request
registration rights for the shares received in the transactions under certain
circumstances at the Company's expense.
The results of operations of Growth Strategy and IPS have been included in the
Company's financial statements commencing on April 1, 2000 and June 1, 2000,
respectively, the effective dates of the transactions for accounting purposes.
The unaudited pro forma consolidated results of operations for the current year
up to June 30, 2000 (and for the corresponding period in the preceding year) as
though the companies had combined at the beginning of the period being reported
on are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
(unaudited)
2000 1999
<S> <C> <C>
Revenues $24,357,961 $22,068,155
Net loss from continuing operations (13,631,720) (1,593,045)
Loss per share (.51) (.07)
Weighted average shares outstanding 26,506,732 23,523,585
</TABLE>
7
<PAGE>
In July 2000, the Company acquired substantially all of the assets of Tumble
Interactive Media, Inc. (Tumble), a creative and design firm, for 250,000
unregistered shares of the Company's common stock valued at $4,937,500, and
$325,000 in cash. The principal selling shareholder entered into an employment
agreement with the Company. The agreement terminates in July 2003 and includes a
non-compete provision for the term of the agreement and one year thereafter. The
transaction will be accounted for under the purchase method of accounting.
RESULTS OF OPERATIONS
The following table sets forth certain condensed consolidated statement of
operations data expressed as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------ ---------------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 72.9% 87.8% 76.1% 88.9%
------------------ ---------------------
Gross margin 27.1% 12.2% 23.9% 11.1%
------------------ ---------------------
Operating expenses:
Selling, general and administrative 45.9% 13.3% 47.3% 11.3%
Depreciation and amortization 8.5% 1.6% 7.6% 0.8%
Stock-based compensation and costs 55.2% -% 38.0% -%
------------------ ---------------------
Total operating expenses 109.6% 14.9% 92.9% 12.1%
------------------ ---------------------
Loss from operations -82.5% -2.7% -69.0% -1.0%
Other income 0.8% 0.4% 0.1% 0.5%
------------------ ---------------------
Loss before income taxes
and discontinued operations -81.7% -2.3% -68.9% -0.5%
Benefit (provision) for income taxes -% 0.2% -% -0.1%
------------------ ---------------------
Loss from continuing operations -81.7% -2.1% -68.9% -0.6%
Discontinued operations 0.1% -0.3% 0.1% -0.3%
------------------ ---------------------
Net loss -81.6% -2.4% -68.8% -0.9%
================== =====================
</TABLE>
REVENUES
Total revenues increased 72% from $6.7 million to $11.5 million for the three
months ended June 30, 1999 and 2000, respectively. Total revenues increased 27%
from $14.4 million to $18.3 million for the six months ended June 30, 1999 and
2000, respectively. Total revenues increased from the three and six months ended
June 30, 1999 to the three and six months ended June 30, 2000 as a result of
increased revenues generated from the Company's e-Services business as the
Company executes its business strategy of migrating from a value-added reseller
(VAR) of hardware and software to a professional e-Services company. The Company
has substantially completed this migration in the second quarter of fiscal 2000
and expects substantially all of its future revenues to be derived from
professional e-Services. As a result, the Company expects revenues to be lower
in the second half of fiscal 2000.
8
<PAGE>
Professional Service Revenues
Professional service revenues increased 520% from $0.7 million for the three
months ended June 30, 1999 to $4.6 million for the three months ended June 30,
2000, representing 11% and 40% of total revenues in the respective periods.
Professional service revenues increased 771% from $0.7 million for the six
months ended June 30, 1999 to $6.4 million for the six months ended June 30,
2000, representing 5% and 35% of total revenues in the respective periods.
Professional service revenues have continued to increase in absolute dollars and
as a percentage of total revenues as the Company has executed its business
strategy of migrating from a value-added reseller (VAR) of hardware and software
to a professional e-Services company which has resulted in an increase in its
professional service customer base and professional service contracts.
Technology Integration Revenues
Technology integration revenues increased 16% from $6.0 million for the three
months ended June 30, 1999 to $6.9 million for the three months ended June 30,
2000, representing 89% and 60% of total revenues in the respective periods.
Technology integration revenues decreased 13% from $13.6 million for the six
months ended June 30, 1999 to $11.9 million for the six months ended June 30,
2000, representing 95% and 65% of total revenues in the respective periods. The
six month trend in technology integration revenues is reflective of the
Company's strategy to migrate from a value-added reseller (VAR) of hardware and
software to a professional e-Services company which has resulted in the phasing
out of its VAR operations. The Company does not expect to generate any
substantial additional revenues from its VAR business after the second quarter
of fiscal 2000.
