UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period from
_________________ to _______________
Commission File Number 0-07418
eLINEAR, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 76-0478045
----------------------------------- --------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
7240 Brittmoore, Suite 118, Houston, Texas 77041
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(Address of principal executive offices)
(713) 896-0500
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(Issuer's telephone number)
Check whether the issuer has (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.
Yes [X] No [_]
As of May 15, 2003, there were outstanding 14,190,010 shares of common
stock, $.02 par value per share.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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ELINEAR, INC.
INDEX TO FORM 10-QSB
MARCH 31, 2003
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
March 31, 2003 (unaudited) and December 31, 2002
pro forma unaudited
Condensed Consolidated Statements of Operations 4
(unaudited) Three Months Ended March 31, 2003
and 2002
Condensed Consolidated Statement of Changes in 5
Shareholders' Equity (Deficit) Three Months
Ended March 31, 2003 (unaudited)
and Year Ended December 31, 2002 pro forma
unaudited
Condensed Consolidated Statements of Cash Flows 6
(unaudited) Three Months Ended March 31,
2003 and 2002
Notes to Unaudited Condensed Consolidated 7
Financial Statements
Item 2. Management's Discussion and Analysis of 12
Results of Operations and Financial Condition
Item 3. Controls and Procedures 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ELINEAR, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
----------------------------
ASSETS (Unaudited) (See Note 1)
(unaudited)
Current assets:
Cash $ 42,163 $ 140,834
Accounts receivable, net of allowance of $59,200 at March 31, 2003
and December 31, 2002 1,808,458 1,653,441
Note receivable 43,500 --
Inventory 192,718 16,947
Unbilled services -- 13,748
Other current assets 25,025 22,082
----------------------------
Total current assets 2,111,864 1,847,052
----------------------------
Property and equipment 81,261 81,261
Less accumulated depreciation (41,671) (35,145)
----------------------------
Net property and equipment 39,590 46,116
Other assets 11,484 10,180
----------------------------
Total assets $ 2,162,938 $ 1,903,348
============================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade $ 1,585,253 $ 1,495,034
Accrued liabilities 127,196 195,684
Accrued liabilities due to officers 155,000 64,000
Deferred revenue 7,500 10,000
----------------------------
Total current liabilities 1,874,949 1,764,718
----------------------------
Long-term debt due to officers 266,888 239,900
----------------------------
Commitments and contingencies (Note 5)
Shareholders' equity (deficit):
Preferred stock, $.02 par value, 10,000,000 shares authorized,
none issued -- --
Common stock, $.02 par value, 100,000,000 shares authorized,
14,030,260 shares issued and outstanding at March 31, 2003
and December 31, 2002 280,606 280,606
Additional paid-in capital 13,188 --
Accumulated deficit (272,693) (381,876)
----------------------------
Total shareholders' equity (deficit) 21,101 (101,270)
----------------------------
Total liabilities and shareholders' equity (deficit) $ 2,162,938 $ 1,903,348
============================
See accompanying notes to unaudited condensed consolidated financial statements.
3
ELINEAR, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31,
---------------------------
2003 2002
---------------------------
(See Note 1)
Revenue $ 3,369,597 $ 904,278
Cost of sales 2,700,374 868,613
---------------------------
Gross profit 669,223 35,665
---------------------------
Operating expenses:
Selling, general and administrative expenses:
Payroll and related expenses 284,172 125,382
Office administration 68,187 64,769
Professional services 169,626 65,769
Other 28,179 69,151
---------------------------
Total selling, general and administrative 550,164 325,071
Depreciation 5,482 4,397
---------------------------
Total operating expenses 555,646 329,468
---------------------------
Income (loss) from operations 113,577 (293,803)
Other income (expense):
Interest, net (4,394) (1,836)
Other expense -- (9,961)
---------------------------
Income (loss) before income taxes 109,183 (305,600)
Pro forma income tax expense 37,000 --
---------------------------
Pro forma net income (loss) $ 72,183 $ (305,600)
===========================
Pro forma net income (loss) per share:
Basic $ 0.01 ($0.02)
===========================
Diluted $ 0.01 ($0.02)
===========================
Weighted average number of common shares outstanding:
Basic 14,030,260 13,904,757
===========================
Diluted 14,030,260 13,904,757
===========================
See accompanying notes to unaudited consolidated financial statements.
