**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  September 30, 2003**                                                                                                                                                                     |
|       |                                                                                                                                                                                                                            |
|       | **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**                                                                                                                                                                                              |

 

**enherentCorp.**

(Exact name ofRegistrant as Specified in Its Charter)

 

| **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 markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES  ý        NO  o

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock as of thelatest practicable date:

 

| **Class**                     |   | **Shares outstanding as of November 10, 2003** |
|-------------------------------|--------|-----------------------------------------------------|
|                          |   |                                                |
| Common stock, par value $.001 |   | 17,552,188                                          |

 

 

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**enherent Corp. and Subsidiaries**

 

## **INDEX**

## ** **

| **PART I.  FINANCIAL INFORMATION**                                                                              |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                      |   |
| **Item 1.  Financial Statements.**                                                                                   |   |
|                                                                                                                      |   |
| **Condensed  Consolidated Balance Sheets as of September 30,  2003 and December 31, 2002**                      |   |
|                                                                                                                      |   |
| **Condensed  Consolidated Statements of Operationsfor  the three and nine months ended September 30, 2003 and 2002** |   |
|                                                                                                                      |   |
| **Condensed  Consolidated Statements of Cash Flowsfor  the nine months ended September 30, 2003 and 2002**           |   |
|                                                                                                                      |   |
| **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 5.  Other Information**                                                                                       |   |
|                                                                                                                      |   |
| **Item 6.  Exhibits and Reports on Form 8-K**                                                                        |   |
|                                                                                                                      |   |
| **Signatures**                                                                                                            |   |
|                                                                                                                      |   |
| **Exhibit  Index**                                                                                                        |   |

 

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##### **Item1. Financial Statements**

#####  

enherent Corp. andSubsidiaries

Condensed ConsolidatedBalance Sheets

*(In thousands, except number ofshares)*

 
|                                                                                                                                                                                                                       |   | **September 30,  2003** |       | **December 31,  2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                                                       |   | **(unaudited)**              |       | **(Note 1)**                |       |
| **Assets**                                                                                                                                                                                                                 |   |                         | ** ** |                        | ** ** |
| Current  assets:                                                                                                                                                                                                           |   |                         | ** ** |                        | ** ** |
| Cash and equivalents                                                                                                                                                                                                       |   | $                            | 2,755      |                        | $          | 3,067 |   |
| Accounts  receivable, net of allowance of $6 at September 30, 2003 and $57 at  December 31, 2002                                                                                                                 |   | 1,349                        |       | 1,926                       |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                 |   | 131                          |       | 259                         |       |
| Total  current assets                                                                                                                                                                                                      |   | 4,235                        |       | 5,252                       |       |
|                                                                                                                                                                                                                       |   |                         |       |                        |       |
| Fixed  assets, net                                                                                                                                                                                                         |   | 205                          |       | 477                         |       |
| Other  assets                                                                                                                                                                                                              |   | 58                           |       | 69                          |       |
| Total assets                                                                                                                                                                                                               |   | $                            | 4,498      |                        | $          | 5,798 |   |
|                                                                                                                                                                                                                       |   |                         |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                                             |   |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                                                                      |   |                         |       |                        |       |
| Accounts  payable                                                                                                                                                                                                          |   | $                            | 302        |                        | $          | 470 |   |
| Accrued  compensation                                                                                                                                                                                                      |   | 338                          |       | 283                         |       |
| Accrued  expenses                                                                                                                                                                                                          |   | 371                          |       | 294                         |       |
| Current  portion of capital lease obligations                                                                                                                                                                              |   | 5                            |       | 14                          |       |
| Deferred  revenue                                                                                                                                                                                                          |   | 43                           |       | 171                         |       |
| Total  current liabilities                                                                                                                                                                                                 |   | 1,059                        |       | 1,232                       |       |
|                                                                                                                                                                                                                       |   |                         |       |                        |       |
| Capital  lease obligations, net of current portion                                                                                                                                                                         |   | 1                            |       | 5                           |       |
| Deferred  rent                                                                                                                                                                                                             |   | 35                           |       | 58                          |       |
| Total  liabilities                                                                                                                                                                                                         |   | 1,095                        |       | 1,295                       |       |
|                                                                                                                                                                                                                       |   |                         |       |                        |       |
| Commitments  and contingencies                                                                                                                                                                                             |   |                         |       |                        |       |
|                                                                                                                                                                                                                       |   |                         |       |                        |       |
| Series  A senior participating redeemable convertible preferred stock, $0.001 par  value; authorized - 10,000,000 shares; issued and outstanding - 7,000,000  shares at September 30, 2003 and December 31, 2002 |   | 5,974                        |       | 5,553                       |       |
|                                                                                                                                                                                                                       |   |                         |       |                        |       |
| Common  stockholders’ equity (deficit):                                                                                                                                                                               |   |                         |       |                        |       |
| Common  stock, $0.001 par value; authorized - 50,000,000 shares; issued - 19,351,311  shares; outstanding - 17,502,188 shares at September 30, 2003 and  December 31, 2002                                       |   | 19                           |       | 19                          |       |
| Additional  paid-in capital                                                                                                                                                                                                |   | 94,422                       |       | 94,411                      |       |
| Treasury  stock, at cost - 1,849,123 shares at September 30, 2003 and  December 31, 2002                                                                                                                         |   | (366                         | )          | (366                        | )          |
| Accumulated  deficit                                                                                                                                                                                                       |   | (96,646                      | )          | (95,114                     | )          |
| Total  common stockholders’ deficit                                                                                                                                                                                   |   | (2,571                       | )          | (1,050                      | )          |
|                                                                                                                                                                                                                       |   |                         |       |                        |       |
| Total liabilities and stockholders’ deficit                                                                                                                                                                           |   | $                            | 4,498      |                        | $          | 5,798 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

