ASTN's 10Q:
freeedgar.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
*NOTE THIS IS ONLY A PORTION OF THE 10Q DUE TO THE LIMITATIONS OF THE MESSAGE BOARDS. PLEASE GO TO THE LINK ABOVE TO READ THE 10Q IN ITS ENTIRETY.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is engaged in the development and commercialization of on-line
transaction systems for participants in the U.S. and international financial
markets. The Company was founded in 1994 to take advantage of commercial
opportunities through the application of advanced telecommunication and
computing technologies to the area of financial and electronic commerce
("e-commerce"). The Company is currently organized as a parent company, which
has four subsidiaries:
. Universal Trading Technologies Corporation ("UTTC") and its three
subsidiaries:
REB Securities, Inc. ("REB")
Croix Securities, Inc. ("Croix")
NextExchange, Inc. ("NextExchange")
. Gomez Advisors, Inc. ("Gomez")
. Electronic Market Center, Inc. ("EMC")
. ATG (TM) International, Inc. ("International")
For the quarters ended September 30, 1999 and 1998, Gomez generated
substantially all of the Company's revenues. Gomez provides information and
research to individuals and businesses that want to effectively and efficiently
transact e-commerce online.
On March 24, 1999, the SEC approved the Philadelphia Stock Exchange's ("PHLX")
proposed rule change allowing the Company to begin implementation of the
eVWAP(TM) trading system. On August 27, 1999, Ashton began a controlled, live
trading period of its eVWAP(TM) on the PHLX with a group of PHLX floor
specialists and "upstairs" customers involving twenty (20) listed equity
securities. This initial trading period has successfully met management's
expectations for the first phase rollout of the eVWAP(TM) trading system.
Highlights from the 41 trading days beginning on August 27, 1999 and ending on
October 25, 1999 include:
. Successful integration of electronic connectivity among 13 users;
. Demonstrated ability to provide electronic back office (T+3) straight
through processing for the floor specialists;
. eVWAP(TM) match engine processed and reported matched trades within 15
seconds;
. Received and processed 7.5 million shares through the system in 20
securities; and
. Matched over 2.6 million shares resulting in match efficiency in excess
of 30%.
Management anticipates the second phase of the eVWAP(TM) trading system rollout
to commence by the end of November 1999 with the addition of participants and
eligible securities. This next phase of the rollout is expected to integrate up
to eight national clearing firms, which is expected to allow over 20
institutions and broker-dealers to participate in the system. This phase is
intended to solidify the electronic integration of geographically diverse
customers through their clearing agents, which is a prerequisite of the PHLX for
an effective electronic straight through processing system. The third stage of
the rollout is expected to provide the connectivity to the larger institutions
and brokers-dealers, who aggregate orders from multiple locations, and will
demonstrate eVWAP(TM) volume growth and liquidity.
The Company's limited operating history and dependence upon the operation of its
eVWAP(TM) make the prediction of future operating results difficult. Although
the Company has activated its eVWAP(TM) and attempted to develop additional
sources of revenue, there can be no assurance that the Company will generate the
anticipated revenues from the operation of the eVWAP(TM) or other sources.
The Company intends to continue to increase its investments in research and
development, sales and marketing and related infrastructure. Such increases will
be dependent upon factors including, but not limited to, operation of the
eVWAP(TM), success in hiring the appropriate personnel, market acceptance of the
Company's products, and development of a revenue stream from the Company's
products. Due to such anticipated increases in the Company's operating expenses,
the Company's operating results may be materially and adversely affected.
13
At September 30, 1999, the Company's consolidated total assets were $32,931,079,
compared to $5,653,737 at March 31, 1999. Current assets at September 30, 1999
totaled $29,563,760 and current liabilities were $1,881,102. Stockholders'
equity at September 30, 1999 increased to $23,549,977 from $4,444,978 at March
31, 1999 due to the issuance of 20,000 shares of its Series F Preferred Stock
for gross proceeds of $20,000,000, the issuance of 1,582,685 shares of its
common stock for proceeds of $7,908,713 in connection with the Company's Private
Equity Line of Credit Agreement (see "Notes to Unaudited Consolidated Financial
Statements - Stockholders' Equity), and the exercise of stock options and
warrants. The increase in stockholders' equity resulting from the issuance of
stock was partially offset by the net loss applicable to common stock of
$7,468,111 and net issuance costs of approximately $1,300,000.
