<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB
(MARK ONE)
[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 UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-23446
--------------------
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
--------------------
CALIFORNIA 94-3008888
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
999 BAKER WAY, FIFTH FLOOR,
SAN MATEO, CALIFORNIA 94404
--------------------- -----
(Address of principal executive offices) (Zip code)
(650) 578-0700
--------------
(Registrant's telephone number, including area code)
--------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 2000:
Outstanding
Class August 4, 2000
----- --------------
COMMON STOCK, NO PAR VALUE 4,971,467
<PAGE> 2
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-QSB
THREE MONTHS ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets: June 30, 2000 and December 31, 1999..
3
Condensed Consolidated Statements of Operations:
Three and Six Months Ended June 30, 2000 and 1999........................ 4
Condensed Consolidated Statements of Cash Flows:
Three Months Ended June 30, 2000 and 1999................................ 5
Notes to Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis or Plan of Operations................... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 21
Item 2. Changes in Securities and Use of Proceeds.................................... 21
Item 3. Defaults Upon Senior Securities.............................................. 21
Item 4. Submission of Matters to a Vote of Security Holders.......................... 21
Item 5. Other Information............................................................ 21
Item 6. Exhibits and Reports on Form 8-K............................................. 21
SIGNATURES................................................................... 22
</TABLE>
-2-
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 2,317,600 $ 1,045,600
Short-term investments ................................................ 246,600 247,500
Accounts receivable, less allowance for doubtful accounts
of $50,000 ........................................................... 800,300 1,285,500
Prepaid expenses and other assets ..................................... 180,600 60,900
------------ ------------
Total current assets ................................................ 3,545,100 2,639,500
Property and equipment, net .............................................. 332,900 402,700
Software development costs, net .......................................... 197,200 208,400
Other assets ............................................................. 339,200 312,100
------------ ------------
$ 4,414,400 $ 3,562,700
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................................ $ 206,100 $ 177,000
Accrued and other current liabilities ................................. 379,900 335,600
Deferred revenue ...................................................... 192,700 81,800
------------ ------------
Total current liabilities ........................................... 778,700 594,400
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized, none issued
and outstanding ...................................................... -- --
Common stock, no par value, 10,000,000 shares authorized, 4,953,789
and 4,217,978 issued and outstanding at June 30, 2000 and December
31, 1999, respectively ............................................... 11,289,800 8,410,400
Deferred stock-based compensation ..................................... (41,700) (85,000)
Accumulated other comprehensive income (loss) ......................... (33,100) (32,200)
Accumulated deficit ................................................... (7,579,300) (5,324,900)
------------ ------------
Total shareholders' equity .......................................... 3,635,700 2,968,300
------------ ------------
$ 4,414,400 $ 3,562,700
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
<PAGE> 4
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
Revenue: 2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product license fees ....................... $ 425,900 $ 292,800 $ 605,800 $ 1,031,900
Product maintenance fees ................... 189,700 160,900 361,800 325,100
Consulting services ........................ 28,400 9,000 96,800 319,600
Royalties .................................. 22,600 48,400 38,500 100,000
----------- ----------- ----------- -----------
Total revenue ............................ 666,600 511,100 1,102,900 1,776,600
Cost of revenue:
Product licenses ........................... 35,100 63,500 59,900 187,600
Product maintenance ........................ 41,700 66,900 98,500 169,000
Consulting services ........................ 5,100 1,800 50,700 50,000
----------- ----------- ----------- -----------
Total cost of revenue .................... 81,900 132,200 209,100 406,600
----------- ----------- ----------- -----------
Gross margin ........................... 584,700 378,900 893,800 1,370,000
Operating expenses:
Research and development ................... 693,900 486,700 1,305,000 997,800
Sales and marketing ........................ 656,500 402,200 1,336,600 931,400
General and administrative ................. 269,800 208,700 563,800 438,800
----------- ----------- ----------- -----------
Total operating expenses ................. 1,620,200 1,097,600 3,205,400 2,368,000
----------- ----------- ----------- -----------
Operating loss ....................... $(1,035,500) $ (718,700) $(2,311,600) $ (998,000)
Other income, net ............................. 23,900 37,200 41,800 68,000
----------- ----------- ----------- -----------
Loss before income taxes ............. $(1,011,600) $ (681,500) $(2,269,800) $ (930,000)
----------- ----------- ----------- -----------
Income tax expense (benefit) .................. (16,700) -- (15,400) 800
----------- ----------- ----------- -----------
Net loss ............................. $ (994,900) $ (681,500) $(2,254,400) $ (930,800)
=========== =========== =========== ===========
Basic and diluted net loss per share .......... $ (0.21) $ (0.17) $ (0.50) $ (0.24)
=========== =========== =========== ===========
Shares used in computing basic and diluted
net loss per share .......................... 4,714,483 3,964,677 4,472,036 3,948,549
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
<PAGE> 5
