<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 2-93477-D
I-STORM, INC.
(FORMERLY DIGITAL POWER HOLDING COMPANY)
(Exact name of small business issuer as specified in its charter)
NEVADA 87-040127
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2440 West El Camino Real, Suite 520, Mountain View, California 94040-1400
(Address of principal executive offices)
(650) 962-5420
(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 issuer 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.
Class Outstanding at March 31, 1999
- ----------------------------- -----------------------------
Common Stock, par value $0.01 5,346.206
Traditional Small Business Disclosure Format (Check One): Yes No X
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
I-STORM, INC.
(A development stage company)
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
-----------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,078 $ 5
Accounts receivable, net of allowance for doubtful accounts of
$99 and $51, respectively 35 44
Factored accounts receivable, net of allowance for doubtful accounts of
$175 and $349, respectively 76 105
Prepaid expenses and other current assets 98 158
-------------------------
Total current assets 2,287 312
Property and equipment, net 36 81
Other assets 533 32
Reorganization asset, net of amortization of $222 and $147, respectively 2,982 3,060
-------------------------
Total assets $ 5,838 $ 3,485
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 51 $ --
Factoring liability 296 1,197
Accounts payable 253 1,144
Accrued liabilities 1,061 912
Deferred revenue -- 504
-------------------------
Total current liabilities 1,661 3,757
-------------------------
Long-term notes payable (Note 5) 260 260
-------------------------
Total noncurrent liabilities 260 260
-------------------------
Redeemable common stock, at $1.00 per share, 0 and 600,000 shares,
respectively (Note 7) -- 600
-------------------------
Commitments and contingencies (Note 6)
Shareholders' equity (deficit):
Preferred stock, no par value
Series A cumulative convertible preferred stock; liquidation preference of $4,002:
Designated--600 shares; outstanding--408 and 0 shares, respectively
Subscribed--583 and 600 shares, respectively 6 6
Series B cumulative convertible preferred stock:
Designated--1,700 shares; 408 and 0 shares outstanding, respectively 4 --
Series C cumulative convertible preferred stock:
Designated--1,225 shares; 135 and 0 shares outstanding, respectively 1 --
Common stock, $0.01 par value:
Authorized--25,000
Outstanding--4,259 and 3,726 shares, respectively
Subscribed -- 590 and 600 shares, respectively 59 51
Subscribed warrants to purchase common stock 107 110
Additional paid-in capital 7,725 1,461
Deficit accumulated during the development stage (3,985) (2,760)
-------------------------
Total shareholders' equity (deficit) 3,917 (1,132)
-------------------------
Total liabilities and shareholders' equity (deficit) $ 5,838 $ 3,485
=========================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
1
<PAGE>
I-STORM, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Post Emergence Predecessor
------------------------------------------- ------------------
Three months ended Period from inception Three months ended
March 31, 1999 (July 17, 1998) to March 31, 1998
March 31, 1999
--------------------------------------------------------------
(unaudited)
--------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 328 $ 1,165 $ 728
--------------------------------------------------------------
Costs and expenses:
Cost of revenues 368 1,279 519
Selling, general, and administrative 995 3,316 965
Amortization of reorganization asset 78 225 --
--------------------------------------------------------------
Total operating expenses 1,441 4,820 1,484
--------------------------------------------------------------
Loss from operations (1,113) (3,655) (756)
Other income (expense), net (112) (330) (36)
--------------------------------------------------------------
Net loss and comprehensive loss $ (1,225) $ (3,985) $ (792)
==============================================================
Net loss per share:
Basic and diluted $ (0.21) $ (0.76) $ (0.07)
==============================================================
Shares used in computing net loss per share:
Basic and diluted 5,855 5,246 11,590
==============================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
2
<PAGE>
I-STORM, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Convertible Warrants to Total
Preferred Stock Common Stock Purchase Additional Shareholders'
------------------------------------- Common Paid-in Accumulated Equity
Post-Emergence Shares Amount Shares Amount Stock Capital Deficit (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at inception (July 17, 1998) 600 $ 6 3,040 $ 30 $ 47 $ 1,084 $ -- $ 1,167
Issuance of common stock for services -- -- 2,000 20 -- 336 -- 356
Issuance of common stock related to
debt financing -- -- 170 2 -- 41 -- 43
Issuance of Series B Preferred stock
in January and February 1999, net of
issuance costs of $737 408 4 -- -- -- 4,255 -- 4,259
Issuance of Series C Preferred stock
in March 1999, net of issuance costs
of $238 135 1 -- -- -- 1,411 -- 1,412
Conversion of redeemable common stock
into non-redeemable common stock -- -- 600 6 -- 594 -- 600
Exchange of Series A Preferred stock
for cash (17) -- -- -- -- (8) -- (8)
