10QSB 1 edge10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _________________ Commission file number: 0-20995 EDGE TECHNOLOGY GROUP, INC. (Exact name of small business issuer as specified in its charter) DELAWARE 13-3778895 (State or other jurisdiction (IRS Employer incorporation or organization) Identification No.) 901 YAMATO ROAD, SUITE 175, BOCA RATON, FLORIDA 33431 (Address of principal executive offices) (214) 999-2245 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) 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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of April 15, 2001 the issuer had 16,016,335 shares of Common Stock outstanding. EDGE TECHNOLOGY GROUP, INC. TABLE OF CONTENTS PART I FINANCIAL INFORMATION ITEM 1. Financial Statements: Balance Sheets as of December 31, 2000 and March 31, 2001 (unaudited)...................... 3 Unaudited Statements of Operations for the Three Months Ended March 31, 2001 and 2000...... 4 Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000...... 5 Notes to Unaudited Interim Financial Statements...................................... 6 ITEM 2. Management's Discussion and Analysis or Plan of Operations.............................. 7-12 PART II OTHER INFORMATION ITEM 1. Legal Proceedings............................... 13 ITEM 2. Changes in Securities and Use of Proceeds....... 13 ITEM 3. Defaults Upon Senior Securities................. 14 ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 15 ITEM 5. Other Information............................... 15 ITEM 6. Exhibits and Reports on Form 8-K................ 16-18 Signatures.............................................. 20 2 EDGE TECHNOLOGY GROUP, INC. BALANCE SHEETS December 31, March 31, 2000 2001 ------------ ------------ ASSETS (unaudited) Current Assets: Cash and cash equivalents........ $ 169,846 $ 82,984 Accounts receivable.............. 13,504 6,056 Inventories...................... 9,096 9,804 Prepaid expenses - advance royalties....................... 5,024 -- Other current assets............. 85,390 78,155 ----------- ----------- Total current assets........ 282,860 176,999 Fixed Assets, net................ 67,394 44,102 Other Assets..................... -- 14,906 Investment - Related Party....... 4,587,262 4,587,262 Note Receivable.................. 1,400,000 1,400,000 ----------- ----------- Total Assets........... $ 6,337,516 $ 6,223,269 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................. $ 390,991 $ 371,021 Accrued expenses................. 345,011 430,065 Other current liabilities........ 73,496 42,719 Notes Payable-related parties.... -- 939,000 ----------- ----------- Total Current Liabilities... 809,498 1,782,805 Notes Payable-related parties.... 839,000 -- ----------- ----------- Total Liabilities...... $ 1,648,498 $ 1,782,805 =========== =========== Stockholders' Equity: Common Stock, $.01 par value, 22,500,000 shares authorized, 16,016,335 shares issued and outstanding at December 31, 2000 and March 31, 2001................. 160,163 160,163 Additional paid in capital.......... 37,978,720 38,090,637 Deferred stock option compensation...................... (316,696) (287,008) Accumulated deficit................. (33,133,169) (33,523,328) ----------- ----------- Total Stockholders' Equity Total liabilities and .......... 4,689,018 4,440,464 ----------- ----------- stockholder's equity.......... $ 6,337,516 $ 6,223,269 =========== =========== The accompanying notes are an integral part of these financial statements. 3 EDGE TECHNOLOGY GROUP, INC. STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended March 31, -------------------------- 2000 2001 ----------- ------------- Sales................................ $ 105,252 $ 100,055 Cost of Sales........................ 203,585 32,148 ---------- ----------- Gross Profit (Loss).................. (98,333) 67,907 ---------- ----------- Operating Expenses: General and administrative...... 358,071 398,138 Selling and marketing........... 113,321 40,289 ---------- ----------- Total operating expenses... 471,392 438,427 ---------- ----------- Operating loss............. (569,725) (370,520) ---------- ----------- Other income (Expense): Interest income................. 1,860 700 Interest expense................ (83,956) (18,116) Amortization of deferred financing fees................. (43,690) -- Gain (loss) on sale of fixed assets......................... (63,032) 589 Financing fees.................. (2,773) (2,813) ---------- ----------- Total other income (expense).................. (191,591) (19,640) ---------- ----------- Net loss................... (761,316) (390,160) Provision for Preferred Stock Dividends 123,750 -- ---------- ----------- Net loss to common stockholders...... $(885,066) $ (390,160) ========= =========== Net loss per share, basic and diluted............................. $ (0.34) $ (0.02) ========= =========== Weighted average common shares outstanding........................ 2,598,832 16,016,335 ========== =========== The accompanying notes are an integral part of these financial statements. 4 EDGE TECHNOLOGY GROUP, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, ----------------------- 2000 2001 ---------- ---------- Operating activities: Net loss................................ $(761,316) $(390,160) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash stock compensation expense........................... -- 141,605 Depreciation and amortization...... 169,169 9,706 Amortization of deferred financing expenses.......................... 43,690 -- Loss (gain) on disposal of fixed 63,032 (589) assets............................ Changes in assets and liabilities: Decrease in accounts receivable................... 30,131 7,448 Decrease in other current assets....................... 27,751 7,235 Decrease in prepaid expense - advance royalties............ 5,194 5,024 Decrease (increase) in inventories.................. 3,376 (708) Increase in other assets -- (14,906) Decrease in accounts payable.. (33,515) (19,970) Increase in accrued expenses.. 84,464 85,054 (Decrease) increase in other current liabilities.......... 95,211 (30,777) --------- --------- Net cash used in operating activities....... (272,813) (201,038) --------- --------- Investing activities: Capital expenditures............... (13,403) -- Proceeds from the sale of assets... 