**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 
| ** **                                                                                                                                                                               | ** ** | **[Mark One]**                                                                                      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                               | ** ** | ** **                                                                                          |
| **ý**                                                                                                                                                                               | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                                                               | ** ** | ** **                                                                                          |
| **For the quarterly period ended  June 30, 2004**                                                                                                                                   |
| ** **                                                                                                                                                                               | ** ** | ** **                                                                                          |
| **OR**                                                                                                                                                                                   |
| ** **                                                                                                                                                                               | ** ** | ** **                                                                                          |
| **o**                                                                                                                                                                                    | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                               | ** ** | ** **                                                                                          |
| **For the transition period from              to              ** |
| ** **                                                                                                                                                                               | ** ** | ** **                                                                                          |
| **Commission File Number 0-23315**                                                                                                                                                       |

 

**enherent Corp.**

(Exact name of Registrant as Specified in ItsCharter)

 

| **Delaware**                                               | ** ** | **No.  13-3914972**                  |
|------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of  Incorporation)            |       | (I.R.S. Employer Identification No.) |
|                                                       |       |                                 |
| **80 Lamberton Road  Windsor, CT 06095**                   |
| (Address of Principal Executive Offices)                   |
|                                                       |       |                                 |
| **(860) 687-2200**                                         |
| (Registrant’s Telephone Number, Including  Area Code) |

 

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Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

YES   ý                                                     NO   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).   YES   o  NO   ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock as of the latest practicable date:

 

| **Class**                     | ** ** | **Shares outstanding as of August 4, 2004** |
|-------------------------------|------------|--------------------------------------------------|
| Common stock, par value $.001 |       | 17,718,854                                       |

 

 

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**enherent Corp. and Subsidiaries**

 

## **INDEX**

## ** **

| **PART I.  FINANCIAL INFORMATION**                                                                              |       |
|----------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                 |       |
| **Item 1.  Financial Statements.**                                                                              |       |
|                                                                                                                 |       |
| **Condensed Consolidated Balance Sheets as of  June 30, 2004 and December 31, 2003**                       |       |
|                                                                                                                 |       |
| **Condensed  Consolidated Statements of Operations for the three and six months ended  June 30, 2004 and 2003** | ** ** |
| ** **                                                                                                           | ** ** |
| **Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2004 and 2003**            |       |
|                                                                                                                 |       |
| **Notes  to Condensed Consolidated Financial Statements**                                                            |       |
|                                                                                                                 |       |
| **Item 2.  Management’s Discussion and Analysis of  Financial Condition and Results of Operations.**       |       |
|                                                                                                                 |       |
| **Item 3.   Quantitative and Qualitative Disclosures about Market Risk.**                                       |       |
|                                                                                                                 |       |
| **Item 4.   Controls and Procedures.**                                                                          |       |
|                                                                                                                 |       |
| **PART II.  OTHER INFORMATION**                                                                                 |       |
|                                                                                                                 |       |
| **Item 1.  Legal Proceedings**                                                                                  |       |
|                                                                                                                 |       |
| **Item 4. Submission of Matters to a Vote of  Security Holders**                                                     |       |
|                                                                                                                 |       |
| **Item 5.  Other Information**                                                                                  |       |
|                                                                                                                 |       |
| **Item 6.   Exhibits and Reports on Form 8-K**                                                                  |       |
|                                                                                                                 |       |
| **Signatures**                                                                                                       |       |
|                                                                                                                 |       |
| **Exhibit  Index**                                                                                                   |       |

 

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##### **Item 1. Financial Statements**