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ....................................................................... $(2,254,400) $ (930,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................ 171,200 213,200
Stock-based compensation ..................................................... 42,900 --
Changes in operating assets and liabilities:
Accounts receivable ........................................................ 485,200 (267,600)
Prepaid expenses and other assets .......................................... (146,800) (30,700)
Trade accounts payable ..................................................... 29,100 (133,800)
Accrued and other current liabilities ...................................... 44,300 (151,000)
Deferred revenue ........................................................... 110,900 32,400
----------- -----------
Net cash used in operating activities .................................... (1,517,600) (1,268,300)
----------- -----------
Cash Flows from Investing Activities:
Capitalization of software development costs ................................... (48,600) --
Purchases of property and equipment ............................................ (41,600) (53,000)
----------- -----------
Net cash used in investing activities .................................... (90,200) (53,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock, net ........................................... 2,879,800 129,500
----------- -----------
Net cash provided by financing activities ................................ 2,879,800 129,500
----------- -----------
Net decrease in cash and cash equivalents ......................................... 1,272,000 (1,191,800)
Cash and cash equivalents at beginning of period .................................. 1,045,600 1,900,000
----------- -----------
Cash and cash equivalents at end of period ........................................ $ 2,317,600 $ 708,200
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
<PAGE> 6
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by Enlighten Software Solutions, Inc. and subsidiary ("Enlighten"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. These condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-QSB and therefore
certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. However, Enlighten believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in Enlighten's
Annual Report on Form 10-KSB for the year ended December 31, 1999.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the financial
position and results of operations as of and for the periods presented. The
results for such periods are not necessarily indicative of the results to be
expected for the full year.
The preparation of condensed consolidated 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 condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain amounts in the condensed consolidated financial statements as of
December 31, 1999 and for the three and six months ended June 30, 1999, have
been reclassified to conform with the 2000 presentation.
2. Revenue Recognition
Product license fees are recognized after the following events have occurred: a
product evaluation has been shipped to the customer; the customer elects to
purchase the software following an evaluation period; the customer signs the
related contract; and collection of the sales price is probable. Royalty
revenues that are contingent upon sale to an end-user by original equipment
manufacturers are recognized upon receipt of a report of shipment from the
original equipment manufacturer. Product maintenance fees committed as part of
new product licenses and maintenance resulting from renewed maintenance
contracts are deferred and recognized ratably over the contract period,
generally one year. Consulting service revenue is recognized
-6-
<PAGE> 7
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
when services are performed for time and material contracts and on a percentage
of completion basis for fixed price contracts.
3. Cash and Cash Equivalents and Short-Term Investments
Enlighten considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Enlighten classifies its investments in commercial paper and U.S. Treasury notes
as "held-to-maturity." All such investments mature in less than one year and are
stated at amortized cost, which approximates fair value. Interest income is
recorded using an effective interest rate, with the associated discount or
premium amortized to interest income.
Additionally, Enlighten has classified its investments in preferred stock of
$246,600 as of June 30, 2000 as "available-for-sale." Such investments are
recorded at fair value based on quoted market prices, with unrealized gains and
losses reported as a separate component of stockholders' equity.
4. Offering of Common Stock
On April 28, 2000, Enlighten completed a private placement of 715,885 units each
consisting of one share of common stock and one redeemable purchase warrant to
purchase one share of common stock for gross proceeds of approximately
$3,114,100. Enlighten sold the common stock at $4.225 and the warrants at
$0.125, for an aggregate of $4.35 per unit. The price for the common stock was
determined based on the five-day average closing price of the Company's common
stock from April 17 through April 24, 2000. The private placement was completed
entirely with accredited investors as defined in Regulation D promulgated under
the Securities Act of 1933. The warrants have an exercise price of approximately
$4.65 per share and a term of five years.
5. Comprehensive Income (Loss)
Comprehensive income (loss) includes unrealized gains and losses on
"available-for-sale" short-term investments that have been excluded from net
income and reflected in equity. A summary of comprehensive loss follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss .......................... $ (994,900) $ (681,500) $(2,254,400) $ (930,800)
Unrealized loss on securities ..... (8,900) (4,700) (900) (10,200)
----------- ----------- ----------- -----------
Comprehensive loss ................ $(1,003,800) $ (686,200) $(2,255,300) $ (941,000)
=========== =========== =========== ===========
</TABLE>
-7-
<PAGE> 8
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Net Loss Per Share
Basic net loss per share is based on the weighted average number of all common
shares issued and outstanding, and is calculated by dividing net loss per share
by the weighted average shares of common stock outstanding during the period.