77,405 14,176 Proceeds from the sale of short-term investments............ 200,000 -- --------- --------- Net cash provided by investing activities................... 264,002 14,176 --------- --------- Financing activities: Repayment of borrowings............ (210,111) -- Borrowings on short-term notes payable, net...................... 209,682 100,000 --------- --------- Net cash (used in) provided by financing activities......... (429) 100,000 --------- --------- Net change in cash and cash equivalents.................. (9,240) (86,862) --------- --------- Cash and cash equivalents at beginning of period................... 19,724 169,846 --------- --------- Cash and cash equivalents at end of period................................ $ 10,484 $ 82,984 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest............. $ 2,043 $ 237 ========= ========= The accompanying notes are an integral part of these financial statements. 5 EDGE TECHNOLOGY GROUP, INC. NOTES TO FINANCIAL STATEMENTS UNAUDITED (1) BASIS OF PRESENTATION The financial statements included herein have been prepared by Edge Technology Group, Inc. ("Edge" or the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited financial statements include all necessary adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company. The results of operations and cash flows for the three month period ended March 31, 2001 are not necessarily indicative of the results of operations or cash flows that may be reported for the year ended December 31, 2001. The unaudited financial statements included herein should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Form 10-KSB for the year ended December 31, 2000. (2) Uncertainty of Proposed Plan of Operation The Company has suffered recurring losses from operations and has an accumulated deficit of approximately $33.5 million at March 31, 2001. The Company's recent focus on information technology consulting services, business process software applications and application services is a new business concept for the Company and the Company cannot predict the nature and extent of demand for its services. During the past two years Edge has experienced declining sales and increasing operating losses. Should this trend continue, it will be necessary to secure additional financing to continue operations. There can be no assurance that any additional financing will be available on acceptable terms. Should Edge be unable to obtain additional financing, it may be unable to develop, enhance, and market products, retain qualified personnel, take advantage of future opportunities, respond to competitive pressures, or continue operations, any of which could have a material adverse effect on its business, operating results, financial condition and liquidity. (3) Reverse stock split During September 2000, Edge effected a four (4) for one (1) reverse stock split. All share and per share amounts have been restated accordingly. 6 (4) Investment - Related Party In September 2000, the Company issued 2,644,841 shares of its common stock to PurchasePooling Investment Fund in return for 9,593,824 shares of Series A Convertible Preferred Stock of Purchase Pooling Solutions, Inc. ("Purchase Pooling"). In December 2000, the Company invested an additional $620,000 with PurchasePooling in return for 2,214,285 shares of Series C Convertible Preferred Stock. As a result, the Company now has an approximately 18% ownership interest in PurchasePooling, a web-based demand aggregator enabling government and educational entities to save significantly on large-ticket capital items by combining their purchasing power nationwide and globally. The Company is accounting for this investment under the cost method of accounting. The Company's President and CEO is also the CEO of PurchasePooling. In 2000, the Company entered into an agreement to acquire from Odyssey Ventures Online S.A. 975,000 shares of Series A Convertible Preferred Stock of PurchasePooling in exchange for 268,789 shares of the Company's common stock. In April 2001, the agreement was finalized and the shares of common stock were issued. PurchasePooling is in its development stage and is not generating any cash flow. Should PurchasePooling be unable to generate sufficient future revenue and cash flow, it could have a negative impact on the Company's operations. The Company has entered into a management agreement with PurchasePooling in which PurchasePooling pays the Company a management fee of $20,000 per month in return for the services provided by the Company's President and other employees of Edge. During the three month period ended March 31, 2001, the Company received $60,000 of management fees from PurchasePooling which is reflected as a reduction in general and administrative expenses in the statement of operations. (5) Loss per Share The Company follows SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and presenting basic and diluted earnings per share. Basic loss per share is calculated by dividing loss attributed to common stockholders by the weighted average number of shares of common stock outstanding during each period. For all periods presented basic and diluted net loss per share are the same. As of March 31, 2000 and 2001, due to the Company's net losses, shares of common stock issuable upon conversion of convertible debt and Preferred Stock and the exercise of outstanding options and warrants have been excluded from the computation of diluted loss per share in the accompanying statements of operations as their impact is antidilutive. (6) Note Receivable In September 2000, the Company loaned $1.4 million to Hencie, Inc. ("Hencie") in the form of a Promissory Note (the "Note"). The Note accrues interest at a rate of 8% per annum and the principal and interest is due on or before November 21, 2001. The Note was convertible into 885,543 shares of Hencie's common stock through November 22, 2000, however, the Company did not exercise the conversion option. The Note is unsecured and guaranteed by Hencie's President. Should Hencie be unable to generate sufficient future revenue and cash flow, it could have a negative impact on the Company's operations. (7) FINANCINGS a. 2000 Infinity Loans In 2000 and the first quarter of 2001, Infinity Investors Limited, a related party, made certain loans to the Company for working capital purposes. These loans totaled $319,000. As part of the reorganization of the Company effective September 1, 2000, Infinity Investors Limited became entitled to the repayment of these loans. In April 2001, the loan agreement was renegotiated to extend the payment date to January 31, 2002. 