10QSB 1 e-9198.txt QUARTERLY REPORT FOR THE QTR ENDED 9/30/02 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the quarterly period ended September 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from _________________ to _________________ Commission file number: 0-28471 ENTRADA SOFTWARE, INC. (Name of small business issuer in its charter) NEVADA 86-0968364 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7825 E. GELDING DRIVE SCOTTSDALE, ARIZONA 85260 (Address of principal executive offices) (480) 607-3535 Issuer's telephone number Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares outstanding of the registrant's common equity as of October 31, 2002 was 7,381,676 shares of common stock, par value $.001. Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X] ENTRADA SOFTWARE, INC. INDEX TO FORM 10-QSB FILING FOR THE QUARTER ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial statements.................................................. 3 Balance sheet at September 30, 2002................................... 3 Statement of operations for the three months and nine months ended September 30, 2002 and 2001....................... 4 Statement of cash flows for the nine months ended September 30, 2002 and 2001......................................... 5 Notes to the financial statements..................................... 6 Item 2. Management's discussion and analysis of financial condition and results of operations................................... 7 PART II. OTHER INFORMATION Item 2. Changes in securities.................................................11 Item 4. Submission of Matters to a Vote of Security Holders...................11 Item 6. Exhibits and reports on Form 8-K......................................11 Signatures....................................................................12 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENTRADA SOFTWARE, INC. BALANCE SHEET SEPTEMBER 30, 2002 ASSETS Current assets Cash and cash equivalents $ 490 Accounts receivable 95,493 Prepaid expenses and deposits 37,065 ----------- Total current assets 133,048 ----------- Furniture, fixtures and equipment 168,346 Less accumulated depreciation (78,219) ----------- Net furniture, fixtures and equipment 90,127 ----------- Deposits 11,450 Intellectual property, net 20,940 ----------- Total assets $ 255,565 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses 1,315,571 Deferred revenue 478,422 Notes payable 624,813 ----------- Total current liabilities 2,418,806 ----------- Other liabilities 120,180 ----------- Total liabilities 2,538,986 ----------- Stockholders' equity Serial preferred stock, $.001 par value; authorized 20,000,000 shares Series A convertible preferred stock, $.001 par value; $1.00 liquidation preference, 250,000 shares authorized, issued and outstanding 250 Series B convertible preferred stock, $.001 par value; $1.00 liquidation preference, 1,700,000 shares authorized, 827,479 issued and outstanding 828 Common stock; $.001 par value, authorized 70,000,000 shares, 7,381,676 shares issued and outstanding 7,381 Paid in capital 2,450,239 Accrued dividends (72,488) Accumulated deficit (4,669,631) ----------- Total stockholders' equity (2,283,421) ----------- Total liabilities and stockholders' equity $ 255,565 =========== 3 ENTRADA SOFTWARE, INC. STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Support and license revenue $ 358,413 $ 175,710 $ 1,011,845 $ 208,006 Other revenue 8,845 14,179 ----------- ----------- ----------- ----------- Total revenue 367,258 175,710 1,026,024 208,006 Cost of sales 29,948 28,654 55,782 28,714 ----------- ----------- ----------- ----------- Gross profit 337,310 147,056 970,242 179,352 ----------- ----------- ----------- ----------- Operating expenses: Administration, finance and general 247,717 162,321 687,372 533,814 Product development 154,884 194,138 475,870 502,259 Business development 144,795 137,005 472,962 349,621 Customer support 45,730 96,980 193,635 109,994 Product management 48,809 -- 181,876 -- ----------- ----------- ----------- ----------- Total operating expenses 641,935 590,444 2,011,715 1,495,688 ----------- ----------- ----------- ----------- Loss from operations (304,625) (443,388) (1,041,473) (1,316,336) ----------- ----------- ----------- ----------- Other income (expense) Interest expense (26,515) (11,327) (70,880) (24,480) Other income 4,340 5,458 ----------- ----------- ----------- ----------- Total other income (expense) (22,175) (11,327) (65,422) (24,480) ----------- ----------- ----------- ----------- Net loss $ (326,800) $ (454,715) $(1,106,895) $(1,340,816) =========== =========== =========== =========== Loss per common share Basic $ (.04) $ (.06) $ (.15) $ (.18) =========== =========== =========== =========== Diluted $ (.04) $ (.06) $ (.15) $ (.18) =========== =========== =========== =========== Weighted average number of common shares outstanding: Basic 7,381,626 7,381,626 7,381,626 7,381,626 =========== =========== =========== =========== Diluted 7,381,626 7,381,626 7,381,626 7,381,626 =========== =========== =========== ===========