Issuance of warrants related to debt
financing -- -- -- -- 73 -- -- 73
Exercise of warrants -- -- 50 1 (13) 12 -- --
Deficit accumulated during the
development stage -- -- -- -- -- -- (3,985) (3,985)
----------------------------------------------------------------------------------------
Balance at March 31, 1999 1,126 $ 11 5,860 $ 59 $ 107 $ 7,725 $ (3,985) $ (3,917)
========================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
I-STORM, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Post Emergence Predecessor
-------------------------------------------------- ----------------------
Three months ended Period from inception Three months ended
March 31, 1999 (July 17, 1998) to March 31, 1998
March 31, 1999
(unaudited)
---------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,225) $ (3,985) $ (63)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss on disposal of fixed assets 29 29 3
Depreciation and amortization 104 296 44
Provision for bad debts 46 330 --
Changes in assets and liabilities:
Accounts receivable 87 129 (64)
Unbilled receivables -- -- (96)
Factored accounts receivable -- 120 (310)
Prepaid expenses and other assets (60) (63) (96)
Accounts payable (659) 164 67
Deferred revenue -- -- (55)
Accrued liabilities 88 72 40
---------------------------------------------------------------------------
Net cash used in operating activities (365) (1,655) (530)
---------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (6) (14) --
---------------------------------------------------------------------------
Net cash used in investing activities (6) (14) --
---------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 105 659 600
Repayment of notes payable (1,251) (1,251) --
Factoring liability, net (848) (404) (23)
Payments on capital leases -- -- (2)
Proceeds from issuance of redeemable common stock 5,671 5,671 --
Payment on notes receivable from shareholders (8) -- --
Proceeds from the exercise of warrants -- 10 --
---------------------------------------------------------------------------
Net cash provided by financing activities 3,669 4,677 575
---------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,073 1,783 45
Cash and cash equivalents at beginning of period 5 295 --
---------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,078 $ 2078 $ 45
===========================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Valuation of common stock related to
debt financing $ 10 $ 42 $ --
Valuation of warrants issued in conjunction
with debt financing $ -- $ 63 $ --
Notes payable issued to secured creditors
for pre-petition claims and taxes $ -- $ 275 $ --
Valuation of redeemable common stock $ 600 $ 600 $ --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
1. GENERAL:
The condensed consolidated financial statements included herein have been
prepared by I-Storm, Inc. ("I-Storm" or the "Company") without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations; however, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The condensed consolidated financial statements
included herein should be read in conjunction with the financial statements and
the notes thereto included in the Company's Report on Form 10-K as of December
31, 1998.
In the opinion of management, the accompanying interim financial statements
contain all material adjustments necessary to present fairly the consolidated
financial condition, results of operations, and changes in financial position
and stockholders' equity of the Company for interim periods. Certain amounts in
the prior interim consolidated financial statements have been reclassified to
conform to the current period presentation.
Due to the Restructuring and implementation of Fresh Start Reporting,
Consolidated Financial Statements for the new Reorganized Company (period
starting July 17, 1998) are not comparable to those of the Predecessor Company.
For financial reporting purposes, the effective date of the bankruptcy is
considered to be the close of business on July 16, 1998.
A black line has been drawn on the accompanying Condensed Consolidated
Financial Statements to distinguish between the Reorganized Company and the
Predecessor Company.
2. DESCRIPTION OF THE COMPANY:
Company Formation and Financial Reorganization
I-Storm was created through the merger of LVL Communications Corporation
("LVL") and Digital Acquisition Corporation, a wholly owned subsidiary of
Digital Power Holding Company ("Digital"), a Nevada public shell corporation, on
July 17, 1998, resulting in LVL becoming a wholly owned subsidiary of Digital.
Digital has been renamed "I-Storm, Inc." The merger was accounted for as a
reverse acquisition under the purchase method with LVL being the surviving
entity.
Since December 1989, Digital has not engaged in any material business
operations. Its only activities since that time have consisted of restoring and
maintaining its good standing in the State of Nevada.
5
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
I-Storm is an Internet advertising, marketing and communications agency,
and the developer of the "I-Storm CyberStore" concept, a joint venture program
to finance, design, develop, and operate electronic commerce storefronts in
partnership with brand-name consumer and technology product companies. LVL has
developed electronic and on-line commerce ("E-commerce") on behalf of
international manufacturing and technology corporations.