4
ELINEAR, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2002 AND THREE MONTHS ENDED MARCH 31, 2003
Common Stock Additional Total
-------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity (Deficit)
------------------------------------------------------------------
Balances January 1, 2002, 905,000 $ 18,100 $ 1,205,509 $ (909,781) $ 313,828
as previously reported
Exercise of stock options 29,500 590 42,870 -- 43,460
Stock issued for cash, net of costs 33,000 660 59,045 -- 59,705
Stock issued for compensation 95,781 1,916 24,880 -- 26,796
Re-issuance of common stock 5,000 100 (100) -- --
Stock issued in reorganization 12,961,979 259,240 (1,332,204) 759,233 (313,731)
Net loss -- -- -- (231,328) (231,328)
------------------------------------------------------------------
Balances, December 31, 2002, restated 14,030,260 280,606 -- (381,876) (101,270)
Issuance of options for forgiveness of debt -- -- 13,188 -- 13,188
Net income for period -- -- -- 109,183 109,183
------------------------------------------------------------------
Balances, March 31, 2003 (unaudited) 14,030,260 $280,606 $ 13,188 $ (272,693) $ 21,101
==================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
5
eLINEAR, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
-------------------------
(See Note 1)
Cash flows provided used by operating activities:
Net income (loss) $ 109,183 $ (305,600)
Adjustments to reconcile net income (loss) to cash used by
operating activities:
Depreciation 6,526 6,139
Stock issued for compensation -- 8,000
Loss on disposal of property and equipment -- 10,059
Loss on adjustment of assets held for sale to
net realizable value -- 16,749
Changes in assets and liabilities:
Accounts receivable (155,017) (205,315)
Notes receivable (43,500) --
Inventory (175,771) (63,559)
Unbilled services 13,748 873
Other current assets (2,943) (9,869)
Accounts payable 90,219 278,554
Accrued liabilities (55,300) (11,209)
Accrued liabilities due to officers 91,000 --
Deferred revenue (2,500) 17,507
-------------------------
Net used by operating activities (124,355) (257,671)
-------------------------
Cash flows from investing activities:
Purchase of property and equipment -- (25,606)
Deposits (1,304) (2,694)
-------------------------
Net cash used by investing activities (1,304) (28,300)
-------------------------
Cash flows from financing activities:
Proceeds from notes payable due to officers 52,038 200,700
Repayment of notes payable due to officers (25,050) (6,100)
-------------------------
Net cash provided by financing activities 26,988 194,600
-------------------------
Net decrease in cash (98,671) (91,371)
Cash and cash equivalents, beginning of period 140,834 111,545
-------------------------
Cash and cash equivalents, end of period $ 42,163 $ 20,174
=========================
Non-cash transactions:
Issuance of options for forgiveness of debt $ 13,188 $ --
=========================
See accompanying notes to unaudited condensed consolidated financial statements.
6
ELINEAR, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Note 1. Organization and Nature of Business
STATEMENT OF INFORMATION FURNISHED
The accompanying unaudited consolidated financial statements of eLinear,
Inc. and Subsidiaries (the "Company" or "eLinear") have been prepared pursuant
to the rules and regulations for interim financial information and the
instructions to Form 10-QSB and Regulation S-B. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
have been omitted. In the opinion of management, the unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 2003, and the results of operations and cash flows for the three-month
periods ended March 31, 2003 and 2002.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the complete fiscal year. The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2002, previously filed with the Securities and Exchange Commission.
Reclassifications - Amounts in the prior period's financial statements have
been reclassified as necessary to conform to the current period's presentation.
BUSINESS
Effective March 31, 2003, eLinear completed the acquisition of all of the
issued and outstanding shares of NetView Technologies, Inc. ("NetView").
Pursuant to the transaction, eLinear issued an aggregate of 12,961,979 shares to
the five shareholders of NetView. The merger was completed by NetView
Acquisition Corporation, a wholly-owned subsidiary of eLinear, merging with and
into NetView, with NetView as the surviving corporation. The merger became
effective at the time of filing of the certificate of merger with the Texas
Secretary of State, which occurred on April 15, 2003 (the "Effective Date"). As
of the Effective Date, NetView became a wholly-owned subsidiary of eLinear and
NetView Acquisition Corporation ceased its existence. As of April 16, 2003, (a)
Tommy Allen and Carl A. Chase joined the Board of Directors of eLinear, and (b)
the officers of eLinear are as follows: Jon V. Ludwig - chief executive officer;
Kevan M. Casey - president and treasurer, Tommy Allen - executive vice president
of sales and assistant treasurer and J. Leonard Ivins - secretary. The
accompanying financial statements for the year ended December 31, 2002 and for
the three months ended March 31, 2003 have been restated to present the
financial condition and results of operations of the merged companies as if the
merger had occurred at January 1, 2002.
eLinear, Inc. is a technology consulting services firm providing strategic
consulting solutions, creative web site design, web site content management
software, and technical project management and development services to companies
seeking to increase productivity or reduce costs through investing in
technology. The Company's current customers are based in the United States. The
Company has operated a technology consulting business since December of 1999.
The Company acquired its Internet consulting business as a result of a reverse
merger with Imagenuity, Inc. ("Imagenuity") in 1999. Immediately prior to
acquiring the business of Imagenuity, the Company, which at the time was named
Kinetiks.com, Inc. ("Kinetiks.com") did not engage in any business activities
except for negotiating and compromising debt and searching for merger
candidates. While Kinetics.com was the survivor in the merger, from an
accounting standpoint the transaction was accounted for as though it was a
7
recapitalization of Imagenuity and a sale of shares by Imagenuity in exchange
for the net assets of Kinetics.com. On July 31, 2000, the Company changed its
name to eLinear, Inc.