1

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enherentCorp. and Subsidiaries

Condensed ConsolidatedStatements of Operations

* *

*(In thousands, except per sharedata)*

(Unaudited)

 
|                                                                                                 |   | **Three  Months  Ended September 30** |   | **Nine  Months  Ended September 30** |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                 |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Revenues                                                                                             |   | $                                          | 2,708  |                                      | $      | 4,944 |   | $ | 9,527 |   | $ | 16,411 |   |
| Cost of revenues                                                                                     |   | 2,086                                      |   | 3,908                                     |   | 7,370 |   | 12,965 |   |
| Gross profit                                                                                         |   | 622                                        |   | 1,036                                     |   | 2,157 |   | 3,446 |   |
|                                                                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Selling,  general and administrative expenses                                                        |   | 792                                        |   | 1,940                                     |   | 3,276 |   | 7,182 |   |
| Loss  from operations                                                                                |   | (170                                       | )      | (904                                      | )      | (1,119 | ) | (3,736 | ) |
|                                                                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Other  income (expense):                                                                             |   |                                       |   |                                      |   |   |   |   |   |
| Miscellaneous  income                                                                                |   | (1                                         | )      | 2                                         |   | 4 |   | 5 |   |
| Interest  expense                                                                                    |   | —                                     |   | (2                                        | )      | (3 | ) | (8 | ) |
| Interest  income                                                                                     |   | 2                                          |   | 5                                         |   | 7 |   | 30 |   |
| Net loss                                                                                             |   | (169                                       | )      | (899                                      | )      | (1,111 | ) | (3,709 | ) |
| Preferred stock accretion and income applicable to  common stockholders                              |   | (144                                       | )      | (128                                      | )      | (421 | ) | 147 |   |
| Net loss applicable to common stockholders                                                           |   | $                                          | (313   | )                                         | $      | (1,027 | ) | $ | (1,532 | ) | $ | (3,562 | ) |
|                                                                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Basic and diluted net loss per share applicable to  common stockholders                              |   | $                                          | (.02   | )                                         | $      | (.06 | ) | $ | (.09 | ) | $ | (.20 | ) |
| Number of shares used in computing basic and  diluted  net loss per share (000’s  omitted) |   | 17,502                                     |   | 17,502                                    |   | 17,502 |   | 17,502 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

2

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enherent Corp. andSubsidiaries