4 ENTRADA SOFTWARE, INC. STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NINE MONTHS ENDED SEPTEMBER 30 ------------------------------ 2002 2001 ----------- ----------- Cash flows from operating activities: Net loss $(1,106,895) $(1,340,816) Adjustments: Depreciation and amortization 27,195 26,104 Stock issued for services 23,450 42,801 Changes in assets and liabilities: Receivables, prepaid expenses and deposits 168,124 (189,373) Deferred revenue (11,278) 207,410 Payables, accruals and other liabilities 777,257 315,689 ----------- ----------- Net cash used in operating activities (122,147) (938,185) ----------- ----------- Cash flows from financing activities: Net proceeds from borrowing (20,666) 615,000 Issuance of common and preferred stock 129,000 355,936 ----------- ----------- Net cash provided by financing activities 108,334 970,936 ----------- ----------- Cash flows from investing activities: Purchase of furniture, fixtures and equipment (7,581) (20,236) Purchase of intangible assets (11,570) ----------- ----------- Net cash used in investing activities (7,581) (31,806) ----------- ----------- Net increase (decrease) in cash (21,394) 945 Cash, beginning of period 21,884 4,224 ----------- ----------- Cash, end of period $ 490 $ 5,169 =========== =========== Non-cash financing transaction: Conversion of accrued expenses to notes payable $ 72,153 $ 43,526 Notes and payables converted to preferred stock $ 55,000 $ 192,000 =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest $ 54,167 -- =========== ===========
5 ENTRADA SOFTWARE, INC. NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (1) BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for the interim period presented have been made. The results for the three-month and nine-month periods ending September 30, 2002 may not necessarily be indicative of the results for the entire fiscal year. These financial statements should be read in conjunction with the Company's financial statements and notes in the Company's annual report on Form 10-KSB for the year ended December 31, 2001. (2) STOCKHOLDERS' EQUITY: EMPLOYEE STOCK OPTION PLAN The 1999 Equity Incentive Plan reserves 5,000,000 shares of common stock for option and stock grants, and expires September 30, 2009. As of September 30, 2002, the Company had granted options for 2,409,626 shares with vesting periods of from three months to four years, and exercise prices of $.50 to $2.50 per share. Options to purchase 741,406 shares had vested and were exercisable, and none had been exercised. WARRANTS In connection with financing arrangements, the Company has issued 945,662 warrants to purchase common stock. At September 30, 2002, such warrants generally enabled the holder to purchase common stock for $1.00 per share for periods up to five years. CONVERTIBLE NOTES Included in notes payable are $555,660 of notes that are convertible into 555,660 shares of series B preferred stock at the option of the holder. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for historical information contained herein, this Form 10-QSB contains express or implied forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend those forward-looking statements be subject to the safe harbors created thereby. We may make written or oral forward-looking statements from time to time in filings with the SEC, in press releases, quarterly conference calls or otherwise. The words "BELIEVES," "EXPECTS," "ANTICIPATES," "INTENDS," "FORECASTS," "PROJECTS," "PLANS," "ESTIMATES" and similar expressions identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and financial performance or operations and speak only as of the date the statements are made. Forward-looking statements involve risks and uncertainties and readers are cautioned not to place undue reliance on forward-looking statements. Our actual results may differ materially from such statements. Factors that cause or contribute to the differences include, but are not limited to, those discussed elsewhere in this Form 10-QSB, as well as those discussed in our Annual Report on Form 10-KSB for the year ended December 31, 2001, including those in the Notes to Financial Statements and in "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS" and "DESCRIPTION OF BUSINESS - FACTORS AFFECTING FUTURE PERFORMANCE" sections which are incorporated by reference in this Form 10-QSB. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. The inclusion of forward-looking information should not be regarded as a representation that the future events, plans or expectations contemplated will be achieved. We undertake no obligation to publicly update, review or revise any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any forward-looking statements are based. Our filings with the SEC, including the Form 10-KSB referenced above, may be accessed at the SEC's Web site, www.sec.gov. OVERVIEW In today's world, products are the result of world-wide supply chains and distribution channels, and the former knowledge, intimacy, and local controls on products and services have given way to globalization. Entrada believes that the recall and quality challenges suffered by automotive companies, and the counterfeit problems which plague product companies, illustrate the cost and risk of having lost those controls. Our conclusion is that consumers and suppliers alike are demanding more accountability, and regulatory bodies are beginning to mandate companies identify and trace the products they sell. The TREAD Act imposed on the consumer products industry last year is just one example. Through its ECHANGE SOLUTIONS, Entrada already provides complete document traceability management to nearly 100 companies in 12 countries across a variety of industries, including automotive, aerospace, utilities, and pharmaceuticals. Entrada's ECHANGE SOLUTIONS is a leading electronic document management solution that provides complete document control, revision history and workflow. Entrada ECHANGE delivers effective design change management by providing secure anywhere-access to design information, automated best practice change processes, seamless integration with CAD and desktop systems and collaboration across the enterprise. Its powerful technology infrastructure is widely accepted and easy to deploy. Customers benefit from ECHANGE SOLUTIONS' ability to provide data control, reduce engineering change time, increase data available to all users, reduce time to market and development cycles, improve development productivity and reduce overall engineering costs. Following an extensive development effort over the past several