On March 23, 1998, LVL and its two wholly owned subsidiaries, LVL
Advertising, Inc. ("LVLA"), and LVL Interactive, Inc. ("LVLI"), filed a
voluntary petition in the United States Bankruptcy Court for the Northern
District of California ("Bankruptcy Court") seeking protection under Chapter 11
of the U.S. Bankruptcy Code. The Chapter 11 proceedings of the Companies were
jointly administered by the Bankruptcy Court. LVL and its subsidiaries operated
their business as debtors-in-possession, subject to Bankruptcy Court approval
for certain transactions, while they developed a reorganization plan to
restructure LVL. On April 16, 1998, the Bankruptcy Court confirmed the First
Amended Plan of Reorganization ("POR") which became effective on July 17, 1998.
The principal terms of the POR are as follows:
1. LVLA and LVLI merged into LVL.
2. LVL became a wholly owned subsidiary of Digital.
3. The outstanding shares of common stock of LVL ("Old Common Stock") and
options to purchase Old Common Stock were canceled effective July 17,
1998.
4. Certain founders and shareholders of LVL received 600,000 shares of
common stock of the Company, subject to certain restrictions on the sale
and disposition of these shares.
5. Certain secured claims are to be repaid by the Company pursuant to the
original terms of the agreements or will be repaid over five years in
equal quarterly installments at an annual interest rate of 10%.
6. An investor in LVL, Trident III, LLC ("Trident") that provided $600,000
in pre-confirmation bridge financing was issued 600,000 shares of
redeemable non-voting common stock and 440,000 shares of non-redeemable
common stock.
7. All unsecured claims will receive a pro rata portion of 600,000 shares
of Series A Cumulative Convertible Preferred Stock ("Series A"). Claims
of less than $5,000 may elect to receive 10% of their claim in cash in
lieu of receiving shares of Series A
6
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
("Cash Option"). Claims exceeding $5,000 may elect to reduce their claim
to $5,000 and receive $500 in lieu of receiving shares of Series A. The
pool of 600,000 shares of Series A was reduced by the percentage dollar
amount of claims electing the Cash Option.
8. The Company issued warrants to purchase common stock to certain
investors and service providers during the reorganization.
The Company also concluded the following additional transactions relating
to the restructuring of the Company:
1. Trident provided $228,000 in post-confirmation bridge financing and
received 91,200 shares of non-voting common stock.
2. The Company has also received $100,000 in pre-confirmation bridge
financing and $300,000 in post-confirmation bridge financing from other
investors. The Company issued warrants to purchase 80,000 shares of
common stock at $0.50 per share and 120,000 shares of common stock at
$0.001 per share, respectively, in conjunction with these financings.
3. I-Storm issued warrants to purchase 290,000 shares of common stock at
$0.25 per share in conjunction with post-confirmation bridge financing
of $725,0000.
Significant Risks and Uncertainties
The Chapter 11 proceedings significantly affected I-Storm's capital
structure, liquidity and capital resources. During 1997 and 1998, the Company's
operations generated substantial losses. I-Storm expects that in the near term,
it will continue to sustain losses from operations (before giving effect to the
non-cash charges that it will incur with respect to the amortization of a $3.1
million bankruptcy Reorganization Asset over the next ten years).
The Company is in the development stage, has yet to generate any
significant revenues and has no assurance of future revenues. The Company is
subject to the risks and challenges associated with other companies at a similar
stage of development, including: dependence on key individuals, successful
development, marketing and sales of products and services, and competition from
larger companies with greater financial, technical, management, marketing, and
sales resources.
In order to achieve successful operations, the Company will require
additional capital to sustain and expand its business. I-Storm is currently
seeking additional equity financing and is seeking to list its stock on a
nationally-recognized exchange. There can be no assurance that
7
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
I-Storm will be able to obtain financing or that the terms of the financing will
be favorable to I-Storm. These factors raise substantial doubt about the ability
of I-Storm to continue as a going concern and about the ability of I-Storm to
realize its Reorganization Asset. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In addition to the need for additional financing, I-Storm is subject to a
number of other risk factors including, but not limited to, a limited operating
history as a reorganized entity; significant concentration of revenue from a few
customers; highly competitive markets with limited barriers to entry; and
implementation of its new E-Commerce CyberStore concept.