Diluted net loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding plus all potentially dilutive common
shares outstanding. Potentially dilutive common shares included in the dilution
calculation consist of dilutive shares issuable upon the exercise of outstanding
common stock options computed using the treasury stock method. For the periods
in which Enlighten had losses, potential common shares from common stock options
are excluded from the computation of diluted net loss per share, as their
effects are antidilutive.
The following is a reconciliation of the weighted average common shares used to
calculate basic net loss per share to the weighted average common and
potentially dilutive common shares used to calculate diluted net loss per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares used to calculate
basic net loss per share ............................ 4,714,483 3,964,677 4,472,036 3,948,549
Stock options ..................................... -- -- -- --
Warrants .......................................... -- -- -- --
--------- --------- --------- ---------
Weighted average common and potentially dilutive
common shares used to calculate diluted earnings
(loss) per share .................................... 4,714,483 3,964,677 4,472,036 3,948,549
========= ========= ========= =========
</TABLE>
Weighted average stock options and warrants to purchase 490,316 and 344,746
shares of common stock for the three months ended June 30, 2000 and 1999,
respectively, and 760,703 and 313,017 shares of common stock for the six months
ended June 30, 2000 and 1999 respectively, were outstanding but not included in
the computation of diluted earnings per common share because they are
antidilutive as a result of Enlighten's net loss.
7. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB No. 101A that delayed the
implementation date of SAB No. 101. In June 2000, the SEC issued SAB No. 101B
that further delayed the implementation date of SAB No. 101. Enlighten must
adopt SAB No. 101 no later than in the fourth quarter of 2000. Enlighten has not
determined the impact that
-8-
<PAGE> 9
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SAB No. 101 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of initial
adoption.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion No.
25." This Interpretation clarifies the application of Opinion 25 for certain
issues including: (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. In
general, this Interpretation is effective July 1, 2000. Management does not
expect the adoption of Interpretation No. 44 to have a material effect on
Enlighten's consolidated financial positions or results of operations.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following discussion and analysis in conjunction
with our financial statements and the notes thereto included elsewhere herein.
Except for historical information contained herein, the following discussion
contains forward-looking statements based on current expectations that involve
certain risks and uncertainties. Such forward-looking statements include, among
others, those statements including the words "expects," "anticipates,"
"intends," "believes" and similar language. Our actual results could differ
materially from those discussed herein. Factors that could cause actual results
or performance to differ materially or contribute to such differences include,
but are not limited to, those discussed below in "Factors That May Affect Future
Results," "Disclosures about Market Risk," and "Liquidity and Capital
Resources."
OVERVIEW
We provide software products that allow the user to automate
administration and management tasks and to monitor critical performance and
operational characteristics of computer servers and workstations in the
commercial environment. Our products allow the user to manage many computers
through a single console view of their computer infrastructure. Our product is
available for multiple operating systems with three distinct categories of
computer and software architecture, including Linux, Unix and Windows. Linux is
a free, open source alternative to proprietary Unix operating systems. "Open
source" means that this software has had its internal source code made open to
the public for viewing, copying, examining, modifying and commercial purposes.
Our products enable users of computer servers and workstations that are
networked together or internet based to manage their operations across various
sites. Our core product, the Enlighten(R) Distributed Systems Manager or
EnlightenDSM(TM), allows companies to manage their mission critical computer
servers and workstations by enabling system managers and administrators to
standardize the management of diverse computer operating systems, such as Linux,
Unix and Windows and to monitor the on-going performance and availability of
many different systems running together.
Our software manages products from vendors such as Compaq Computer
Corporation, Hewlett-Packard Company, International Business Machines
Corporation, Intel Corporation, Microsoft Corporation, The Santa Cruz Operation,
Silicon Graphics, Sun Microsystems, Red Hat, TurboLinux, Caldera Systems, and
SuSE. Our award winning EnlightenDSM product suite is a fully integrated,
cross-platform software solution.
The key elements of our strategy include enabling the integration of
Linux into the corporate environment, focusing on the mid-sized organization and
departments of larger companies, adding timely effective manageability to web
based application environments and distributing our products through third-party
relationships such as software vendors, hardware vendors, Linux distributors,
systems management service providers and Linux appliance manufacturers.
-10-
<PAGE> 11
Our products are suited for quick, effective implementation to provide
management infrastructure that matches today's needs for immediate, flexible
solutions in the Internet business environment. Our mission is to provide the
industry's most pervasive software solutions to help corporate enterprises
simply and inexpensively monitor, manage and administer computers that are
spread among many locations and consist of many different operating systems. We
intend to be a market leader for easy to use, out-of-the-box, broad-based
functionality for event monitoring and systems administration across major
operating systems platforms. While numerous standards are being introduced and
companies are vying to position themselves in the open systems management
market, we are positioning our EnlightenDSM product suite as the one product
that is vital and affordable to open systems managers in mixed Linux, Unix and
Windows environments.