#####  

enherent Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

*(In thousands, except number of shares)*

 
| ** **                                                                                                                                                                                                                                                                 | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                 | ** ** | **(unaudited)**         | ** ** | **(Note 1)**                | ** ** |
| **Assets**                                                                                                                                                                                                                                                                 |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                                                                                                            |       |                    |       |                        |       |
| Cash and equivalents                                                                                                                                                                                                                                                       |       | $                       | 1,842      |                        | $          | 2,669 |   |
| Accounts receivable, net of allowance of  $16 at June 30, 2004 and December 31, 2003                                                                                                                                                                             |       | 1,718                   |       | 1,263                       |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                  |       | 200                     |       | 141                         |       |
| Total current assets                                                                                                                                                                                                                                                       |       | 3,760                   |       | 4,073                       |       |
| Fixed assets, net                                                                                                                                                                                                                                                          |       | 85                      |       | 159                         |       |
| Other assets                                                                                                                                                                                                                                                               |       | 50                      |       | 50                          |       |
| Total assets                                                                                                                                                                                                                                                               |       | $                       | 3,895      |                        | $          | 4,282 |   |
|                                                                                                                                                                                                                                                                       |       |                    |       |                        |       |
| **Liabilities and  stockholders’ equity**                                                                                                                                                                                                                             |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                       |       |                    |       |                        |       |
| Current portion of long term debt                                                                                                                                                                                                                                          |       | $                       | 50         |                        | $          | — |   |
| Accounts payable                                                                                                                                                                                                                                                           |       | 575                     |       | 327                         |       |
| Accrued compensation                                                                                                                                                                                                                                                       |       | 420                     |       | 302                         |       |
| Accrued expenses                                                                                                                                                                                                                                                           |       | 300                     |       | 362                         |       |
| Current portion of capital lease  obligations                                                                                                                                                                                                                              |       | 3                       |       | 5                           |       |
| Deferred revenue                                                                                                                                                                                                                                                           |       | 23                      |       | 57                          |       |
| Total current liabilities                                                                                                                                                                                                                                                  |       | 1,371                   |       | 1,053                       |       |
| Long term debt                                                                                                                                                                                                                                                             |       | 100                     |       | —                      |       |
| Deferred rent                                                                                                                                                                                                                                                              |       | 11                      |       | 27                          |       |
| Total liabilities                                                                                                                                                                                                                                                          |       | 1,482                   |       | 1,080                       |       |
| Commitments and contingencies                                                                                                                                                                                                                                              |       |                    |       |                        |       |
| Series A senior participating redeemable  convertible preferred stock, $0.001 par value; authorized – 10,000,000  shares; issued and outstanding – 4,250,000 shares at June 30, 2004 and  issued and outstanding 7,000,000 shares at December 31, 2003 |       | 3,908                   |       | 6,124                       |       |
|                                                                                                                                                                                                                                                                       |       |                    |       |                        |       |
| Common stockholders’ equity (deficit):                                                                                                                                                                                                                                |       |                    |       |                        |       |
| Common stock, $0.001 par value; authorized  – 50,000,000 shares; issued – 19,567,977 shares; outstanding – 17,718,854  shares at June 30, 2004;  issued  19,401,311 shares , outstanding – 17,552,188 at December 31, 2003              |       | 19                      |       | 19                          |       |
| Additional paid-in capital                                                                                                                                                                                                                                                 |       | 94,427                  |       | 94,423                      |       |
| Treasury stock, at cost – 1,849,123 shares  at June 30, 2004 and December 31, 2003                                                                                                                                                                          |       | (366                    | )          | (366                        | )          |
| Accumulated deficit                                                                                                                                                                                                                                                        |       | (95,575                 | )          | (96,998                     | )          |
| Total common stockholders’ deficit                                                                                                                                                                                                                                    |       | (1,495                  | )          | (2,922                      | )          |
|                                                                                                                                                                                                                                                                       |       |                    |       |                        |       |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                                           |       | $                       | 3,895      |                        | $          | 4,282 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

1

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enherent Corp. and Subsidiaries

Condensed Consolidated Statements of Operations

*(In thousands, except per share data)*

(Unaudited)

 
| ** **                                                                           | ** ** | **Three Months  Ended June 30** | ** ** | **Six Months  Ended June 30** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **2004**                                                                             | ** ** | **2003**                             | **2004**   | ** **                         | **2003**   |
|                                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Revenues                                                                             |       | $                                    | 3,151      |                               | $          | 3,166 |   | $ | 6,063 |   | $ | 6,819 |   |
| Cost of revenues                                                                     |       | 2,331                                |       | 2,369                              |       | 4,512 |   | 5,284 |   |
| Gross profit                                                                         |       | 820                                  |       | 797                                |       | 1,551 |   | 1,535 |   |
| Selling, general and administrative  expenses                                        |       | 1,018                                |       | 1,236                              |       | 1,943 |   | 2,484 |   |
| Loss from operations                                                                 |       | (198                                 | )          | (439                               | )          | (392 | ) | (949 | ) |
| Other income (expense):                                                              |       |                                 |       |                               |       |   |   |   |   |
| Miscellaneous income                                                                 |       | —                               |       | 2                                  |       | — |   | 5 |   |
| Interest expense                                                                     |       | (2                                   | )          | (1                                 | )          | (2 | ) | (3 | ) |
| Interest income                                                                      |       | 1                                    |       | 2                                  |       | 1 |   | 5 |   |
| Net loss                                                                             |       | (199                                 | )          | (436                               | )          | (393 | ) | (942 | ) |
| Preferred stock redemption benefit to  common shareholders, net of accretion         |       | 1,970                                |       | (141                               | )          | 1,816 |   | (277 | ) |
| Net income (loss) applicable to common  stockholders                                 |       | $                                    | 1,771      |                               | $          | (577 | ) | $ | 1,423 |   | $ | (1,219 | ) |
| Basic net income (loss) per share  applicable to common stockholders                 |       | $                                    | .10        |                               | $          | (.03 | ) | $ | .08 |   | $ | (.07 | ) |
| Number of shares used in computing basic  net income (loss) per share (000’s)   |       | 17,719                               |       | 17,502                             |       | 17,709 |   | 17,502 |   |
| Diluted net income (loss) per share  applicable to common stockholders               |       | $                                    | .09        |                               | $          | (.03 | ) | $ | .07 |   | $ | (.07 | ) |
| Number of shares used in computing diluted  net income (loss) per share (000’s) |       | 21,969                               |       | 17,502                             |       | 23,334 |   | 17,502 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

2

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enherent Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