7 Catalyst Loans In December 2000, the Company entered into a loan agreement with Catalyst Master Fund, L.P. (the "Catalyst Loan"), a related party, to borrow $620,000. The Catalyst Loan was originally due on June 30, 2001 and bears interest at a rate equal to eight percent (8%) per annum. The Company used the proceeds of the Catalyst Loan to purchase 2,214,285 shares of Series C Convertible Preferred Stock of PurchasePooling. Catalyst Master Fund is a shareholder of the Company and certain of the Company's directors are also officers of an entity that manages Catalyst Master Fund. The Catalyst Loan is convertible at the option of the holder into the Company's common stock at a conversion price of $1.50 per share. The Catalyst Loan is also secured by a pledge of substantially all of Edge's assets. Effective April 16, 2001, the Company entered into an amended loan agreement with Catalyst that increased the borrowings available under the original loan agreement from $620,000 to a total of $2,120,000. Under the amended loan agreement, the Company can draw down amounts under the loan agreement as the Company has need for funds, subject to the Company being in compliance with the covenants contained in that loan agreement. The amended loan agreement bears interest at eight percent (8%) per annum and is due March 31, 2002. The additional amount available under the amended loan agreement is also convertible into the Company's common stock at a conversion price of $1.50 per share and is secured by a pledge of substantially all of the Company's assets. (8) Common Stock In September 2000, the Company issued 2,644,841 shares of its common stock to PurchasePooling Investment Fund in return for 9,593,824 shares of Series A Convertible Preferred Stock of Purchase Pooling. In December 2000, the Company invested an additional $620,000 with PurchasePooling in return for 2,214,285 shares of Series C Convertible Preferred Stock. As a result, the Company now has an approximate 18% ownership interest in PurchasePooling. The Company's President and CEO is also the CEO of PurchasePooling. In 2000, the Company entered into an agreement to acquire from Odyssey Ventures Online S.A. 975,000 shares of Series A Convertible Preferred Stock of PurchasePooling in exchange for 268,789 shares of the Company's common stock. In April 2001, the agreement was finalized and the shares of common stock were issued. (9) Stock Options In July 2000, the Company granted 1,275,000 options to purchase the Company's common stock, 225,000 to an employee and 850,000 to a consultant of the Company at an exercise price of $2.31 per share. Later in July 2000, the Company granted 82,000 options to purchase the Company's common stock to employees of the Company at an exercise price of $2.32 per share. In both instances, the grants were made with exercise prices equal to the fair market value of the Company's stock at the time of the grant. For the 850,000 options to a consultant, the fair value of the options were $1,343,000, of which $223,833 was recorded as expense in 2000 and $111,917 was recorded as expense during the three months ended March 31, 2001. (10) Proceedings with Former Officers and Directors In September 1999, former officers of the Company filed suit against Edge and certain other parties, asserting claims for breach of contract and other matters. In October 1999, the Company counter-sued the former officers for, among other items, breach of fiduciary duty and breach of employment agreements. In April 2001, the Company, the former officers, and the other individuals and entities named in the lawsuits, entered into a settlement agreement whereby Edge agreed to issue 100,000 shares of restricted common stock and pay a cash amount of $30,000 to the former officers in satisfaction of any outstanding claims or claims to options. Accordingly, the Company recorded an accrual for $84,000 related to this settlement which is included in accrued expenses as of March 31, 2001. (11) Employment Agreements The Company has entered into employment agreements with several of its executive officers for periods ranging from three to four years. The agreements provide the employees with salary, bonuses and the right to terminate their agreements and receive certain lump sum payments of compensation if there is a change of control of the Company. In connection with two of the employment agreements, in January 2001, the Company granted stock 8 options to certain executive officers to purchase up to 2,250,000 shares of the Company's common stock at an exercise price of $1.50 per share. 25% of the options are exercisable upon grant and an additional 18.75% vest annually each anniversary date. The options expire 10 years from the date of grant. The Company will not be required to record any compensation expense in 2001 as a result of the grant of these options. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and notes thereto. This discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Edge's actual results and the timing of certain events could differ materially from those discussed in the forward-looking statements as a result of certain factors including those set forth in Edge's filings with the Securities and Exchange Commission, specifically including the risk factors set forth below. GENERAL Edge Technology Group, Inc. operates, acquires and invests in technology products and services including information technology consulting services, business process software applications and application service providers. We are in the early stages of continuing to broaden and expand the scope of its business to include business opportunities beyond our historical golf training technology products. As part of this expansion, we intend to seek opportunities in technology products and services for acquisition by Edge to include in an overall business strategy of developing a complete business process software application and delivery targeted primarily towards middle market businesses. We have historically