NetView was incorporated in the State of Texas in December 2001 as an
S-Corporation and commenced operations on January 1, 2002. Upon the completion
of the merger, NetView terminated its S-Corporation status for income tax
purposes.
NetView is an advanced information technology solutions company that
provides its customers with network and storage solutions infrastructure and
related services. NetView's focus is on creating long-term recurring revenue
streams from a diverse client base. NetView markets its products and services
through its own direct sales and marketing team, direct mail and trade shows.
NetView sells to entities throughout the United States, however a majority
of its revenue is earned from sales in the State of Texas.
Note 2. Property and Equipment
Property and equipment consist of the following at March 31, 2003 and
December 31, 2002:
March 31, December 31,
2003 2002
---------------------------
Automobile $ 12,806 $ 12,806
---------------------------
Leasehold improvements 2,350 2,350
Computer equipment 46,030 46,030
Furniture and equipment 20,075 20,075
---------------------------
81,261 81,261
Accumulated depreciation (41,671) (35,145)
---------------------------
Net property and equipment $ 39,590 $ 46,116
===========================
Note 3. Related Party Transactions
Notes payable and accrued liabilities due to officers of the Company
consist of the following at March 31, 2003 and December 31, 2002:
March 31, December 31,
2003 2002
-------------------------
Note payable to an officer with interest at 7% per annum and
principal and interest due July 1, 2004, without collateral. $ 122,488 $ 89,000
Note payable to an officer with interest at 7% per annum and
principal and interest due July 1, 2004, without collateral. 144,400 150,900
Accrued liabilities due to officers 155,000 64,000
-------------------------
Total $ 421,888 $ 303,900
=========================
Note 4. Credit Facilities
From time to time, NetView purchases goods distributed by various
manufacturers for resale to customers. To facilitate the purchase of these
goods, NetView has entered into supply purchase agreements with certain vendors.
These agreements generally provide for a dollar threshold for purchases and
repayment terms. Certain of the agreements are collateralized by essentially
all of the assets of NetView and are personally guaranteed by two of the
officers of the Company and their wives. The amount available to the Company
pursuant to these agreements approximate $1,500,000 and the amounts due to these
vendors at March 31, 2003 approximated $1,200,000. These agreements are
subordinate to the Textron agreement discussed below.
8
During the year ended December 31, 2002, NetView entered into a Financing
Agreement with Deutsche Financial Services ("DFS") whereby DFS would extend
credit to NetView to purchase inventory available for resale to its customers.
NetView pays a finance charge equal to the principal amount financed times the
applicable rates for each transaction. This agreement is personally guaranteed
by two of the officers of the Company. As of March 31, 2003, NetView has no
borrowings under this agreement and does not anticipate borrowing under this
agreement as a result of the Textron agreement discussed below. NetView
incurred minimal finance charges pursuant to this agreement for the year ended
December 31, 2002.
On March 25, 2003, NetView entered into a financing agreement with Textron
Financial ("Textron") whereby Textron will finance up to $1 million of inventory
purchases. The agreement calls for interest at prime rate, as quoted in the
Wall Street Journal, plus six percent (6%) and is secured by essentially all the
assets of NetView and the personal guarantees of two officers and their wives.
The agreement requires NetView to maintain certain financial ratios. NetView
was in compliance with these covenants as of March 31, 2003.
Note 5. Commitments and Contingent Liabilities
The Company's executive and administrative offices are located at 7240
Brittmoore, Suite 118, Houston, Texas 77041, which facilities are leased by the
Company from an unaffiliated third party. The Company's lease on these premises
covers approximately 8,100 square feet and expires on October 31, 2004. The
Company is required to make monthly payments of $4,388 for the months of January
and February 2003 and monthly payments of $5,103 for the remainder of the lease.
The Company has no present intent to invest in real estate, real estate
mortgages or persons primarily engaged in real estate activities, however, the
Company may change this policy at any time. Furthermore, the Company believes
that suitable additional or replacement space will be available when required on
terms acceptable to the Company.
The Company will attempt to sublease its previous office space located at
8800 Jameel Road, Suite 170, Houston, Texas 77040. There can be no assurance
that the Company will be successful in subleasing its previous office
facilities.
Future minimum lease payments under the non-cancelable operating leases are as
follows:
Twelve Months Ending March 31,
------------------------------
2004 $ 84,036
2005 49,021
------------
Total $ 133,057
============
Note 6. Common Stock Options and Warrants
Common Stock Warrants
Effective April 15, 2003, certain warrant holders agreed to terminate their
warrant agreements and were issued 134,750 shares of restricted common stock
valued at $0.40 per share. In exchange for the issuance of these shares, the
warrant holders agreed to forgo their rights to register these shares.
9
Note 7. Industry Segments
The Company has adopted the provisions of Statements of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). At March 31, 2003, the Company's two
business units have separate management teams and infrastructures that offer
different products and services.
eLinear, Inc. is a technology consulting services firm providing strategic
consulting solutions, creative web site design, web site content management
software, and technical project management and development services to
companies seeking to increase productivity or reduce costs through investing in
technology.
NetView is an advanced information technology solutions company that
provides its customers with network and storage solutions infrastructure and
related services.
