SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
COMMISSION FILE NUMBER 0-14039
eNUCLEUS, INC.
(Name of Small Business Issuer in its charter)
DELAWARE 11-2714721
(State or other jurisdiction (I.R.S. Employer Identification No.)
of corporation or organization)
401 NORTH MICHIGAN AVENUE, SUITE 745
CHICAGO, IL 60611
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312)683-9000
Check whether the Registrant (l) filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act during the past 12 months
(or for such shorter periods that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
As of November 14, 2000 the company had outstanding 12,436,865 shares of
its common stock, par value $0.001 per share.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
FORM 10-QSB SIGNATURE PAGE
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated (Unadudited) Balance Sheets as of September 30,
2000 and December 31, 1999.
Condensed Consolidated (Unaudited) Statements of Operations for the
three months and nine months ended September 30, 2000 and 1999.
Condensed Consolidated (Unaudited) Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999.
Notes to Condensed Consolidated (Unaudited) Financial Statements.
<PAGE>
eNUCLEUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
SEPT. 30, DEC. 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 29,442 $ 270,291
Accounts receivable, net........................................ 93,146 2,047
Other current assets............................................ 210,838 26,030
Deferred finance costs, net..................................... 205,921 --
----------- -----------
Total current assets......................................... 539,347 298,638
----------- -----------
Property and equipment, net..................................... 1,645,214 106,251
Goodwill, net................................................... 816,276 --
Net long-term assets of discontinued operations................. -- 6,482,363
----------- -----------
Total assets................................................. $ 3,000,837 $ 6,886,982
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Senior notes payable (net of debt discount of $910,246)......... $ 5,193,754 $ --
Lines of credit................................................. 499,444 499,444
Notes payable................................................... 133,950 131,756
Capitalized lease............................................... 1,029,425 --
Accounts payable................................................ 1,174,277 1,218,066
Related party payables due to officers.......................... 482,062 151,220
Accrued expenses................................................ 1,245,504 288,422
Net liabilities of discontinued companies....................... 1,009,696 1,750,623
----------- -----------
Total current liabilities.................................... 10,768,112 4,039,531
----------- -----------
Long-term liabilities.......................................... -- --
----------- -----------
Total liabilities........................................... $10,768,112 $ 4,039,531
=========== ===========
Redeemable securities........................................... $ 202,449 $ --
----------- -----------
Stockholders' equity (deficit):
Common stock - $0.001 par value, 900,000,000 shares
authorized; shares issued and outstanding (12,422,575
and 9,610,104 on September 30, 2000 and December 31, 1999,
respectively)................................................. 12,422 9,610
Additional paid-in capital...................................... 22,042,587 12,250,664
Stock warrants.................................................. 727,349 377,069
Treasury stock.................................................. (651,838) --
Accumulated deficit............................................. (30,100,244) (9,789,892)
----------- -----------
Total stockholders' equity (deficit)......................... (7,969,724) 2,847,451
----------- -----------
Total liabilities and stockholders' equity (deficit)............ $ 3,000,837 $ 6,886,982
=========== ===========
</TABLE>
See accompanying notes to condensed unaudited financial statements.