Fresh Start Accounting
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," prescribes the use of "fresh start
accounting" when the sum of the allowed claims plus post-petition liabilities
exceeds the value of pre-confirmation assets and the entity experiences a change
in control as pre-reorganization equity holders effectively receive less than
50% of new common stock issued pursuant to the POR. Under these circumstances,
a new reporting entity is created and assets and liabilities should be recorded
at their fair values. This accounting treatment is referred to as "fresh start
reporting."
Distributions in settlement of allowed claims, other transactions pursuant
to the POR and fresh start reporting adjustments have been applied to I-Storm's
pre-confirmation balance sheet resulting in the accompanying July 17, 1998
consolidated balance sheet of I-Storm. Since fresh start accounting results in
a new reporting entity, amounts included in the accompanying consolidated
financial statements as of or subsequent to July 17, 1998 are not intended to be
comparable to financial statements as of or for any previous period.
Fresh start reporting equity value was determined in good faith by the
Board of Directors of I-Storm. I-Storm has valued the Series A Cumulative
Convertible Preferred Stock at $1.00 per share, representing proceeds to the
unsecured creditors of approximately $0.10 per $1.00 of liabilities. Redeemable
common stock has also been valued at $1.00 based on the redemption features of
the common stock. Common stock has been valued at $0.25 per share based on the
value of the last transaction involving Digital's common stock. Warrants to
purchase common stock to be issued pursuant to the POR have been valued at
approximately $0.13 based on an option-pricing model.
The reorganization and the adoption of fresh start reporting resulted in
the following adjustments to the Company's Consolidated Balance Sheet as of July
17, 1998 (in thousands):
8
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
(UNAUDITED INFORMATION)
<TABLE>
<CAPTION>
Predecessor Reorganization and
Company Fresh Start Adjustments Reorganized
July 17, ------------------------------ Company
1998 Debit Credit July 17, 1998
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Assets:
Current assets $ 1,360 $ -- $ 379 (a) $ 981
Property and equipment, net 307 -- 185 (b) 122
Reorganization asset -- 3,131 (c) -- 3,131
---------- ----------- ------------- ------------
Total assets $ 1,667 $ 3,131 $ 564 $ 4,234
========== =========== ============= ============
Liabilities and equity:
Accounts payable $ 9,574 $ 7,635 (d) $ -- $ 1,939
Long-term notes payable 403 -- 125 (e) 528
Redeemable common stock -- -- 600 (f) 600
Preferred A -- -- 600 (g) 600
Common 11 -- 19 (h) 30
Warrants -- -- 47 (i) 47
Paid in capital 724 234 (j) -- 490
Accumulated deficit (9,045) -- 9,045 (k) --
---------- ----------- ------------- ------------
Total liabilities and equity $ 1,667 $ 7,869 $ 10,436 $ 4,234
========== =========== ============= ============
</TABLE>
Explanation of the above adjustment columns are as follows:
(a) To adjust current assets to fair market value.
(b) To adjust property and equipment to fair market value.
(c) To establish the reorganization value in excess of identifiable assets as
follows (in thousands):
<TABLE>
<S> <C>
New debt $ 125
New equity 1,266
--------
Reorganization value 1,391
Plus: Fair value of liabilities 2,843
Less: Fair value of assets (1,103)
--------
$ 3,131
========
</TABLE>
(d) To reflect the cancellation of old accounts payable and notes payable.
(e) To reflect the addition of bridge debt pursuant to the Reorganization
Plan.
(f) To reflect the issuance of 600,000 shares of Redeemable Common pursuant to
the Reorganization Plan.
9
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
(g) To reflect the issuance of 600,000 shares of Convertible Preferred A
pursuant to the Reorganization Plan.
(h) To reflect the net issuance of Common shares pursuant to the
Reorganization Plan.
(i) To reflect the issuance of 350,000 shares of Common Warrants pursuant to
the Reorganization Plan.
(j) To reflect net adjustments to Capital pursuant to the Reorganization Plan.
(k) To reflect the elimination of stockholders' deficit of the Predecessor
Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements reflect the activities
of I-Storm and its wholly-owned subsidiary after elimination of all intercompany
accounts and transactions.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, I-Storm considers all highly
liquid investments purchased with original maturities of three months or less to
be cash and cash equivalents. Cash and cash equivalents consist of amounts on
deposit at a commercial bank.
Concentrations of Credit Risk
Financial instruments that potentially subject I-Storm to concentrations of
credit risk consist principally of accounts receivable. I-Storm performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets.