HISTORICAL RESULTS OF OPERATIONS
Net Revenue
Net revenue increased $155,500, or 30%, to $666,600 in the second
quarter of 2000, as compared to the same period in 1999. This increase is due
primarily to an increase in end-user sales. Total revenue for the six months
ended June 30, 2000, decreased $673,700, or 38% from the same period in 1999.
The decrease is due in part to Enlighten's change in reporting revenues from our
OEM relationship with SGI. For the first quarter of 2000, revenues from our
relationship with SGI were not included in operating results. In prior quarters,
SGI provided Enlighten with revenue information prior to the issuance of
Enlighten's interim financial information and thus, revenue had been recorded in
the period in which SGI shipped its servers and workstations. During the first
quarter of 2000, SGI did not report revenue prior to the issuance of Enlighten's
interim financial information and beginning in the second quarter of 2000
revenues from SGI will be recorded in the quarter in which the revenue is
reported.
Revenue from product license fees increased $133,100, or 44%, to
$425,900 in the second quarter of 2000, as compared to 1999. The increase was
primarily attributable to an increase in revenues from direct sales. Total
revenue from product license fees for the six months ended June 30, 2000
decreased $426,100, or 42%, from the same period in 1999. The change in
reporting SGI revenues as discussed above, is attributable for this decrease.
License fees from SGI are derived from SGI's Unix server and workstation sales
on a per unit shipped basis.
Product maintenance fees increased by $28,800, or 18%, to $189,700 in
the second quarter of 2000, and increased $36,700, or 11%, to $361,800 in the
six months ended June 30, 2000, as compared to the same periods in 1999. An
increased end user customer base is the main cause for this increase.
Consulting services revenue increased by $19,400, or 216%, to $28,400,
in the second quarter of 2000, as compared to 1999. This increase was primarily
due to the increase in professional services sold to our customers. For the six
months ended June 30, 2000 consulting services revenue decreased by $222,800, or
70%, to $96,800 due to a decrease in non-recurring
-11-
<PAGE> 12
engineering revenues related to Enlighten's 1999 strategic relationship with IBM
compared to the Enlighten's 2000 OEM relationship with Intel.
Royalties consist primarily of royalties from BMC Corporation ("BMC"),
formerly New Dimensions Software, Inc., from product license fees and product
maintenance fees generated by the Tandem product line sold to BMC in October
1997. Total royalties decreased by $25,800, or 53%, to $22,600 in the second
quarter of 2000 and decreased $61,500, or 62%, to $38,500 in the six months
ended June 30, 2000, as compared to the same periods in 1999. This decrease was
primarily due to a lower royalty rate used during 2000 than 1999. Enlighten is
entitled to receive royalties from BMC through September 2000.
Cost of Revenue
Cost of license revenue consists of royalties paid to third parties,
amortization of software acquisition costs, product packaging and documentation,
and software media. Cost of license revenue decreased by $28,400, or 45%, in the
first quarter of 2000, and $127,700, or 68%, in the six months ended June 30,
2000, as compared to the same periods in 1999. This decrease was primarily due
to a decrease in royalties paid to third parties and a decrease in the quantity
of hardcopy product documentation shipped during the first and second quarters
of 2000.
Cost of maintenance revenue includes customer support costs, such as
hot-line and on-site support. Cost of maintenance revenue decreased by $25,200,
or 38%, in the first quarter of 2000, and $70,600, or 42%, in the six months
ended June 30, 2000, as compared to same periods in 1999. This decrease was due
primarily to a decrease in customer support headcount and personnel related
costs.
Cost of consulting services revenue consists of the direct costs
required to provide the consulting services. Cost of consulting services
revenues increased by $3,300, or 183%, in the first quarter of 2000, as compared
to 1999. This increase is due primarily to an increase in customers that require
consulting services.
Research and Development
Research and development expenses consist of personnel expenses and
associated overhead, the costs of short-term independent contractors required in
connection with product development efforts and amortization of software
development costs less amounts capitalized. Enlighten's investment in research
and development, prior to the reduction for capitalization of software
development costs, was $732,300 and $486,700, respectively, representing 110%
and 95% of total revenue for the second quarter of 2000 and 1999, respectively.
