U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
____________
COMMISSION FILE NO.: 000-30326
VSOURCE, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-3538903
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5740 RALSTON STREET, SUITE 110
VENTURA, CALIFORNIA 93003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 677-6720
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Yes X No
--- ---
Number of shares of Common Stock, par value $.01, outstanding as of June 12,
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,815,421
Number of shares of Series 1-A Convertible Preferred Stock, par value $.01
outstanding as of June 12, 2000 . . . . . . . . . . . . 2,802,000
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 7
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . 20
Item 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 21
Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 13. EXHIBITS, REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . 22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
April 30, 2000 January 31, 2000
(unaudited)
-------------- ----------------
<S> <C> <C>
Current assets:
Cash in bank $ 3,868,134 $ 5,124,399
Restricted cash 84,965 82,768
-------------- ----------------
Total Cash 3,953,099 5,207,167
Employee receivables 155,847 109,847
Prepaid expenses 149,280 --
-------------- ----------------
Total current assets 4,258,226 5,317,014
Property and equipment
Fixed assets 411,058 240,208
Less: accumulated depreciation (35,516) (17,708)
-------------- ----------------
Property and equipment, net 375,542 222,500
Other assets 1,197 881
-------------- ----------------
$ 4,634,965 $ 5,540,395
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 839,195 $ 247,472
Accrued expenses 163,984 100,937
Convertible notes payable 150,000 150,000
Liabilities related to private placement of
preferred stock -- 6,002,500
-------------- ----------------
Total Current Liabilities 1,153,179 6,500,909
Shareholders' Equity (Deficit)
Preferred stock ($0.01 par value, 5,000,000 shares
authorized: 2,802,000 issued and outstanding) 28,020 --
Common stock ($0.01 par value, 50,000,000 shares
authorized: 15,815,421 issued and outstanding) 158,154 158,071
Additional paid-in capital 44,804,735 10,645,934
Deferred compensation (18,848,570) (1,780,817)
Accumulated equity (deficit) (22,481,755) (9,804,904)
Less: Notes receivable from the sale of stock (178,798) (178,798)
-------------- ----------------
Total Shareholders' Equity (Deficit) 3,481,786 (960,514)
-------------- ----------------
$ 4,634,965 $ 5,540,395
============== ================
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED
(UNAUDITED)
April 30, 2000 April 30, 1999
-------------- --------------
<S> <C> <C>
Revenue $ -- $ 4,060
Expenses
General and administrative (excluding $2,752,889
of stock based compensation for the period
ended April 30, 2000) 895,910 337,647
Research and development (excluding $601,448
of stock based compensation for the period
ended April 30, 2000) 1,591,307 --
Stock-based compensation 3,354,337 --
-------------- --------------
5,841,554 337,647
Loss from operations (5,841,554) (333,587)
Other income/(expense)
Interest income 38,399
Interest expense (3,699) --
-------------- --------------
Loss before income taxes (5,806,854) (333,587)
Provision for income taxes 1,600 --
-------------- --------------
Net loss $ (5,808,454) $ (333,587)
============== ==============
Basic loss available to $ (12,676,851) $ (333,587)
common stockholders (Note 5) ============== ==============
Basic weighted average number of
common shares outstanding: 15,815,421 11,838,164
============== ==============
Net loss per share available to common stockholders
Basic $ (0.80) $ (0.03)
============== ==============
Diluted $ (0.80) $ (0.03)
============== ==============
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED
(UNAUDITED)
April 30, 2000 April 30, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,808,454) $ (333,587)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 18,027 13,194
Compensation expense for stock option grants 1,106,431 --
Compensation expense for warrant grants 2,083,250 --
Compensation expense for stock issued 164,656 --
Issuance of stock and debt for services, expense
reimbursements and accrued interest -- 43,775
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable -- 3,590
(Increase)/decrease in employee receivables (46,000) --
(Increase)/decrease in prepaid expenses (149,280) 11,250
(Increase)/decrease in other assets (535) --
Increase/(decrease) in accounts payable 591,723 2,906
Increase/(decrease) in deferred revenue -- (1,384)
Increase/(decrease) in accrued expenses 63,047 20,195
-------------- --------------
Net cash used in by operating activities (1,977,135) (240,061)
Cash flows from investing activities:
Purchase of capitalized software (44,718) --
Purchase of property and equipment (126,132) (29,640)
Advances to related parties -- (35,070)
-------------- --------------
Net cash used in investing activities (170,850) (64,710)
Cash flows from financing activities:
Proceeds from issuance of private placement-preferred stock 893,917 --
Proceeds from borrowings -- 29,700
-------------- --------------
Net cash provided by financing activities 893,917 1,029,642
-------------- --------------
Net (decrease)/increase in cash (1,254,068) 724,871
-------------- --------------
Cash at beginning of period 5,207,167 59,937
-------------- --------------
Cash at end of period $ 3,953,099 $ 784,808
============== ==============
Supplemental disclosure of non-cash financing activities
Reclassification of liability to equity $ 6,002,500 $ --
Interest Paid $ -- $ --
Income Taxes $ 1,600 $ 1,600
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The interim consolidated financial statements as of April 30, 2000 have
been prepared by Vsource, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") for interim
financial reporting. These consolidated statements are unaudited and, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments and accruals) necessary to present fairly the consolidated balance
sheets, consolidated operating results, and consolidated cash flows for the
period presented in accordance with generally accepted accounting principles.
The consolidated balance sheet at January 31, 2000 has been derived from the
audited consolidated financial statements at that date. Operating results for
the three months ended April 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending January 31, 2001. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted in accordance with the rules and regulations of the SEC. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements, and accompanying notes, included in the
Company's Registration Statement on Form 10-SB (formerly Interactive Buyers
Network International, Ltd.) and Annual Report on Form 10-KSB for the fiscal
year ended January 31, 2000 (File No. 000-030326).
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenue, expenses and
disclosure of contingent assets and liabilities to prepare these financial
statements in accordance with generally accepted accounting principles.
Accordingly, actual results may differ from those estimates.
LOSS PER SHARE
Basic and diluted loss per share of common stock is computed by dividing
the loss available to common shareholders by the weighted average number of
common shares outstanding during the period shown. Common stock equivalents are
not included in the determination of diluted loss per share, as their inclusion
would be antidilutive. See notes to consolidated financial statements as of
January 31, 2000 and Notes 4 and 5.
2. NOTES RECEIVABLE FROM THE SALE OF STOCK
The Company has unsecured notes receivables from several officers, which
totaled $178,798 as of April 30, 2000. The notes are due on demand and bear
interest at an annual rate of 6%. The notes were granted in connection with the
exercise of 636,100 stock options on May 15, 1999. In addition, the Company also
has issued loans and other advances to employees that totaled $155,847 as of
April 30, 2000.
3. CONVERTIBLE NOTES PAYABLE
In November 1999, the Company issued $150,000 of 10% convertible notes due
December 31, 2000 to certain investors. The notes are convertible into shares
of restricted common stock at a per share price of $2.50. None of these notes
were converted as of April 30, 2000.