10
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
Amortization of Reorganization Asset
At July 17, 1998, the reorganization value of I-Storm in excess of its net
assets was determined to be $3,131,000. This intangible asset was classified as
a reorganization asset ("Reorganization Asset") in the accompanying consolidated
balance sheet of I-Storm and will be amortized on a straight-line basis over ten
years. Pursuant to Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code," the Reorganization Asset was
determined by discounting future cash flows for I-Storm at rates reflecting the
business and financial risks involved and it approximates the amount a willing
buyer would pay for the assets of the Company immediately after the
restructuring. The carrying value of the Reorganization Asset will be reviewed
periodically for impairment, and if the facts and circumstances suggest that it
may not be recoverable, as determined based on the undiscounted cash flows of I-
Storm over the remaining amortization period, the carrying value of the
Reorganization Asset will be adjusted in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of."
Stock-Based Compensation
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in October 1995. This accounting standard permits the use of
either a fair value based method of accounting or the method defined in
Accounting Principles Board Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" to account for stock-based compensation arrangements. Companies
that elect to employ the method prescribed by APB 25 are required to disclose
the pro forma net income (loss) that would have resulted from the use of the
fair value based method. I-Storm has elected to account for its stock-based
compensation arrangements under the provisions of APB 25.
Revenue Recognition
I-Storm's revenues consist principally of services related to development
and maintenance of web sites. I-Storm recognizes revenue as the services are
provided. To the extent costs incurred and anticipated costs to complete
projects in progress exceed anticipated billings, a loss is accrued for the
excess.
Comprehensive Income (Loss)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which I-Storm adopted beginning on January 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income (loss)
and its components in a full set of general purpose financial statements. The
objective of SFAS No. 130 is to report a measure of
11
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
all changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with shareholders
("comprehensive income"). Comprehensive income (loss) is the total of net income
(loss) and all other non-owner changes in equity. For the three months ended
March 31, 1999 and 1998, I-Storm's comprehensive loss was equal to net loss.
Computation of Basic and Diluted Net Loss Per Share and Pro Forma Basic and
Diluted Net Loss Per Share
In accordance with SFAS No. 128, "Earnings Per Share," basic net loss per
common share has been computed using the weighted average number of shares of
common stock outstanding during the period less shares subject to repurchase.
Basic and diluted pro forma net loss per common share, as presented in the
statements of operations, has been computed as described above and also gives
effect to the conversion of the convertible preferred stock if anti-dilutive
(using the if-converted method) from the original date of issuance.
Segment Reporting
During 1998, I-Storm adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach). This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure. On this basis, I-Storm has only one business segment, the
development and implementation of the eStore concept.
During the three months ended March 31, 1999 and 1998, I-Storm's revenue
was generated in the United States.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedging accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or January 1, 2001 for I-Storm).
12
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
This Statement will not have a material impact on the financial condition or
results of the operations of I-Storm.
4. FACTORED ACCOUNTS RECEIVABLE:
I-Storm has entered into a factoring agreement with a financial
institution. Under this arrangement, I-Storm sells to the financial institution
all third-party receivables that meet certain criteria outlined in the
agreement. The financial institution has the right to charge back any
receivables that are not paid within 90 days of the invoice date to I-Storm. As
I-Storm does not surrender control over the factored receivables, the amounts
received from the transfer are treated as secured borrowings until either
payment is received by the financial institution or the receivable is put back
to I-Storm. The factoring agreement expired on March 25, 1999. Subsequent to
March 31, 1999, I-Storm has completely paid off the factoring liability.
5. INCOME TAXES:
I-Storm accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes." A valuation allowance has been recorded for the total deferred
tax assets as a result of uncertainties regarding the realization of the assets
based upon the lack of profitability in recent years, the uncertainty of future
profitability, and limitations on the utilization of net operating losses due to
I-Storm's reorganization.
6. RELATED PARTIES:
The Company entered into a twelve-month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay a total of $175,000 in twelve monthly instalments to
Benchmark for merger and acquisitions consulting services rendered to either LVL
or the Company, commencing as of March 1, 1998. Benchmark also entered into an
agreement in April 1998, to provide consulting services to LVL and its successor
entity in consideration of 600,000 shares of unregistered Common Stock, and the
Board of Directors approved the issuance of this Common Stock to Benchmark or
its designees on August 1, 1998, subject to a month lock-up agreement.