For the six months ended June 30, 2000, Enlighten's investment in research and
development, prior to the reduction for capitalization of software development
costs, was $1,353,700 and $997,800, respectively, representing 123% and 56% of
total revenue. The increase of $245,600, or 51%, in the second quarter of 2000,
and the increase of $355,900, or 36%, in the six months ending June 30, 2000,
when compared to the same periods in 1999, was primarily attributable to
increases in employee recruiting, contract labor costs, and higher personnel
related expenses due to higher headcount.
-12-
<PAGE> 13
Enlighten capitalized approximately $38,400 of software development costs in the
second quarter of 2000 and $48,700 for the six months ended June 30, 2000, which
represented approximately 5% and 4%, respectively, of total research and
development expenditures incurred. There were no software development costs
capitalized in the second quarter of 1999. The amount of capitalized software
development costs in any given period may vary depending on the nature of the
development performed.
Costs incurred in the research and development of new software products
are expensed as incurred until technological feasibility is established in form
of a working model. Enlighten expects research and development expenses to
continue to increase in absolute dollars as Enlighten continues to invest in the
enhancement of existing products and the development of new products.
Sales and Marketing
Sales and marketing expenses include costs of sales and marketing
personnel, advertising and promotion expenses, customer service and technical
support, travel and entertainment, and other selling and marketing costs. Sales
and marketing expenses increased by $254,300, or 63%, to $656,500 in the second
quarter of 2000, and by $405,200, or 44%, to $1,336,600 in the six months ended
June 30, 2000, when compared to the same periods in 1999. The increases were
primarily due to increases in employee recruiting, trade show expenses, and
higher personnel related expenses due to higher headcount.
General and Administrative
General and administrative expenses, which include personnel costs for
finance, administration, information systems, and general management, as well as
professional fees, legal expenses, and other administrative costs, increased by
$61,000, or 29%, to $269,800 in the second quarter of 2000, and by $125,000, or
29%, to $563,800 in the six months ended June 30, 2000, when compared to the
same periods in 1999. The increase was primarily due to higher compensation
expense on stock options granted to consultants and higher investor relations
expenses.
Other income, net
Other income and expense includes interest income net of interest
expense. Interest income is primarily derived from short-term interest-bearing
securities and money market accounts. Other income, net decreased by $13,300, or
36%, to $23,900 in the second quarter of 2000, and $26,200, or 39% in the six
months ended June 30, 2000, when compared to the same periods in 1999, primarily
due to a decrease in interest income due to a lower average balance of invested
cash and short-term investments.
-13-
<PAGE> 14
Income tax expense (benefit)
Income tax expense (benefit) consists of the minimum state income taxes
due in California and New Jersey offset by refunds received in 2000 from net
operating loss carrybacks realized for Enlighten's subsidiary in the United
Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, our cash and cash equivalents and short-term
investments were $2,564,200, representing 58% of total assets. Cash equivalents
are highly liquid investments with original maturities of ninety days or less.
Our short-term investments are primarily highly liquid investment grade
preferred stock. Our working capital was $2,766,400 as of June 30, 2000. We had
no debt as of June 30, 2000, other than normal trade payables and accrued
liabilities. Shareholders' equity as of June 30, 2000 was $3,635,700.
During the six months ended June 30, 2000, cash used in operating
activities increased $249,300 to $1,517,600, compared to the same period of the
prior year. The change was principally caused by increases in net losses
partially offset by changes in the balances of operating assets and liabilities.
Enlighten's investing activities consisted primarily of additions to
capital equipment and the capitalization of software development costs, which
combined represented $90,200 and $53,000 of cash used for investing activities
during the six months ended June 30, 2000 and 1999, respectively.
Financing activities provided cash of $2,879,800 in the first six
months of 2000, compared with cash provided of $129,500 in the same period of
1999. The increase in cash provided from financing activities resulted from
Enlighten's April 2000 private placement offering of 715,885 units, each
consisting of one share of common stock and one redeemable purchase warrant to
purchase one share of common stock
We believe that our existing capital resources, including the private
placement, are adequate to maintain our current operations through January 2001.
However, in order to continue to fund and expand our operations and meet our
other obligations through 2001, we may be required to obtain additional
financing. Our need for additional financing depends on our future performance,
which, in turn, is subject to general economic conditions, and business and
other factors beyond our control. There can be no assurance that we would be
able to obtain such financing, or that any financing would result in a level of
net proceeds required.
-14-
<PAGE> 15
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Quarterly Report on Form 10-QSB,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "intends," "expects" and words of similar import,
constitute forward-looking statements within the meaning of the Private
Securities Reform Act of 1995. Actual results could vary materially from those
expressed in those statements. Readers are referred to "Products," "Sales and
Distribution," "Product Development," "Competition," "Product Protection" and
"Management's Discussion and Analysis or Plan of Operation" sections contained
herein as well as the factors described below, which identify some of the
important factors or events that could cause actual results or performance to
differ materially from those contained in the forward looking statements.