The Company allocated a portion of the convertible notes to the embedded
beneficial conversion feature in the convertible notes and credited paid-in
capital. The portion allocated to the beneficial conversion feature was charged
to interest expense at the date of issuance. The amount charged to interest
expense related to convertible notes issued during the three months ended April
30, 2000 was $3,699.
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<PAGE>
4. SHAREHOLDERS' EQUITY
Common Stock - On April 30, 2000, common stock totaled $158,154. This
reflects the issuance of 8,250 shares of common stock during the three months
ended April 30, 2000, up $83 from the value of common stock, $0.01 par value, on
January 31, 2000.
Preferred Stock - Effective February 24, 2000, the Company had 5,000,000
shares of preferred stock authorized and had designated 2,900,000 shares of the
preferred stock "Series 1-A Convertible Preferred Stock" of which 2,802,000
shares were issued and outstanding at a conversion price of $2.50 per share. The
Company allocated all of the net proceeds from the issuance of the preferred
stock to an embedded beneficial conversion feature. The recorded discount
resulting from the allocation was fully amortized through retained earnings at
issuance. There remain 2,100,000 shares of preferred stock, which may be issued
with rights, preferences and privileges to be designated by the board of
directors. In the event of any liquidation or dissolution, either voluntary or
involuntary, the holders of the series 1-A Convertible Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus funds, to the holders of the Common Stock by reason of their
ownership thereof, a preference amount per share consisting of the sum (A) $2.50
for each outstanding share of Series 1-A Preferred Stock, and (B) an amount
equal to declared but unpaid dividends on such shares, if any. Each share of
Series 1-A Preferred Stock shall be convertible at any time after the date of
issuance of such shares, into such number of fully paid shares of Common Stock
as is determined by dividing the Original Issue Price by the then applicable
Conversion Price, in effect on the date the certificate evidencing such share is
surrendered for conversion. Under certain circumstances, such as stock splits,
these shares are subject to stated Conversion Price Adjustments.
Each share of Series 1-A Preferred Stock, subject to the surrendering of
the certificates of the Series 1-A Preferred Stock, shall be automatically
converted into shares of Common Stock at the then effective Conversion Price,
immediately upon closing of a public offering of the Company's Common Stock with
an aggregate gross proceeds of at least $10,000,000 and a per share price of at
least five dollars, or at the election of the holders of a majority of the
outstanding shares of Series 1-A Preferred Stock. The holder of each share of
Series 1-A Preferred Stock shall have the right to that number of votes equal to
the number of shares of common stock issued upon conversion of the Series 1-A
Preferred Stock.
On April 30, 2000, paid-in-capital totaled $44,804,735, up $34,158,801 from
$10,645,934 at January 31, 2000. This increase reflects the value, in excess of
par, of the new preferred shares issued. This primarily reflects the recording
of the issuance of stock of $6,868,397, the recording of $10,368,184 in
compensation related to stock options granted to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and $16,922,220 in compensation for marketing, investor relations
and referral services in accordance with the Statement of Financial Accounting
Standards #123, "Accounting for Stock-based Compensation." Stockholders equity
is partially offset by deferred compensation of $18,848,570 as of April 30,
2000.
In conjunction with expenses relating to the issuance of the "Series 1-A
Convertible Preferred Stock", 235,985 warrants were granted at an exercise price
of $6.00 per share as compensation for services rendered. As of April 30, 2000,
985,985 warrants and 2,025,250 options had been granted and were outstanding.
In February 2000, the Company entered into a strategic relationship with
U.S. West, Inc. of Denver, Colorado, pursuant to which the two firms agreed to
make VSN available to U.S. West's business customers. U.S. West provides
telecommunications and related services, wireless services, high-speed data and
Internet services and directory services. U.S. West also agreed to make a
minority equity investment in Vsource.
In exchange for services to be rendered, Vsource granted to U.S. West
600,000 warrants with a seven-year term, at an exercise price of $5.00. The
terms of the distribution and marketing agreement are automatically renewable
each year unless either party notifies the other of its intent to terminate the
agreement, in writing, sixty calendar days prior to February 14th of the
potential renewal year. When the warrants were granted, the Company's stock was
valued at $17.50 per share, resulting in a charge to the Company of $8,412,000.
In the three months ended April 30, 2000, the Company recognized $1,051,500 of
this charge as a marketing expense. The Company plans to recognize the
remaining $7,360,500 evenly on a quarterly basis as a marketing expense until
February 14, 2002.
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<PAGE>
5. BASIC LOSS AVAILABLE TO SHAREHOLDERS
The Company has adopted SFAS No. 128, "Earnings Per Share," which is
effective for financial statements issued after December 15, 1997. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised and converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
The loss available to common shareholders for the three months ended April
30, 2000 is the net loss for the period, adjusted for preferred stock dividends.
The following table illustrates the calculation of basic and diluted
earnings/(loss) per share:
Net loss ($ 5,808,454)
Less discount to preferred shareholders ( 6,868,397)
--------------
Basic loss available to common shareholders ($ 12,676,851)
==============
Weighted average common shares outstanding for dilution purposes do not take
into account the exercise of options or warrants because to do so would be
antidilutive.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and the related notes thereto appearing elsewhere herein.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB and the documents incorporated herein
by reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. All statements, trends, analyses and
other information contained in this report relative to trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well as other statements including, but not limited to, words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend," and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include, among
others, those set forth in this Item 2. Particular attention should be paid to
the cautionary statements involving the Company's limited operating history, the
unpredictability of its future revenues, the Company's need for and the
availability of capital resources, the evolving nature of its business model,
the intensely competitive market for business-to-business electronic
procurement, and the risks associated with systems development, management of
growth and business expansion. Except as required by law, the Company
undertakes no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise. Readers, however, should
carefully review the factors set forth in other reports or documents that the
Company files from time to time with the Securities and Exchange Commission
("SEC").
OVERVIEW
The Company creates and markets "pure" Internet-based applications using an
Application Service Provider (ASP) model. An ASP model is best described as
providing the ability on a rental basis for clients to access by an Internet
browser, such as Internet Explorer or Netscape Communicator, computer software
and data that reside on a remote server on the Internet, rather than the user's
computer or a server on the user's local area network. The Company intends to
generate fees by charging a small set-up fee to use its software and then
charging based upon time or transactions, depending upon the situation.
Currently, the Company offers one application, Virtual Source Network (VSN),
which may be used by corporate clients to purchase goods and services via the
Internet.
Currently all financial, technical and marketing resources of the Company
are dedicated to VSN. The Company plans to sell VSN through a direct sales
force, through independent resellers, and through strategic partnerships in
which VSN will be offered to the partner's base of customers. VSN is designed to
be sold initially through a pilot program for on-going transaction fees and an
initial set-up fee of $25,000. During the pilot program, the client is expected
to test the functionality of VSN and determine how much customization of the
system, if any, is required for a full implementation.
During 1997 and early 1998, the Company offered an earlier version of VSN,
which was a software application installed on client computers. The Company has
discontinued the sale and use of this product. The Company's Internet version
of VSN has just recently been made available for use by clients. The Company is
presently hiring a direct sales force and creating relationships with
independent resellers and strategic partners.