Condensed ConsolidatedStatements of Cash Flows

*(In thousands)*

(Unaudited)

 
|                                                                         |   | **Nine  Months Ended September 30** |   |
|------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                         |   | **2003**                                 |   | **2002** |   |
| **Cash  flows from operating activities**                                    |   |                                     |   |   |   |
| Net loss                                                                     |   | $                                        | (1,111 | ) | $ | (3,709 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                     |   |   |   |
| Depreciation  and amortization                                               |   | 255                                      |   | 707 |   |
| Provision  (credit) for doubtful accounts                                    |   | 28                                       |   | (180 | ) |
| Loss  on disposal of fixed assets                                            |   | 10                                       |   | 1 |   |
| Deferred  rent                                                               |   | (23                                      | )      | (25 | ) |
| Stock  option activity                                                       |   | 11                                       |   | — |   |
| Changes  in operating assets and liabilities:                                |   |                                     |   |   |   |
| Accounts  receivable                                                         |   | 549                                      |   | 844 |   |
| Prepaid  expenses and other current assets                                   |   | 128                                      |   | 93 |   |
| Other  assets                                                                |   | 11                                       |   | 15 |   |
| Accrued  compensation                                                        |   | 55                                       |   | (253 | ) |
| Accounts  payable and other accrued expenses                                 |   | (91                                      | )      | (11 | ) |
| Deferred  revenue                                                            |   | (128                                     | )      | (64 | ) |
| Net  cash used in operating activities                                       |   | (306                                     | )      | (2,582 | ) |
|                                                                         |   |                                     |   |   |   |
| **Cash  flows from investing activities**                                    |   |                                     |   |   |   |
| Purchases  of fixed assets                                                   |   | —                                   |   | (110 | ) |
| Proceeds  from sale of fixed assets                                          |   | 7                                        |   | 206 |   |
| Net  cash provided by  investing activities                             |   | 7                                        |   | 96 |   |
|                                                                         |   |                                     |   |   |   |
| **Cash  flows from financing activities**                                    |   |                                     |   |   |   |
| Purchase  of treasury stock                                                  |   | —                                   |   | (200 | ) |
| Principal  payments under capital lease obligations                          |   | (13                                      | )      | (16 | ) |
| Net  cash used in financing activities                                       |   | (13                                      | )      | (216 | ) |
|                                                                         |   |                                     |   |   |   |
| Net  decrease in cash and equivalents                                        |   | (312                                     | )      | (2,702 | ) |
| Cash  and equivalents at beginning of period                                 |   | 3,067                                    |   | 5,269 |   |
| Cash  and equivalents at end of period                                       |   | $                                        | 2,755  |   | $ | 2,567 |   |
|                                                                         |   |                                     |   |   |   |
| **Supplemental  disclosure of cash flow information**                        |   |                                     |   |   |   |
| Interest  paid                                                               |   | $                                        | 3      |   | $ | 8 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

3

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**enherent Corp.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

1.               Basis ofPresentation

 

The unaudited condensedconsolidated financial statements presented herein have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Item 10-01 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, the accompanying condensed consolidatedfinancial statements include all adjustments (consisting only of normalrecurring entries, except as disclosed) considered necessary for a fairpresentation of the financial condition and results of operations for theperiods presented.  The results ofoperations for the three-month and nine-month periods ended September 30,2003 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2003. The condensed consolidated balance sheet asof December 31, 2002 was derived from the audited consolidated balancesheet as of that date. The statements should be read in conjunction with theaudited consolidated financial statements and notes thereto included in theenherent Corp. (the “Company”) Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

The Company anticipatesthat its primary uses of working capital in the near term will be to fund theCompany’s operations.  Managementbelieves that the cash equivalents are sufficient to fund operations for thenext 12 months.  If 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.If the Company is unsuccessful in obtaining additional sources of financing,the Company could experience difficulty meeting its current obligations as theybecome due.

 

2.               Principles ofConsolidation

 

The accompanyingfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries.  All significantintercompany balances and transactions have been eliminated in consolidation.

 

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3.               Stock-Based Compensation

 

The Companyaccounts for stock options using the intrinsic value method set forth inAccounting 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.