In September 1997, the Company engaged Mackenzie Shea, Inc. ("MSI") as a
consultant to assist the Company in structuring a reorganization and post-
organization operating entity. MSI or its designees were issued 500,000 shares
of the Company's Common Stock in August 1998, and MSI was paid a $20,000 cash
fee in 1998 in full compensation for such services. The shares are exempt from
registration under the federal securities laws, in accordance with Section 1145
of the Bankruptcy Code. The shares are subject to an eighteen-
13
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
month lock-up agreement, commencing August 1, 1998. Ten percent of such shares
to date have been released from the lock-up agreement.
In September 1997, the Company engaged Thomas Schulz as a consultant to
assist the Company in structuring a reorganization and post-organization
operating entity. Mr. Schulz or its designees were issued 500,000 shares of the
Company's Common Stock in August 1998, and Mr. Schulz also was paid a fee for
such services. Mr. Schulz is a director of the Company. The shares are exempt
from registration under the federal securities laws, in accordance with Section
1145 of the Bankruptcy Code. The shares are subject to an eighteen month lock-
up agreement, commencing August 1, 1998. Ten percent of such shares to date
have been released from the lock-up agreement.
In August 1998, the Company engaged Weatherly Securities Corp.
("Weatherly") to provide investment banking services and strategic planning for
the management, capitalization and business development of the Company for a
flat fee of 1,000,000 shares of Common Stock of the Company, valued at $0.25 per
share. The shares of Common Stock issued to Weatherly were fully vested as of
August 1, 1998, are unregistered shares and are subject to an eighteen month
lock-up agreement.
In August 1998, the Company engaged Pound Capital Corp. ("Pound") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of 225,000
shares of Common Stock of the Company, valued at $0.25 per share. The shares of
Common Stock issued to Pound were fully vested as of August 1, 1998, are
unregistered shares and are subject to an eighteen month lock-up agreement.
Robert Tomz entered into a consulting arrangement with the Company on
December 8, 1998 whereby he was entitled to receive monthly compensation of
$8,000 a month and warrants to purchase 14,000 shares of Common Stock,
exercisable at $2.00 per share each month for a period of twelve months
commencing January 11, 1999. Mr. Tomz also served briefly as Acting Chief
Financial Officer of the Company from January 1 to March 15, 1999. Mr. Tomz and
the Company terminated this consulting arrangement on June 15, 1999, and
renegotiated the consulting fee so that Mr. Tomz received in total $90,000 and
84,000 warrants to purchase Common Stock of the Company exercisable at $2.00 per
share.
Pursuant to the Plan of Reorganization, the Company has issued 297,642
shares of Common Stock to each of Calbert Lai and Stephen Venuti, and 500,000
shares of Common Stock to Thomas A. Schulz, or his designees, as set forth
below. Further, Benchmark Equity Group, Inc., an affiliate of Frank DeLape, a
director, has been issued 557,800 shares of Common Stock. Additionally, Mr.
DeLape, has received options to purchase 50,000 shares of Common Stock at $3.50
per share for one year's service as the Chairman of the Board of
14
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
Directors of the Company on July 23, 1999, and all other non-employee directors
have received options to purchase 25,000 shares at $3.50 per share for one
year's service on the Board of Directors of the Company, to be issued on July
23, 1999.
The Company is a party to a twelve-month consulting agreement with
Benchmark Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to
which the Company is obligated to pay $175,000 in twelve monthly instalments to
Benchmark for consulting services rendered to either LVL or the company,
commencing as of March 1, 1998. As of February 1999, 11 months of the
Consulting Agreement has been paid in full. Benchmark also entered into an
earlier agreement, in April 1998, to provide consulting services to LVL and its
successor entity in consideration of 600,000 shares of Common Stock, and the
Board of Directors approved the issuance of this Common Stock to Benchmark or
its designees on July 23, 1998. Frank DeLape, Chairman of the Board, is the
President of Benchmark Equity Group, Inc. The Company has a management
consulting agreement with Matthew Howard, a director, for a fee of $5,000 per
month. Mr. Howard's consulting arrangement commenced August 1998.
7. EQUITY FUNDING:
In February 1999, I-Storm raised net proceeds of $4,396,927 in connection
with the issuance of 407,900 shares of Series B Cumulative Convertible Preferred
Stock ("Series B") offered in a Regulation D private placement at par value of
$0.01 per share for an offering price of $12.25 per share. The Series B shares
shall pay a quarterly cumulative dividend at 9% per annum, payable in cash or
common stock at the option of the Board of Directors, and shall be convertible
into common stock at a conversion price of not greater than $3.50 per share and
not less than $2.80 per share.