The Internet version of VSN is now being used on a trial basis by initial
customers. As a result, the limited operating history makes the prediction of
future operating results very difficult. In particular, the Company believes
that period-to-period comparisons of operating results should not be relied upon
as predictive of future performance. Operating results are expected to vary
significantly from quarter to quarter and are difficult or impossible to
predict. The Company's operating prospects must be considered in relationship
to the risks, expenses and difficulties encountered by any company at an early
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<PAGE>
stage of development, particularly companies in new and rapidly evolving
markets. The Company may not be successful in addressing such risks and
difficulties. For more information, please refer to "FORWARD LOOKING
STATEMENTS" and "FACTORS THAT MAY AFFECT FUTURE PERFORMANCE."
RECENT EVENTS
In April 2000, the Company signed a letter of intent with NeTune
Corporation of Los Angeles, California, pursuant to which the Company will
provide its electronic purchasing service to companies in the film and
television production industries that use NeTune's satellite based
communications services. NeTune allows film and television companies to perform
a series of electronic services directly from remote production locations by
using two-way satellite communications.
In March 2000, the Company formed a strategic marketing and technical
alliance with Internet Commerce Corp. (ICC) of New York City, New York, pursuant
to which ICC will connect its Internet electronic data interchange (EDI) network
with VSN. The interconnection will allow VSN customers to exchange
purchase-related documents with companies that accept such documents in the EDI
standard. ICC estimates that more than 400,000 companies worldwide have the
ability to accept purchasing-related documents via the EDI standard.
In February 2000, the Company entered into a strategic relationship with
U.S. West, Inc. of Denver, Colorado, pursuant to which the two firms agreed to
make VSN available to U.S. West's business customers. U.S. West also agreed
to take a minority equity stake in Vsource. VSN is the first component of a
comprehensive collection of services that U.S. West said it intends to launch
in 2000. U.S. West provides telecommunications and related services, wireless
services, high-speed data and Internet services and directory services
principally to customers in the states of Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming.
In February 2000, the Company entered into a strategic alliance with Vitria
Technology Inc. of Sunnyvale, California, pursuant to which Vitria's eBusiness
platform, BusinessWare, will be used by Vsource customers to speed the
development of links between VSN and existing internal processing systems.
Vitria is a provider of eBusiness infrastructure software that enables
incompatible information technology systems to exchange information over
corporate networks and the Internet.
In January 2000, the Company entered a strategic alliance with ZoomON, Inc.
of San Jose, California, pursuant to which ZoomON's vector graphics
visualization and design software will be used to develop sophisticated product
catalogs based on product drawings. Customers can use the ZoomON-based catalogs
over the Internet to click on a product drawing and then select specific parts
to be ordered.
In November 1999, the Company entered into a strategic alliance with
Corporate Express of Broomfield, Colorado, pursuant to which Corporate Express's
extensive catalog of office and computer products and services will be made
available as part of VSN. Corporate Express, a wholly owned subsidiary of
Buhrmann NV, has operations in more than 300 locations worldwide, including 89
distribution centers.
The Company is a paying client of IBM, which has developed the training
program for VSN users. Clients of the Company retain the services of IBM in
order to train their staffs to use the VSN system. In addition, IBM and the
Company have each agreed informally to make their respective clients aware of
the other firm's services, where it seems appropriate for the client in
question. MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS - THREE
MONTHS ENDED APRIL 30, 2000, COMPARED TO THE THREE MONTHS ENDED APRIL 30, 1999:
REVENUE
For the three months ended April 30, 2000, there were no revenues compared
to $4,060 in revenues during the three months ended April 30, 1999. This
decrease in revenues results from the Company's decision, early in the 2000
fiscal year, to discontinue the annual subscription program relative to its
previous software-based version of VSN. It also reflects the fact that the new
Internet version of VSN has not yet begun to generate revenue for the Company.
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<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended April 30, 2000, general and administrative
expenses were $895,910 (excluding $2,752,889 of stock-based compensation), up
$558,263, or 165%, from $337,647 during the three months ended April 30, 1999.
This increase was caused primarily by increased expenses associated with
marketing, advertising, public relations, and executive staff.
RESEARCH AND DEVELOPMENT
For the three months ended April 30, 2000, research and development
expenses were $1,591,307 (excluding $601,448 of stock-based compensation), up
from no expenditures for this area during the three months ended April 30, 1999.
This increase was caused primarily by implementation of a development effort
associated with the Company's Internet version of VSN. These costs included the
use of independent contractors, as well as the addition of technical employees
in the Company's Seattle office. The Company does no work that would be
considered pure research, or basic research.
STOCK BASED COMPENSATION
For the three months ended April 30, 2000, recognition of stock based
compensation was $3,354,337 up from no expenditures for this area during the
three months ended April 30, 1999. This increase was caused by the issuance of
options, warrants and stock primarily for employee related compensation, and in
obtaining services for marketing, investor relations and referral fees.
NET LOSS
For the three months ended April 30, 2000, the net loss was $5,808,454, an
increase of $5,474,867, or 1641%, from the net loss of $333,587 during the three
months ended April 30, 1999. This increase is a result of significantly
increased marketing and advertising expenses, as well as significantly increased
research and development expense and stock based compensation, as described
above.
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED
For the three months ended April 30, 2000, the basic weighted average
common shares outstanding were 15,815,421, up 3,977,257, or 33.6%, from
11,838,164 for the three months ended April 30, 1999. This increase resulted
primarily from the issuance of 2,095,787 shares upon conversion of convertible
notes, the issuance of 636,100 shares upon exercise of stock options, as well as
the issuance of shares in return for cash invested in the Company. Weighted
average common shares outstanding for dilution purposes do not take into account
the exercise of stock options or warrants because to do so would be
anti-dilutive.
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
The basic net loss per common share for the three months ended April 30,
2000 was $0.80 per share, up $0.77 per share from a net loss of $0.03 per share
for the three months ended April 30, 1999. This increase reflects the
$5,808,454 increase in the net loss and the return of equity to preferred
stockholders of $6,868,397, partially offset by the increase of 3,977,257 shares
in the basic weighted average outstanding common shares.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION - AT APRIL 30, 2000,
COMPARED TO JANUARY 31, 2000:
CASH
On April 30, 2000, cash totaled $3,953,099 down $1,254,068, or 24.1%, from
$5,207,167 at January 31, 2000. This decrease reflects proceeds of the sale of
preferred stock in private transactions during the three months ended April 30,
2000, less the funds used for operations during that period.
ACCOUNTS RECEIVABLE
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<PAGE>
On April 30, 2000 and January 31, 2000 there were no accounts receivable.
This reflects that the Company is finishing development of its main product,
VSN, and has not yet generated any revenues or receivables from the product.
EMPLOYEE RECEIVABLES
On April 30, 2000, employee receivables totaled $155,847, up $46,000, or
41.9% from $109,847 at January 31, 2000. This increase results from personal
advances to employees.
PREPAID EXPENSES
On April 30, 2000, prepaid expenses totaled $149,280 as compared to no
balance at January 31, 2000. This increase primarily reflects prepaid fees of
$149,280 that will be expensed in the current year.