COST OF REVENUES
Total cost of revenues increased 42% from $5.9 million for the three months
ended June 30, 1999 to $8.4 million for the three months ended June 30, 2000.
Total cost of revenues increased 9% from $12.8 million for the six months ended
June 30, 1999 to $13.9 million for the six months ended June 30, 2000.
Cost of Service Revenues
Cost of service revenues consists primarily of salaries and employee costs for
personnel dedicated to client projects, sub-contractor costs related to client
projects, and direct expenses incurred to complete projects that were not
reimbursed by clients. Cost of service revenues increased 367% from $0.6 million
for the three months ended June 30, 1999 to $2.6 million for the three months
ended June 30, 2000, representing 8% and 23% of total revenues in the respective
periods. Cost of service revenues increased 583% from $0.6 million for the six
months ended June 30, 1999 to $3.8 million for the six months ended June 30,
2000, representing 4% and 21% of total revenues in the respective periods. The
increases are the result of the Company being engaged on larger and more
numerous client projects during the three and six months ended June 30, 2000 in
comparison with the same periods in fiscal 1999.
The gross margin on professional service revenues was 43% and 40%, respectively,
for the three and six months ended June 30, 2000 and was 24% for the three and
six months ended June 30, 1999.
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Cost of Technology Integration Revenues
Cost of technology integration revenues consists primarily of hardware and
software costs associated with product sales. Cost of technology integration
revenues increased 8% from $5.3 million for the three months ended June 30, 1999
to $5.8 million for the three months ended June 30, 2000, representing 79% and
50% of total revenues in the respective periods. Cost of technology integration
revenues decreased 17% from $12.2 million for the six months ended June 30, 1999
to $10.1 million for the six months ended June 30, 2000, representing 85% and
55% of total revenues in the respective periods. The changes in the cost of
technology integration revenues is the result of related increases or decreases
in product sales. The gross margin on technology integration revenues was 11%
and 17% for the three months ended June 30, 1999 and 2000, respectively. The
technology integration margin was 10% and 15% for the six months ended June 30,
1999 and 2000, respectively.
OPERATING EXPENSES
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) increased 495% from $0.9
million for the three months ended June 30, 1999 to $5.3 million for the three
months ended June 30, 2000, representing 13% and 46% of total revenues in the
respective periods. SG&A expenses increased 431% from $1.6 million for the six
months ended June 30, 1999 to $8.6 million for the six months ended June 30,
2000, representing 11% and 47% of total revenues in the respective periods. The
increase in SG&A expenses reflects the acquisition of certain businesses which
brought additional SG&A expenses to the Company and our continued investment in
increased staffing and related expenses for the enhancement of the
infrastructure necessary to support our growing business.
Depreciation and Amortization
Depreciation and amortization increased 834% from $0.1 million for the three
months ended June 30, 1999 to $1.0 million for the three months ended June 30,
2000, representing 2% and 9% of total revenues in the respective periods.
Depreciation and amortization increased 1,159% from $0.1 million for the six
months ended June 30, 1999 to $1.4 million for the six months ended June 30,
2000, representing 0.8% and 8% of total revenues in the respective periods.
Depreciation and amortization increased during the three and six months ended
June 30, 2000 as a result of amortization of goodwill recorded in connection
with the acquisition of certain businesses. Amortization of goodwill and
unearned ESOP share deferral at June 30, 2000 will be approximately $2.0 million
per quarter in future quarters.
Stock-based Compensation and Costs
Stock-based compensation and costs was $6.3 million and $6.9 million for the
three and six months ended June 30, 2000, representing 55% and 38% of total
revenues in the respective periods. No stock-based compensation was recorded
during the three and six months ended June 30, 1999. The stock-based
compensation charges during the three and six months ended June 30, 2000 were
based on certain transactions as follows:
In November 1999, the Company granted 190,000 unregistered shares of the
Company's common stock to two of its board members as compensation for their
participation on the Company's Board of Directors. The shares are issued to each
board member in equal installments at the end of each quarter through the
quarter ended September 30, 2000. The Company records the value of the shares
issued each quarter by multiplying the quoted market price of the stock on the
issuance date times the number of shares issued for that period. The Company
recorded stock-based compensation related to the shares issued of $874,792 and
$1,476,458, respectively, for the three and six months ended June 30, 2000. The
Company issued 47,500 shares to these board members during the six months ended
June 30, 2000.