years, the company is now in the preparatory stages of launching its solution for PRODUCT traceability, KINNOSA(TM). KINNOSA is an enterprise class software solution that 7 provides a total business solution for identification, authentication and traceability of goods or services, and enables collaboration throughout the supply chain by giving manufacturers a PRODUCT-CENTRIC(R) view of their business. KINNOSA captures design, development, and related business information into a structured PRODUCT BIOGRAPHY(R). KINNOSA'S maiN advantage is that it traces the stages, development and changes of physical objects by capturing information about the composition, construction, events and circumstances of each part. It is also secure, affordable, scalable and easy-to-use. OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 During this quarter we started our second year since the acquisition and re-introduction of the ECHANGE product line in the second quarter 2001. Since launching ECHANGE we have stabilized the ECHANGE customer base, and established a support organization capable of providing on-going technical support and software maintenance. Since introducing ECHANGE, we have closed cumulative license sales and support contracts for over $2 million with nearly 100 customers. During the third quarter of 2002, we continued our strategy to stabilize and gain the confidence of the global ECHANGE customer base, and added new ECHANGE partners and customers in Europe. We closed support contracts or license sales with 5 new customers during the period. Also during this quarter, 23 customers renewed annual support and maintenance contracts, which further validated our belief that we have successfully gained credibility with our customers. While we continued to generate revenue from the ECHANGE customer base, such revenues were insufficient to offset operating expenses during the quarter, which included expenses to support business development of our KINNOSA product line. Consequently, we had an operating loss for this period of $304,625. Total operating expenses for this period were $641,935, of which $503,778 was personnel related, with the remainder for occupancy, administration and other costs. The operating loss was narrowed from the comparable period last year when we were completing product development and expanding ECHANGE sales activities. OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 With the acquisition of the eChange product line in March 2001, we focused our attention on stabilizing the eChange customer base, and establishing a support organization capable of providing on-going technical support and software maintenance for over 200 world wide customers. Through September 30, 2001 we had closed customer support contracts and new license sales for over $650,000. Since the support contracts are generally for up to twelve-month periods, the associated revenue will be recognized ratably over the contract period. While we have begun generating revenue from the acquired customer base, such revenues were insufficient to offset operating expenses. Consequently, we had an operating loss for this period of $454,715. Total operating expenses for this period were $590,444, of which $429,600 was personnel related, $46,000 was spent on our marketing and promotional activities and the remainder was for occupancy, administrative and other costs. Despite the fact that we have significantly increased customer-focused activities, the operating loss and operating expenses are comparable to the same period last year when we were completing product development and marketing studies. OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 During period, we continued our strategy to stabilize and gain the confidence of the ECHANGE customer base, and continued focus on European ECHANGE partners and customers. We closed support contracts or license sales with 33 new customers during the period, and generated over $1 million in closed sales contracts. Also during the period, 34 customers renewed annual support agreements, which further validated our belief that we have successfully gained credibility with the customer base. 8 While we continued to generate revenue from our ECHANGE customer base, such revenues were insufficient to offset operating expenses during the period, including the continued development and launch of our KINNOSA product line. Consequently, we had an operating loss for this period of $1,041,473. Total operating expenses for this period were $2,011,715, of which $1,587,016 were personnel related, with the remainder for occupancy, administration and other costs. Despite the fact that we have significantly increased customer-focused activities, the operating loss was less than the comparable period last year when we were completing product development and commencing ECHANGE sales activities. During this period we completed a significant advancement of our KINNOSA product suite. By integrating Kinnosa with several commercially available marking symbology technologies, we added major new utility to Kinnosa's capability. The combination of the two solutions should enable any product's authenticity to be verified at any time, and the product's entire life history to be accessed by a simple scan with any one of several inexpensive, commercial reading devices. We believe this enhanced solution has wide applicability, with particular appeal to the automotive and aerospace industries, as well as the art, clothing and collectible markets where authenticity is always a prime concern. During the second quarter we launched initiatives to test and deploy this solution in both the aerospace and automotive industries. While both these initiatives are progressing steadily, the sales cycle for this type of solution is long -six to nine months - and so we believe we will not begin generating