*(In thousands)*

(Unaudited)

 
| ** **                                                                   | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **2004**                                                                     | ** ** | **2003**                          |
| **Cash flows from  operating activities**                                    |       |                              |       |   |   |
| Net loss                                                                     |       | $                                 | (393       | ) | $ | (942 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                              |       |   |   |
| Depreciation and amortization                                                |       | 74                                |       | 205 |   |
| Provision (credit) for doubtful accounts                                     |       | 5                                 |       | 33 |   |
| Loss on disposal of fixed assets                                             |       | —                            |       | 10 |   |
| Deferred rent                                                                |       | (16                               | )          | (16 | ) |
| Changes in operating assets and  liabilities:                                |       |                              |       |   |   |
| Accounts receivable                                                          |       | (460                              | )          | 498 |   |
| Prepaid expenses and other current assets                                    |       | (59                               | )          | 103 |   |
| Other assets                                                                 |       | —                            |       | 6 |   |
| Accrued compensation                                                         |       | 118                               |       | 48 |   |
| Accounts payable and other accrued expenses                                  |       | 186                               |       | (153 | ) |
| Deferred revenue                                                             |       | (34                               | )          | (127 | ) |
| Net cash used in operating activities                                        |       | (579                              | )          | (335 | ) |
|                                                                         |       |                              |       |   |   |
| **Cash flows from  investing activities**                                    |       |                              |       |   |   |
| Proceeds from sale of fixed assets                                           |       | —                            |       | 7 |   |
| Net cash provided by investing activities                                    |       | —                            |       | 7 |   |
|                                                                         |       |                              |       |   |   |
| **Cash flows from  financing activities**                                    |       |                              |       |   |   |
| Proceeds from exercise of stock options                                      |       | 4                                 |       | — |   |
| Purchase and redemption of preferred stock                                   |       | (250                              | )          |   |   |
| Principal payments under capital lease  obligations                          |       | (2                                | )          | (9 | ) |
| Net cash used in financing activities                                        |       | (248                              | )          | (9 | ) |
| Net decrease in cash and equivalents                                         |       | (827                              | )          | (337 | ) |
| Cash and cash equivalents at beginning of  period                            |       | 2,669                             |       | 3,067 |   |
| Cash and cash equivalents at end of period                                   |       | $                                 | 1,842      |   | $ | 2,730 |   |
| Interest paid                                                                |       | $                                 | —     |   | $ | 3 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

3

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**enherent Corp.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

1.               Basis of Presentation

 

Theunaudited condensed consolidated financial statements presented herein havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and the instructions to Form 10-Q and Item 10-01of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, theaccompanying unaudited condensed consolidated financial statements include alladjustments (consisting only of normal recurring entries, except as disclosed)considered necessary for a fair presentation of the financial condition andresults of operations for the periods presented.  The results of operations for the six-monthperiod ended June 30, 2004 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2004. The condensedconsolidated balance sheet as of December 31, 2003 was derived from the auditedconsolidated balance sheet as of that date. The statements should be read inconjunction with the audited consolidated financial statements and notesthereto included in the enherent Corp. (the “Company”) Annual Report on Form10-K for the year ended December 31, 2003.

 

TheCompany anticipates that its primary uses of working capital in the near termwill be to fund the Company’s operations. Management believes that the cash and cash equivalents are sufficient tofund operations for the next 12 months. The Company does not anticipate thatholders of its Series A Senior Participating Redeemable Convertible PreferredStock will require the Company to redeem the preferred stock discussed in Note4. If the cash and cash equivalents at June 30, 2004 and cash generated fromoperations is insufficient to satisfy the Company’s liquidity requirements, theCompany may in the future be required to seek additional sources of financing.Also, if the Company is required to redeem its Series A Senior ParticipatingRedeemable Convertible Preferred Stock, the Company might be required to obtainadditional financing. If the Company is unsuccessful in obtaining additionalsources of financing, the Company could experience difficulty meeting itscurrent obligations as they become due.

 

2.               Principles of Consolidation

 

Theaccompanying condensed consolidated financial statements include the accountsof the Company and its wholly owned subsidiaries.  All significant intercompany balances andtransactions have been eliminated in consolidation.

 

4

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3.               Stock-Based Compensation

 

TheCompany accounts for stock options using the intrinsic value method set forthin Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees” and accordingly, recognizes compensation expense only ifthe fair value of the underlying Common Stock exceeds the exercise price of thestock option on the date of grant. As permitted by Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”), the Company continues to account for stock-based compensation inaccordance with APB Opinion No. 25 and has elected the pro forma disclosurealternative of SFAS No. 123.

 

Thefollowing table illustrates the effect on net loss and loss per share if theCompany had applied the fair value recognition provisions of SFAS 123 insteadof APB Opinion No. 25’s intrinsic value method to account for stock-basedemployee compensation (in thousands, except per share amounts):