TOTAL CURRENT ASSETS
On April 30, 2000, total current assets totaled $4,258,226, down
$1,058,788, or 19.9%, from $5,317,014 at January 31, 2000. This decrease
primarily reflects the use of cash to fund operations during the quarter.
FIXED ASSETS
On April 30, 2000, fixed assets totaled $411,058, an increase of $170,850,
or 71.1%, from $240,208 at January 31, 2000. This increase primarily reflects
the addition of equipment and software needed to accommodate the increase in the
development and marketing of VSN.
ACCUMULATED DEPRECIATION
On April 30, 2000, accumulated depreciation totaled $35,516, up $17,808, or
100.6%, from $17,808 at January 31, 2000. This increase reflects the addition
of normal depreciation expense for the three months ended April 30, 2000.
PROPERTY AND EQUIPMENT, NET
On April 30, 2000, property and equipment, net totaled $375,542, up
$153,042, or 68.8%, from $222,500 at January 31, 2000. This increase primarily
reflects the addition of equipment and software needed to accommodate the
increase in the development and marketing of VSN.
OTHER ASSETS
On April 30, 2000, other assets totaled $1,197, up $316, or 35.9% from $881
at January 31, 2000. This increase reflects an additional rental deposit for
additional space, net against normal amortization of organizational expenses for
the three months ended April 30, 2000.
TOTAL ASSETS
On April 30, 2000, total assets were $4,634,965, down $905,430, or 16.3%,
from $5,540,395 at January 31, 2000. This change primarily reflects cash used in
research and development costs, and general and administrative expenses
associated with the development and marketing of VSN.
ACCOUNTS PAYABLE
On April 30, 2000, accounts payable were $839,195, up $591,723, or 239.1%,
from $247,472 at January 31, 2000. This change is a result of increased amounts
due independent contractors involved in development of the Internet version of
VSN, as well as amounts due for marketing, advertising and legal expenses.
ACCRUED LIABILITIES
On April 30, 2000, accrued liabilities were $163,984, up $63,047, or 62.5%,
from $100,937 at January 31, 2000. This increase resulted primarily from accrued
wages and related compensation expenses.
CONVERTIBLE NOTES PAYABLE
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On April 30, 2000, convertible notes payable was $150,000, remaining the
same as at January 31, 2000. Interest accrued on this liability is included in
accrued liabilities.
LIABILITIES RELATED TO THE PRIVATE PLACEMENT OF PREFERRED STOCK
On April 30, 2000, liabilities related to private placement of preferred
stock were zero, as compared to liabilities of $6,002,500 at January 31, 2000.
This is due to the reclassification to equity and issuance of 2,802,000 shares
of Series 1-A Preferred Stock in April 2000. As of January 31, 2000, the
Company had received $6,002,500 in cash associated with the private placement,
which it treated as a liability until the transaction was completed and the
preferred stock was issued.
TOTAL CURRENT LIABILITIES
On April 30, 2000, total current liabilities totaled $1,153,179, down
$5,347,730, or 82.3%, from $6,500,909 at January 31, 2000. This reduction
reflects the reclassification of liabilities related to the private placement of
preferred stock in the amount of $6,002,500 to equity as preferred stock,
partially offset by the increase in accounts payable of $591,723 and accrued
liabilities of $63,047.
COMMON STOCK, $0.01 PAR VALUE
On April 30, 2000, common stock totaled $158,154. This reflects the
issuance of 8,250 shares of common stock during the three months ended April 30,
2000, up $83 from the value of common stock, $0.01 par value, on January 31,
2000.
PREFERRED STOCK, $0.01 PAR VALUE
On April 30, 2000, preferred stock totaled $28,020 versus no preferred
stock at January 31, 2000. This reflects the issuance of 2,802,000 new
preferred shares during the period. All of the shares were issued in return for
cash invested in the Company.
ADDITIONAL PAID-IN-CAPITAL
On April 30, 2000, paid-in-capital totaled $44,804,735, up $34,158,801 or
321%, from $10,645,934 at January 31, 2000. This increase reflects the value
(in excess of par) of the new preferred shares issued during the period, of
which 2,802,000 shares were issued in return for cash invested in the Company.
This primarily reflects the recording of additional paid in capital for common
stockholders' of $6,868,397, compensation of $10,368,184 related to stock
options granted to employees in accordance with the Statement of Financial
Accounting Standards #123, accounting for stock-based compensation, and
$16,922,220 in compensation for marketing, investor relations and referral
services.
DEFERRED COMPENSATION
On April 30, 2000, deferred compensation was $18,848,570, up $17,067,753,
or 958% from $ 1,780,817 at January 31, 2000. This change was due to the
granting of stock options to employees as employment incentives and bonuses, and
compensation for marketing, investor relations and referral services.
ACCUMULATED DEFICIT
On April 30, 2000, the accumulated deficit was $22,481,755 up $12,676,851
or 129% from $9,804,904 at January 31, 2000. This change resulted from a net
loss of $5,808,454 during the three months ended April 30, 2000 and the
recognition of a stock dividend to preferred stockholders of $6,868,397.
NOTES RECEIVABLE FROM THE SALE OF STOCK
On April 30, 2000, notes receivable from the sale of stock totaled
$178,798. This amount is used to offset the balance in stockholders' equity.
These notes are receivable from officers who exercised stock options during a
prior period. The Company's stock option program provides several alternative
methods of paying for shares acquired through exercise of stock options, and one
of those alternatives is to provide a demand note payable to the Company, in the
amount of the purchase.
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TOTAL STOCKHOLDERS' EQUITY/(DEFICIT)
On April 30, 2000, total stockholders' equity was $3,481,786, up
$4,442,300, or 462.5%, from a deficit of $960,514 at January 31, 2000. This
change resulted primarily from increases in preferred stock and paid-in-capital
of $34,158,801 offset by an increase in deferred compensation of $16,016,254,
the recognition of a stock dividend to preferred stockholders of $6,868,397, and
the net loss of $5,808,454 during the three months ended April 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no revenue at this time, other than small amounts of
interest income, and certain non-recurring items. While the Company expects to
generate revenue in the future, it is currently entirely dependent on investor
funds. At April 30, 2000, the Company had cash balances totaling $3,953,099,
primarily as a result of its private placement of preferred stock during the
first quarter of 2000. The Company is currently expending approximately $800,000
per month of cash and cash equivalents. At this rate, without additional
capital or revenues, management expects those funds to last through August 2000.
The Company's principal sources of cash and cash equivalents were derived
from private sales of the Company's equity and debt securities. The sole source
of funds for the Company from the date of inception through April 30, 2000,
other than the sale of equity and debt securities, has been from sales of the
earlier software products. No cash was derived from such sales made in the
three months ended April 30, 2000.
The Company anticipates client revenues to begin during the period from May
1, 2000 to July 31, 2000. Also, the Company has initiated a private equity
offering through its investment bank that is anticipated to fund, fully or in
part, during the period from May 1, 2000 to July 31, 2000. There can be no
assurances that the Company will raise funds as anticipated or that the Company
will begin generating revenues from clients. If client revenues or the private
equity offering do not materialize on schedule, the Company has a contingent
plan of cash conservation that will allow it to operate through the remaining
quarters of the current year.