In March 2000, the Company issued warrants for the purchase of 40,000 shares of
the Company's common stock to two advisory board members for services to be
rendered from April 2000 to March 2002. The warrants have an exercise price of
$21.88 and are exercisable for five years from the date of grant. One third of
the warrants vest upon grant, and the remaining two-thirds vest in one half
increments on the first and second anniversary of the grant date. The Company
recorded the initial value of these warrants based on the Black-Scholes model,
totaling $346,465, as unearned compensation on the date of grant. The Company is
amortizing this amount as compensation expense over the consulting period, and
will revalue the warrants over the consulting period. The Company recorded
stock-based compensation of $158,793 for the three months ended June 30, 2000.
The Company has issued 47,500 shares to these advisory board members during the
six months ended June 30, 2000.
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In April 2000, the Company issued a client a warrant to purchase 500,000 shares
of the Company's common stock at an exercise price of $22.00 per share. The
warrant is exercisable at any time after the earlier of (i) 60 days after the
consummation of a registered public offering and (ii) October 3, 2001 (such
earlier date being the vesting date), through the third anniversary of the
vesting date. The warrant was issued contemporaneously with the negotiation of a
consulting contract between the Company and the client. The Company has
determined the value of the warrant to be $4,843,195 based on the Black-Scholes
model. As there is no assurance that the Company and its client will engage in
future contracts, the Company recorded the customer acquisition cost as a
stock-based compensation and costs charge of $4,843,195 during the three months
ended June 30, 2000.
In June 2000, the Company entered into a severance agreement with one of its
employees that provided, among other things, for the modification of the
employee's stock options allowing a cashless exercise of vested and unexercised
stock options. As a result, the Company accounted for the stock options as
variable options and recorded a stock-based compensation charge on the
measurement date during the three months ended June 30, 2000 of $467,188 based
on the difference between the exercise price and the quoted market price of the
underlying stock. The Company issued 22,353 shares of its common stock to the
former employee as a result of the cashless exercise.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company's primary sources of liquidity were cash and
cash equivalents of $2,042,633, and accounts receivable of $9,381,337. The
Company also relies on amounts available under lines of credit totaling
$6,000,000 with two financial institutions. There were no amounts available
under the lines of credit at June 30, 2000.
Net cash used in operating activities was $7,477,567 for the six months ended
June 30, 2000 and is the result of the net loss incurred during the period in
addition to increases in accounts receivable, unbilled receivables, and
inventories and a decrease in accounts payable. Net cash provided by operations
was $632,873 for the six months ended June 30, 1999 and is primarily the result
of decreases in accounts receivable and increases in accounts payable and
accrued expenses.
Net cash used in investing activities was $5,379,255 for the six months ended
June 30, 2000 and is the result of net purchases of property and equipment as
well as cash used to acquire certain businesses. Net cash used in investing
activities was $257,600 for the six months ended June 30, 1999 and is the result
of net purchases of property and equipment as well as cash used to acquire
certain businesses
Net cash provided by financing activities was $13,382,390 for the six months
ended June 30, 2000 and reflects the sale of the Company's common stock to a
group of private equity investors netting approximately $10,900,000 to the
Company and borrowings under the line of credit of $2,699,589. Net cash used in
financing activities was $1,056,483 for the six months ended June 30, 1999 and
reflects net payments under the Company's revolving line of credit.
In February 2000, the Company sold 2,260,000 unregistered shares of its common
stock to a group of private equity investors for $11.3 million ($5.00 per
share). The transaction resulted in certain shareholder rights being granted to
the investors including a right to request registration of the shares at the
Company's expense. In August 2000, the investor group exercised its right to
request registration of the shares. In connection with the transaction, the
Company paid a commission to an individual who facilitated the execution of the
transaction that consisted of a cash payment of $395,000 and a warrant to
purchase 22,000 shares of the Company's common stock at an exercise price of
$15.00 per share. The warrants are exercisable for a period of five years from
the date of issuance.