 
| ** **                                                          | ** ** | **Three  months ended June 30** | ** ** | **Six  months ended June 30** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **2004**                                                            | ** ** | **2003**                        | **2004**   | ** **                    | **2003**   |
|                                                                |       |                            |       |                          |       |   |   |   |   |
| Net income (loss) available to common stockholders  as reported     |       | $                               | 1,771      |                          | $          | (577 | ) | $ | 1,423 |   | $ | (1,219 | ) |
| Total stock option expense determined under fair  value base method |       | (28                             | )          | (49                           | )          | (53 | ) | (136 | ) |
| Pro forma net income (loss)                                         |       | $                               | 1,743      |                          | $          | (626 | ) | $ | 1,370 |   | $ | (1,355 | ) |
| Net income (loss) per common share as reported:                     |       |                            |       |                          |       |   |   |   |   |
| Basic                                                               |       | $                               | .10        |                          | $          | (.03 | ) | $ | .08 |   | $ | (.07 | ) |
| Diluted                                                             |       | $                               | .09        |                          | $          | (.03 | ) | $ | .07 |   | $ | (.07 | ) |
| Net income (loss) per common share pro forma:                       |       |                            |       |                          |       |   |   |   |   |
| Basic                                                               |       | $                               | .10        |                          | $          | (.04 | ) | $ | .08 |   | $ | (.08 | ) |
| Diluted                                                             |       | $                               | .09        |                          | $          | (.04 | ) | $ | .07 |   | $ | (.08 | ) |

 

Proforma information regarding net loss and loss per share is required by SFAS No.123 and has been determined as if the Company had accounted for its employees’stock options under the fair value method provided by that Statement. The fairvalue of the options was estimated at the date of grant using the Black-Scholesoption pricing model with the following assumptions for vested and non-vestedoptions:

 
| ** **                                                                         | ** ** | **June  30** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------|------------|
| **Assumption**                                                                     | ** ** | **2004**     | ** ** | **2003** | ** ** |
| Risk-free  interest rate                                                           |       | 2.00         | %          | 0 | % |
| Dividend  yield                                                                    |       | 0            | %          | 0 | % |
| Volatility factor of the expected market price of  the Company’s Common Stock |       | 1.34         |       | 1.29 |   |
| Average  life years                                                                |       | 5            |       | 5 |   |

 

5

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4.               Series A Senior Participating RedeemableConvertible Preferred Stock

 

OnApril 1, 2004, with the approval of its Board of Directors, enherent enteredinto a Stock Purchase Agreement with Primesoft LLC (“Primesoft”), pursuant towhich enherent purchased 2,750,000 shares of its Series A Senior ParticipatingRedeemable Convertible Preferred Stock and a warrant to obtain 1,875,000 sharesof enherent’s Common Stock, from Primesoft. Consideration paid by enherent consisted of a cash payment of $250,000and a three year, $150,000 promissory note (bearing interest at the rate of 4%per annum) payable in annual installments of $50,000 beginning on April 15,2005.

 

TheSeries A Senior Participating Redeemable Convertible Preferred Stock wascarried at approximately $2.5 million at the date of the transaction. Becausethe Preferred Stock was purchased below its carrying value, a benefit to commonshareholders of approximately $2.1 million was recognized in the quarter endedJune 30, 2004.

 

Theremaining Preferred Stock is being accreted to its liquidation value at April12, 2005 of $4,250,000. Accretion of approximately $96,000 and $141,000 wasrecognized in the three-month periods ending June 30, 2004 and 2003,respectively. In the six month periods ending June 30, 2004 and 2003, accretionof approximately $250,000 and $277,000, respectively, was recognized.

 

5.               Income (Loss) Per Share

 

Thefollowing table sets forth the computation of basic and diluted income (loss)per share (in thousands, except per share data):

 
| ** **                                         | ** ** | **Three  months ended  June 30** | ** ** | **Six  months ended  June 30** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                         |       |                             |       |                           |       |   |   |   |   |
| Net income (loss) available to common stockholders |       |                             |       |                           |       |   |   |   |   |
| Basic                                              |       | $                                | 1,771      |                           | $          | (577 | ) | $ | 1,423 |   | $ | (1,219 | ) |
| Accretion on preferred                             |       |                             | 96         |                           | —     |   |   | 250 |   | — |   |
| Diluted                                            |       | $                                | 1,867      |                           | $          | (577 | ) | $ | 1,673 |   | $ | (1,219 | ) |
| Denominator:                                       |       |                             |       |                           |       |   |   |   |   |
|  Weighted  average of shares outstanding      |       |                             |       |                           |       |   |   |   |   |
| Basic                                              |       | 17,719                           |       | 17,502                         |       | 17,709 |   | 17,502 |   |
| Shares as if converted                             |       | 4,250                            |       | —                         |       | 5,625 |   | — |   |
| Fully diluted                                      |       | 21,969                           |       | 17,502                         |       | 23,334 |   | 17,502 |   |
| Basic  income (loss) per share                     |       | $                                | .10        |                           | $          | (.03 | ) | $ | .08 |   | $ | (.07 | ) |
| Diluted  income (loss) per share                   |       | $                                | .09        |                           | $          | (.03 | ) | $ | .07 |   | $ | (.07 | ) |

 

Forthe 2004 periods the Company’s Series A Senior Participating RedeemableConvertible Preferred Stock has been reflected on an as if converted basis forpurposes of calculating diluted earnings per share. In 2003 the Company hasexcluded the impact of its Series A Senior Participating Redeemable ConvertiblePreferred Stock and related

 

6

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warrantsand stock options outstanding under the Company’s stock option plan because theeffect would be anti-dilutive.

 

6.               Contingencies

 

Inthe normal course of business, various claims are made against theCompany.  At this time, in the opinion ofmanagement, there are no pending claims the outcome of which are expected toresult in a material adverse effect on the consolidated financial position orresults of operations of the Company.