2
<PAGE>
eNUCLEUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 2000 SEPT. 30, 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue .................................... $ 87,654 $ -- $ 136,347 --
Cost of revenue.............................. 53,276 -- 82,132 --
------------ ----------- ------------
Gross profit.............................. 34,378 -- 54,215 --
Operating expenses........................... 1,086,670 725,924 3,580,456 1,585,097
Stock based compensation expense............. 373,614 104,000 1,610,011 104,000
Depreciation and amortization expense........ 105,105 10,094 143,454 34,935
------------ ----------- ------------ -----------
Operating loss from
continuing operations.................... (1,531,011) (840,018) (5,279,706) (1,724,032)
Interest and other income (expenses), net.... (3,384,107) (664) (6,998,367) (8,875)
------------ ----------- ------------ -----------
Income from continuing operations............ (4,915,118) (840,682) (12,278,003) (1,732,907)
Loss from discontinued operations............ (500,422) (161,196) (1,465,444) (154,538)
Loss on disposal of discontinued
operations................................. (6,566,835) -- (6,566,835) --
------------ ----------- ------------ -----------
Net loss................................... $(11,982,375) $(1,001,878) $(20,310,352) $(1,887,445)
============ =========== ============ ===========
Basic and diluted loss per common share
from continuing operations................ $ (0.40) $ (0.09) $ (1.07) $ (0.23)
============ ========== ============ ===========
Basic and diluted loss per common share
from discontinued operations.............. $ (0.04) $ (0.13) $ (0.13) $ (0.02)
============= ========== ============ ===========
Basic and diluted loss per common share
from disposal of discontinued
operations................................ $ (0.53) -- $ (0.57) --
============= ========== ============ ===========
Basic and diluted net loss per common
share..................................... $ (0.97) $ (0.11) $ (1.77) $ (0.25)
============= ========== ============ ===========
Weighted average shares outstanding -
basic and diluted......................... 12,403,344 9,052,753 11,449,400 7,491,181
============= ========== ============ ===========
</TABLE>
See accompanying notes to condensed unaudited financial statements.
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eNUCLEUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Cash Flows from operating activities:
Net loss................................................... $(20,310,352) $(1,887,445)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss from discontinued operations.......................... 1,465,444 154,538
Loss on disposal of discontinued operations................ 6,566,835 --
Depreciation and amortization.............................. 143,454 34,935
Compensation expense related to issuance of equity
security................................................ 1,610,011 104,000
Amortization of deferred financial costs and debt
discount................................................ 5,399,675 --
Changes in operating assets and liabilities................ 637,386 794,823
------------ -----------
Net cash used in continuing operations..................... (4,487,547) (799,149)
Net cash used in discontinued operations................... (816,970) 75,083
Net cash used in operating activities...................... (5,304,517) (724,066)
------------ -----------
Cash flows from investing activities:
Deposits on CCI acquisition................................ -- (500,000)
Capital expenditures....................................... (541,984) (50,188)
------------ -----------
Net cash used for investing activities.................. (541,984) (550,188)
------------ -----------
Cash flows from financing activities:
Proceeds from the issuance of senior notes payable......... 6,104,000 --
Repayments of notes payable................................ -- (56,254)
Decrease in lines of credit................................ -- --
Proceeds from the sale of common stock..................... 548,048 1,595,000
Purchase of treasury stock................................. (651,838) --
Payments of deferred finance costs......................... (725,400) --
Proceeds from issuance of related party payables........... 330,842 --
Payments to former owners.................................. -- (222,339)
------------ -----------
Net cash provided by financing activities............... 5,605,652 1,316,407
------------ -----------
Increase (decrease) in cash................................ (240,849) 42,153
Cash, beginning of period.................................. 270,291 25,217
------------ -----------
Cash, end of period........................................ $ 29,442 $ 67,370
============ ===========
Non-cash investing and financing activities:
Common stock issued with senior notes payable.............. $ 6,104,000 $ --
Fair value of stock warrants issued with debt facility..... 350,280 --
Fixed assets acquired through capital lease................ 1,029,425 --
Stock issued to effect acquisition......................... $ 1,735,125 --
============ ===========
</TABLE>
See accompanying notes to condensed unaudited financial statements.
4
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eNUCLEUS, INC.
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED) FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1. GENERAL
We deliver the digital building blocks that enable middle market companies
to operate in the new digital environment. The eNucleus Platform Solution (eNPS)
is a framework for providing customers an integrated and secure environment,
which delivers high-end data hosting, connectivity and co-location services. Our
goal is to provide the backbone for all of these network requirements in one
consolidated best-of-breed product offering to the middle market, thereby
eliminating the need for multiple vendors.