 

The followingtable illustrates the effect on net loss and loss per share if the Company hadapplied the fair value recognition provisions of SFAS 123 instead of APBOpinion No. 25’s intrinsic value method to account for stock-based employeecompensation (in thousands, except per share amounts):

 
|                                                                |   | **Three months ended  September 30** |   | **Nine months ended  September 30** |   |
|---------------------------------------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|                                                                |   | **2003**                                  |   | **2002**                                 |   | **2003** |   | **2002** |   |
|                                                                |   |                                      |   |                                     |   |   |   |   |   |
| Net loss available to common  stockholders as reported              |   | $                                         | (313   | )                                        | $      | (1,027 | ) | $ | (1,532 | ) | $ | (3,562 | ) |
| Total stock option expense  determined under fair value base method |   | (28                                       | )      | (167                                     | )      | (164 | ) | (776 | ) |
| Pro forma net loss                                                  |   | $                                         | (341   | )                                        | $      | (1,194 | ) | $ | (1,696 | ) | $ | (4,338 | ) |
| Net loss per common share as reported: basic and  diluted           |   | $                                         | (.02   | )                                        | $      | (.06 | ) | $ | (.09 | ) | $ | (.20 | ) |
| Net loss per common share pro forma: basic and diluted              |   | $                                         | (.02   | )                                        | $      | (.07 | ) | $ | (.10 | ) | $ | (.25 | ) |

 

Pro formainformation regarding net loss and loss per share is required by SFAS No. 123and 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:

 
|                                                                               |   | **September 30,** |   |
|------------------------------------------------------------------------------------|--------|------------------------|--------|
| **Assumption**                                                                     |   | **2003**               |   | **2002** |   |
|                                                                               |   |                   |   |   |   |
| Risk-free  interest rate                                                           |   | 2.00                   | %      | 2.99 | % |
| Dividend  yield                                                                    |   | 0                      | %      | 0 | % |
| Volatility factor of the expected market price of  the Company’s Common Stock |   | 1.50                   |   | 1.40 |   |
| Average life years                                                                 |   | 5                      |   | 5 |   |

 

On September 23, 2003 the Board of Directors of the Company approvedthe partial vesting of Incentive Stock Options (ISOs) previously granted toRobert Merkl,

 

5

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Chairman, President and Chief Executive Officer, whoresigned to pursue other opportunities. As these options would not have vestednormally before October 28, 2003, the early vesting was deemed a new award. Inconnection with this award the Company recognized compensation  expense of approximately $11,000. Mr. Merkl,who is remaining with the Company as a director, did not participate in theBoard’s deliberations or voting on this matter.

 

4.               Series A SeniorParticipating Redeemable Convertible Preferred Stock

 

On January 30, 2002,with the approval of its Board of Directors, enherent entered into a StockPurchase Agreement (the “Stock Purchase Agreement”) with The TravelersIndemnity Company (“The Travelers”), pursuant to which The Travelers converted1,000,000 shares of its Series A Senior Participating Redeemable ConvertiblePreferred Stock into 1,000,000 shares of enherent Common Stock. Under the termsof the Stock Purchase Agreement, The Travelers then sold the 1,000,000 sharesof Common Stock to enherent for $200,000, with such shares considered treasuryshares.  The Preferred Stock was carriedat approximately $720,000 at the date of the transaction.  Because the Common Stock was purchased belowthe carrying value of the Preferred Stock, a benefit to common shareholders ofapproximately $527,000 was recorded.

 

The remaining PreferredStock is being accreted to its liquidation value at April 12, 2005 of$7,000,000. Accretion of approximately $144,000 and $128,000 was recognized inthe three-month periods ending September 30, 2003 and 2002, respectively.In the nine- month periods ending September 30, 2003 and 2002, accretionof approximately $421,000 and $380,000, respectively, was recognized.