 

# **Item 2.****          ****Management’s Discussion and Analysis of Financial Conditionand Results of Operations.**

#  

**Critical Accounting Policies**

 

Useof Estimates

 

Asdescribed in Note 1, the condensed consolidated financial statements presentedelsewhere in this document have been prepared in conformity with generallyaccepted accounting principles for interim financial information and withinstructions to Form 10-Q and Item 10-01 of Regulation S-X. The preparation ofthese financial statements requires management to make estimates andassumptions that affect the reported amounts in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

RevenueRecognition

 

Revenuesare primarily derived from consultants on engagements with clients for a periodof time. The revenues from these time and materials contracts are recognizedduring the period in which the related services are provided. Revenue may alsoinclude fees earned on recruiting individuals for positions in client companiesas full time employees (permanent placements). Revenues from permanentplacements are recognized when the candidate has satisfied any guaranteeperiod.  Such guarantee periods rangefrom 30 to 90 days. In the six-month period ending June 30, 2004, the Companyrecognized approximately $24,000 in revenue from permanent placements.

 

AccountsReceivable and Allowance for Doubtful Accounts

 

TheCompany’s accounts receivable balance is reported net of estimated allowancesfor balances not expected to be collectible. The Company regularly evaluates the collectability of amounts owed to itbased on the ability of the debtor to make payments. When the Company’sevaluation indicates that a customer will be unable to satisfy its obligation,the Company will record a reserve to reflect this anticipated loss.  The Company periodically reviews the requirements,and adequacy of the reserve, for doubtful accounts.

 

7

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FixedAssets

 

Fixedassets are stated at cost and depreciation on furniture and equipment, computerequipment and software is calculated on the straight-line method over theestimated useful lives of the assets ranging from three to seven years.Equipment held under capital leases and leasehold improvements are amortizedusing the straight-line method over the shorter of the lease term or estimateduseful life of the asset.  The Companyevaluates long-lived assets for impairment and records charges in operatingresults when events and circumstances indicate that assets may be impaired. Theimpairment charge is determined based upon the amount by which the net bookvalue of the asset exceeds its estimated fair market value or undiscounted cashflow. No impairment charges have been recognized in any of the periodspresented herein.

 

**Results of Operations**

 

*Revenues.*  Revenue of $3.2 million duringthe three-month period ended June 30, 2004 was comparable to the revenue forthe three-month period ended June 30, 2003. Revenue of $6.1 million for thesix-month period ended June 30, 2004 was $0.7 million below the $6.8 million inrevenue for the comparable prior year period. The decrease in revenue was aresult of the completion of client projects and non-renewal of certain clientassignments partially offset by new client assignments.

 

*Cost of Revenues.*  Cost of revenues were $2.3million for the three-month period ended June 30, 2004 and were $0.1 millionless than the $2.4 million incurred in the three-month period ended June 30,2003. Cost of revenues decreased $0.8 million for the six-month period endedJune 30, 2004 to $4.5 million compared to $5.3 million for the six-month periodended June 30, 2003. The decrease in cost of revenues was primarilyattributable to the lower volume and overall decrease in revenues. Cost ofrevenues as a percentage of revenues decreased from 74.8% for the three-monthperiod ended June 30, 2003 to 73.9% for the three-month period ended June 30,2004. Cost of revenues as a percentage of revenues decreased from 77.5% for thesix-month period ended June 30, 2003 to 74.5% for the six-month period endedJune 30, 2004.

 

*Gross Profit.*  Gross profit as a percentage ofrevenues for the three-month period ended June 30, 2004 was 25.9% versus 25.2%in the comparable prior year period. In the six-month period ended June 30,2004 the gross profit as a percentage of revenues was 25.5% compared to 22.5%gross profit as a percentage of revenues for the six-month period ended June30, 2003.  The increase in gross profitas a percentage of revenues for the three and six month periods ended June 30,2004 versus the comparable periods of 2003 reflects higher margins on newassignments, completion of lower margin contracts, continued improvements inbillable workforce scheduling as well as reducing consultant compensation incases where engagement renewals have resulted in lower billing rates forconsultants.

 

*Selling, General & Administrative (“SG&A”)**Expenses.*SG&A expenses decreased approximately 16.7% to $1.0 million inthe three-month period ended June 30, 2004 from $1.2 million for the comparableperiod in 2003.  In the six-month periodended June 30, 2004, SG&A expenses of $1.9 million were $0.6 million or23.6% lower than the $2.5 million for the comparable period in the prior year.SG&A expenses as a percentage of revenue were 32.3% and 32% for thethree-month and six-month periods ended June 30, 2004, respectively.

 

Forthe six-month period ended June 30, 2004 versus the comparable period of theprior year, the lower level of SG&A expenses reflects reductions inadministrative, sales and marketing staffing

 

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levels,elimination of costs related to the Barbados Solutions Center and Dallasoffices as well as the absence of closure and restructuring costs. The lowerSG&A expenses in the three-month period ending June 30, 2004, versus thecomparable period of 2003, reflects the Dallas office shutdown and the absenceof related shutdown costs in the 2004 period.