OUR FUTURE REVENUES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER AND IF WE FAIL TO MEET THE EXPECTATIONS OF
INVESTORS OR ANALYSTS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY.
We have experienced significant quarterly fluctuations in operating
results and expect that these fluctuations will continue in future periods.
These fluctuations have been caused by a number of factors, including: the
timing of new product or product enhancement introductions by us or our
competitors; the development and introduction of new operating systems that
require additional development efforts; purchasing patterns of our customers;
size and timing of individual orders; the rate of customer acceptance of new
products; and pricing and promotion strategies undertaken by us or our
competitors.
Future operating results may fluctuate as a result of these and other
factors, including: our ability to continue to develop, acquire and introduce
new products on a timely basis; the timing and level of sales by our OEM or
other third-party licensees of computer systems or software incorporating our
products; technological changes in computer systems and environments; quality
control of the products sold; our success in shifting our primary sales strategy
from direct to indirect channels; and general economic conditions.
Additionally, our operating results may be influenced by seasonality
and overall trends in the global economy. Because we operate with a relatively
small backlog, quarterly sales and operating results generally depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast. Historically, we have recognized a substantial portion of our license
revenues in the last month of the quarter, particularly the last week. Since our
staffing levels and other operating expenses are based upon anticipated
revenues, delays in the receipt of orders can cause significant fluctuations in
income from quarter to quarter.
-15-
<PAGE> 16
WE NOW DERIVE ALL OF OUR REVENUES FROM THE OPEN SYSTEMS MARKET AND WE MAY NOT BE
SUCCESSFUL IN THAT MARKET
Through 1997, we derived a substantial portion of our revenue from our
Tandem-based products. However, we sold all rights to our Tandem technology in
October 1997. The future success of our business is substantially dependent on
our ability to generate significant revenue from our Linux, Unix and Windows
product offering. Although we have entered into a number of agreements with
others to bundle or integrates our products into theirs, we may not be
successful in our efforts to generate significant revenue from these agreements.
WE CONTINUE TO NEED ADDITIONAL CAPITAL, AND THERE IS NO CERTAINTY OF ADDITIONAL
FINANCING
During the last five years we have financed our operations primarily
through sales of equity securities and the sale of a prior product line. We
believe that our existing capital resources, including the private placement,
are adequate to maintain our current operations through December 2000. However,
in order to continue to fund and expand our operations and meet our other
obligations through 2001, we may be required to obtain additional financing. Our
need for additional financing depends on our future performance, which, in part,
is subject to general economic conditions and other factors beyond our control.
We may not be able to obtain such financing, or financing in the level of net
proceeds required for us to remain in business.
A SIGNIFICANT PERCENTAGE OF OUR REVENUES IS ATTRIBUTED TO SALES TO ONE OF OUR
CUSTOMERS
Our largest customer accounts for a substantial percentage of our
revenues. During the six months ended June 30, 2000 and the year ended December
31, 1999, approximately 37% and 60% of our revenues consisted of license and
maintenance fees received under our OEM relationship with Silicon Graphics to
bundle a subset of features of the EnlightenDSM product with each Unix server
and workstation that Silicon Graphics ships. License fees from Silicon Graphics
decreased in 1999 when compared to 1998. If these license fees continue to
decline, our revenues and financial results may be harmed.
WE ARE DEPENDENT ON RESELLERS AND IF THEY ARE NOT SUCCESSFUL MARKETING OUR
TECHNOLOGY, OUR ABILITY TO MAINTAIN OR INCREASE OUR REVENUES WILL BE HARMED
We sell primarily through resellers in the United States and abroad. We
have no control over our third-party distributors, their shipping dates, or the
volumes of systems shipped by them. These companies may not license our products
in volumes anticipated by us. If they fail to do so, our revenues will be
harmed.
IF OUR RESELLERS ARE NOT SUCCESSFUL IN EXPANDING DISTRIBUTION CHANNELS, OUR
ABILITY TO MAINTAIN OR INCREASE OUR REVENUES MAY BE HARMED
Our growth depends on our ability to continue to expand our third-party
distribution channel to market, sell and support our software products. We are
currently investing, and
-16-
<PAGE> 17
intend to continue to invest, significant resources to develop this channel. We
may not be successful in recruiting new organizations to represent us and our
products.
WE RELY ON THIRD PARTIES FOR TECHNICAL SUPPORT, AND IF THEY DON'T PROVIDE
ADEQUATE SERVICE, OUR BUSINESS MAY BE HARMED
We are dependent on our third-party distributors for technical support
and consultation to end-users. We must educate our third-party distributors so
that they obtain technical proficiency and knowledge with respect to our
products. This may result in, among other things, an increased workload for our
internal support and engineering staff, or poor customer acceptance of our
products, or both, either of which would significantly harm our business.