The Consolidated Statements of Cash Flows for the three months ended April
30, 2000, and three months ended April 30, 1999 show that net losses were
$5,808,454 and $333,587, respectively, with the issuance of preferred stock for
cash of $893,917, partially offsetting the cash requirement. A non-cash entry
was made for the period ended April 30, 2000 to recognize the conversion of
liabilities related to the private placement of preferred stock in the amount of
$6,002,500 to equity as preferred stock. In addition, a non-cash accounting
entry of $20,422,090 was made to additional paid-in capital with an offsetting
entry of $3,354,337 for compensation expense, and $17,067,753 to deferred
compensation is shown as an increase in paid-in-capital. This did not offset
any cash requirement directly or indirectly, and there was no such cash or other
consideration paid as compensation in the period.
RESEARCH AND DEVELOPMENT FOR THE FISCAL YEAR ENDING JANUARY 31, 2001
During the fiscal year ending January 31, 2001, it is expected that
approximately $6,000,000 will be spent on product development. The Company does
not expect to expend any resources in basic research. Additional work is being
done to enhance the present system. Developments will make the system more
flexible, and allow additional options for the user to modify portions of the
system to better meet the unique needs of each particular user's business.
Other enhancements will add new capabilities to the system in the future. No
assurance can be given that the Company will have the resources necessary to
conduct this product development.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
RISKS RELATED TO THE COMPANY'S BUSINESS
NEED FOR ADDITIONAL CAPITAL: The Company has recorded substantial operating
losses and, as of April 30, 2000, has an accumulated deficit of $22.5 million.
As discussed in Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND RESOURCES, if the Company
is to sustain its current rate of development and operating expenditures, it
must generate additional capital in the second quarter or third quarter of the
fiscal year ending January 31, 2001, from client revenues, private equity sales,
or both. The Company is currently implementing contracts with five clients.
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These clients, and others that are near the implementation stage, are expected
to produce revenues in the second quarter of this year. In March 2000, the
Company retained a full time Chief Financial Officer and engaged a major
investment bank to help the Company raise additional equity. The investment
bank is currently working on the private placement of equity capital sufficient
to fund the Company's operations until such time as a public equity offering is
practicable.
ANTI-TAKEOVER PROVISIONS: Provisions in Nevada law and the Company's
Articles of Incorporation and Bylaws could delay or prevent a third party from
acquiring the Company, even if doing so would be beneficial to the stockholders.
In addition, such provisions may affect the price that some investors may be
willing to pay for the Company's stock. Such provisions include the issuance of
preferred stock by the board of directors without prior stockholder approval,
commonly referred to as "blank check" preferred stock, with rights senior to the
Company's common stock. The Company has 5,000,000 shares of preferred stock
authorized. The Company has designated 2,900,000 shares of the preferred stock
"Series 1-A Convertible Preferred Stock" of which 2,802,000 shares are issued
and outstanding. There remain 2,100,000 shares of preferred stock, which may be
issued with rights, preferences and privileges to be designated by the board of
directors. While such shares of preferred stock may not have rights or
preferences senior to the Series 1-A Convertible Preferred Stock, they may be
senior to the common stock of the Company.
In addition, the Company is seeking stockholder approval to reincorporate
in the State of Delaware. In connection with the reincorporation, the Company
is seeking an increase in the number of shares of common stock authorized for
issuance, which could be used to prevent or discourage a change of control.
LIMITED OPERATING HISTORY: VSN, the Company's primary service offering,
began operations in October 1996 when the earlier version of VSN, a software
application for personal computers rather than an Internet application, was
successfully installed and used at a private company in southern California.
The Company has had a limited operating history since then, although it did
successfully install the earlier VSN version (personal computer application) for
several clients, and was paid the annual subscription rate then in effect. This
limited history makes an evaluation of the Company's future prospects very
difficult. The new Internet version of VSN is now available for evaluation and
use by customers, but does not yet have any fully operational customers. As
such, because of the limited operational history of VSN, there can be no
assurances that the product will meet the needs of potential customers or that
the product will operate correctly.
RISKS OF EARLY STAGE COMPANY; NEW, RAPIDLY CHANGING MARKET; NEED TO ATTRACT
LARGE CORPORATIONS: The market for Internet applications and services is at an
early stage, and changing rapidly. Internet procurement is a relatively new
market. Its rate of growth and change is unpredictable, as is the nature of
this change. The Company will encounter the risks and difficulties often
encountered by early-stage companies in new and rapidly evolving markets. The
Company's initial success will depend upon attracting several large,
technologically advanced corporations to use VSN, and their favorable results
from this usage. Subsequent success will depend on the Company's ability to
communicate these early successes to the marketplace, thus attracting
significant numbers of other businesses and buying organizations. No assurance
can be given that the Company will be successful in the marketplace, or if
successful, that it will attract significant numbers of clients. There can be
no assurance that an adequate demand for, and usage of, the Company's products
will develop.
COMPLEX IMPLEMENTATION AND INTEGRATION OF VIRTUAL SOURCE NETWORK MAY IMPEDE
MARKET PENETRATION: The installation of VSN, including integration with a
client's systems currently in use, can be a complex, time consuming and
expensive process. While the Company is designing a simplified version for use
by smaller organizations with limited enhancement capabilities and, as a result,
a low cost associated with its implementation, the Company anticipates that its
initial customers will be mid-sized or larger organizations that will require
that VSN undergo substantial customization to meet their needs. These firms
will also likely require that VSN be integrated with existing internal ERP and
other operational systems. The Company's management estimates that the
installation and integration process may take anywhere from one month to six
weeks or longer in some cases, depending on the size of the client, the
complexity of its operations, the configurations of its current computer
systems, and other systems projects that compete for the time and attention of
the Information Technology departments of the clients. Management also expects
that most integration projects in larger companies will involve various
integrators as outside systems consultants to the client. The Company's ability
to continually enhance the features of VSN, in response to client's widely
differing needs, is yet to be proven. The Company's ability to develop a
simplified version for smaller businesses that is inexpensive to implement is
also unproven. As a result, VSN may not achieve significant market penetration
in the near future, or ever.
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LARGE OPERATING LOSSES EXPECTED TO CONTINUE: The Company has accumulated
net losses of $22.5 million through April 30, 2000. Since inception, the Company
has not had material revenues, and has recognized no revenues at all from the
Internet version of VSN. The Company expects to derive the majority of its
revenues from VSN fees over the next five years. In addition, provided that
revenues develop more or less as expected, the Company expects to spend a
substantial portion of revenues during the next two or three years on marketing,
sales, technology development, training and administration. There can be no
assurance that the Company will be able to fund these expenses.
FAILURE TO ACHIEVE LISTING ON MAJOR STOCK MARKET: In March 2000, the
Company applied for listing on the Nasdaq National Market System. Management
believes that it meets the stated requirements for listing on Nasdaq. Presently,
the Company's stock is traded on the over-the-counter bulletin board system
under the stock symbol, VSRC. While the listing of the Company's stock does not
have a direct effect on the Company's operations, it has an effect on the
perception of the Company amongst potential investors and can have an effect on
the ability of the Company to raise additional funds. It can also impact the
dilution associated with any financing. There can be no assurances that the
Company's application will be accepted by Nasdaq or that the Company will have
its shares listed on a major exchange.