We began business operations in 1987 in Colorado Springs, Colorado. We
adopted the name Nucleus, Inc. in December 1998. On July 14, 2000 our
shareholders approved our re-incorporation into Delaware from Nevada and
changing our name to eNucleus, Inc. from Nucleus, Inc. We operate data centers
and sales branches in Chicago, Illinois and Atlanta, Georgia. We maintain our
headquarters in Chicago, Illinois.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2000. Certain prior period amounts have been reclassified to
conform to the current period presentation. These financial statements should be
read in conjunction with our audited consolidated financial statements and
footnotes for the year ended December 31, 1999 that are included in our annual
report on Form 10-KSB.
NOTE 3. DISCONTINUED OPERATIONS
In August 2000 we decided to strategically focus on only the managed
services offering of our business plan and elected to discontinue offering
certain non-related client premise equipment sales and associated professional
services. As part of this decision, we closed our Seattle and Denver offices as
well as discontinued certain operations of our Chicago and Atlanta offices.
Revenue from these discontinued operations were $913,000 and $4.7 million for
the three months ending September 30, 2000 and 1999 respectively and $7.2
million and $6.0 million for the nine months ending September 30, 2000 and 1999
respectively. We recorded a charge of approximately $6.7 million representing
the loss on disposal of these operations resulting from the write off of
unamortized goodwill, fixed assets and the present value of estimated
unrecoverable lease payments associated with these offices. Additionally, we
discontinued reselling long-distance telephone services and we recorded a gain
of approximately $130,000 on the sale of our customer base of long-distance
telecommunication accounts. Upon the conclusion of these transactions, we remain
focused on our core business offering of managed services, including managed
hosting, connectivity and co-location.
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NOTE 4. FINANCIAL RESULTS AND LIQUIDITY
Since we have only recently begun to execute on our business plan, we face
all the risks common to companies in their early stages of development,
including undercapitalization and uncertainty of funding sources, high initial
expenditure levels and uncertain revenue streams, an unproven business model,
difficulties in managing growth, and difficulties in managing operations in
different geographic locations. As of September 30, 2000, our working capital
was a negative $10.2 million, a decrease of $6.5 million from a deficit of $3.7
million at December 31, 1999. The bridge notes payable of $6.1 million represent
the majority of this increase. We have incurred net losses of $2.3 million for
the three months ended September 30, 2000, and $9.7 million for the nine months
ended September 30, 2000, excluding losses resulting from our discontinued
operations. Our recurring losses raise substantial doubt about our ability to
continue as a going concern. Our financial statements do not reflect any
adjustments that might result from the outcome of this uncertainty. Our cash
resources are presently not adequate for us to continue operating. Unless we
raise additional cash from outside resources, we will not be able to satisfy our
current operating obligations. We are currently in discussions with several
sources for securing debt financing and raising capital. Additionally, on
October 5, 2000, we engaged Roth Capital Partners to raise permanent equity
financing through a Private Placement of Securities for $3.0 million by November
30, 2000. However no assurances can be given that we will be successful in
raising additional funds. We will continue to pursue long-term financial support
including seeking strategic investors, lenders and/or technology partners to
execute our business plan. Under any of these scenarios, management believes
that our common stock would likely be subject to substantial dilution.
NOTE 5. FINANCING ARRANGEMENTS
In the first quarter 2000, we issued 365,365 shares of our common stock for
$548,000 in cash. We paid a broker-dealer $9,000 in cash and warrants to
purchase 6,000 shares of our common stock at $1.50 per share related to certain
of these sales.