OUR MARKET IS SUBJECT TO INTENSE COMPETITION AND CONTINUED COMPETITION IN OUR
MARKET MAY LEAD TO A REDUCTION IN OUR PRICES, REVENUES AND MARKET SHARE
We experience intense competition from other systems management
companies. Our ability to compete successfully depends on a number of factors,
including the performance, price and functionality of our products relative to
those of our competitors. Most of our competitors are larger and have greater
financial, technical, marketing, support and other resources than us. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements than us. In addition, our industry is
characterized by low barriers to entry. Other competitors can easily enter the
market. Our current competitors or any new market entrants may develop systems
management products that offer significant performance, price, or other
advantages over our technology. In addition, we sell our products through
operating system vendors. These same operating system vendors could introduce
new or upgrade existing operating systems or environments that include systems
which perform the same functions as the products offered by us. This could
render our products obsolete and unmarketable. If we are not able to
successfully compete against current or future competitors, our revenues or
profits could be harmed.
ALL OF OUR LICENSE REVENUE IS DERIVED FROM A SINGLE PRODUCT FAMILY AND IF THOSE
PRODUCTS FAIL TO ACHIEVE AND MAINTAIN MARKET ACCEPTANCE, OUR BUSINESS WOULD BE
SIGNIFICANTLY HARMED
Our EnlightenDSM products have accounted for all of our license revenue
since October 1, 1997. We expect that the EnlightenDSM product family and its
extensions and derivatives will continue to account for a substantial majority,
if not all, of our revenue for the foreseeable future. Broad market acceptance
of EnlightenDSM is, therefore, critical to our future success. Failure to
achieve broad market acceptance of EnlightenDSM, as a result of competition,
technological change, or otherwise, would significantly harm our business. Our
future financial performance will depend in significant part on the successful
development, introduction and market acceptance of EnlightenDSM and its product
enhancements. If we are not successful in marketing EnlightenDSM or any new
products, applications or product enhancements, our revenues would be
significantly reduced.
-17-
<PAGE> 18
THE MARKET FOR OUR PRODUCTS IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, AND
IF WE ARE NOT ABLE TO DEVELOP OR MARKET NEW PRODUCTS TO RESPOND TO SUCH CHANGE,
OUR REVENUE WOULD BE SIGNIFICANTLY AFFECTED
The market for our products is characterized by rapid technological
developments, evolving industry standards and rapid changes in customer
requirements. The introduction of products embodying new technologies, including
new operating systems, applications, hardware products, systems management
frameworks and network management platforms, the emergence of new industry
standards, or changes in customer requirements could render our existing
products obsolete and unmarketable. As a result, our success depends upon our
ability to continue to enhance existing products, respond to changing customer
requirements and rapidly develop and introduce new products that keep pace with
technological developments and emerging industry standards. We may not be
successful in developing and marketing, on a timely basis, product enhancements
or new products that respond to technological change, evolving industry
standards or changing customer demands.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS COULD SERIOUSLY HARM
OUR BUSINESS
We generally rely on copyrights, trademarks, trade secret laws and
software security measures, along with employee and third-party nondisclosure
agreements, to establish and protect our proprietary intellectual property
rights, products and technology. Our products are typically licensed on a "right
to use" basis pursuant to licenses that restrict the use of the products to the
customer's internal purposes. We distribute our software under license
agreements that are signed by our end-users. We also distribute our software to
our OEM partners under similar software license and distribution agreements.
Despite our precautions taken to protect our software, unauthorized parties may
attempt to reverse engineer, copy, or obtain and use information we regard as
proprietary. Policing unauthorized use of our products is difficult and software
piracy is a persistent problem. Additionally, the laws of some foreign countries
do not protect our proprietary rights to the same extent as do the laws of the
United States. We cannot assure you that our reliance on licenses to third
parties, or copyright, trademark, trade secret protection or our software
security measures, will be enough to be successful and profitable in the
industry in which we compete.
WE MAY BE REQUIRED TO RELEASE OUR SOURCE CODE TO CERTAIN CUSTOMERS IF WE FAIL TO
FULFILL OUR CONTRACTUAL OBLIGATIONS, WHICH COULD RESULT IN THE MISUSE OF OUR
INTELLECTUAL PROPERTY
We have entered into source code escrow agreements with some of our
customers that require the release of source code to the customer in the event
there is a bankruptcy proceeding by or against us, we cease to do business, or
we are unable to fulfill our contractual support obligations. In the event of a
release of the source code, the customer is required to maintain confidentiality
of the code and, in general, to use the source code solely for the purpose of
maintaining the software's usability. Releasing source code to customers may
increase the likelihood of misappropriation or other misuse of our intellectual
property. If our source code was misused or misappropriated, it could
significantly harm our business.