Until the Company's securities are listed on a major exchange, the
securities of the Company are subject to a Securities and Exchange Commission
rule that imposes special sales practice requirements upon broker-dealers who
sell such securities to persons other than established customers or accredited
investors. For purposes of the rule, the phrase "accredited investors" means,
in general terms, institutions with assets in excess of $5,000,000, or
individuals having a net worth in excess of $1,000,000 or having an annual
income that exceeds $200,000 (or that, when combined with a spouse's income,
exceeds $300,000). For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
securities of the Company and also may affect the ability of any shareholder to
sell their securities in any market that might develop for the common stock.
EFFECT OF INCREASED OPERATING EXPENSES ON OPERATIONS AND PRICE OF COMMON
STOCK: The Company plans to increase operating expenses to expand its sales and
marketing operations, establish new strategic relationships, fund additional
systems development, and increase its business and technical staff. These
planned expenses will increase operating losses during reporting periods before
significant revenues develop. These increased losses could have a negative
effect on the price of the Company's common stock.
DEPENDENCE ON VIRTUAL SOURCE NETWORK ANTICIPATED REVENUES: The Company
expects that when revenues do develop, substantially all of those revenues will
come from VSN clients. Although VSN fees are believed by management of the
Company to be below those currently charged for leading competitive systems and
services, future reductions in competitive prices could negatively impact the
demand for, or usage of, VSN. These changes may impede VSN's ability to achieve
broad market acceptance, thus negatively impacting the Company's opportunity to
eventually become profitable. There can be no assurance that broad and timely
acceptance of VSN, which is critical to the Company's future success, will be
achieved. Failure to achieve anticipated revenues would have adverse
consequences for the Company.
DEPENDENCE ON ONE PRODUCT: At the present time all of the Company's
resources are being devoted to the development and marketing of VSN. The
Company expects to depend on VSN for substantially all of the Company's revenues
for the foreseeable future. Accordingly, if VSN is not accepted by customers or
potential customers, or does not generate the demand or revenues necessary to
the Company, the Company may face serious or irreparable harm.
DEPENDENCE ON SALES AND MARKETING RELATIONSHIPS FOR GROWTH: Our business
model includes generating sales through our alliance and affiliate programs.
Consequently, the Company will depend, in part, on sales and marketing strategic
relationships for growth. The Company has established and plans to continue to
establish sales and marketing strategic relationships with large organizations
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as part of our growth strategy. Such relationships may not contribute to
increased use of the Company's services, help the Company add new clients, or
increase the Company's revenue. The Company may not be able to enter into new
relationships or renew existing relationships on favorable terms, if at all. In
addition, the Company may not be able to recover costs and the expenses
associated with the formation of these programs.
THIRD PARTY IMPLEMENTATION/INTEGRATION OF VIRTUAL SOURCE NETWORK; NEGATIVE
IMPACT UPON REVENUE GOALS IF THIRD PARTIES UNAVAILABLE OR DO NOT PERFORM: The
Company expects to rely, to a large degree, on a number of third parties to
propose and explain VSN to prospective clients, to sell pilot projects to the
clients, and to integrate VSN with clients' existing systems, and to train users
when VSN is rolled out for general usage. The Company itself is planning to
work with clients and third-parties to implement the pilot projects. The
Company's ability to support its strategic partners, in pursuit of large numbers
of buyers and suppliers, is yet to be proven. If the Company is unable to
establish and maintain effective, long-term relationships with these third
parties, if these third parties are unable to meet the needs and expectations of
VSN clients, or if the Company cannot properly implement pilot projects, the
Company will likely have difficulty achieving its revenue goals.
UNSUCCESSFUL ACQUISITIONS COULD HARM OUR OPERATING RESULTS, BUSINESS AND
GROWTH: The Company may acquire businesses, products and technologies that
complement or augment the Company's existing businesses, services and
technologies. The inability to integrate any newly acquired entities or
technologies effectively could harm the Company's operating results, business
and growth. Integrating any newly acquired businesses or technologies may be
expensive and time consuming. To finance any acquisitions, the Company may need
to raise additional funds through public or private financings. Any equity or
debt financings, if available at all, may be on terms that are not favorable to
the Company and, in the case of equity financings, may result in dilution to the
Company's stockholders. The Company may not be able to operate any acquired
businesses profitably or otherwise implement the Company's business strategy
successfully.
LONG SALES CYCLE FOR LARGE CORPORATE ACCOUNTS COULD CAUSE DELAYS IN REVENUE
GROWTH: The Company's sales cycles for large corporate accounts may take many
months to complete and may vary from contract to contract. Further, the Company
expects that a large number of then Company's clients may be introduced to VSN
through such large accounts. Lengthy sales cycles for large corporate accounts
could cause delays in revenue growth, and result in significant fluctuations in
the Company's quarterly operating results. The length of the sales cycle may
vary depending on a number of factors over which the Company may have little or
no control, including the internal decision-making process of the potential
customer and the level of competition that the Company encounters in its selling
activities. Additionally, since the market for business-to-business e-commerce
is relatively new, the Company believes that it will have to educate many
potential customers about the use and benefits of the Company's products and
services, which can in turn prolong the sales process. The Company has provided
access to VSN on a trial basis for customer evaluation, which can again may
prolong the sales process. Sales made through third parties, such as the
Company's alliance partners, can further extend sales cycles.
QUARTERLY RESULTS MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS; EXPECTATIONS
OF INVESTORS AND ANALYSTS MAY NOT BE MET: The Company expects that its quarterly
operating results will fluctuate significantly due to many factors, many of
which are outside the control of the Company. Such factors include:
. demand for and market acceptance of VSN
. inconsistent growth, if any, of the Company's client base
. loss of key customers or strategic partners
. timing of the recognition of revenue for large contracts
. variations in the dollar volume of transactions effected through VSN
. intense and increased competition
. introductions of new services or enhancements, or changes in pricing
policies, by us and our competitors
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. the Company's ability to control costs
. reliable continuity of VSN availability.
The Company believes that quarterly revenues, expenses and operating
results are likely to vary significantly in the future, that period-to-period
comparisons of results of operations are not necessarily meaningful and that, as
a result, such comparisons should not be relied upon as indications of future
performance. Due to these and other factors, it is likely that the Company's
operating results will be below market analysts' expectations in some future
quarters, which would cause the market price of the Company's stock to decline.
COMPETITIVE "BUSINESS-TO-BUSINESS" INTERNET COMMERCE MARKET; EFFECT ON
MARKET SHARE AND BUSINESS: The market for VSN is very competitive, evolving and
subject to rapid technological change. Intensity of competition is likely to
increase in the future. Increased competition from new competitors is likely to
result in loss of market share, which could negatively impact the Company's
business. Competitors vary in size, and in the scope and breadth of the
products and services offered. VSN will encounter competition from Ariba,
Clarus, Commerce One, Concur Technologies, Extricity, GE Information Services,
i2 Technologies, Intelisys, Netscape Communications, PurchasePro, and TRADE'ex
Electronic Commerce Systems. VSN may also encounter competition from several
major enterprise software developers, such as Oracle, PeopleSoft and SAP who are
not presently considered to be direct competitors, but who have announced
intentions to enter into the market. In addition, because there are relatively
low barriers to entry in this market, additional competition from other
established and emerging companies may develop.