 

In May 2003, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 150, "Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity" (“SFAS150”). This statement establishes standards for classifying and measuring, asliabilities, certain financial instruments that embody obligations of theissuer and have characteristics of both liabilities and equity. SFAS 150generally requires liability classification for financial instruments,including mandatorily redeemable equity instruments and other non-equityinstruments requiring, from inception, the repurchase by the issuer of itsequity shares. This statement is applicable to the Company as of the beginningof the first interim financial reporting period beginning after June 15, 2003.The adoption of this Statement did not have a significant effect on theCompany’s financial position as of September 30, 2003 or on the results ofoperations for the three-month or nine-month periods ending September 30, 2003.

 

6

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5.               Loss Per Share

 

The following sets forth the computation of basic and diluted loss pershare (in thousands, except per share data):

 
|                                                    |   | **Three months ended  September 30** |   | **Nine months ended  September 30** |   |
|---------------------------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|                                                    |   | **2003**                                  |   | **2002**                                 |   | **2003** |   | **2002** |   |
| Numerator:                                              |   |                                      |   |                                     |   |   |   |   |   |
| Net loss available to commonstockholders                |   | $                                         | (313   | )                                        | $      | (1,027 | ) | $ | (1,532 | ) | $ | (3,562 | ) |
| Denominator:                                            |   |                                      |   |                                     |   |   |   |   |   |
| Weighted average sharesoutstanding (000’s omitted) |   | 17,502                                    |   | 17,502                                   |   | 17,502 |   | 17,502 |   |
|                                                    |   |                                      |   |                                     |   |   |   |   |   |
| Basic and diluted loss per  share                       |   | $                                         | (.02   | )                                        | $      | (.06 | ) | $ | (.09 | ) | $ | (.20 | ) |

 

The Company has excluded the impact of the redeemableconvertible preferred stock and related warrants and stock options outstandingunder the Company’s stock option plan as the effect would be anti-dilutive.

 

6.               Office Closure

 

To reduce costs and increase efficiency, the Companyhas closed its Dallas, Texas office and centralized that office’sadministrative and financial functions at the Company’s Windsor, Connecticutcorporate office. The closure and relocation was effectively completed in thesecond quarter of 2003.

 

In accordance with Statement of Financial AccountingStandards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit orDisposal Activities,” costs associated with training personnel, travel, movingexpenses and duplicate facility costs are expensed as incurred and are expectedto total approximately $101,000. Benefits costs, for which employees are required to render servicesuntil they are terminated consisting of severance and stay bonuses for sixadministrative personnel, are recognized over the service period. The totalbenefit costs associated with the closure will be approximately $103,000. Thetotal costs of the closure will be approximately $204,000. In the nine monthsended September 30, 2003, the Company has incurred approximately $184,000in costs, including $12,000 incurred in the quarter ended September 30,2003. These costs, which have all been paid, are included in selling, generaland administrative expenses in the Condensed Consolidated Statements ofOperations. Remaining benefit costs, of approximately  $20,000 are expected to be incurred, and will be expensed in thefourth quarter of 2003.

 

7

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7.               Contingencies

 

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

 

# **Item 2.**           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

# ** **

**Critical Accounting Policies**

** **

Use of Estimates

 

As described in Note 1,the condensed consolidated financial statements presented elsewhere in thisdocument, have been prepared in conformity with generally accepted accountingprinciples for interim financial information and with instructions to Form 10-Qand Rule 10 of Regulation S-X. The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

Revenue Recognition

 

Revenues are primarilyderived from consultants on engagements with clients for a period of time. Therevenues from these time and materials contracts are recognized during theperiod in which the related services are provided. Revenues in 2003 alsoinclude fees earned on recruiting individuals for positions in client companiesas full time employees (permanent placements). Revenues from permanentplacement have been recognized when the candidate has satisfied any guaranteeperiod.  Such guarantee periods rangefrom 30 to 90 days.

 

Accounts Receivable andAllowance for Doubtful Accounts

 

The Company’s accountsreceivable balance is reported net of estimated allowances for balances notexpected to be collectible.  The Companyregularly evaluates the collectabilty of amounts owed to it based on theability of the debtor to make payments. When the Company’s evaluation indicatesthat a customer will be unable to satisfy its obligation, the Company willrecord a reserve to reflect this anticipated loss.  The Company periodically reviews the requirements for, andadequacy of the reserve for doubtful accounts.