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Dollars ($) eLinear NetView Elimination Consolidated
--------- ---------- ------------ -------------
Revenue 218,455 3,151,142 -- 3,369,597
Segment profit 24,628 84,555 -- 109,183
Total assets 173,495 1,999,443 (10,000) 2,162,938
Capital expenditures -- -- -- --
Depreciation 2,088 3,394 -- 5,483
FOR THE THREE MONTHS ENDED MARCH 31, 2002
Dollars ($) eLinear NetView Elimination Consolidated
--------- ---------- ------------ -------------
Revenue 192,113 712,165 -- 904,278
Segment loss (299,051) (6,549) -- (305,600)
Total assets 213,431 575,262 -- 788,693
Capital expenditures 5,526 20,080 -- 25,606
Depreciation 2,929 1,468 -- 4,396
The accounting policies of the reportable segments are the same. The
Company evaluates the performance of its operating segments based on income
before net interest expense, income taxes, depreciation expense, accounting
changes and non-recurring items.
Note 8. Litigation
From time to time, the Company may become involved in litigation arising in
the ordinary course of its business. The Company is not presently subject to
any material legal proceedings outside of the ordinary course of business except
as set forth below:
On December 16, 1999, eLinear and Imagenuity were served with a complaint
captioned Chris Sweeney v. Kinetics.com, Inc. and Imagenuity, Inc., Circuit
Court, Duval County, Florida, Civil Case Number 1999-7252-CA. The complaint
alleged a breach of an alleged oral modification of a written employment
agreement between the Plaintiff, Chris Sweeney, and Imagenuity and alleged
breaches by eLinear and Imagenuity of fiduciary obligations which the Plaintiff
claims were owed to him. Plaintiff is seeking as damages twenty percent (20%)
of eLinear's common stock received by the sole shareholder of Imagenuity in
connection with the merger of Imagenuity with and into eLinear's subsidiary.
After the filing of the complaint, eLinear's subsidiary, eLinear Corporation,
was added as a Defendant. Management intends to vigorously contest the case.
While the Company believes the case to have no merit, at this stage it is
impossible to predict the amount or range of potential loss, if any.
In December 1999 eLinear counter-sued Chris Sweeney in a lawsuit captioned
eLinear Corporation v. Chris Sweeney, United States District Court, District of
Colorado, Case Number 99-WM-2434. The Complaint sought a determination of the
rights of the parties with respect to the termination of Chris Sweeney's
employment agreement with Imagenuity. The lawsuit was indefinitely stayed
pending resolution of the Florida litigation discussed above.
10
On March 27, 2003, the Company filed a motion to dismiss for failure to
prosecute, since the Plaintiff has failed to file any "record activity" in the
case for a period of more than one year.
Note 9. Significant Concentration
During the three-month period ended March 31, 2003, the Company generated
revenue from 3 customers that represented 44% of total revenue. During the
three-month period ended March 31, 2002, the Company generated revenue from 1
customers that represented 24% of total revenue.
Note 10. Subsequent Events
2003 Stock Option Plan
On April 16, 2003, the Board of Directors adopted the 2003 Stock Option
Plan (the "Plan"), which allows for the issuance of up to 1,500,000 stock
options to directors, executive officers, employees and consultants of the
Company who are contributing to the Company's success. In order to remain fully
effective, the Plan must be approved by the shareholders prior to April 16,
2004. None of the options granted pursuant to the Plan may be exercised unless
and until the Plan is approved by the shareholders. On April 16, 2003, the
Company issued incentive stock options to purchase 100,000 shares of common
stock, exercisable at $0.55 per share that are immediately exercisable to Kevan
M. Casey and issued incentive stock options to purchase 100,000 shares of common
stock, exercisable at $0.55 per share that are immediately exercisable to Tommy
Allen. Also on April 16, 2003, the Company issued nonqualified stock options to
Carl A. Chase to purchase 250,000 shares of common stock, exercisable at $0.50
per share, of which 83,335 vested immediately with the remaining vesting over a
three-year period. All of these issuances were under the Company's 2003 Stock
Option Plan. These issuances are subject to shareholder approval of the 2003
Stock Option Plan.
In April 2003, the Company issued 300,000 restricted shares of its common
stock to an employee pursuant to an exployee agreement. The shares were valued
by the Board of Directors at the fair market value of the Company's common stock
on the date of grant. The Company recorded compensation expense in the amount of
$135,000.
In April 2003, the Company issued 25,000 restricted shares of its common
stock to the Company's former counsel as additional compensation. The shares
were valued by the Board of Directors at the fair market value of the Company's
common stock on the date of grant. The Company recorded compensation expense in
the amount of $11,250.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
The following discussion and analysis of the Company's financial condition as of
March 31, 2003, and the Company's results of operations for the three-month
periods ended March 31, 2003 and 2002, should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2002,
filed with the Securities and Exchange Commission on April 15, 2003.