developed, marketed and sold personalized CD-ROM and videotape golf lessons featuring One-on- One instruction by leading professional golfer Greg Norman. Edge also effected the following changes in management during the first part of 2001: * Pierre Koshakji served as our President from September 5, 2000 until January 23, 2001 when he began serving in his current position of Vice President. * On January 18, 2001, Johan Schotte resigned his position as Chairman of the Board of Directors. The Board of Directors of Edge is currently engaged in a search for a Chairman. On January 19, 2001, Mr. Peters and Mr. Koshakji resigned from their positions as members of the Board of Directors. * On January 23, 2001, Edge entered into an employment agreement effective January 2, 2001 with Graham C. Beachum II for Mr. Beachum to serve as our President and Chief Executive Officer. Mr. Beachum has assembled other personnel to develop and expand Edge's business model. * On January 23, 2001, Mr. Beachum was also elected to our Board of Directors. As of May 15, 2001, our Board of Directors consisted of Graham C. Beachum II, J. Keith Benedict and John A. Wagner. As a result of our reorganization in September 2000, our business strategy is changing. We have expanded our business model to include developing additional technology solutions through organic growth, investments in other businesses or acquisitions of other businesses. These strategies will require significant amounts of capital to undertake. We will be entirely dependent on raising additional capital through public or private offerings of our debt or equity securities. We can give no assurance that we will be able to raise any additional capital for the purposes of funding the historical business operations of Edge or any contemplated businesses we may desire to enter. The majority of our cost of sales is contributed to Edge's fixed operating costs which includes operator salaries, vehicle storage and depreciation and our fixed overhead expenses. Approximately 25% of the cost of sales are variable costs related to sales and production. These costs include the cost of the videotapes and CD-ROMs, royalties to Greg Norman and sales commissions. We believe that significantly higher sales levels are needed before we may be able to generate profits on the One-on-One with Greg Norman product. We believe that will not achieve such sales levels in 2001 and we can give no assurance that we will ever achieve such sales levels, that our variable costs will remain constant as a percent of sales or that we will not incur additional fixed costs. 9 RESULTS OF OPERATIONS Quarter ended March 31, 2001 compared with quarter ended March 31, 2000. Sales for the three months ended March 31, 2001 decreased 4.9% to $100,055, as compared to $105,252 for the three months ended March 31, 2000. This decrease in sales in 2001, as compared to 2000, is due to fewer events being performed in 2001. The cost of sales for the three months ended March 31, 2001 decreased 84.2% to $32,148, as compared to $203,585 for the three months ended March 31, 2000. This decrease in the cost of sales is primarily attributable to the lower cost of sales associated with the management and consulting services Edge performed. Operating expenses for the three months ended March 31, 2001 decreased 6.9% to $438,427, as compared to $471,392 for the three months ended March 31, 2000. This decrease was primarily attributable to a decrease in executive salaries and salaries relating to personnel associated with Edge's strategy of acquiring and operating technology businesses. As of April 15, 2001, Edge had two executive employees and six employees. Interest expense for the three months ended March 31, 2001 decreased 78.4% to $18,116 from $83,956 for the three months ended March 31, 2000. This decrease is primarily attributable to the elimination of penalty interest payable on the convertible notes that were converted into common stock in September 2000. As a result of the above, operating loss for the three months ended March 31, 2001 decreased 35.0% to $370,520 as compared to $569,725 for the three months ended March 31, 2000. The Provision for Preferred Stock Dividends of $123,750 for the three months ended March 31, 2000 relates to the dividends on the Company's Series A-2 Convertible Preferred Stock. The dividends commenced on January 1, 2000. As of December 31, 2000, all of the outstanding preferred stock had been converted into common stock. LIQUIDITY AND CAPITAL RESOURCES The Company has suffered recurring losses from operations and has an accumulated deficit of approximately $33.5 million at March 31, 2001. The Company's plan of operation and prospects are largely dependent upon the Company's ability to achieve significant market acceptance for its products, establish and maintain satisfactory relationships with those who arrange golf events, successfully hire and retain skilled technical, marketing and other personnel, and successfully implement its new business plan and strategy. There can be no assurance that the Company will be able to continue to implement its business plan. Failure to implement its business plan would have a material adverse effect on the Company. Demand and market acceptance for the Company's One-on-One personalized CD-ROM and videotape golf lesson continues to be subject to a high level of uncertainty. Achieving market acceptance for the Company's One-on-One products will require significant efforts and expenditures by the Company to create awareness and demand. The Company's prospects will be significantly affected by its ability to successfully build an effective sales organization and successfully implement its business plan. The Company has limited marketing and technical experience and limited financial, personnel and other resources to independently undertake extensive marketing activities. The Company's strategy and preliminary and future marketing plans may be subject to change as a result of a number of factors, including progress or delays in the Company's marketing efforts and changes in market conditions. To the extent that the Company enters into third-party marketing and distribution arrangements in the future, it will be dependent on the marketing efforts of such third parties and in certain instances on the popularity and sales of