Results of Operations
For the Three Months Ended September 30, 1999 and 1998
The net loss applicable to common stock totaled $5,727,261 or $.24 per share for
the three months ended September 30, 1999, and $8,959,607 or $.99 per share for
the three months ended September 30, 1998. The Company incurred a net loss of
$4,695,074, or $.19 per share for the three months ended September 30, 1999,
compared to a net loss of $7,229,723, or $.80 per share for the three months
ended September 30, 1998.
The Company's revenues totaled $1,057,508 for the three months ended September
30, 1999, and $208,390 for the three months ended September 30, 1998. UTTC
generated $12,717 from the operation of eVWAP(TM) during the three months ended
September 30, 1999 and Gomez generated the balance of the revenues. The revenues
in the three months ended September 30, 1998 were generated entirely by Gomez.
In the three months ended September 30, 1999, $526,085 or 50% of Gomez's
revenues were from subscriptions and related data and analysis services from its
GomezPro web site, which it began selling in March 1999. For the same period,
Gomez generated $334,473 in advertising and sponsorship revenues and listing
fees paid by vendors to be listed in its Vendor Showcase. Consulting and
advisory service revenues for the period declined as a percentage of total
revenues from the three months ended September 30, 1998 due to Gomez's
introduction of its GomezPro web site and Research Station as new sources of
revenue. Total consulting and advisory service revenues were $174,390 or 17% of
Gomez's revenues in the three months ended September 30, 1999, compared to
$175,500 or 84% of revenues in the three months ended September 30, 1998.
The costs of revenues represent salaries associated with the delivery of Gomez's
consulting and advisory services, and amounts paid in connection with lead
generations. Costs of revenues for the three months ended September 30, 1999
were $71,442 or 6.8% of total revenues, compared to $56,000 or 26.9% of revenues
for the three months ended September 30, 1998. The decrease as a percent of
total revenues is primarily due to the decline in consulting and advisory
revenues as a percent of the Company's total revenues.
During the three-month periods ended September 30, 1999 and 1998, the Company
amortized system development costs related to the eVWAP(TM) totaling $47,915 and
$47,677, respectively. The Company has not capitalized computer software costs
related to the eVWAP(TM) since the second quarter of fiscal 1999, when the
application development stage of the eVWAP(TM) was completed. As of September
30, 1999, the capitalized computer software asset has been completely amortized.
Depreciation and amortization expense includes depreciation of property and
equipment, comprised primarily of computer equipment, and amortization of
intangible assets. Depreciation and amortization for the three months ended
September 30, 1999 increased to $275,416 from $93,853 for the three months ended
September 30, 1998, due to an increase in the computer equipment purchased.
Capital expenditures increased to approximately $685,000 for the three months
ended September 30, 1999 compared to approximately $190,000 in the same period
last year. The increase is primarily due to Gomez's purchase of computer
equipment and software to accommodate additional staff and to support the
increased traffic on their web site and network servers. The level of capital
expenditures is expected to increase as the Company moves to replace hardware
originally purchased in 1996, expand the operation of the eVWAP(TM) trading
system, and to develop additional trading systems.
14
In February 1998, the Company entered into a consulting agreement with
Continental Capital & Equity Corporation ("Continental") whereby the Company
issued 300,000 shares of common stock, with a fair value of $475,125, in
exchange for promotional services through February 1999. During August 1998, the
Company amended the consulting agreement with Continental whereby the Company
issued 250,000 additional shares of common stock, with a fair market value of
$416,657, in exchange for additional promotional services and a reduction in
cash payments required pursuant to the previous consulting agreement. The
Company recorded the deferred consulting expenses in 1998 and 1999 as a
reduction to stockholders' equity. During the three months ended September 30,
1999, $135,989 was reflected as a non-cash compensation charge for the
amortization of deferred consulting expenses, compared to $144,531 during the
three months ended September 30, 1998. The deferred consulting expense relating
to this agreement was fully amortized as of September 30, 1999.
During the three months ended September 30, 1998, the Company entered into
employment agreements with Julio Gomez, John Robb and Alexander Stein. Pursuant
to the employment agreements, an aggregate of 3,000,000 options were granted at
an exercise price of $.01 per share. In addition, 1,400,000 options with an
exercise price of $.01 per share were granted to certain officers and directors
of ATG. During the three months ended September 30, 1998, Gomez and the Company
recognized a non-cash compensation charge of $4,367,809 to reflect the
difference between the estimated fair market value of the vested Gomez stock
options at the date of grant and the exercise price of those options. Those
options were exchanged for Gomez common stock on January 22, 1999 pursuant to an
exchange agreement among Gomez, ATG, and other persons affiliated with them.
Also during the three months ended September 30, 1998, the Company incurred a
non-cash compensation charge of $258,327 related to the issuance of non-employee
stock options to consultants and professional advisors.