OVERVIEW
eLinear, Inc. (the "Company" or "eLinear") is a technology consulting
services firm providing strategic consulting solutions, creative web site
design, web site content management software, and technical project management
and development services to companies seeking to increase productivity or reduce
costs through investing in technology. The Company's current customers are
based in the United States. The Company has operated a technology consulting
business since December of 1999. The Company's Internet address is
http://www.elinear.com. Information contained on the Company's web site is not
----------
a part of this report. The Company's stock is traded on the OTC Bulletin Board
under the symbol "ELIN."
Effective April 15, 2003, eLinear completed the acquisition of all of the
issued and outstanding shares of NetView Technologies, Inc. ("NetView").
Pursuant to the transaction, eLinear issued an aggregate of 12,961,979 shares to
the five shareholders of NetView. The merger was completed by NetView
Acquisition Corporation, a wholly owned subsidiary of eLinear, merging with and
into NetView, with NetView as the surviving corporation. The merger became
effective at the time of filing of the certificate of merger with the Texas
Secretary of State, which occurred on April 15, 2003 (the "Effective Date"). As
of the Effective Date, NetView became a wholly owned subsidiary of eLinear and
NetView Acquisition Corporation ceased its existence. As of April 16, 2003, (a)
Tommy Allen and Carl A. Chase will join the Board of Directors of eLinear, and
(b) the officers of eLinear will be as follows: Jon V. Ludwig - chief executive
officer and secretary; Kevan M. Casey - president and treasurer and Tommy Allen
- executive vice president of sales and assistant treasurer.
NetView is a proven Information Technology solutions provider for the
commercial and institutional market. In its first year of operation it
generated $7.7 million in revenue. eLinear has a customer base that includes
small, medium and large corporate and institutional customers in Houston, Texas
and Denver, Colorado. NetView has a customer base that includes medium to large
companies primarily in Houston. Management believes there are opportunities for
the cross-selling of Information Technology services to NetView customers.
It is expected that the merger with NetView will provide the Company the
opportunity to expand its product and service offerings. The Company's Board of
Directors approved the acquisition of NetView through a reverse merger with
NetView, with eLinear as the survivor in the merger and NetView as a wholly
owned subsidiary of eLinear. From an accounting standpoint, the transaction was
accounted for as though it was a recapitalization of NetView and a sale of
shares by NetView in exchange for the net assets of eLinear. The combined
company will be a diversified provider of complete Information Technology
solutions.
12
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth certain operating information regarding the
Company for the three months ended March 31, 2003 and 2002:
March 31,
-----------------------
2003 2002
-----------------------
Revenue $3,369,597 $ 904,278
Cost of sales 2,700,374 868,613
-----------------------
Gross profit 669,223 35,665
Operating expenses 555,646 329,468
-----------------------
Income (loss) from operations 113,577 (293,803)
Other expense (4,394) (11,797)
-----------------------
Income (loss) before income taxes 109,183 (305,600)
Pro forma income tax expense (37,000) --
-----------------------
Pro forma net income (loss) $ 72,183 $(305,600)
=======================
Pro forma net income (loss) per share - basic and diluted $ 0.01 $ (0.02)
=======================
Revenue. Revenue includes all amounts that are billable to customers. For
eLinear's services contracts, revenue is recognized on a time and materials
basis for a time and materials contract, or on a percent to completion basis for
fixed fee contracts. For the Company's network and storage solutions business
through its NetView subsidiary, revenue is recognized when products are shipped
to the customer. Revenue from time and material service contracts is recognized
as the services are provided. Revenue from fixed price contracts is recognized
over the contract term based on the percentage of services provided during the
period compared to the total estimated services to be provided over the entire
contract. Losses on contracts are recognized during the period in which the
loss first becomes probable and reasonably estimable. Losses recognized during
the three-month periods ended March 31, 2003 and 2002 were insignificant.
Revenue recognized in excess of billings is recorded as unbilled services.
Billings in excess of revenue recognized are recorded as deferred revenue until
the above revenue recognition criteria are met.
Total revenue for the three months ended March 31, 2003 was $3,369,597,
which was $2,465,319 better than the prior year period of $904,278. Revenue
from the consulting services business segment for the 2003 period was $218,455,
which was an improvement of $26,342 over revenue for the 2002 period of
$192,113. Revenue generated from the network and storage solutions business
segment through the Company's NetView subsidiary for the 2003 period was
$3,151,142 compared to $712,165 for the 2002 period. NetView began its
operations in the first quarter of 2002. The increase in revenue was a result
of a full three months of sales by NetView during the 2003 period, as well as an
increase in the number of customers and orders that NetView procured during the
period.
Of the revenue generated for the period ended March 31, 2003, 3 customers
provided in excess of 10% of the Company's revenue. The loss of any of these
customers may have an adverse financial effect on the Company.
Cost of sales. Total cost of sales for the three-month period ended March
31, 2003 was $2,700,374, an increase of $1,831,761 over the 2002 period. For
the network and storage solutions business segment, cost of sales is comprised
primarily of the costs associated with acquiring hardware to fill customer
orders and payroll for support personnel. For the consulting services business
segment, cost of sales consists primarily of full-time personnel and contract
employee costs associated with projects the Company provides to its clients for
a fee. The primary component of the increase was the cost of procuring hardware
to fill an expanded number of customer orders. This amounted to $2,563,402 for
the 2003 period. The Company anticipates that cost of sales will increase as
revenue increases.