their products. There can be no assurance that the Company's strategy will result in successful product commercialization or that the Company's efforts will result in initial or continued market acceptance for the Company's products. If the Company's strategy is unsuccessful, it could have a significant impact on the Company's operations. The Company's recent focus on information technology consulting services, business process software 10 applications and application services is a new business concept for the Company and the Company cannot predict the nature and extent of demand for its services. Edge does not currently maintain a bank credit facility. Edge has historically financed its operations primarily through the sale of equity securities or instruments convertible into equity securities. On March 31, 2001, Edge had cash and cash equivalents of $82,984, and a working capital deficit of $1,605,806, as compared to cash and cash equivalents of $169,846, and a working capital deficit of $526,638 at December 31, 2000. Net cash used in operating activities for the three months ending March 31, 2001 was $201,038. Net cash provided by investing activities was $14,176 and $100,000 was provided by financing activities for a total decrease in cash and cash equivalents of $86,862. Net cash used in operating activities for the three months ending March 31, 2000 was $272,813. Net cash provided by investing activities for the three months ending March 31, 2000 was $264,002, and $429 was used in financing activities, for a total decrease in cash and cash equivalents for the three months ending March 31, 2000 of $9,240. Edge has entered into an Amended Loan Agreement with Catalyst Master Fund L.P., a related party, for borrowings up to $2,120,000. Under the Amended Loan Agreement, Edge can draw down amounts as Edge has needs for funds, subject to Edge being in compliance with the covenants contained in the Amended Loan Agreement. The loan bears interest at 8.0% per annum and is due March 31, 2002. Further, the loan is convertible into Edge common stock at a conversion price of $1.50 per share and is secured by a pledge of substantially all of Edge's assets. As of April 12, 2001, Edge has $1,200,000 available under the Amended Loan Agreement. Edge believes that this facility will be adequate to fund Edge's needs for at least twelve months, although additional financing for acquisitions as part of Edge's business plan will be necessary. In addition, Edge owes $319,000 of principal as of March 31, 2001 to Infinity, a related party, as a result of loans that were not repaid in our September 2000 reorganization, as well as additional $100,000 borrowed in the first quarter of 2001. These loans are due January 31, 2002. Edge has no current source for the repayment of these loans. Edge expects to meet future liquidity requirements through cash flows generated from operations and cash reserves and maturities or sales of marketable securities and utilization of its Amended Loan Agreement. It is anticipated that those sources of funds will also fund capital expenditure programs. These capital expenditure programs can be suspended or delayed at any time with minimal disruption to Edge's operations if cash is needed in other areas of Edge's operations. The expected operating cash flow, current cash reserves and the Amended Loan Agreement are expected to allow Edge to meet working capital requirements during periods of low cash flows resulting from the seasonality of the industry. During the past two years Edge has experienced declining sales and increasing operating losses. Should this trend continue, it will be necessary to secure additional financing to continue operations. There can be no assurance that any additional financing will be available on acceptable terms. Should Edge be unable to obtain additional financing, it may be unable to develop, enhance, and market products, retain qualified personnel, take advantage of future opportunities, respond to competitive pressures, or continue operations, any of which could have a material adverse effect on its business, operating results, financial condition and liquidity. On March 31, 2001, Edge had stockholders equity of $4,440,464, as compared to stockholders equity of $4,689,018 at December 31, 2000. SEASONALITY Edge's One-on-One product business has historically been seasonal with higher sales in the second and third quarters of each fiscal year. THIRD-PARTY REPORTS AND PRESS RELEASES Edge does not make financial forecasts or projections nor does Edge endorse the financial forecasts or projections of third parties or comment on the accuracy of third-party reports. Edge does not participate in the preparation of the reports or the estimates given by analysts. Analysts who issue financial reports are not privy to non-public financial information. Any purchase of our securities based on financial estimates provided by analysts or third parties is done entirely at the risk of the purchaser. 11 Edge periodically issues press releases to update shareholders on new developments relating to Edge and our business. These releases may contain certain statements of a forward-looking nature relating to future events or the future financial performance of Edge within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are intended to be covered by the safe harbors created thereby. Readers are cautioned that such statements are only predictions and that actual events or results may materially differ with those statements. In evaluating such statements, readers should specifically consider the various risk factors identified which could cause actual results to differ materially from those indicated by such forward-looking statements. RISK FACTORS Readers of this report or any of our press releases should carefully consider the following risk factors, in addition to the other information contained herein. This report and our press releases contain statements of a forward-looking nature relating to future events or the future financial performance of Edge within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are intended to be covered by the safe harbors created thereby. Readers are cautioned that such statements are only predictions and that actual events or results may differ substantially. In evaluating those statements, readers