In May 1999, I-Storm raised net proceeds of $4,004,000 in connection with
the issuance of 371,429 shares of Series C Cumulative Convertible Preferred
Stock ("Series C") offered in a Regulation D private placement at par value of
$0.01 per share for an offering price of $12.25 per share. The Series C shares
shall pay a quarterly cumulative dividend at 9% per annum, payable in cash or
common stock at the option of the Board of Directors, and shall be convertible
into common stock at a conversion price of not greater than $3.50 per share and
not less than $2.80 per share.
8. SUBSEQUENT EVENTS:
On June 11, 1999, the Board of Directors authorized the issuance of options
to purchase 50,000 shares of common stock to the Chairman of the Board of
Directors. Each director other than the Chairman shall be granted options to
purchase 25,000 shares of common stock. These options will be granted annually
for each full year of service and vest
15
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
one year from the date of grant. The exercise price of options granted for the
current year of service is $3.50 per share. The Board of Directors also
authorized the issuance of options to purchase 50,000 and 25,000 shares of
common stock to the Chairman and members of the Advisory Board of I-Storm,
respectively, under the same terms as the options granted to the Chairman and
members of the Board of Directors. Individuals may only receive options as a
member of either the Board of Directors or the Advisory Board, but not as a
member of both boards.
Item 2. Management's Discussion and Analysis
The Company's net loss for the year to date March 31, 1999 was
approximately $1,225,000, primarily due to operating losses compared to a loss
of $792,000 ended March 31, 1998. The Company's operating loss for the quarter
ended March 31, 1999 was $1,113,000 as compared to an operating loss of $756,000
ended March 31, 1998. The increase in operating loss of approximately $357,000
was caused primarily by a decline in gross profits from the prior year of
approximately $249,000 and an increase in operating expenses of approximately
$108,000. The increase in operating costs is due to extraordinary costs incurred
in downsizing the advertising service and the Company's dependence on
consultants for marketing and financial services and amortization of the
reorganization asset.
Revenue for the year to date March 31, 1999 and 1998 were $328,000 and
$728,000, respectively, a decrease of approximately $400,000 due to the change
in focus of the Company from generating advertising service revenue to seeking
financing for the newly-merged corporation and developing E-commerce
partnerships. Gross profit for the year to date ended March 31, 1999 and March
31, 1998 were ($40,000) and $209,000, or -12% and 28.5% of sales, respectively.
The decrease in gross profit was primarily a result of the Company's shift away
from advertising service revenue toward E-commerce development activities.
Operating expenses for the year to date March 31, 1999 and 1998 were
$1,441,000 and $1,484,000, respectively. The decrease in operating expenses of
approximately $43,000 from the period a year earlier was due to a reduction
staff resulting from a shift from advertising services business to E-Commerce
site development and to a reduction in leased facility costs due to the
relocation of the Company's corporate headquarters.
Interest expenses for the year to date March 31, 1999 and 1998 were
$108,500 and $69,000, respectively. As of March 31, 1999, the outstanding debt
of the Company consisted of $260,000 long term debt and current liabilities of
$1,661,000, for total liabilities of $1,921,000, primarily all of which is
classified as current.
16
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
Liquidity and Capital Resources
- -------------------------------
At March 31, 1999, the Company had current assets of $2,287,000 and
$1,388,528 in March 31, 1998.
As of March 31, 1999, the Company owed $259,641 in long term debt and
current notes payable totaling $51,000. The Company also has a Factoring
Agreement in place with a lender secured by the Company's accounts receivable
and other assets, with a factoring liability as of March 31, 1999 of $296,091,
down from $797,505 as of March 31, 1998. The Company is in compliance with all
material covenants of the shareholder notes payable and Factoring Agreement as
of March 31, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information and events reported in the Company's 1998 Form 10-KSBA,
filed September 8, 1999, are hereby incorporated by reference and should be read
in conjunction with this Form 10-QSB.
Item 2. Changes in Securities and Use of Proceeds
The information and events reported in the Company's 1998 Form 10-KSB,
filed on September 8, 1999, hereby incorporated by reference and should be read
in conjunction with this Form 10-QSB.