 

*Loss from Operations.* Due to improved gross profit and lowerSG&A expenses described above the loss from operations for the three-monthperiod ended June 30, 2004 decreased to $0.2 million as compared to a loss fromoperations of $0.4 million in the comparable period in 2003.  As a percentage of revenues, the loss fromoperations for the three-month period ended June 30, 2004 decreased toapproximately 6.2% as compared to approximately 13.9% in the comparable periodin 2003. The loss from operations of $0.4 million for the six-month periodended June 30, 2004 was $0.5 million lower than the $0.9 million operating lossin the six-month period ending June 30, 2003. For the six-month periods endingJune 30, operating loss as a percent of revenue was 6.5% in 2004 compared to13.9% in 2003.

 

*Preferred Stock Redemption Benefit, Net of Accretion*. In the second quarter of 2004, the Companypurchased and retired 2,750,000 shares of its Series A Senior ParticipatingRedeemable Convertible Preferred Stock for $400,000, consisting of a cashpayment of $250,000 and a promissory note for $150,000. As the Preferred Stockwas being carried at an accreted book amount of approximately $2.5 million, anon-cash benefit to common shareholders of $2.1 million was recognized.Accretion on the preferred stock of approximately $96,000 and $141,000 wasrecognized in the three-month periods ended June 30, 2004 and 2003,respectively. In the six-month period ended June 30, 2004 and 2003, accretionof approximately $250,000 and $277,000, respectively, was recognized.

 

# **Liquidity and Capital Resources**

#  

*Working Capital.* The Company’s working capital decreased to approximately $2.5 millionat June 30, 2004 from $3.0 million at December 31, 2003.  Cash and cash equivalents were $1.8 millionat June 30, 2004 compared to $2.7 million at December 31, 2003.  The primary use of cash during the six-monthperiod ended June 30, 2004 was to redeem 2,750,000 shares of its preferredstock and warrants to purchase common stock, using cash of $250,000 and apromissory note for $150,000, and to fund operating activities of approximately$0.6 million. The Company’s accounts receivable were $1.7 million at June 30,2004 and $1.3 million at December 31, 2003. Billed days sales outstanding, netof allowance for doubtful accounts, were 48 days at June 30, 2004 and 44 daysat December 31, 2003.

 

TheCompany anticipates that its primary uses of cash in the near term will be tofund the Company’s operations. Management believes that the cash equivalents at June 30, 2004 aresufficient to fund operations for the next twelve months and satisfy allobligations due under its debt agreement and capital and non-cancelableoperating leases. As of June 30, 2004, the Company’s obligations under capitalleases, all due within the next year, totaled $3,000.  Obligations under non-cancelable operatingleases total $62,000.  In addition, as aresult of the acquisition of the preferred stock, described in Note 4 to theCondensed Consolidated Financial Statements, the Company expended $250,000 inApril 2004 and is obligated to make principal and interest payments on a threeyear $150,000 promissory note.  Annualprincipal payments of $50,000 are due commencing on April 15, 2005. If cashgenerated from operations is insufficient to satisfy the Company’s liquidityrequirements, the Company may be required to seek additional sources offinancing in the future. If the Company is unsuccessful in obtaining additionalsources of financing, it could experience difficulty meeting its currentobligations as they become due.

 

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Theholders of the Company’s remaining Series A Senior Participating RedeemableConvertible Preferred Stock have a redemption right, exercisable at theiroption, starting after April 12, 2005. The redemption value is $1.00 pershare.  The Company does not havesufficient cash to redeem in full the 4,250,000 shares of its Series A SeniorParticipating Redeemable Convertible Preferred Stock currentlyoutstanding.  Should the holders of thepreferred exercise their optional redemption feature, the Company will berequired to obtain financing to make such redemption payment or negotiate anon-cash settlement.

 

# **Forward-looking and Cautionary Statements**

#  

Forward-lookingstatements in this report, including without limitation, statements related tothe Company’s plans, strategies, objectives, expectations, intentions andadequacy of resources, are made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  Investors are cautioned that suchforward-looking statements involve risks and uncertainties including withoutlimitation the following:  (i) theCompany’s plans, strategies, objectives, expectations and intentions aresubject to change at any time at the discretion of the Company; (ii) theCompany’s plans and results of operations will be affected by the Company’sability to manage its growth and resources; (iii) competition in the industryand the impact of competition on pricing, revenues and margins; (iv) theCompany’s ability to recruit and retain IT professionals; and (v) other risksand uncertainties indicated from time to time in the Company’s filings with theSecurities and Exchange Commission.

 

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

Forthe period ended June 30, 2004, the Company did not experience any materialchanges in market risk exposures that affect the quantitative and qualitativedisclosures presented in the Company’s Annual Report on Form 10-K for thefiscal year ended December 31, 2003.

 

**Item 4.Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in its Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to the Company’s management, including the Company’s ChiefExecutive Officer and Senior Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Such controls and procedures, by their nature, can provide onlyreasonable assurance regarding management’s control objectives.

 

TheCompany carried out an evaluation, under the supervision and with theparticipation of its management, including its Chief Executive Officer andSenior Financial Officer, on the effectiveness of the design and operation ofits disclosure controls and procedures pursuant to Exchange Act Rules 13a-15and 15d-15 as of June 30, 2004.  Basedupon that evaluation, the Company’s Chief Executive Officer and SeniorFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the Company’s Exchange Act reports.