On March 21, 2000, we issued senior bridge notes in the aggregate principal
amount of $6,104,000. The note investors also received 1,692,172 shares of
common stock. The notes were due on July 6, 2000 and pay interest of 12% per
annum on a monthly basis. We elected to extend the maturity date of these notes
for another 120 days pursuant to the terms in consideration for issuance of an
additional 5% fee payable in equity. On November 3, 2000 the senior bridge notes
came due. We have defaulted on the notes. We are currently in discussions with
these note holders to extend the maturity date and/or to convert the principal
and interest due under these notes into equity. We have secured agreements for
approximately $2.3 million and are currently working on agreements for the
remaining amount currently in default. Such agreements require the note holders
to extend the maturity date and/or to convert their notes into permanent equity
at the price per share for which equity is sold or at the conversion or exercise
price per share if convertible securities or warrants are sold, based upon new
equity funding in excess of $3.0 million. No assurances can be made that we will
be successful in securing agreements for all note holders or that $3.0 million
will be raised to facilitate conversions.
Roth Capital Partners (formerly Cruttenden Roth Incorporated) acted as
placement agent for the senior bridge notes and received a cash fee of $610,400,
reimbursement for expenses of $115,000 and a 5-year warrant to purchase
approximately 170,000 shares of common stock at an exercise price of $3.625 per
share. On October 5, 2000, we also engaged Roth Capital Partners to raise
permanent equity financing through a
6
<PAGE>
Private Placement of Securities for $3.0 million, however no assurances can be
given that we will be successful in raising additional funds.
NOTE 6. RELATED-PARTY TRANSACTIONS
As of November 14, 2000, Mr. Paulsen has outstanding personal guarantees of
approximately $900,000 and has continued to advance monies for operating
activities in excess of $600,000. While Mr. Paulsen has committed to helping us
in our financing needs, there is no assurance that we will continue to receive
advances from Mr. Paulsen prior to raising additional outside financial support.
On May 24, 2000, in consideration of past and current personal guarantees
provided by John C. Paulsen on various obligations of eNucleus and for advancing
funds from time to time to eNucleus, Mr. Paulsen was provided the opportunity to
purchase 1,250,000 shares of our common stock at the then market price (as
quoted by NASDAQ) of $2,156 per share. ENucleus has agreed to loan Mr. Paulsen
the full amount of the purchase price for the stock which would be pledged as
security for the loan. Subsequently, Mr. Paulsen and the Company agreed to
cancel such opportunity prior to its execution.
NOTE 7. ACQUISITIONS
On May 11, 2000, we completed the acquisition of WebNet.com, Inc. WebNet is
an Atlanta-based provider of dedicated Internet access and hosting solutions to
middle market companies. Webnet also provided client premise equipment sales and
professional services. As acquisition consideration, we issued 661,000 shares of
our common stock to WebNet's shareholders and have agreed to issue an additional
300,000 shares if the WebNet operation meets certain revenue targets or other
noted conditions. WebNet shareholders also received a put option to require
eNucleus to repurchase 60,000 shares at $5.00 per share on May 11, 2001.
The acquisition has been accounted for as a purchase business combination,
and, accordingly, has been included in our unaudited condensed statements of
operations for the nine-month period ended September 30, 2000 from the date of
acquisition. The purchase price of 661,000 shares, valued at $1,735,125, was
allocated to the acquired assets and liabilities based on their respective fair
market value (net value of $13,053) and intangibles. Goodwill acquired recorded
in connection with the acquisition is being amortized over seven years. In
August, in conjunction with the restructuring of our Company, we wrote off
approximately $800,000 of this goodwill related to operations that were
discontinued.
The following unaudited pro forma data presents the combined results of
operations of eNucleus and WebNet as if the acquisition occurred at the
beginning of the periods presented. Such unaudited pro forma data does not
reflect the effects of any anticipated changes to be made by eNucleus in its
operations from the historical operations and are presented for informational
purposes only and should not be construed to be indicating (i) the results of
operations or the financial position of eNucleus that actually would have
occurred had the acquisition been consummated as of the date indicated or (ii)
the results of operations or the financial position of eNucleus in the future.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
Revenues ....................... $ 87,654 $ 175,860
Net Loss........................ (11,982,375) (20,410,584)
Diluted loss per share.......... $ (0.97) $ (1.73)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes which are included under Item 1 and with the
Management's Discussion and Analysis Of Financial Condition and Results Of
Operations and the audited financial statements and related notes included in
eNucleus' Form 10-KSB, as filed with the Securities and Exchange Commission on
April 14, 2000.