Sales of Unregistered Stock
Private Placement Offering of Series B Preferred Stock
-------------------------------------------------------
The Company raised a total of $4,996,439 in gross proceeds from a private
placement offering of Series B Cumulative Convertible Preferred Stock ("Series B
Preferred Stock"), made pursuant to Section 506 of Regulation D, at a price per
share of $12.25. The offering of such Series B Preferred Stock ("the Offering")
commenced on December 11, 1998 and concluded on February 18, 1999. A total of
407,900 shares of Series B Preferred Stock were offered and sold through
Weatherly Securities Corp. ("Weatherly"), a placement agent which received a 10%
placement fee and a 3% non-accountable expenses allowance, or 13% of the gross
proceeds of the sale of such Series B Preferred Stock Offering, less certain
expenses, for a total of $599,512. Weatherly also received as compensation for
the Offering Warrants to purchase 40,790 shares of Series B Preferred Stock.
After deducting the placement agent's fees and expenses, a total of $4,396,927
in proceeds was received by the Company from the
17
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
Offering. The majority of such proceeds was used to fully retire its outstanding
bridge loans, which had been incurred both pre- and post-bankruptcy; to almost
fully retire its loans under a factoring agreement, and to pay down many of its
outstanding expenses and professional fees. The balance of the proceeds is being
used for the development of I-Storm CyberStores and for general working capital
purposes.
The Series B Preferred Stock has a par value of $0.01 per share. Each
share is entitled to cumulative annual dividends, when and as declared by the
Board of Directors, at an annual rate of nine percent (9%) each year, in
quarterly installments of $0.28 on February 15, May 15, August 15 and November
15 of each year, payable at the option of the Company either in shares of Series
B Preferred Stock or in cash. The right of the Series B Preferred Stock to
payment of either cash or Common Stock dividends is subordinate to the right to
cash or stock dividend payments of Series A Preferred Stock. The shares of
Series B Preferred Stock are convertible into Common Stock at any time following
the closing of the Offering, at the option of the holder, into such number of
shares of the Company's Common Stock as shall equal $12.25 divided by the lower
of $3.50 (the "Conversion Price"), or should the closing bid price for any five
consecutive trading days during the period commencing 11 months after the Final
Closing of the Offering and ending one month thereafter be less than $3.50, the
Conversion Price shall be readjusted to that price, provided, however, that in
no event shall the Conversion Price be reduced below $2.80. The number of
shares of Common Stock to be issued upon conversion are subject to certain
antidilution provisions. Each share may be converted into Common Stock at the
Conversion Price at the option of the Company, at any time after four years from
the Final Closing of the Offering, upon the payment to the holder of any unpaid
accumulated dividends, in cash or Common Stock, at the option of the Company.
The Common Stock exercisable upon conversion of the shares has piggy-back
registration rights effective from the Final Closing of this Offering and shall
have demand registration rights effective from the Final Closing until 12 months
thereafter.
Executive Compensation
Robert Tomz entered into a consulting arrangement with the Company on
December 8, 1998, whereby he was entitled to receive monthly compensation of
$8,000 a month and warrants to purchase 14,000 shares of Common Stock,
exercisable at $2.00 per share, each month for a period of 12 months commencing
January 11, 1999. Mr. Tomz also served briefly as Acting Chief Financial
Officer of the Company from January 1 to March 15, 1999. Mr. Tomz and the
Company terminated this consulting arrangement on June 15, 1999, and
renegotiated the consulting fee so that Mr. Tomz received in total $90,000 and
84,000 warrants to purchase Common Stock of the Company exercisable at $2.00 per
share.
18
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1999
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of securities holders during this
period.
Item 5. Other Information
The information and events reported in the Company's 1998 Form 10-KSBA,
filed September 8, 1999, are hereby incorporated by reference and should be read
in conjunction with this Form 10-QSB.
On March 11, 1999, the Company entered into a two-year lease for 11,500
square feet of office space at 2440 West El Camino Real, Suite 520, Mountain
View, California 94040-1400.
In March 1999, the Company closed its advertising services branch, formerly
known as "LVL Advertising," in order to devote its resources entirely to the E-
commerce business. In connection with this closing, the Company reduced its
staff from 27 full time employees to 21 employees. By mutual agreement, Timothy
Cohrs, Vice President, terminated his position at that time with the Company to
pursue other executive opportunities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
Date: October 22, 1999 I-STORM, INC.
By: /s/ Calbert Lai
-----------------------
Calbert Lai, President
19
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 1999
FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,078,000
<SECURITIES> 0
<RECEIVABLES> 35,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,287,000
<PP&E> 36,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,838,000
<CURRENT-LIABILITIES> 1,661,000
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0
600,000
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,838,000
<SALES> 0
<TOTAL-REVENUES> 328,000
<CGS> 0
<TOTAL-COSTS> 1,441,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,000
<INCOME-PRETAX> 0
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