should specifically consider the various factors identified in this annual report, including the matters set forth below, which could cause actual results to differ substantially from those indicated by those forward-looking statements. WE HAVE EXPERIENCED SIGNIFICANT AND CONTINUING LOSSES. As of March 31, 2001, we had an accumulated deficit of approximately $33.5 million. For the quarter ended March 31, 2001, we recorded a net loss of $390,160. For each of the five years ended December 31, 2000, we have recorded an operating loss; in certain cases, a substantial operating loss. We incurred a net loss of $8,959,625 for the year ended December 31, 2000. We believe that we will continue to incur losses until we are able to generate sufficient revenues to offset the operating costs associated with commercializing our products. These losses could limit our ability to grow and to raise new funds and could ultimately jeopardize our ability to remain in business. WE ARE AT A RELATIVELY EARLY STAGE WITH OUR REVISED BUSINESS MODEL AND THEREFORE OUR BUSINESS AND PROSPECTS ARE DIFFICULT TO EVALUATE. Our corporate reorganization and related shift in our business strategy commenced in September 2000 and is ongoing. Since that time, we have been engaged principally in (1) assembling our senior management team, (2) managing our existing portfolio companies, (3) developing our revised business plan, and (4) attending to various capital raising activities. As such, we have not begun to establish, on any meaningful basis, the strategic relationships and/or to identify the potential businesses, products, or technologies that will be necessary for us to ultimately succeed in the business segment in which we now expect to compete. Accordingly, we do not have any meaningful operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the many risks, uncertainties, expenses, delays, and difficulties frequently encountered by companies in their early states of development, particularly companies participating in new and rapidly evolving markets. Some of the risks and difficulties we expect to encounter include our ability to: * adapt and successfully execute our revised business plan; * overcome the negative market stigma associated with certain over-the- counter technology companies; * manage and adapt to changing and expanding operations; * implement and improve operational, financial and management systems and processes; * locate, negotiate with, close and ultimately integrate additional attractive portfolio investments; * attract, retain and motivate qualified personnel; and * numerous other risks and difficulties experienced by early state business models generally. 12 Because of our recent reorganization and our shift away from a single product enterprise, we may have limited insight into trends and conditions that may exist or might emerge and affect our business. We cannot be certain that our revised business strategy will be successful or that we will successfully address these risks. As a result of our continuing losses, the low market price of our common stock and the delisting of our common stock from the Nasdaq SmallCap Market, we believe that it will be very difficult, if not impossible, for Edge to raise additional capital in the future. As of March 31, 2001, Edge had a total of cash and cash equivalents of approximately $82,984. Edge is unlikely to become profitable in the reasonably foreseeable future. Accordingly, if Edge cannot raise new funds, Edge may exhaust its cash resources and be unable to continue in business. WE NEED ADDITIONAL FINANCING. As of March 31, 2001, we had a total of cash and cash equivalents of only $82,984. Accordingly, we need additional financing immediately to implement our business strategy and are relying entirely on the Catalyst Loan for working capital. We do not currently maintain a credit facility with any bank or financial institution. We believe that our ability to raise additional financing, as either debt or equity, is further hindered by our continuing operating losses, the low market price of our common stock and our delisting from Nasdaq. If we are unable to arrange additional financing as needed, we are likely to reduce the scope of our operations or cease operations altogether. SUBSTANTIALLY ALL OF OUR ASSETS ARE PLEDGED. The Catalyst Loan is secured by a pledge of substantially all of our assets. Therefore, there is a risk that upon material default of that loan, we could lose substantially all of our assets through a foreclosure proceeding. THE SHARES ELIGIBLE FOR FUTURE SALE MAY FURTHER DECREASE THE PRICE OF OUR COMMON STOCK. If our stockholders sell substantial amounts of their common stock in the public market, including shares issued upon the exercise of outstanding options, then the market price of our common stock could fall. As of March 31, 2001 there were a substantial number of outstanding options and warrants to purchase shares of our common stock. The exercise of any of these options or warrants will also have a dilutive effect on our stockholders. Furthermore, holders of such options or warrants are more likely to exercise them at times when Edge could obtain additional equity capital on terms that are more favorable to us than those provided in the options or warrants. As a result, exercise of the options or warrants may adversely affect the terms of such financing and would require us to issue significant amounts of common stock at the time of exercise. The sale of a substantial number of our common stock may adversely affect the prevailing price of such common stock in the public market and may impair our ability to raise capital through the sale of its equity securities. EDGE RELIES SIGNIFICANTLY ON ITS LICENSE WITH GREG NORMAN FOR ITS ONE-ON-ONE PRODUCT. In connection with the production and promotion of our products, Edge uses, under a worldwide license, Greg Norman's name, likeness, endorsement and certain trademarks. The initial term of the Greg Norman license expires on December 31, 2001 subject to earlier termination pursuant to the terms thereunder. Our business may be adversely affected if the Greg Norman license is terminated in the future or if Greg Norman dies, becomes disabled, retires from tournament play, experiences a significant decline in his performance at golf tournaments, reduces his