Many current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
the Company, significantly greater name recognition, and a larger installed base
of customers. In addition, many of the competitors have well-established
relationships with the Company's clients and potential clients, and have
extensive knowledge of the industry. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors, or alliances among
competitors, may emerge and rapidly acquire significant market share. Actions
taken by the Company competitors, including price cuts, new product
introductions and enhancements could have material adverse consequences for the
Company. There can be no assurance that the Company will be able to compete
with price cuts, or develop, introduce and market enhancements to its service on
a timely basis to compete successfully in this market.
VIRTUAL SOURCE NETWORK REVENUES EXPECTED FROM A LIMITED NUMBER OF CLIENTS,
MEANING INCREASED POTENTIAL IMPACT OF CUSTOMER LOSS: The Company expects that
VSN revenues, if any, during the current fiscal year will come from a small
number of clients, perhaps as few as 20 or less. The loss of any few customers
or a change in a client's budget could have a substantial negative impact on the
business of the Company.
VENDORS ARE ESSENTIAL TO SUCCESS OF VIRTUAL SOURCE NETWORK; NEGATIVE IMPACT
OF VENDORS' FAILURE TO JOIN THE NETWORK: In order to operate, VSN requires that
vendors (suppliers) be able to access the network and that client buyers be able
to communicate their requirements electronically to vendors. Currently, vendors
can access VSN even if they have not joined the network, but it is far more
efficient if a vendor does join the network and sets up a catalog online. It is
necessary, furthermore, that a client's key vendors join the network in order to
achieve the full benefits of the system, such as buying from an electronic
catalog. The Company, furthermore, expects that vendors will join VSN upon
invitation from their respective buyers. Network membership is now free for any
vendor. Client buyers operating on VSN make direct requests of their key
vendors that they join. When a large corporation requests that its vendors
adapt to a new purchasing process, and that change is free, the Company believes
that there is a strong incentive for those vendors to make that change to
protect their customer relationships.
To date there has been no significant vendor resistance to joining the new
Internet version of VSN. During 1996 and 1997, however, the Company found
significant vendor resistance to joining the PC version of VSN. Vendors, at the
time, viewed VSN as increasing competitive price pressure. They also saw an
increased possibility of losing customers to lower cost vendors not previously
competing for the business. Vendors also resisted annual subscription fees of
$980. Finally, the non-Internet version was more difficult for vendors to
operate.
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Since 1997 the Company believes that important changes have occurred in the
procurement environment. Electronic commerce, and the resultant increased
competition, has become more accepted by vendors. It is management's opinion
that most vendors believe that they will eventually be required to do business
electronically, if they have not already started. The Company also believes
that the Internet version of VSN is easier for vendors to use. As a final
incentive, the Company no longer charges subscription fees to vendors. Despite
these changes, there can be no assurance that vendors will not resist
participating in VSN. Should significant new vendor resistance develop, that
could slow adoption of VSN by clients, and negatively impact potential revenues
of the Company.
ABILITY TO ENHANCE FEATURES AND FUNCTIONALITY OF PRODUCTS; CHANGE IN THE
MARKET: The success of the Company will depend on its ability to tailor VSN to
meet the requirements of its clients, not only as such requirements are
presently known and understood by the Company and its client base, but also as
such requirements evolve. Such requirements may be driven by competitive
products or the changing preferences of the Company's client base. An inability
to offer enhanced products or features that anticipate or meet such requirements
in a timely and efficient manner may result in a loss of sales and revenues and
the obsolescence of the Company's products. There can be no assurance that
the Company can make the changes and enhancements to its products necessary to
meet and satisfy the demands of its clients.
In addition, the rapid technological changes and rapidly changing industry
standards, which have characterized the Internet and companies doing business on
the Internet, may have the effect of rendering the Company, its business model
and products obsolete. Making the adjustments, changes and adaptations
necessary in this market may also require significant expenditures in equipment,
infrastructure and product development. There can be no assurance that the
Company will be able to adapt to such rapid changes.
FAILURE TO MAINTAIN ACCURATE DATABASES: The Company must update and
maintain extensive databases of the products, services and procurement network
transactions for its clients. The Company's computer systems and databases must
allow for expansion as a client's business grows without losing performance.
Database capacity constraints may result in data maintenance and accuracy
problems, which could cause a disruption in service and the Company's ability to
provide accurate information to its clients. These problems may result in a
loss of clients that could severely harm the Company's business.
DEFECTS IN SOFTWARE: VSN is complex software. Software often contains
defects, particularly when first introduced or when new versions are released.
The Company's testing procedures may not discover software defects that affect
new or current services or enhancements until after they are deployed. Such
defects could cause service interruptions, which could damage the Company's
reputation or increase its service costs, cause it to lose revenue, delay market
acceptance or divert development resources, any of which could severely harm the
Company's business.
SYSTEM FAILURES, SERVICE DELAYS AND INTERRUPTIONS: The Company's ability to
provide acceptable levels of customer service largely depends on the efficient
and uninterrupted operation of the Company's computer and communications
hardware and procurement network systems. Any interruptions could severely harm
the Company's business and result in a loss of customers. The Company's
computer and communications systems are located in the state of Washington. The
Company does not maintain a redundant site, although is currently planning to do
so. The Company's systems and operations are vulnerable to damage or
interruption from a variety of sources including human error, sabotage, fire,
flood, earthquake, power loss, telecommunications failure and similar events.
The Company cannot give assurances that it will not experience system failures
in the future. The occurrence of any system failure or similar event could harm
the Company's business dramatically.
NO DISASTER RECOVERY PLAN: The Company does not have a disaster recovery
plan and does not yet have redundant systems at an alternate site to permit the
company to continue to provide services on the event of a failure in its
computer and communications systems. Accordingly, any such failure would cause
severe harm to the Company's business.
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SUBSTANTIAL COSTS OF ANY PRODUCT LIABILITY CLAIMS; NO PRODUCT LIABILITY
INSURANCE: Errors, defects or other performance problems with VSN could result
in financial or other damages to our clients. Management believes that the
contractual limits of liability, indemnification provisions and disclaimers of
warranties should minimize the exposure of the Company in the event of a product
liability claim. A product liability claim, however, even if not successful,
would likely be time consuming and costly and could seriously harm the Company.
The Company presently does not maintain product liability insurance. Although
the terms and conditions in VSN user agreements contain disclaimers of any
warranties designed to limit exposure to these claims, existing or future laws,
or unfavorable judicial decisions, could weaken or negate these provisions and
have materially adverse consequences for the Company.