Gross profit. Total gross profit increased from $35,665 for the three
months ended March 31, 2002, to $669,223 for the three months ended March 31,
2003. The increase in gross profit was a result of an increase in revenue from
13
both the consulting services and network and storage solutions business
segments. Total gross profit as a percentage of revenue increased from 4% for
the 2002 period to 20% for the 2003 period.
Operating expenses. Total operating expenses for the three-month period
ended March 31, 2003, were $555,646, an increase of $226,178 over the 2002
period of $329,468. The Company has added additional personnel in its network
and storage solutions business segment to facilitate the rapid increase in
customer orders and has reduced personnel in its consulting services business
segment, reflecting an increase in the use of subcontractors to execute on
projects as opposed to full-time employees. The net effect was an increase in
payroll and related costs of $158,790. Professional services, which is
comprised of legal, accounting and consulting fees, increased from $65,769 for
the three-month period ended March 31, 2002, to $169,626 for the 2003 period.
Of this amount, $90,000 was invoiced to the Company as consulting fees from two
officers of the Company. The Company does not anticipate incurring such fees
from the officers in the future. Other expenses decreased from $69,151 for the
three-month period ended March 31, 2002, to $28,179 for the 2003 period. The
primary reason for the decrease was due to a reduction in the amount of business
travel expense incurred by the Company in the 2002 period. The Company is
continuing to identify areas whereby it may continue to reduce its overhead
costs during 2003.
Pro forma net income. Pro forma net income for the three months ended
March 31, 2003, after giving effect to the pro forma income tax adjustment, was
$72,183 compared to a pro forma net loss of $305,600 for the 2002 period.
LIQUIDITY AND CAPITAL RESOURCES
The following summary table presents comparative cash flows of the Company
for the three-month periods ended March 31, 2003 and 2002:
March 31
----------------------
2003 2002
----------------------
Net cash used by operating activities $(124,355) $(257,671)
Net cash used by investing activities $ (1,304) $ (28,300)
Net cash provided by financing activities $ 26,988 $ 194,600
Changes in cash flow. The Company currently manages the payment of its
current liabilities and other obligations on a monthly basis, as cash becomes
available. Due to its shortage of cash, the Company reserves all of its
liquidity in order to have the capability to pay its employees and/or
contractors who are generating revenue for the Company at its clients' sites and
to purchase product for its network and storage solutions business segment. Net
cash used by operating activities for the three-month period ended March 31,
2003, was $124,355 compared with $257,671 for the 2002 period. This was an
improvement of $133,316 over the prior year. The primary components of net
cash used by operating activities for the 2003 period were increases in accounts
receivable, notes receivable and inventory and decreases in accrued liabilities,
which were partially offset by increases in accounts payable and accrued amounts
due to two officers of the Company and net income of $109,183. Cash used by
investing activities decreased from $28,300 for the three-moth period ended
March 31, 2002, to $1,304 for the 2003 period.
The Company began the period January 1, 2003 to March 31, 2003 with a cash
balance of $140,834, and ended the period with a cash balance of $42,163,
representing a net cash usage of $98,671 for the period. This is primarily
attributable to the rapid growth in both the number of customers and the size of
customer orders. The rapid growth that the Company experienced in the
aforementioned period and in the subsequent months, has lead to cash shortages.
The Company has been able to borrow funds from its officers to meet these
short-term obligations to date. In order to fund the Company's growth and
expansion, management of the Company is seeking outside investors to secure
working capital such that the Company is able to meet its current obligations on
a consistent basis. There can be no assurances, however, that the Company will
be able to continue to borrow from its officers, or from third parties, at terms
that are acceptable to the Company.
14
Capital resources. The Company has funded its operations through the sale
of common stock and the exercise of employee stock options. During the year
ended December 31, 2002, the Company raised $59,705 from the sale of common
stock and $43,460 from the exercise of stock options. The Company has not sold
any stock and there have been no employee stock options exercised during the
three-month period ended March 31, 2003.
NetView has funded its operations by way of loans from two of its officers.
During the three-month period ended March 31, 2003, NetView borrowed $52,038
from these officers and repaid $25,050. The amount due these officers at March
31, 2003, was $266,888. These notes are due July 1, 2004 and accrue interest at
the rate of 7% per annum. These notes are unsecured. NetView has funded its
purchases of network and storage solutions products primarily through vendor
provided financing arrangements. On March 25, 2003, NetView was able to obtain
a $1 million line of credit to fund purchases of network and storage solutions
product for delivery to customers. This was secured by essentially all of
NetView's assets, as well as by personal guarantees delivered by two of the
Company's officers and their wives.
Liquidity. NetView has various vendor financing arrangements with its
suppliers for the purchase of network and storage solutions product. In
addition, as previously discussed, NetView obtained a $1 million line of credit
from Textron to finance purchases of network and storage solutions products.