participation in golf tournaments, commits a serious crime or performs any act which adversely affects his reputation. OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ SMALLCAP MARKET AND IS SUBJECT TO ADDITIONAL SIGNIFICANT RISKS. Because we were unable to meet Nasdaq's minimum ongoing listing requirements, Edge was delisted from the Nasdaq SmallCap Market as of June 1, 1999. The delisting of our common stock means that, among other things, fewer investors have access to trade our common stock which will limit our ability to raise capital through the sale of our securities. In addition, our common stock is subject to penny stock regulations, which could cause fewer brokers and market makers to execute trades in our common stock. This is likely to hamper our common stock trading with sufficient volume to provide liquidity and could cause our stock price to further decrease. The penny stock 13 regulations require that broker-dealers who recommend penny stocks to persons other than institutional accredited investors must make a special suitability determination for the purchaser, receive the purchaser's written agreement to the transaction prior to the sale and provide the purchaser with risk disclosure documents which identify risks associated with investing in penny stocks. Furthermore, the broker-dealer must obtain a signed and dated acknowledgement from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before effecting a transaction in penny stock. These requirements have historically resulted in reducing the level of trading activity in securities that become subject to the penny stock rules. Holders of our common stock may find it more difficult to sell their shares of common stock, which is expected to have an adverse effect of the market price of the common stock. WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR STOCK PRICE VOLATILITY. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation. Securities litigation may result in substantial costs and divert management's attention and resources, which may seriously harm our business, prospects, financial condition and results of operations. WE MUST BE ABLE TO IMPLEMENT OUR BUSINESS PLAN. Our business plan will succeed only if we are able to identify, acquire and integrate companies to expand our product and service offerings. Our plan of operation and prospects are largely dependent upon our ability to achieve significant market acceptance for our products and services, establish and maintain relationships with our customers, successfully hire and retain skilled technical, marketing and other personnel, and successfully develop, market and sell our products and services on a timely and cost effective basis. There can be no assurance that Edge will be able to continue to implement our business plan. Failure to implement effectively our business plan will have a material adverse effect on Edge. WE MAY NOT BE ABLE TO CARRY OUT OUR ACQUISITION STRATEGY. While we have no current agreements with respect to any acquisition, we may make acquisitions of products, services, technologies, systems or entire businesses in the future. This strategy currently focuses on technology companies with products or services such as information technology consulting, software applications and application service providers. To be suitable for acquisition by Edge, these companies must be small enough to be affordable yet profitable. These candidates may be few in number and may attract offers from companies with greater financial resources than Edge. Acquisitions involve numerous risks, including, among others, loss of key personnel of the acquired company, the difficulties associated with assimilating the personnel and operations of the acquired company, the potential disruption of our ongoing business and the maintenance of uniform standards, controls, procedures and polities. We cannot assure you that Edge will be able to locate suitable acquisition targets or that Edge will be able to complete any acquisitions. 14 OUR CURRENT FINANCIAL CONDITION PREVENTS EDGE FROM FINANCING AN ACQUISITION INDEPENDENTLY. Our current financial condition will not allow Edge to finance an acquisition independently. If Edge locates an acquisition opportunity, it will have to depend on the profitability of the target company and the efforts of some of our major stockholders to attract and obtain financing. We cannot assure you that Edge will be able to obtain financing on acceptable terms or at all. If we cannot obtain financing, we will not be able to complete any acquisitions. CERTAIN OF OUR PRODUCTS MAY BE SUBJECT TO PRODUCT OBSOLESCENCE. The markets for our Greg Norman One-on-One product may be characterized by rapidly changing technology which could result in product obsolescence or short product life cycles. Our competitors could develop technologies or products that render this product obsolete or less marketable. Accordingly, our ability to compete in this segment may be depend upon our ability to continually enhance and improve our product. 15 WE DEPEND ON OUR OFFICERS AND KEY PERSONNEL. The prospects of Edge depend on the personal efforts of Graham C. Beachum II, our President and Chief Executive Officer, and other key personnel to implement our operating and growth strategies. The loss of the services of these executives could have a material adverse effect on our business and prospects because of their experience and knowledge in the industry. EDGE HAS A LIMITED PRODUCT LINE. Edge currently depends entirely on the sales of a limited product line to generate revenues. Edge may develop other products in the future that may or may not be similar to our current products. Edge cannot assure that our current or future products will prove to be commercially viable. Failure to achieve commercial viability on a timely basis would cause Edge to close our business. OUR INVESTMENTS MAY INCUR LOSSES AND MAY NOT HAVE ANY FUTURE PROFITS. Companies into which Edge makes investments may have operating losses. As start- up companies, these businesses may continue to incur significant increases in expenses. These increases may adversely impact our business and their financial condition. WE HAVE AN UNPROVEN BUSINESS MODEL. Our ability to generate revenues depends upon whether we can generate revenues from our operations and invest