7
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This Form 10-QSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933 that involve numerous risks and uncertainties.
Forward-looking statements can be identified by the use of forward-looking
terminology such as "estimates," "projects," "anticipates," "expects,"
"intends," "believes," or comparable terminology or by discussions of strategy
that involve risks and uncertainties. In addition, any statements which refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. Actual results could differ from
such forward-looking statements. We undertake no obligation to revise
forward-looking statements. Readers are encouraged to review and consider
carefully the various disclosures made by us in this report and our other
reports filed with the Securities and Exchange Commission, including our Form
10-KSB for the year ended December 31, 1999. Such risks and uncertainties
include our ability to raise the funds necessary to finance our operations, our
ability to successfully execute on our business plan, competitive factors and
attracting new customers.
INTRODUCTION
We deliver the digital building blocks that enable middle market companies
to operate in the new digital environment. The eNucleus Platform Solution (eNPS)
is a framework for providing customers an integrated and secure environment,
which delivers high-end data hosting, connectivity and co-location services. Our
goal is to provide the backbone for all of these network requirements in one
consolidated best-of-breed product offering to the middle market, thereby
eliminating the need for multiple vendors.
In August 2000 we decided to strategically focus on only the managed
services offering of our business plan and elected to discontinue offering
certain non-related client premise equipment sales and associated professional
services. As part of this decision, we closed our Seattle and Denver offices as
well as discontinued certain operations of our Chicago and Atlanta offices.
Revenue from these discontinued operations were $913,000 and $4.7 million for
the three months ending September 30, 2000 and 1999 respectively and $7.2
million and $6.0 million for the nine months ending September 30, 2000 and 1999
respectively. We recorded a charge of approximately $6.7 million representing
the loss on disposal of these operations resulting from the write off of
unamortized goodwill, fixed assets and the present value of estimated
unrecoverable lease payments associated with these offices. Additionally, we
discontinued reselling long-distance telephone services and we recorded a gain
of approximately $130,000 on the sale of our customer base of long-distance
telecommunication accounts. Upon the conclusion of these transactions, we remain
focused on our core business offering of managed services, including managed
hosting, connectivity and co-location.
Our revenues consist primarily of monthly fees for connectivity, managed
hosting services and co-location agreements. Such revenue is recognized ratably
over the term of the agreement, which generally range from two to five years.
Installation and set-up fees are typically recognized at the time the
installation is completed.
Cost of Revenue includes the costs of our network telecommunications
circuits, salaries and benefits for our operations personnel, rents and
utilities and depreciation and amortization.
Operating expenses consist primarily of salaries, commissions, and benefits
for our marketing, sales and support personnel, professional fees, provision for
doubtful accounts and other miscellaneous expenses.
Depreciation and amortization expense consists primarily of the
amortization of intangible assets recorded in connection with our acquisitions
and depreciation of our fixed assets. We expect these expenses to increase in
the future due to our plans to invest significant capital to expand our network.
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Stock based compensation expense is recorded to reflect the compensation
costs over the vesting period of the options and/or warrants issued. Certain
stock options and warrants were granted to the Board of Directors and certain
employees at exercise prices below market value.
GROWTH STRATEGY
We intend to expand our data center presence domestically and are currently
in discussions for several new locations. We recently signed a lease agreement
to open a new state-of-the-art facility in downtown Chicago and are currently in
discussions for two additional sites. We plan to have the Chicago center
operational by early December. We also plan to aggressively expand our hosting,
co-location and connectivity service offerings, including advanced security and
firewall management, network optimization and systems management. We focus
primarily on the middle market, a business segment underserved. We have
increased our sales force by 50% during this past quarter and are continuing to
pursue additional experienced sales force candidates. Additionally, we are
increasing our channel partner relationships throughout the eNucleus network.