 

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Fixed Assets

 

Fixed assets are statedat cost and depreciation on furniture and equipment, computer equipment andsoftware is calculated on the straight-line method over the estimated usefullives of the assets ranging from three to seven years. Equipment held undercapital leases and leasehold improvements are amortized using the straight-linemethod over the shorter of the lease term or estimated useful life of theasset.  The Company evaluates long-livedassets for impairment and records charges in operating results when events andcircumstances indicate that assets may be impaired. The impairment charge isdetermined based upon the amount by which the net book value of the assetexceeds its estimated fair market value or undiscounted cash flow. Noimpairment charges have been recognized in any of the periods presented herein.

 

**Results of Operations**

 

*Revenues.*  Revenues decreased $2.2 million during thethree-month period ended September 30, 2003 to $2.7 million comparedto  $4.9 million for the three-monthperiod ended September 30, 2002. Revenues decreased  $6.9 million during the nine-month periodended September 30, 2003 to $9.5 million compared to $16.4 million for thenine-month period ended September 30, 2002. The decrease in revenue was a resultof the completion of client projects, non-renewal of certain client assignmentsand billing rate reductions. Revenue in the three-month period endingSeptember 30, 2003 included $30,000 in permanent placement fees.  There were no such revenues earned in thecomparable prior year period.

 

*Cost of Revenues.*  Cost of revenues decreased $1.8 million forthe three-month period ended September 30, 2003 to $2.1 million comparedto $3.9 million for the three-month period ended September 30, 2002. Costof revenues decreased $5.6 million for the nine-month period endedSeptember 30, 2003 to $7.4 million compared to $13.0 million for thenine-month period ended September 30, 2002. The decrease in cost ofrevenues was attributable to the overall decrease in revenues. Cost of revenuesas a percentage of revenues decreased from 79.0% for the three-month periodended September 30, 2002 to 77.0% for the three-month period endedSeptember 30, 2003. Cost of revenues as a percentage of revenues decreasedfrom 79.0% for the nine-month period ended September 30, 2002 to 77.4% forthe nine-month period ended September 30, 2003.

 

*Gross Profit.*  Gross profit as a percentage of revenues forthe three-month period ended September 30, 2003 was 23.0% versus 21.0% inthe comparable prior year period. In the nine-month period endedSeptember 30, 2003 the gross profit as a percentage of revenues was 22.6%compared to the 21.0% gross profit as a percentage of revenues for thenine-month period ended September 30, 2002.  The increase in gross profit as a percentage of revenues for thethree and nine month periods ended September 30, 2003 versus thecomparable periods of 2002 is primarily due to three contributing factors.  First, the Company has completed low marginand unprofitable contracts.  Second, theCompany has managed its billable workforce to attempt to minimize the expenseof non-billed time.

 

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Third,where engagement renewals result in lower billing rates for consultants, the Companyhas in turn reduced the consultant’s rate of compensation. Gross profit in theperiods ending September 2003 include fees earned from permanentplacements. No such fees were earned in the comparable 2002 periods.

 

*Selling, General &Administrative (SG&A)**Expenses. *SG&Aexpenses decreased approximately 59.7% to $0.8 million in the three-monthperiod ended September 30, 2003 from $1.9 million for the comparableperiod in 2002.  In the nine-monthperiod ended September 30, 2003, SG&A expenses of $3.3 million was$3.9 million or 54.5% lower than the $7.2 million for the comparable period inthe prior year. SG&A expenses as a percentage of revenue was 28.8% and34.3% for the three month and nine month periods ended September 30, 2003,respectively. These amounts are favorable to the 39.2% and 43.8% rates forcomparable periods of 2002.

 

Thelower level of SG&A expenses for the three-month period endingSeptember 30, 2003 versus the comparable period of the prior year includethe absence in the current year of management bonus - $0.3 million, eliminationof $0.4 million of costs associated with the closed Barbados Solutions Centerand other on-going cost reduction programs.