Selling, general and administrative expenses ("SG&A") totaled $5,070,154 and
$2,509,889 for the three-month periods ended September 30, 1999 and 1998,
respectively. For the period ended September 30, 1999, Gomez's SG&A totaled
$2,881,030, or 57% of the Company's total SG&A, compared to $575,876 or 23% in
the three months ended September 30, 1998. The increase in Gomez's SG&A was due
primarily to the growth in staff and related expenses incurred in building
Gomez's infrastructure, and increased advertising and marketing costs related to
introduction of new products and services.
Excluding Gomez, the Company's SG&A for the three months ended September 30,
1999 totaled $2,189,124 compared to $1,934,013 during the three months ended
September 30, 1998. The increase in SG&A is primarily a result of the growth in
staff and is partially offset by decreases in consulting and professional fees.
As of September 30, 1999, ATG and UTTC employed a total of 30 employees compared
to 21 employees at September 30, 1998.
Interest income increased to $264,966 for the three months ended September 30,
1999 from $39,973 for the three months ended September 30, 1998, as a result of
the higher cash and cash equivalents and investments available for sale
balances. (see "Liquidity and Capital Resources"). Other expense for the three
months ended September 30, 1999 is comprised of a charge of $416,632 for the
value of UTTC stock issued to one of the Company's former directors in
satisfaction of the terms of an agreement executed on June 29, 1999 between the
former director and the Company.
For the Six Months Ended September 30, 1999 and 1998
The net loss applicable to common stock totaled $8,500,298 or $.37 per share for
the six months ended September 30, 1999, and $14,703,052 or $1.68 per share for
the six months ended September 30, 1998. The Company incurred a net loss of
$7,468,111, or $.32 per share for the six months ended September 30, 1999,
compared to a net loss of $9,042,909, or $1.03 per share for the six months
ended September 30, 1998.
The Company's revenues totaled $1,879,547 and $651,952 for the six months ended
September 30, 1999 and 1998, respectively. UTTC generated $12,717 from the
operation of eVWAP(TM) during the six months ended September 30, 1999 and Gomez
generated the balance of the revenues. The revenues in the six months ended
September 30, 1998 were generated entirely by Gomez.
15
In the six months ended September 30, 1999, $662,919 or 36% of Gomez's revenues
were from subscriptions and related data and analysis services from its GomezPro
web site, which it began selling in March 1999. For the six-month periods ended
September 30, 1999 and 1998, Gomez generated $642,621 and $244,952,
respectively, in advertising and sponsorship revenues and listing fees paid by
vendors to be listed in its Vendor Showcase. Consulting and advisory service
revenues declined as a percentage of total revenues due to Gomez's introduction
of its GomezPro web site and Research Station as new sources of revenue. Total
consulting and advisory service revenues were $497,601 or 27% of Gomez's
revenues in the six months ended September 30, 1999, compared to $394,000 or 60%
of revenues in the three months ended September 30, 1998.
The costs of revenues represent salaries associated with the delivery of Gomez's
consulting and advisory services, and amounts paid in connection with lead
generations. Costs of revenues for the six months ended September 30, 1999 were
$130,630 or 6.9% of total revenues, compared to $90,000 or 13.8% of revenues for
the six months ended September 30, 1998. The decrease as a percent of total
revenues is primarily due to the decline in consulting and advisory revenues as
a percent of the Company's total revenues.
During the six-month periods ended September 30, 1999 and 1998, the Company
amortized system development costs related to the eVWAP(TM) totaling $95,592 and
$95,354, respectively. The Company has not capitalized computer software costs
related to the eVWAP(TM) since the second quarter of fiscal 1999, when the
application development stage of the eVWAP(TM) was completed. As of September
30, 1999, the capitalized computer software asset has been completely amortized.
Depreciation and amortization expense includes depreciation of property and
equipment, comprised primarily of computer equipment, and amortization of
intangible assets. Depreciation and amortization for the six months ended
September 30, 1999 increased to $413,084 from $186,629 for the six months ended
September 30, 1998, due to an increase in the computer equipment purchased.
Capital expenditures increased to approximately $1,460,000 for the six months
ended September 30, 1999 compared to approximately $383,000 in the same period
last year. The increase is primarily due to Gomez's purchase of computer
equipment and software to accommodate additional staff and to support the
increased traffic on their web site and network servers. The level of capital
expenditures is expected to increase as the Company moves to replace hardware
originally purchased in 1996, expand the operation of the eVWAP(TM) trading
system, and to develop additional trading systems.