significant revenue from KINNOSA sales before the end of this year. OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 We began early sales activities in the fourth quarter of 2000, and closed our first significant sale in December 2000. While we have continued to increase our sales activities, the sales cycle for our products remains lengthy - up to three months for eChange and up to twelve months for Kinnosa - and as such we have not realized additional revenues from sales of Kinnosa. As noted above, we have began generating revenue from the acquired customer base, but such revenue was not sufficient to offset operating expenses. Consequently, we had an operating loss for this period of $1,340,816. Total operating expenses for this period were $1,495,688, of which $998,560 was personnel related, $138,008 was spent on our marketing and promotional activities and the remainder was for occupancy, administrative and other costs. Despite the fact that we have significantly increased customer-focused activities, the operating loss and operating expenses are comparable to the same period last year when we were completing product development and marketing studies. LIQUIDITY AND CAPITAL RESERVES As expected, although we generated revenues and working capital from operations for the period ended September 30, 2002, such revenues were insufficient to fully offset operating expenses and fund our operations, which included business development of KINNOSA. While we expect revenues to increase in the fourth quarter, we expect to continue to operate at a deficit. Until sufficient sales revenues are realized, we must continue to fund operating deficits by raising additional capital when possible. Until we are able to transition to institutional financing, or generate significant additional sales revenues, we will continue to maintain minimal cash reserves and request additional capital from our current investors only as necessary, though there is no assurance that such investors will provide additional capital when, or in the amounts, necessary to fund our operations. In addition, even if we are successful raising additional capital, the terms of any such transactions may involve substantial interest, fees and other transaction costs and/or result in substantial dilution to our existing shareholders. PLAN OF OPERATIONS FOR FISCAL YEAR 2002 For almost 18 months we have been generating operating revenues, primarily from our ECHANGE product suite. We expect ECHANGE revenues to increase in the fourth quarter, as well as additional sales of our KINNOSA products. However, we expect to continue to incur net losses in the fourth quarter of 2002. 9 During the nine months ended September 30, 2002, we raised $129,000 in working capital from the sale of preferred stock, and generated over $1,000,000 from customer billings. While these funds were marginally sufficient to fund operations for the period, we believe it is necessary for the Company to raise additional outside capital to fund growth operations for the remainder of the 2002 and for 2003. To this end, in October 2002 we entered into a agreement with a Wall Street investment banking firm to assist the Company in the private placement of up to $10 million of our equity or convertible securities. While this firm has a successful track record in similar financing arrangements, and after extensive due diligence has expressed to us their optimism concerning the ultimate success of this placement, there are no guarantees or assurances that we will be successful in this investment transaction. If this investment transaction is not successful, it will be necessary for us to obtain alternative sources of capital, or we may be forced to reduce the level of our operations. FACTORS AFFECTING FUTURE PERFORMANCE WE HAVE A LIMITED RELEVANT OPERATING HISTORY, MAKING IT DIFFICULT TO EVALUATE AND FORECAST OUR BUSINESS. We commenced our current operations through the acquisition of CIMsoft in September 1999. CIMsoft had been in existence since May 1998. To date, we have had operating revenues insufficient to offset operating expenses, and we incurred losses from operations of $1,737,753 for the year ended December 31, 2001 and $1,041,473 for the nine-month period ended September 30, 2002. Future losses are planned and likely to occur. There can be no assurance that our business plan will be successful or that we will achieve or be able to maintain profitability. We will encounter numerous risks and difficulties faced by early stage companies in the rapidly developing enterprise software markets, and we may or may not be successful in addressing these risks. Our business strategy may or may not be successful. As a result of our limited operating history, it is difficult to accurately forecast future operations and plan operating expenses. As a result, we may or may not be able to timely adjust spending to compensate for any unexpected events. This could adversely affect our ability to achieve or maintain profitability. 10 PART II: OTHER INFORMATION ITEM 2: CHANGES IN SECURITIES In the quarter ended September 30, 2002, the Company issued 22,000 shares of Series B preferred stock. The issuance was made in reliance on the exemption from registration afforded under Rule 506 of Regulation D, and the shares issued are "restricted securities." ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Incorporated by reference to the Company's Definitive Proxy Statement filed May 10, 2002. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits None b. Reports on Form 8-K None 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned that have been duly authorized. ENTRADA SOFTWARE, INC. By: /s/ Bruce D. Williams Bruce D. Williams Chief Executive Officer By: /s/ Terry J. Gustafson Terry J. Gustafson, Chief Financial Officer, Secretary and Treasurer Date: November 11, 2002 12