Under the terms of the agreement, NetView has 45 days to pay for product
financed by Textron at no interest. After 45 days, NetView must pay interest to
Textron at the annual rate of prime plus six percent (6%).
From time to time, the Company experiences cash flow shortages due to its
rapid rate of growth, and lack of capital resources. Although management of the
Company has been able to manage these shortfalls without interruption to the
business to date, there can be no assurances that this will continue to occur.
Accordingly, the Company is seeking additional working capital to satisfy its
daily operating requirements. There can be no assurances, however, that such
capital will be available on terms that are acceptable to the Company.
At March 31, 2003, the Company had available cash of $42,163 and positive
working capital of $236,915. Management believes that it will begin to generate
positive cash flow from operations during its second fiscal quaretr and believes
that sufficient cash flow from operations will be available during the next
twelve months to satisfy its short-term obligations. If expenses are in excess
of management's estimates or if revenues decline, the Company may need to raise
additional financing to fund operations. If the Company is required to raise
additional financing it will be required to do so on a best efforts basis, as it
currently has no commitments for such funding.
Item 3. Controls and Procedures
With the participation of management, the Company's chief executive officer
and principal accounting officer evaluated the Company's disclosure controls and
procedures on May 15, 2003. Based on this evaluation, the chief executive
officer and the principal accounting officer concluded that the disclosure
controls and procedures are effective in connection with the Company's filing of
its quarterly report on Form 10-QSB for the quarterly period ended March 31,
2003. Subsequent to May 15, 2003, through the date of this filing of Form
10-QSB for the quarterly period ended March 31, 2003, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, including any significant
deficiencies or material weaknesses of internal controls that would require
corrective action.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may become involved in litigation arising in
the ordinary course of its business. The Company is presently not subject to
any material legal proceedings outside of the ordinary course of business except
as set forth below:
On December 16, 1999, eLinear and Imagenuity were served with a complaint
captioned Chris Sweeney v. Kinetiks.com, Inc., Circuit Court, Duval County,
Florida, Civil Case Number 1999-7252-CA. The Complaint alleged a breach of an
alleged oral modification of a written employment agreement between Plaintiff,
Chris Sweeney, and Imagenuity and alleged breaches by eLinear and Imagenuity of
fiduciary obligations that the Plaintiff claims were owed to him. Plaintiff is
seeking as damages twenty percent (20%) of eLinear's common stock received by
the sole shareholder of Imagenuity in connection with the merger of Imagenuity
15
with and into eLinear's subsidiary. After the filing of the Complaint,
eLinear's subsidiary, eLinear Corporation, was added as a Defendant. Management
intends to vigorously contest the case. While the Company believes the case to
have no merit, at this stage it is impossible to predict the amount or range of
potential loss, if any.
In December 1999, eLinear Corporation counter-sued Chris Sweeney in a
lawsuit captioned eLinear Corporation v. Chris Sweeney, United States District
Court, District of Colorado, Case Number 99-WM-2434. The Complaint sought
determination of the rights of the parties with respect to the termination of
Chris Sweeney's employment agreement with Imagenuity. This lawsuit was
indefinitely stayed pending resolution of the Florida litigation discussed
above.
On March 27, 2003, the Company filed a motion to dismiss for failure to
prosecute as a result of the fact that the Plaintiff has failed to file any
"record activity" in the case for a period of more than one year.
Item 2. Changes in Securities and Use of Proceeds.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all issuances of
securities by the Company from January 1, 2003 through May 15, 2003, that were
not registered under the Securities Act.
On April 15, 2003, pursuant to the exemption provided by Rule 506 of
Regulation D of the Securities Act, the Company issued 6,201,371 shares to Nancy
Allen in exchange for 478.4277 shares of NetView Technologies, Inc. in
accordance with the merger agreement dated April 15, 2003.
On April 15, 2003, pursuant to the exemption provided by Rule 506 of
Regulation D of the Securities Act, the Company issued 129,619 shares to Tommy
Allen in exchange for 10 shares of NetView Technologies, Inc. in accordance with
the merger agreement dated April 15, 2003.
On April 15, 2003, pursuant to the exemption provided by Rule 506 of
Regulation D of the Securities Act, the Company issued 300,000 shares to William
Blocher in exchange for 23.1446 shares of NetView Technologies, Inc. in
accordance with the merger agreement dated April 15, 2003.
On April 15, 2003, pursuant to the exemption provided by Rule 506 of
Regulation D of the Securities Act, the Company issued 6,201,370 shares to
Tabitha Casey in exchange for 478.4277 shares of NetView Technologies, Inc. in
accordance with the merger agreement dated April 15, 2003.
On April 15, 2003, pursuant to the exemption provided by Rule 506 of
Regulation D of the Securities Act, the Company issued 129,619 shares to Kevan
M. Casey in exchange for 10 shares of NetView Technologies, Inc. in
accordance with the merger agreement dated April 15, 2003.
On April 15, 2003, pursuant to Section 4(2) of the Securities Act, the
Company issued 25,000 shares for legal services valued at $11,250.