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In July 2000, the Company completed a $5.0 million convertible debt offering
with certain private investors. The convertible debt bears annual interest of
9.5%. Principal and interest are due at maturity on December 30, 2000, if not
converted earlier. The principal and accrued and unpaid interest is convertible
at the option of the holder into common stock of the Company at a 25% discount
from the per share price of a Qualified Financing consummated prior to the
maturity date. A Qualified Financing is defined as an equity financing in which
the Company raises at least $7.0 million. If a Qualified Financing is not
consummated prior to the maturity date, then the principal and accrued and
unpaid interest is convertible at the option of the holder into common stock of
the Company at a conversion price of $5.00 per share. During the remainder of
fiscal 2000, the Company will record a non-cash charge of approximately $5.0
million as incremental interest expense related to the beneficial conversion
feature in accordance with EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios."
The Company's discontinued operations relate to the operations of Loch
Exploration, Inc. ("Loch"), which was a publicly-listed oil and gas company that
was acquired by the Company through a reverse merger effective January 1, 1999.
The Company is currently contemplating the disposal of its remaining investment
in Loch. The result may require the Company to write-off the remaining balance
of the net assets relating to the discontinued operations of $383,885 at June
30, 2000.
At June 30, 2000, the Company had negative working capital of $3,385,699.
Additionally, the Company has completed several acquisitions that may place an
additional strain on the Company's cash resources as the operations of the
acquired businesses are integrated with the Company's operations. Furthermore,
the Company will require additional cash to meet its short- and long-term
liquidity requirements and to execute its current business plan. Management is
currently in the process of raising additional financing to meet planned working
capital requirements. In the event that the Company is unable to obtain
additional financing on terms which are acceptable to the Company, then the
Company will have to modify its business plan to reduce future cash outflows to
enable it to meet its liquidity requirements for the remainder of the current
fiscal year. There is no assurance that the Company will be able to successfully
obtain the additional financing required to execute its current business plan or
that the Company will be able to modify its business plan sufficiently to reduce
future cash outflows to a level that would enable it to meet its liquidity
requirements for the remainder of the current fiscal year. These uncertainties
could have a material adverse affect on the Company's future operations.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS
We Face Intense Competition in Our Market
Our services are targeted at the new and rapidly evolving market for e-commerce
solutions. Although the competitive environment in this market has yet to
develop fully, we anticipate that it will be intensely competitive, subject to
rapid change and significantly affected by new service and product introductions
and other market activities of industry participants.
Increased competition could result in pricing pressures, reduced margins or the
failure of our services to achieve or maintain market acceptance, any of which
could have a serious adverse effect on our business, financial condition and
results of operations.
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Our Industry is Subject to Rapid Technological Change
The emerging market for e-commerce solutions and related services is
characterized by rapid technological developments and services and evolving
industry standards. The emerging nature of this market and its rapid evolution
will require us to improve existing services as well as be first to market new
services in the e-commerce environment. Our failure to develop and introduce new
and existing services successfully and on a timely basis could have a
significant adverse effect on our business, financial condition and result of
operations.
We Must Manage Our Growth
We are currently experiencing tremendous growth which places a significant
strain on our management and other resources. Our business has grown
significantly in size and complexity over the past year. The growth in size and
complexity of our business as well as its customer base has placed, and is
expected to continue to place, a significant strain on our management and
operations. We anticipate that continued growth will require us to recruit and
hire a substantial number of new managerial, finance, sales and marketing and
support personnel. Our ability to compete effectively and to manage future
growth will depend on, among other things: (1) our ability to continue to
implement and improve operational, financial and management information systems
on a timely basis and (2) our ability to expand, train, motivate and manage our
work force.
Possible Future Acquisitions Could Impact Our Expected Results
As part of our future growth strategy, it is possible that we will acquire or
make investments in companies, technologies, or professional services offerings.
With respect to these acquisitions, we would face the difficulties of
assimilating their personnel and operations with our present business, and the
problems of retaining and motivating key personnel from acquired businesses. In
addition, these acquisitions may disrupt ongoing operations, divert management
from day-to-day business, and adversely impact our results of operations.
Certainly, these types of transactions often result in charges to earnings for
items such as amortization of goodwill.
Our Stock Price May be Volatile in the Future
The trading price of our common stock has been, and is expected to continue to
be, highly volatile and may be significantly and adversely affected by factors
such as: (1) actual or anticipated fluctuations in our operating results, (2)
new services, products or contracts offered by us or our competitors, (3)
developments with respect to patents, copyrights and propriety rights, (4)
conditions and trends in the e-commerce industry, (5) changes in financial
estimates by securities analysts, (6) private placement transactions completed
to raise needed capital and (7) general market conditions and other factors.