 

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Whilethe Company believes that its existing disclosure controls and procedures havebeen effective to accomplish their objectives, the Company intends to continueto examine, refine and formulize its disclosure controls and procedures and tomonitor ongoing developments in this area.

 

**PART II.  OTHERINFORMATION**

 

**Item1.  Legal Proceedings.**

 

Inthe normal course of business, various claims are made against the Company. Atthis time, in the opinion of management, there are no pending claims theoutcome of which are expected to result in a material adverse effect on theconsolidated financial position or results of operations of the Company.

 

**Item.4.  Submission of Matters to a Vote ofSecurity Holders.**

 

TheCompany held its annual meeting of stockholders on May 5, 2004. Douglas K.Mellinger and Douglas A. Catalano were elected as Class I directors at theannual meeting with terms expiring in 2007.

 

DirectorElection Results.

 
| **Class I  Director** | ** ** | **Affirmative  Votes** | ** ** | **Withheld  Votes** |
|-----------------------|------------|------------------------|------------|---------------------|
| Douglas  K. Mellinger |       | 18,971,273             |       | 287,911             |
| Douglas  A. Catalano  |       | 18,973,656             |       | 285,528             |

 

 

Otherdirectors whose terms continued after the annual meeting and their termexpiration date.

 
| **Director**        | ** ** | **Class** | ** ** | **Term**     |
|---------------------|------------|-----------|------------|--------------|
| Robert  P. Forlenza |       | II        |       | Expires 2006 |
| Irwin  J. Sitkin    |       | II        |       | Expires 2006 |

 

Theonly other matter voted upon by the Company’s stockholders at the 2004 annualmeeting was a proposal to ratify the appointment of Ernst & Young LLP asthe Company’s auditors for 2004.  Holdersof 19,254,179 shares voted for this proposal, holders of 950 shares votedagainst or withheld authority to vote with respect to this proposal and holdersof 4,055 shares abstained or did not vote with respect to this proposal.

 

**Item.5.  Other Information.**

 

OnApril 1, 2004 the Company purchased 2,750,000 shares of its Series A SeniorParticipating Redeemable Convertible Preferred Stock, and a warrant to obtain1,875,000 shares of enherent’s Common Stock, from Primesoft, LLC.  The shares, as well as the warrant, wereretired.  Consideration paid by theCompany consisted of a cash payment of $250,000 and a three year, $150,000promissory note (bearing interest at the rate of 4% per annum) payable inannual installments of $50,000 beginning on April 15, 2005.

 

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OnApril 1, 2004 the Compensation Committee recommended and the Board of Directorsapproved canceling the October 27, 2003 award to Douglas A. Catalano of optionsto purchase 400,000 common shares, with a strike price equal to the marketvalue on the date of grant of $0.08 per share. These stock options werenon-qualified stock options.  The Boardfurther approved a grant of options to purchase 400,000 common shares to Mr.Catalano, with a strike price of $0.09 per share, which was the market value onthe date of grant.   These stock optionsare incentive stock options.  Options topurchase 100,000 shares vested on April 1, 2004, with the remainder to vest100,000 each year on April 1 for the next three years.

 

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**Item6. Exhibits and Reports on Form 8-K.**

 

(a)           Exhibits

 

Thefollowing is a list of exhibits filed as part of this quarterly report on Form10-Q:

 
| **Exhibit  No.** |   | **Description  of Exhibits**                                                                                                                                                                                        |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |   | Restated  Certificate of Incorporation (Incorporated by reference to Exhibit 4.1 of the  Company’s Form S-8 filed January 22, 1998).                                                                           |
| 3.2              |   | Certificate  of Amendment of Restated Certificate of Incorporation of enherent Corp.  (Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on  Form 10-K filed April 4, 2001).             |
| 3.3              |   | Amended  and Restated Bylaws (Incorporated by reference to Exhibit 4.2 of the  Company’s Form S-8 filed January 22, 1998).                                                                                     |
| 4.1              |   | Form  of Certificate of Common Stock (Incorporated by reference to Exhibit 4.1 of  the Company’s Annual Report on Form 10-K filed March 22, 2002).                                                             |
| 4.2              |   | Securities  Purchase Agreement dated April 13, 2000, by and among PRT Group Inc. and the  Investors named therein (Incorporated by reference to Exhibit 99.1 of the  Company’s Form 8-K filed April 14, 2000). |
| 4.3              |   | Form  of Certificate of Designations (Incorporated by reference to Exhibit 99.2 of  the Company’s Form 8-K filed April 14, 2000).                                                                              |
| 4.4              |   | Form  of Warrant (Incorporated by reference to Exhibit 99.3 of the Company’s form  8-K filed April 14, 2000).                                                                                                  |
| 10.1             |   | Amended  and Restated 1996 Stock Incentive Plan (Incorporated by reference to Exhibit  10.1 of the Company’s Form S-8 filed January 22, 1998).                                                                 |
| 10.2             |   | Stock  Purchase Agreement dated April 1, 2004 between enherent and Primesoft LLC  (Incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q filed  May 7, 2004).                                   |
| 10.3             |   | Promissory  Note dated April 1, 2004 between enherent and Primesoft LLC (Incorporated by  reference to Exhibit 10.5 of the Company’s Form 10-Q filed May 7, 2004).                                             |
| 31.1             |   | Certification  of the Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                           |
| 31.2             |   | Certification  of the Senior Financial Officer pursuant to 15 U.S.C. Section 7241, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed  herewith).                                         |
| 32.1             |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                           |
| 32.2             |   | Certification  of the Senior Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed  herewith).                                         |