 

Thedecrease in SG&A expenses for the nine-month period endedSeptember 30, 2003 compared to the nine-month period endedSeptember 30, 2002 is primarily the result of eliminating expensesassociated with the closure of the Barbados Solution Center accounting forapproximately $1.3 million, overall staffing and personnel related cost reductions,including non-billing staffing reductions of $1.1 million, the settlement of alawsuit in May, 2002, which resulted in the payment of approximately $0.3million, and other cost-cutting measures which account for approximately $1.2 million.

 

*Loss from Operations.*Loss from operations for the three-month period ended September 30, 2003decreased to $170,000 as compared to a loss from operations of $904,000 in thecomparable period in 2002.  As apercentage of revenues, the loss from operations for the three-month periodended September 30, 2003 decreased to 6% as compared to approximately18.3% in the comparable period in 2002.

 

Lossfrom operations for the nine-month period ended September 30, 2003decreased to $1,119,000 as compared to a loss from operations of $3,736,000 inthe comparable period in 2002.  As apercentage of revenues, the loss from operations for the nine-month periodended September 30, 2003 decreased to 11.6% as compared to approximately22.8% in the comparable period in 2002.

 

*Preferred Stock Dividends and Accretion Net of Benefit toCommon Stockholders*.Accretion on the preferred stock of approximately $144,000 and $128,000 wasrecognized in the three-month period ended September 30, 2003 and 2002,respectively. In the nine-month period ended September 30, 2003 and 2002,accretion of approximately $421,000 and $380,000, respectively, wasrecognized.  In the quarter endedMarch 31, 2002, the Company recorded a benefit to common stockholders of

 

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approximately $527,000 related to the stock purchaseagreement with the Travelers (see Note 4 to the accompanying financialstatements).

 

# **Liquidityand Capital Resources**

# ** **

*Working Capital:*  The Company’s working capital decreased toapproximately $3.2 million at September 30, 2003 from $4.0 million atDecember 31, 2002.  Cash and cashequivalents were $2.8 million at September 30, 2003 compared to $3.1million at December 31, 2002.  Theprimary use of cash during the nine-month period ended September 30, 2003was to fund operating activities of approximately $0.3 million. The Company’saccounts receivables were $1.3 million at September 30, 2003 and $1.9million at December 31, 2002. Billed days sales outstanding, net ofallowance for doubtful accounts, were 46 days at September 30, 2003 and 40days at December 31, 2002.

 

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 September 30, 2003are sufficient to fund operations for the next 12 months and satisfy allobligations under capital and non-cancelable operating leases. As ofSeptember 30, 2003 the Company’s obligations under capital leases total$6,000, all of which is due in the next year, and obligations undernon-cancelable operating leases total $210,000, including $18,000 due afterSeptember 30, 2004.  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.

 

# **SignificantAccounting Policies**

 

In May 2003, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity” (“SFAS 150”). This statement establishes standards for classifying andmeasuring, as liabilities, certain financial instruments that embodyobligations of the issuer and have characteristics of both liabilities andequity. SFAS 150 generally requires liability classification for financialinstruments, including mandatorily redeemable equity instruments and othernon-equity instruments requiring, from inception, the repurchase by the issuerof its equity shares. This statement is applicable to the Company as of thebeginning of the first interim financial reporting period beginning afterJune 15, 2003. The adoption of this Statement did not have a significanteffect on the Company’s financial position as of September 30, 2003 or onthe results of operations for the three-month or nine-month periods endingSeptember 30, 2003.

 

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# **Forward-lookingand 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 such forward-looking statementsinvolve risks and uncertainties including without limitation thefollowing:  (i) the Company’s plans,strategies, objectives, expectations and intentions are subject to change atany time at the discretion of the Company; (ii) the Company’s plans and resultsof operations will be affected by the Company’s ability to manage its growthand resources; (iii) competition in the industry and the impact of competitionon pricing, revenues and margins; and (iv) other risks and uncertaintiesindicated from time to time in the Company’s filings with the Securities andExchange Commission.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

Forthe period ended September 30, 2003, the Company did not experience any material changes in marketrisk exposures that affect the quantitative and qualitative disclosurespresented in the Company’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2002.