During the six months ended September 30, 1999 and 1998, $285,208 and 289,062,
respectively, was reflected as a non-cash compensation charge for the
amortization of deferred consulting expenses in connection with the common stock
issued to Continental described above. The deferred consulting expense relating
to the agreement with Continental was fully amortized as of September 30, 1999.
Gomez and the Company recognized a non-cash compensation charge of $4,367,809 in
the six months ended September 30, 1998 to reflect the difference between the
estimated fair market value at the date of grant and the exercise price of the
Gomez stock options issued to Julio Gomez, John Robb, Alexander Stein and
certain officers and directors of ATG(TM). Also during the six months ended
September 30, 1998, the Company incurred a non-cash compensation charge of
$258,327 related to the issuance of non-employee stock options to consultants
and professional advisors.
Selling, general and administrative expenses ("SG&A") totaled $8,359,408 and
$4,483,121 for the six-month periods ended September 30, 1999 and 1998,
respectively. For the six months ended September 30, 1999, Gomez's SG&A totaled
$4,451,300, or 53% of the Company's total SG&A, compared to $1,022,312 or 23% in
the six months ended September 30, 1998. The increase in Gomez's SG&A was due
primarily to the growth in staff and related expenses incurred in building
Gomez's infrastructure, and increased advertising and marketing costs related to
introduction of new products and services.
Excluding Gomez, the Company's SG&A for the six months ended September 30, 1999
totaled $3,908,108 compared to $3,460,809 during the six months ended September
30, 1998. The increase in SG&A is primarily a result of the growth in staff of
ATG(TM) and UTTC(TM), and is partially offset by decreases in consulting and
professional fees.
16
Interest income increased to $352,896 for the six months ended September 30,
1999 from $75,441 for the six months ended September 30, 1998, as a result of
the higher cash and cash equivalents and investments available for sale
balances. (see "Liquidity and Capital Resources"). Other expense for the six
months ended September 30, 1999 is comprised of a charge of $416,632 for the
value of UTTC(TM) stock issued to one of the Company's former directors in
satisfaction of the terms of an agreement executed on June 29, 1999 between the
former director and the Company.
Liquidity and Capital Resources
At September 30, 1999, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $18,026,173 and investments available for sale of
$9,969,740, compared to cash and cash equivalents of $2,667,347 at March 31,
1999. The increase in cash and cash equivalents and investments available for
sale is primarily a result of the following transactions: (i) in August 1999,
ATG(TM) completed a private placement of 20,000 shares of its Series F
Convertible Preferred Stock for gross proceeds of $20,000,000; (ii) in June
1999, UTTC(TM) completed a private placement of its Series TK Convertible
Preferred Stock for gross proceeds of $2,000,000; and (iii) in April 1999, Gomez
completed a private placement of its 6% Series B Convertible Preferred Stock for
gross proceeds of $5,500,000. (see "Notes to Unaudited Consolidated Financial
Statements -Certain Transactions").
On April 3, 1998, the Company entered into the Private Equity Agreement with the
Private Equity Investors, which provided for an aggregate commitment of
$18,000,000 to the Company, subject to the satisfaction of certain conditions
(see "Notes to Unaudited Consolidated Financial Statements - Stockholders'
Equity"). During the quarter ended September 30, 1999, the Company drew down
$5,750,000 under the agreement, reaching the aggregate commitment of
$18,000,000.
The Company believes, on a forward-looking basis, it will begin to generate more
significant revenues, in addition to those generated by Gomez, during its fiscal
year ending March 31, 2000. The level and timing of such revenue is dependent
upon, among other factors, the Company's assumptions regarding (i) the rollout
of the eVWAP(TM) trading system implementation; (ii) the trading volume
experienced by the eVWAP(TM) trading system; and (iii) the pricing the Company
is able to obtain for eVWAP(TM) trade execution. Until adequate revenue is
derived from the eVWAP(TM) trading system, the Company's cash and cash
equivalents, investments and cash flow from operations will be sufficient to
meet the presently anticipated cash requirements of the Company for a period of
approximately twenty-four (24) months.
The Company's future capital requirements will depend on many factors, including
the timing for the implementation of the next phases of the eVWAP(TM) trading
system, market acceptance of the Company's products, the timing and extent of
spending to support new product development efforts and the timing of
introductions of new products and enhancements to existing products. The Company
may need additional financing in the future if (i) the Company experiences
unexpected costs, (ii) there are delays in the continued expansion of the
eVWAP(TM), or (iii) the Company fails to successfully develop markets for its
products. The Company and its subsidiaries will also require additional
financing to fund development of its products and launch the Canadian and Asian
joint ventures. Such financing may be raised through spin-offs, additional
equity offerings, borrowings, or other collaborative relationships, which may
require Ashton to share ownership of its subsidiaries, joint ventures, and/or
revenue from products. There can be no assurance that additional equity or debt
financing, if required, will be available on acceptable terms or at all.