The public markets have from time-to-time experienced significant price and
volume fluctuations that have particularly affected the market prices for the
stock of technology companies as a group but have been unrelated to the
performance of particular companies. The market price of our common stock may be
adversely affected by these broad market fluctuations as well as: (1) shortfalls
in sales or earnings as compared with securities analysts' expectations, (2)
changes in such analysts' recommendations or projections, and (3) general
economic and market conditions.
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Cautionary Statement Regarding Risks and Uncertainties That May Affect
Future Results
Certain portions of this report contain forward-looking statements about the
business, financial condition and prospects of EpicEdge. Our actual results
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including, without limitation,
changes in demand for our products and services, changes in competition,
economic conditions, interest rates fluctuations, changes in the capital
markets, changes in tax and other laws and governmental rules and regulations
applicable to our business, and other risks indicated in our filings with the
Securities and Exchange Commission. These risks and uncertainties are beyond the
ability of our control, and in many cases, we cannot predict all of the risks
and uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. When used in this report, the
words "believes," "estimates," "plans," "expects," "anticipates" and similar
expressions as they relate to EpicEdge or its management are intended to
identify forward-looking statements.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 25, 2000 where the
following proposals were adopted by the votes specified below:
(1) The following individuals were elected to the Company's Board of Directors
for one year terms by the following vote:
Name For Withheld
Carl R. Rose 17,381,274 117
Charles H. Leaver, Jr. 17,381,272 119
Jeffrey S. Sexton 17,381,274 117
Bahram Nour-Omid 17,381,269 122
John P. Streeten 17,381,274 117
Nicholas L. Reding 17,381,274 117
Brian J. Thompson 16,121,960 0
(2) Deloitte & Touche LLP were elected to serve as the Company's independent
auditors for the fiscal year ended December 31, 2000 by the following vote:
For Against Abstain
17,381,250 35 106
(3) The proposal to amend the Company's Articles of Incorporation to establish
blank check preferred stock with 5,000,000 shares reserves for issuance was
approved by the following vote:
For Against Abstain
17,330,290 945 50,156
(4) The proposal to amend the Company's 1999 Stock Option Plan to increase the
number of shares of common stock authorized to be issued under the Plan
from 3,000,000 shares of common stock to 7,500,000 shares of common stock
was approved by the following vote:
For Against Abstain
17,380,232 846 313
(5) The proposal to establish an Employee Stock Purchase Plan was approved by
the following vote:
For Against Abstain
17,380,451 727 213
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Item 5. Other Information
In June 2000, the Company's Chairman and principal shareholder entered into a
transaction with the Company's Chief Executive Officer and its President and
Chief Operating Officer whereby the Chairman executed the private sale of
1,000,000 shares of the Company's common stock held by him to each of the two
officers for a purchase price of $7.50 per share. The Company obtained an
independent valuation of the unregistered shares related to this private sale
that considered, among other things, two private placements by the Company of
unregistered common stock, negotiations for other private placement offerings
which were in process at the date of the valuation opinion, large block factors
and illiquidity factors in determining the fair value of the shares sold. The
independent valuation determined that the value of the shares sold were $7.50
per share. As such, the transaction had no effect on the Company's financial
position or results of operations as the shares were sold at their estimated
fair value.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.8 Agreement and Plan of Merger by and between the Company, EACQ, LLC and The
Growth Strategy Group, Inc. (1)
2.9 Agreement and Plan of Merger by and between the Company and IPS Associates,
Inc. (2)
27.1 Financial Data Schedule
---------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 15, 2000.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed on July 14, 2000.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on January 26, 2000, reporting a change
in accountants from Hein + Associates, LLP to Deloitte & Touche, LLP.
A Current Report on Form 8-K was filed on February 28, 2000, reporting a Stock
Purchase Agreement by and among the Company, Edgewater Private Equity Fund III,
LP, Aspen Finance Investors I, LLC, Fleck T.I.M.E. Fund, LP, Fleck Family
Partnership II, LP, LJH Partners, LP, Wain Investment, LLC, Gerald C. Allen and
John Paul DeJoria.
A Current Report on Form 8-K was filed on March 15, 2000 reporting the
acquisition of The Growth Strategies Group, Inc.
A Current Report on Form 8-K was filed on July 14, 2000 reporting the
acquisition of IPS Associates, Inc.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EpicEdge, Inc.
Date: August 18, 2000 By /s/ Paul Ruiz
-----------------------
Paul Ruiz
Chief Financial Officer
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