 

**Item 4. Controls andProcedures.**

 

**Evaluation of Disclosure Controls andProcedures**

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in its ExchangeAct reports is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information is accumulatedand communicated 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.

 

The Company carried out an evaluation, under the supervisionand with the participation of its management, including its Chief ExecutiveOfficer and Senior Financial Officer, on the effectiveness of the design andoperation of its disclosure controls and procedures pursuant to Exchange ActRules 13a-15 and 15d-15 as of September 30, 2003.  Based upon that evaluation, the Company’sChief Executive Officer and Senior Financial Officer concluded that theCompany’s disclosure controls and procedures are effective in timely alertingthem to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s ExchangeAct reports.

 

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While the Company believes that its existing disclosurecontrols and procedures have been effective to accomplish their objectives, theCompany intends to continue to examine, refine and formulize its disclosurecontrols and procedures and to monitor ongoing developments in this area.

 

**PART II.  OTHERINFORMATION**

 

**Item1.  Legal Proceedings.**

 

In the normal course of business, various claims are madeagainst the Company. At this time, in the opinion of management, there are nopending claims the outcome of which are expected to result in a materialadverse effect on the consolidated financial position or results of operationsof the Company.

 

**Item.5.  Other Information.**

 

Effective August 7, 2003, Isaac Shapiro resigned fromthe Board of Directors of the Company for personal reasons.

 

Effective August 7, 2003, the Board of Directors of theCompany elected Douglas A. Catalano as a Director of the Company to fill thevacancy created by the resignation of Isaac Shapiro.  Douglas A. Catalano was also elected as a member of the AuditCommittee.

 

Effective October 15, 2003, Robert D. Merkl resigned asChairman, President and CEO of the Company. Mr. Merkl left the Company to pursue other interests.  Mr. Merkl will remain on the Company’s Boardof Directors.

 

Effective October 15, 2003, Douglas A. Catalano wasnamed interim CEO of the Company.  Mr.Catalano and the Company are not parties to an Employment Agreement.  Pursuant to the terms of Mr. Catalano’s interimappointment, he earns $1,250 per day with a target bonus opportunity of $25,000per quarter beginning with the first quarter of 2004.  Mr. Catalano is eligible to participate in the Company’s StockOption Plan.  Mr. Catalano received astock option grant of 400,000 shares, with a strike price of $0.08 pershare.  100,000 shares vested onOctober 27, 2003, with the remainder to vest 100,000 each year onOctober 27 for the next three years provided Mr. Catalano remains anofficer of the Company.  The Board ofDirectors will review the terms of this interim arrangement afterMarch 31, 2004.  Due to hisappointment as interim CEO, Mr. Catalano resigned from the Audit Committee.

 

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**Item 6. Exhibitsand Reports on Form 8-K**

** **

(a)           Exhibits

 

The following is a list of exhibitsfiled as part of this quarterly report on Form 10-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             |   | Employment Agreement  between Robert D. Merkl and the Company dated November 1, 2002 (Filed  herewith, including Exhibit 2).                                                                                                    |
|   | 31.1             |   | Certification of the  Interim 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  Interim 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

 

On August 13, 2003, the Company filed a Current Report on Form 8-Kwith the Securities and Exchange Commission that included disclosure underItems 7 and 12 related to Financial Statement and Regulation FD Disclosuresregarding a press release disclosing the Company’s

 

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preliminary results for the quarter ended September 30, 2003.  This Current Report on Form 8-K includedfinancial statements consisting of a balance sheet and statement of operationsfor the nine-month period ended September 30, 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   | November 13,  2003 |               | BY | /S/  DOUGLAS A. CATALANO |   |
|   |                    |               |   | Douglas  A. Catalano |
|   |                    |               |   | Interim Chief Executive  Officer |
|   |                    |               |   |   |
|   |                    |               |   |   |
| DATE   | November 13,  2003 |               | 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             |   | Employment Agreement  between Robert D. Merkl and the Company dated November 1, 2002 (Filed  herewith, including Exhibit 2).                                                                                                    |
| 31.1             |   | Certification of the  Interim 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  Interim 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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