Year 2000 Computer Compliance
The Company has assessed the potential impact of what is commonly referred to as
the "Year 2000" or "Y2K" issue, concerning the inability of certain information
systems and automated equipment to properly recognize and process dates
containing the Year 2000 and beyond. If not corrected, these systems and
equipment could fail or create erroneous results. The Company is subject to the
potential impact of the Y2K issue due to the nature of financial information and
the potential impacts which may arise from software, hardware, and equipment
both within the Company's direct control and outside of the Company's control.
17
The Company views its Y2K risks as arising from three primary sources: (i)
internal software, hardware and equipment utilized in the operations of the
Company; (ii) applications the Company has developed or is developing for use by
its customers; and (iii) third parties with which the Company has material
relationships.
State of Readiness. The Company has determined that none of its critical
internal systems and equipment presents Y2K issues. The Company is continuously
acquiring and replacing both hardware and software and is obtaining Y2K
compliance certifications with such purchases. The Company's systems interface
electronically and operationally with software, hardware and equipment outside
of the Company's control. The Company also contracts with third parties for such
services as telecommunications. These third party vendors with whom the Company
has material agreements are primarily large, publicly traded organizations. The
Company is reviewing the publicly available Y2K disclosures of these vendors;
however there can be no assurance that the Company will not be adversely
affected by the failure of these third parties to become Y2K compliant. The
Company is not independently verifying the Y2K compliance of these vendors.
The Company has also determined that none of the applications it has developed
for use by its customers present Y2K issues. In addition, the Company's
customers cannot enter or export non-Y2K compliant dates into the eVWAP(TM) and
all eVWAP(TM) business partners interact with the eVWAP(TM) via Y2K compliant
interfaces.
On October 9, 1999, ATG(TM) and the PHLX completed joint Y2K testing of the
eVWAP(TM) consisting of live order flow, execution, pricing, and settlement. The
testing included multiple user types, multiple trading accounts, enrolled and
adhoc commitments, matching and non-matching trades, queued orders, back office
systems, and other system functionality. The results of the testing were in
compliance with the test criteria.
Risks. Since the Company's eVWAP(TM) trading system has been activated on a
limited basis with a limited number of users, the potential liabilities and
costs associated with the Y2K compliance issue cannot be estimated with
certainty at this time. The potential costs, including any potential loss of
revenue, would be dependent upon several factors including, but not limited to,
the volume transacted through the Company's products, the Y2K readiness of
customers utilizing the Company's products and the concentration of volume among
the Company's customers. Because of these uncertainties regarding others, there
can be no assurance that the Y2K issue will not have a material financial impact
on our business, results of operations and financial condition in any future
period.
More recently, the Company has encountered some delays in deploying its eVWAP
trading system with potential users as a result of Y2K. This situation has, in
some instances, been referred to as the "Y2K slowdown". The Y2K slowdown
involves organizations "locking down" their existing systems and refusing to
introduce new systems, hardware, or technology into operation during the
millennium transition period. During the "lock down" phase, organizations are
not introducing new technology and are deploying technical resources to the
remediation and testing phases of their Y2K plans as they enter the final
quarter of 1999. As a result of these "lockdowns" the Company may encounter
additional delays in deploying its eVWAP with certain potential users. In
addition, there can be no assurance these potential users will become Y2K
compliant and won't extend their "lock down" periods.
Costs. To date, the Company has not incurred any material costs in identifying,
evaluating or resolving Y2K compliance issues and expects any additional costs
incurred to complete its review will be immaterial. However, the costs incurred
to address this issue could become material if the Company identifies non-
compliant systems and third-party technology which must be replaced or modified,
or if the Company identifies any other problems related to the Y2K issue which
must be addressed.
Contingency Plan. Because of the factors described above, the Company has no
Y2K contingency plan and does not intend to develop such a plan at this time.
Should the Company become aware that certain products or services provided by
third parties or the customers utilizing the Company's products, are not Y2K
compliant, then the Company will develop contingency plans for those affected
services and vendors.
*NOTE THIS IS ONLY A PORTION OF THE 10Q DUE TO THE LIMITATIONS OF THE MESSAGE BOARDS. PLEASE GO TO THE LINK TO READ THE 10Q IN ITS ENTIRETY. |