These partnerships will help expand our service offerings within the eNucleus
Platform Solution and open additional sales channels and opportunities.
RESULTS OF OPERATIONS
Revenue. For the third quarter 2000, revenues were $88,000 compared to $0
in the third quarter 1999. Prior to May 2000, the Company had not yet generated
revenue from the managed services product offering. As of September 30, 2000, we
had approximately $50,000 in contracted recurring monthly revenue. We expect to
substantially increase such contracted recurring revenue in the fourth quarter
of 2000 and beyond.
Cost of revenue. For the third quarter 2000, cost of revenue was $53,000
compared to $0 in the third quarter 1999.
Operating expenses. For the third quarter 2000, operating expenses
increased approximately $361,000 to $2.3 million from $726,000 in the third
quarter 1999. As part of our business growth strategy, we will continue to incur
substantial expenses to build our infrastructure and administrative
requirements, including sales and marketing, back office support and the cost of
key executive management to support the development and growth of the business.
Stock based compensation expense. For the third quarter 2000, stock based
compensation expense was approximately $374,000. Stock based compensation
recorded in the third quarter 1999 was $104,000. During 2000, we granted stock
options and/or warrants to attract certain management personnel and/or advisors.
These options/warrants vest over periods ranging from zero to three years and
included certain grants with an exercise price below the market price at date of
grant. As a result, we incurred non-cash compensation charges and expect to
continue to record such charges in future periods until the compensation
associated with these charges has been fully amortized. We expect stock based
compensation expense to increase as we continue to offer equity incentives to
attract talented management and advisory personnel.
Depreciation and amortization expense. Depreciation and amortization
expense increased $95,000 to $105,000 in the third quarter 2000 as compared to
the third quarter 1999. The increase was primarily a result of $79,000 in
amortization expense incurred from goodwill recorded with our Atlanta
acquisition.
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Interest and other expenses. Interest and other expenses increased to
approximately $3.4 million in the third quarter 2000 and primarily relates to
the interest charges and amortization of the costs associated with the common
stock and warrants we issued in connection with our senior bridge financing.
Net loss from continuing operations. Our net loss from continuing
operations increased $4.1 million to $4.9 million in the third quarter 2000
compared to a loss of $841,000 in the third quarter 1999. As discussed above,
the increased loss is attributable to growth strategy costs in excess of current
period revenue and non-cash interest expense incurred in connection with our
senior bridge financing.
Loss from discontinued operations. Our net loss from discontinued
operations increased $3.0 million to $3.1 million in the third quarter 2000
compared to a loss of approximately $161,000 in the third quarter 1999. This
loss represents the operational activity of the segments of business that we
have discontinued, including Seattle, Denver and parts of Chicago and Atlanta.
Loss on disposal of discontinued operations. The loss on disposal included
approximately $6.3 million related to the write off of goodwill associated with
operations discontinued and $300,000 associated with the write off of fixed
assets disposed and the net present value of unrecoverable lease expenses.
Net loss. Our net loss increased $11.0 million to $12.0 million in the
third quarter 2000 compared to a loss of $1.0 million in the third quarter 1999.