in or establish strategic relationships with operating companies to provide us with an adequate revenue stream. If we cannot achieve or sustain an adequate revenue stream or if our products and services, or the products and services of companies in which we invest, do not achieve or sustain broad market acceptance, our business, operating results and financial condition will be materially adversely affected. Our ability to generate future revenues depends on a number of factors, many of which are beyond our control, including among other things, the risk factors described in this Report. Therefore, we are unable to forecast our revenues with any degree of accuracy. OUR INVESTMENTS GIVE US LIMITED CONTROL OVER THE BUSINESSES IN WHICH WE HAVE INVESTED. We hold approximately 18% of the outstanding capital stock of PurchasePooling, a related party, and have an unsecured loan to Hencie, Inc. We may not be able to direct the management and policies of these companies or influence their future direction in a manner that will result in increased value to Edge for the securities Edge holds. Further, PurchasePooling and Hencie, Inc. are in their development stages and are not generating any cash flow. Should PurchasePooling and/or Hencie, Inc. be unable to generate sufficient future revenue and cash flow, it could have a negative impact on the Company's operation. IF WE FAIL TO MANAGE OUR GROWTH AND INTEGRATE OUR ACQUIRED BUSINESSES, OUR BUSINESS WILL BE ADVERSELY AFFECTED. If the reorganization and business strategy discussed in this Report results in significant growth of our operations, we will be required to implement and improve our operating and financial systems and controls, and to expand, train and manage our employee base to manage this growth. We will be dependent upon our management to assume and perform the management functions formerly performed by management of each of the parties to the reorganization. To the extent that our management is unable to assume or perform these combined duties, our business, results of operations and financial condition could be adversely affected. There can be no assurance that the management, systems and controls currently in place or any steps taken to improve such management, systems and controls will be adequate in the future. In addition, the integration of the acquired entities and their operations will require our management to make and implement a number of strategic operational decisions. The timing and manner of the implementation of these decisions will materially impact our business operations. 16 WE MUST RECRUIT AND RETAIN KEY MANAGEMENT AND TECHNICAL PERSONNEL TO BE COMPETITIVE. Our success depends to a significant extent on the continued contributions, experience and knowledge of our senior management team and key technical and marketing personnel. Our success also depends upon our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing personnel. No assurance can be given that we will be able to successfully attract, assimilate or retain a sufficient number of qualified personnel. The failure to do so could have a material adverse effect on our business, results of operation and financial condition. A SMALL NUMBER OF STOCKHOLDERS, SOME OF WHICH ARE AN AFFILIATE GROUP, HOLD LARGE AMOUNTS OF OUR COMMON STOCK AND COULD EXERCISE CONTROL OVER EDGE, WHICH MAY RAISE CONFLICTS OF INTEREST. A small number of stockholders, some of which are an affiliate group, own a sufficient amount of our common stock to exercise significant control over our business, policies and affairs and, in general, determine the outcome of any corporate transaction or other matters submitted to the stockholders for approval, all in a manner that could conflict with the interests of other stockholders. WE MAY BECOME SUBJECT TO INCREASED REGULATORY OVERSIGHT AS A RESULT OF OUR INVESTMENTS IN OTHER COMPANIES. As a result of our investments in other companies, we may be or become subject to the Investment Company Act of 1940 and other laws that regulate investing activities. Any such regulation may negatively impact our cost of doing business, may restrict our business and may materially adversely affect our business, financial condition, operating results and future prospects. WE MAY BECOME SUBJECT TO INCREASED GOVERNMENTAL OVERSIGHT. There can be no assurance that technology-related products and services which are sold by us or the companies into which we invest will not be actively regulated. Increased regulation of technology-related products and services may slow our growth, particularly if other countries also impose similar regulations. Any regulation may negatively impact our cost of doing business and may materially adversely affect our business, financial condition, operating results and future prospects. Increased regulation in one or more countries could materially adversely affect our business, financial condition, operating results and prospects. OUR RIGHT TO ISSUE PREFERRED STOCK AND ANTI-TAKEOVER PROVISIONS UNDER DELAWARE LAW COULD MAKE A THIRD PARTY ACQUISITION OF US DIFFICULT. Our certificate of incorporation provides that our board of directors may issue preferred stock without stockholder approval. The issuance of preferred stock could make it more difficult for a third party to acquire us without the approval of Edge's board. Additionally, Delaware corporate law imposes certain restrictions on corporate control transactions that could make it more difficult for a third party to acquire us without the approval of our board. 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Unchanged since originally reported in our Annual Report on Form 10-K for the year ended December 31, 2000. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.23 Note and Security Agreement dated as of April 16, 2001 between Edge and Catalyst Master Fund, L.P. (filed herewith) (b) Reports on Form 8-K None 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, thereunto duly authorized. Edge Technology Group INC. By: /s/ Graham C. Beachum II ------------------------------ Graham C. Beachum II Chairman and Chief Executive Officer and Principal Financial Officer May 14, 2001 19 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.23 Note and Security Agreement dated as of April 16, 2001 between Edge and Catalyst Master Fund, L.P. (filed herewith) 20