On April 15, 2003, pursuant to Section 4(2) of the Securities Act, the
Company issued 134,750 shares to certain warrant holders in consideration of
termination of their warrant agreements valued at $53,900.
The above transactions were completed pursuant to either Section 4(2) of
the Securities Act or Rule 506 of Regulation D of the Securities Act. With
respect to issuances made pursuant to Section 4(2) of the Securities Act, the
transactions did not involve any public offering and were sold to a limited
group of persons. Each recipient either received adequate information about the
Company or had access, through employment or other relationships, to such
information, and the Company determined that each recipient had such knowledge
and experience in financial and business matters that they were able to evaluate
the merits and risks of an investment in the Company.
With respect to issuances made pursuant to Rule 506 of Regulation D of the
Securities Act, the Company determined that each purchaser was an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
16
All sales of the Company's securities were made by officers of the Company
who received no commission or other remuneration for the solicitation of any
person in connection with the respective sales of securities described above.
The recipients of securities represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits of the Company are included herein.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated October 11, 1999, between
Registrant, eLinear Corporation and Imagenuity, Inc.
(incorporated by reference to Exhibit A-1 to Registrant's Current
Report on Form 8-K, dated October 25, 1999)
2.2 Agreement and Plan of Merger, dated April 15, 2003, between
Registrant, NetView Acquisition Corp. and NetView Technologies,
Inc. (incorporated by reference to Exhibit 2.2 to Registrant's
Annual Report on form 10-KSB, dated April 15, 2002)
3.1 Articles of Incorporation of Registrant (incorporated by reference
to Registrant's Form 10-KSB for the period ended December 31, 1995)
3.2 Bylaws of Registrant (incorporated by reference to Registrant's
Form 10-KSB for the period ended December 31, 1995)
3.3 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Registrant's Form 10-QSB for the
period ended June 30, 2000)
4.1 Specimen of Registrant's Common Stock Certificate (incorporated by
reference to Registrant's Form 10-KSB for the period ended December
31, 1995)
10.1 Employment Agreement with Jon V. Ludwig (incorporated by reference
to Exhibit 10.1 to Registrant's Annual Report on Form 10-KSB, dated
April 15, 2003)
10.2 Employment Agreement with Kevan M. Casey (incorporated by
reference to Exhibit 10.2 to Registrant's Annual Report on Form
10-KSB, dated April 15, 2003)
10.3 Employment Agreement with Tommy Allen (incorporated by reference
to Exhibit 10.3 to Registrant's Annual Report on Form 10-KSB, dated
April 15, 2003)
10.4 2000 Stock Option Plan (incorporated by reference to Exhibit 4.1
to Registrant's Definitive Proxy Statement on Schedule 14A, dated
June 30, 2000)
10.5 Amendment No. 1 to Registrant's 2000 Stock Option Plan
(incorporated by reference to Exhibit 4.2 to Registrant's Form S-8,
dated July 31, 2001)
10.6 Asset Purchase Agreement dated August 31, 2000, among eLinear,
Inc., eLinear Corporation, Innobar, LLC, Jay Vickers and John
Kaercher (incorporated by reference to Registrant's Form 10-QSB
filed with the Commission on October 24, 2000)
10.7 Form of Indemnification Agreement for all officers and directors
of Registrant (incorporated by reference to Registrant's Form
10-QSB filed with the Commission on October 24, 2000)
10.8 Agreement between eLinear, Inc. and Jon Ludwig dated April 15,
2003 (incorporated by reference to Exhibit 10.9 to Registrant's
Annual Report on Form 10-KSB, dated April 15, 2003)
10.9 Agreement between eLinear, Inc. and J. Leonard Ivins dated April
15, 2003 (incorporated by reference to Exhibit 10.10 to
Registrant's Annual Report on Form 10-KSB, dated April 15, 2003)
21.1 Subsidiaries of Registrant (incorporated by reference to Exhibit
21.1 to Registrant's Annual Report on Form 10-KSB, dated April 15,
2003)
99.1 Certification for Sarbanes-Oxley Act of Jon V. Ludwig
99.2 Certification for Sarbanes-Oxley Act of Kevan M. Casey
(b) Reports on Form 8-K. - Registrant filed a report on Form 8-K on
April 25, 2003, disclosing events pursuant to Item 9 (Regulation FD Disclosure)
and Item 12 (Results of Operations and Financial Condition) of Form 8-K. As
part of Exhibit 99.1 to such report, the Company released condensed financial
statements for the year ended December 31, 2002.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
Signature Title Date
--------------------------- --------------------------- ----------------
/s/ Jon V. Ludwig Chief Executive Officer May 20, 2003
--------------------------- and Director
Jon V. Ludwig
/s/ Kevan M. Casey President and Principal May 20, 2003
--------------------------- Accounting Officer
Kevan M. Casey
19
I, Jon V. Ludwig, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of eLinear, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003
/s/ Jon V. Ludwig
--------------------
Jon V. Ludwig,
Chief Executive Officer
20
I, Kevan M. Casey, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of eLinear, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003
/s/ Kevan M. Casey
---------------------
Kevan M. Casey,
President and Principal Accounting Officer
21