As discussed above, this loss includes total charges of $7.1 million related to
the discontinued operations and loss on disposal and approximately $3.2 million
related to interest and non-cash amortization charges associated with the stock
and warrants we issued in connection with our senior bridge financing.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred net losses of $2.3 million for the three months ended
September 30, 2000 and $9.7 million for the nine months ended September 30,
2000, excluding losses resulting from our discontinued operations. As of
September 30, 2000 our working capital was a negative $10.2 million, a decrease
of $6.5 million from a deficit of $3.7 million at December 31, 1999. The bridge
notes payable of $6.1 million represent the majority of this increase as
discussed below. Our cash resources are presently not adequate for us to
continue operating. Unless we raise additional cash from outside resources we
will not be able to satisfy our current operating obligations. We are currently
in discussions with several sources for securing debt financing and raising
capital. Additionally, on October 5, 2000, we engaged Roth Capital Partners to
raise permanent equity financing through a Private Placement of Securities for
$3.0 million by November 30, 2000. However no assurances can be given that we
will be successful in raising additional funds. We will continue to pursue
long-term financial support including seeking strategic investors, lenders
and/or technology partners to execute our business plan. Under any of these
scenarios, management believes that our common stock would likely be subject to
substantial dilution. We believe that despite the financial hurdles and funding
uncertainties going forward, we have under development a business plan that, if
successfully funded and executed, can enhance operating results.
On November 3, 2000, the senior bridge notes in the aggregate principal
amount of $6,104,000 came due. These notes were originally issued on March 21,
2000, and were due on July 6, 2000. We elected to extend these notes until
November 3, 2000, by paying an additional 5% fee in equity. We have defaulted on
the notes. We are currently in discussions with these note holders to extend the
maturity date and/or to convert the principal and interest due under these notes
into equity. We have secured agreements for approximately $2.3 million and are
currently working on agreements for the remaining amount currently in default.
Such agreements require the note holders to extend the maturity date and/or to
convert their notes into permanent equity at the price per share for
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which equity is sold or at the conversion or exercise price per share if
convertible securities or warrants are sold, based upon new equity funding in
excess of $3.0 million. No assurances can be made that we will be successful in
securing agreements for all note holders or that $3.0 million will be raised to
facilitate conversions.
Roth Capital Partners (formerly Cruttenden Roth Incorporated) acted as
placement agent for the senior bridge notes and received a cash fee of $610,400,
reimbursement for expenses of $115,000 and a 5-year warrant to purchase
approximately 170,000 shares of common stock at an exercise price of $3.625 per
share.
On July 23, 1999, we entered into a $500,000 secured demand loan agreement
(the "Loan") with Bank of America. The Loan is secured by our assets and the
assets of Mr. Paulsen, bears interest monthly at the rate of prime plus one
hundred basis points, with principal payable on demand. As of November 14, 2000,
the entire amount under the loan was outstanding. This demand loan agreement has
expired and we are currently in default. We are currently in discussions to
obtain an extension.
Effective June 30, 1999, in connection with the acquisition of ITS, we
issued 1,000,000 shares of our common stock and a $1,000,000 subordinated note.
The note bears interest at the rate of prime plus one percent, and is secured by
375,000 shares of the common stock owned by Mr. Paulsen. The note, which was
originally due on October 8, 1999, was extended by ITS shareholders in
consideration for 100,000 additional shares of our common stock. The note had a
maturity date of June 30, 2000. We retired $610,000 of this note out of the
senior bridge financing. We are currently in default on the note.
PART II
ITEM 1. LEGAL PROCEEDINGS
We are from time to time a party to various legal actions arising in the
normal course of business. We believe that there is no proceeding threatened or
pending against us which, if determined adversely, would have a material adverse
effect on the financial condition or results of operations of eNucleus.
During 2000, we were notified of a collection action filed against us by
one of our shareholders with whom we have a balance outstanding currently in
dispute. We believe the potential outcome of this matter will not have a
material adverse effect on the financial conditions or results of operations of
eNucleus.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 17, 2000, we issued 76,915 shares of common stock to an ex-employee
per conditions of his employment agreement. We recorded additional compensation
expense of approximately $96,000 associated with this grant.