-18-
<PAGE> 19
INTELLECTUAL PROPERTY INFRINGEMENT BY OR AGAINST US COULD SIGNIFICANTLY HARM OUR
BUSINESS
From time to time, we receive notices from third parties asserting that
we have infringed their patents or other intellectual property rights. In
addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the validity of our
proprietary rights. Any such claims could be time-consuming, result in costly
litigation, cause product shipment delays or lead us to enter into royalty or
licensing agreements rather than dispute the merits of such claims. As the
number of software products in the industry increases and the functionality of
such products further overlap, we believe that software developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, can be time consuming and expensive to defend. In addition, an adverse
outcome in litigation could subject us to significant liabilities to third
parties, require expenditure of significant resources to develop non-infringing
technology, require disputed rights to be licensed from others, or require us to
cease the marketing or use of certain products. Such a result could have a
material adverse effect on our business, operating results and financial
condition.
A DECLINE IN SALES OF UNIX OR LINUX SYSTEMS WILL RESULT IN A DECREASE IN
REVENUES
A significant portion of our revenue will be derived from Unix and
Linux based computer systems for the foreseeable future. While we have also
released versions of our products for the Windows NT platform, the product's
graphical user interface is available only on Unix and Linux based systems, and,
therefore, users must manage their environments from these types of systems. A
significant decline in sales of Unix and Linux based systems would decrease the
demand for our products and would significantly harm our business.
IF THE OPEN SYSTEMS MANAGEMENT MARKET FAILS TO GROW, OUR BUSINESS WOULD BE
SIGNIFICANTLY HARMED
For the foreseeable future, all of our business will be in the open
systems (Linux, Unix and Windows NT) management market, which is still an
emerging market. Our future financial performance will depend in large part on
continued growth in the number of companies adopting systems management
solutions for their client/server computing environments. The market for systems
management solutions may not continue to grow. If the systems management market
fails to grow or grows more slowly than we currently anticipate, our business
would be significantly harmed.
OUR SUCCESS IS TIED TO THE SUCCESS OF OTHER SEGMENTS OF THE COMPUTER INDUSTRY
Our products are marketed to users of computer products. During recent
years, segments of the computer industry have experienced significant economic
downturns characterized by decreased product demand, production overcapacity,
price erosion, work slowdowns and layoffs. Our operations may in the future
experience substantial fluctuations from period-to-period as a consequence of
such industry patterns, general economic conditions affecting the timing of
orders from major customers and other factors affecting capital spending. Such
factors may significantly harm our business.
-19-
<PAGE> 20
WE HAVE A HISTORY OF LOSSES, AND WE MAY NOT ACHIEVE PROFITABILITY
We have a history of losses and anticipate further significant losses.
We may not achieve profitability. We have incurred significant operating losses
each of the last five fiscal years and we may not realize sufficient revenue to
achieve profitability. We expect to continue to incur significant losses for the
foreseeable future and these losses may be higher than our current losses. We
may not achieve profitability. Failure to become and remain profitable may
adversely affect the market price or our common stock and our ability to raise
capital and continue operations.
OUR FAILURE TO ATTRACT, TRAIN, MOTIVATE, AND RETAIN KEY EMPLOYEES MAY HARM OUR
BUSINESS
The competition for highly skilled employees is intense. Our business
depends on the efforts and abilities of our senior management, our research and
development staff and other key sales, support, technical, and services
personnel. Our failure to attract, train, motivate, and retain such employees
would impair our development of new products, our ability to provide technical
services and the management of our business. This would seriously harm our
business, operating results, and financial position.
-20-
<PAGE> 21
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Enlighten is subject to certain legal actions that have arisen in the
ordinary course of business. Management believes that the ultimate outcome of
these actions will not have a material affect on Enlighten's consolidated
financial position or results of operations, although there can be no assurance
as to the outcome of such litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.01 Financial Data Schedule
(b) Reports on Form 8-K:
None
-21-
<PAGE> 22
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, JUNE 30, 2000
SIGNATURES
Pursuant to 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, thereunto duly authorized.
Enlighten Software Solutions, Inc.
DATE: August 11, 2000 SIGNATURE: /s/ Bill Bradley
------------------------------ ----------------
Bill Bradley
President and
Chief Executive Officer
DATE: August 11, 2000 SIGNATURE: /s/ Stephen E. Giusti
------------------------------ ---------------------
Stephen E. Giusti
Vice President, Finance and
Administration and
Chief Financial Officer
-22-
<PAGE> 23
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
___________ _______________________
27.01 Financial Data Schedule