 

(b)          Reports on Form 8-K

 

OnApril 7, 2004, the Company filed a Current Report on Form 8-K with theSecurities and Exchange Commission that included disclosure under Item 7(Financial Statements, *Pro Forma*Financial

 

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Informationand Exhibits) and Item 9 (Regulation FD Disclosure) announcing a press releasedisclosing the Company’s purchase of 2,750,000 shares of Series A SeniorParticipating Redeemable Convertible Preferred Stock and a warrant to obtain1,875,000 shares of the Company’s Common Stock from Primesoft LLC.  This Current Report on Form 8-K did notinclude financial statements.

 

OnApril 8, 2004, the Company filed a Current Report on Form 8-K with theSecurities and Exchange Commission that included disclosure under Item 7(Financial Statements, *Pro Forma*FinancialInformation and Exhibits) and Item 12 (Results of Operations and FinancialCondition) announcing a press release disclosing the Company’s results for theyear ended December 31, 2003.  ThisCurrent Report on Form 8-K included financial statements consisting ofconsolidated balance sheets for the years ended December 31, 2003 and 2002 andstatements of operations for the three-month periods ended December 31, 2003and 2002 and the years ended December 31, 2003 and 2002 in exhibit 99.1.

 

OnMay 7, 2004, the Company filed a Current Report on Form 8-K with the Securitiesand Exchange Commission that included disclosure under Item 7 (FinancialStatements, *Pro Forma*FinancialInformation and Exhibits) and Item 12 (Results of Operations and FinancialCondition) announcing a press release disclosing the Company’s preliminaryresults for the quarter ended March 31, 2004. This Current Report on Form 8-K included financial statements consistingof consolidated balance sheets for the three-month period ended March 31, 2004and the year ended December 31, 2003 and statements of operations for thethree-month periods ended March 31, 2004 and 2003 in exhibit 99.1.

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   |            | **enherent Corp.** |
|--------|-----------------|--------------------|
|   |            |               |   |
|   |            |               |   |
| DATE   | August 16, 2004 |               | BY | /S/ DOUGLAS A. CATALANO |
|   |            |               |   | Douglas  A. Catalano |
|   |            |               |   | Chairman,  Chief Executive Officer and President |
|   |            |               |   |   |
|   |            |               |   |   |
| DATE   | August 16, 2004 |               | BY | /S/ JAMES C. MINERLY |
|   |            |               | James  C. Minerly |
|   |            |               | Senior  Financial Officer |

 

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Exhibit Index:

 

 
| **Exhibit  No.** |   | **Description  of Exhibits**                                                                                                                                                                                        |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |   | Restated  Certificate of Incorporation (Incorporated by reference to Exhibit 4.1 of the  Company’s Form S-8 filed January 22, 1998).                                                                           |
| 3.2              |   | Certificate  of Amendment of Restated Certificate of Incorporation of enherent Corp.  (Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form  10-K filed April 4, 2001).             |
| 3.3              |   | Amended  and Restated Bylaws (Incorporated by reference to Exhibit 4.2 of the  Company’s Form S-8 filed January 22, 1998).                                                                                     |
| 4.1              |   | Form  of Certificate of Common Stock (Incorporated by reference to Exhibit 4.1 of  the Company’s Annual Report on Form 10-K filed March 22, 2002).                                                             |
| 4.2              |   | Securities  Purchase Agreement dated April 13, 2000, by and among PRT Group Inc. and the  Investors named therein (Incorporated by reference to Exhibit 99.1 of the  Company’s Form 8-K filed April 14, 2000). |
| 4.3              |   | Form  of Certificate of Designations (Incorporated by reference to Exhibit 99.2 of  the Company’s Form 8-K filed April 14, 2000).                                                                              |
| 4.4              |   | Form  of Warrant (Incorporated by reference to Exhibit 99.3 of the Company’s form  8-K filed April 14, 2000).                                                                                                  |
| 10.1             |   | Amended  and Restated 1996 Stock Incentive Plan (Incorporated by reference to Exhibit  10.1 of the Company’s Form S-8 filed January 22, 1998).                                                                 |
| 10.2             |   | Stock  Purchase Agreement dated April 1, 2004 between enherent and Primesoft LLC  (Incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q filed  May 7, 2004).                                   |
| 10.3             |   | Promissory  Note dated April 1, 2004 between enherent and Primesoft LLC (Incorporated by  reference to Exhibit 10.5 of the Company’s Form 10-Q filed May 7, 2004).                                             |
| 31.1             |   | Certification  of the Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                           |
| 31.2             |   | Certification  of the Senior Financial Officer pursuant to 15 U.S.C. Section 7241, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed  herewith).                                         |
| 32.1             |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).                                           |
| 32.2             |   | Certification  of the Senior Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed  herewith).                                         |

 

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