On May 24, 2000, in consideration of past and current personal guarantees
provided by John C. Paulsen on various obligations of eNucleus and for advancing
funds from time to time to eNucleus, Mr. Paulsen was provided the opportunity to
purchase 1,250,000 shares of our common stock at the then market price (as
quoted by NASDAQ) of $2.156 per share. ENucleus had agreed to loan Mr.Paulsen
the full amount of the purchase price for the stock which would be pledged as
security for the loan. Subsequently, Mr.Paulsen and the Company agreed to cancel
such opportunity prior to its execution.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On July 23, 1999, we entered into a $500,000 secured demand loan agreement
(the "Loan") with Bank of America. The Loan is secured by our assets and the
assets of Mr. John Paulsen, bears interest monthly at the rate of prime plus one
hundred basis points, with principal payable on demand. As of November 14, 2000,
the entire amount under the loan was outstanding. This demand loan agreement has
expired and we are currently in default. We are currently in discussions on
obtaining an extension.
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On November 3, 2000, the senior bridge notes in the aggregate principal
amount of $6,104,000 came due. These notes were originally issued on March 21,
2000, were due on July 6, 2000. We elected to extend these notes until November
3, 2000, by paying an additional 5% fee in equity. We have defaulted on the
notes. We are currently in discussions with these note holders to extend the
maturity date and/or to convert the principal and interest due under these notes
into equity. We have secured agreements for approximately $2.3 million and are
currently working on agreements for the remaining amount currently in default.
Such agreements require the note holders to extend the maturity date and/or to
convert their notes into permanent equity at the price per share for which
equity is sold or at the conversion or exercise price per share if convertible
securities or warrants are sold, based upon new equity funding in excess of $3.0
million. No assurances can be made that we will be successful in securing
agreements for all note holders or that $3.0 million will be raised to
facilitate conversions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Shareholder Meeting was held on July 14, 2000. Five proposals,
with one of the proposals including seven sub-proposals were submitted to
stockholders as described in our proxy dated June 12, 2000. Each of the
proposals and sub-proposals received more than 51% (or 6,910,572 shares of our
common stock) of the votes cast by shareholders, which was the required
percentage for shareholder approval for each of these proposals and
sub-proposals. The following is a brief description of the matters voted upon:
1. The election of seven members to serve on the Board of Directors for
varying terms. The nominees were John C. Paulsen, Vincent Sanchez,
Dennis Chookaszian, David Eskra, Steve Calk, Jeffrey R. Wescott, and
Frederick H. Kopko;
2. Approval and adoption of our name change from Nucleus, Inc. to
eNucleus, Inc.;
3. Approval and adoption of our reincorporation from Nevada to Delaware;
4. Approval and adoption of certain anti-takeover measures in our new
Certificate of Incorporation and By-laws to be effective upon the
reincorporation;
5. Approval and adoption of the eNucleus 2000 Omnibus Stock Incentive
Plan.
ITEM 5. OTHER INFORMATION
During the third quarter, in conjunction with the restructuring of our
Company, we appointed a new management team. Our current management team is as
follows: John C. Paulsen, our CEO and President, Brent Duelm, our Vice President
of Finance, Al Hasan, our Vice President of Operations and Rafiq Kiswani, our
Chief Technology Officer. Several of our previous management team, including
Vincent Sanchez, Ted Hartley, Mark Fera and Jeffrey Lundal are no longer
employed by us.
Additionally, Vincent Sanchez, Dennis Chookaszian, David Eskra, and
Frederick H. Kopko submitted their resignations from the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits.
Exhibit No. Description
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27.1 Financial Data Schedule
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(B) Reports on Form 8-K.
On August 4, 2000, eNucleus filed a Current Report on Form 8-K relating to
a change in its certifying accountant.
On August 11, 2000, eNucleus filed a Current Report on Form 8-K relating to
changing its name from Nucleus, Inc. to eNucleus, Inc. and reincorporating into
Delaware from Nevada.
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SIGNATURE
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
eNUCLEUS, INC.
Date: November 14, 2000 /s/ JOHN C. PAULSEN
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John C. Paulsen,
President and CEO
/s/ BRENT DUELM
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Brent Duelm,
Vice President Finance
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