LEGAL LIABILITY FOR COMMUNICATION ON PROCUREMENT NETWORK: The Company may
be subject to legal claims relating to the content in its procurement network,
or the downloading and distribution of such content. Claims could involve
matters such as fraud, defamation, invasion of privacy and copyright
infringement. Providers of Internet products and services have been sued in the
past, sometimes successfully, based on the content of material. Even if the
Company was ultimately successful in its defense of these claims, any such
litigation is costly and these claims could harm the Company's reputation and
business.
SUCCESS DEPENDS ON KEY PERSONNEL; NO "KEY MAN" LIFE INSURANCE: Future
performance depends on the continued service of key personnel, and the ability
to attract, train, and retain additional technical, marketing, customer support,
and management personnel. The loss of one or more key employees could
negatively impact the Company, and there is no "key man" life insurance in force
at this time. However, the Company does plan to obtain this insurance.
Competition for qualified personnel is intense, and there can be no assurance
that the Company will retain key employees, or attract and retain other needed
personnel.
PROTECTION OF INTELLECTUAL PROPERTY; LACK OF PATENTS; POTENTIAL PIRATING:
The Company's success depends to a large extent on its exclusive technology, and
relies on a combination of contractual provisions, confidentiality procedures,
trade secrets, copyrights and trademark protections. The Company has no patents
at this point, and the Company's technologies may not be patentable. Despite
efforts to protect its exclusive rights, unauthorized parties may attempt to
copy aspects of that technology, or to obtain and use our exclusive information.
Policing unauthorized use of this technology is difficult. While the Company
does not suspect that any of the Company's software has been subject to piracy,
there can be no assurances that such piracy will not occur. Further,
competitors may independently develop similar technology, or duplicate the
Company's services without violating intellectual property rights.
At present, the Company's technologies are owned outright by the Company.
However, the Company may in the future have to license or otherwise obtain
access to intellectual property of third parties in order to remain competitive
in the marketplace.
STRAIN ON LIMITED RESOURCES DUE TO NEED TO MANAGE GROWTH AND EXPANSION: The
Company anticipates a period of significant expansion and growth, which most
likely will place significant strain upon management, employees, systems, and
resources. Because the market is developing rapidly, furthermore, it is
difficult to project the rate of growth, if any. Failure to properly manage
growth and expansion, if and when it occurs, will jeopardize the ability of the
Company sustain its third party and customer relationships. There can be no
assurances that the Company will properly be able to manage growth, especially
if such growth is more rapid than anticipated.
INACCURATE PREDICTIONS OF USAGE RATES: Traffic in the Company's procurement
network may increase to the point where the Company must expand and upgrade some
of its transaction processing systems and procurement network hardware and
software. While the Company's systems are scalable and can be expanded, the
Company may not be able to accurately predict the rate of increase in the usage
of its procurement network. This may affect the Company's timing and ability to
expand and upgrade its systems and procurement network hardware and software
capabilities to accommodate increased use of its procurement network. If the
Company does not upgrade its systems and procurement network hardware and
software appropriately, the Company may experience downgraded service,
interruptions or delays that could damage its business reputation, relationship
with clients and its operating results.
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RISKS OF INTERNATIONAL OPERATION: The Company is exploring international
markets and considering the expansion of its operations and marketing efforts to
include international markets. If the Company should elect to expand into such
markets, it would be confronted with risks including:
- increased impact of recessions in economies outside of the United
States
- difficulties staffing and managing foreign operations
- political instability
- the burdens of compliance with a wide variety of foreign laws and
legal regimes
- unexpected changes in regulatory requirements
- tariffs, export controls and other barriers to trade
- potentially adverse tax consequences
- fluctuations in currency exchange rates
- longer payment cycles and difficulties in collecting accounts
receivables
- seasonal fluctuations in business activity.
RISKS RELATED TO THE INTERNET AND ECOMMERCE
YEAR 2000 RISK: Management believes that its internally developed systems
and technology are Year 2000 compliant and has so far had no indications that
its products are not Y2K compliant. Nevertheless, because the Company relies on
information technology supplied by third parties, it is still possible that year
2000 problems may yet surface that could adversely affect the Company, although
none have surfaced to date. Further, the Internet itself could face serious
disruptions arising from Year 2000 problems, although none have surfaced to
date. Many potential VSN clients, furthermore, may have implemented policies
that prohibit or strongly discourage making changes or additions to their
internal computer systems until after the impact of Year 2000 has been assessed.
While the Year 2000 issue has generally been considered resolved, there can be
no assurances that the issue will not impact the rate at which VSN will be
implemented inside client organizations.
VOLATILITY IN STOCK PRICE: The stock market and especially the stock prices
of Internet related companies have been very volatile. This volatility may not
be related to the operating performance of the companies. The broad market
volatility and industry volatility may reduce the price of the Company's stock
without regard to the Company's operating performance. The market price of the
company's stock could significantly decrease at anytime due to this volatility.
The uncertainty that results from such volatility can itself depress the market
price of the company's stock.
SUBSTANTIAL COSTS OF ANY SECURITIES LITIGATION COULD DIVERT LIMITED
RESOURCES OF THE COMPANY: In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of its securities. The Company could become a target of similar
securities litigation based upon the volatility of its stock in the marketplace.
Litigation of this type could result in substantial costs and divert
management's attention and resources.
SUBSTANTIAL COSTS OF ANY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS: There
has been a substantial amount of litigation in the software industry and the
Internet industry regarding intellectual property rights. It is possible that in
the future, third parties may claim that the Company's technology may infringe
their intellectual property. Management is not aware of any infringement or
claim of infringement by a third party. It is expected, however, that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors grows and the functionality of products in different industry
segments overlaps. Any claims, with or without merit, could be time-consuming
and result in costly litigation.
DEPENDENCE UPON, AND RISKS RELATED TO, THE INTERNET: The use of VSN and
other ASP-based products depends on the increased acceptance and use of the
Internet as a medium of commerce and communication. While management believes
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that acceptance and use of the Internet will continue to increase at very rapid
rates, there can be no assurances that such increase will continue to develop,
or that use of the Internet as a means of conducting business will continue or
increase. If growth in the use of the Internet does not continue, clients may
not adopt or use these new Internet technologies at the rates or for the
purposes management has assumed. This could, in turn, adversely impact the
Company and the results of its business operations. Further, even if acceptance
and use of the Internet does increase rapidly, but the technology underlying the
Internet and other necessary technology and related infrastructure does not
effectively support that growth, the Company's future would be negatively
impacted.
POTENTIAL BREACHES OF THE COMPANY'S SECURITY SYSTEMS: A significant barrier
to electronic commerce and communications is the secure transmission of
confidential information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments could result in compromises or breaches of the Company's security
systems or those of other web sites to protect the Company's exclusive
information. If any well-publicized compromises of security were to occur, it
could have the effect of substantially reducing the use of the web for commerce
and communications. Anyone who circumvents the Company's security measures
could misappropriate its exclusive information or cause interruptions in
services or operations. The Internet is a public network, and data is sent over
this network from many sources. In the past, computer viruses, software
programs that disable or impair computers, have been distributed and have
rapidly spread over the Internet. Computer viruses could theoretically be
introduced into the Company's systems, or those of our clients or vendors, which
could disrupt VSN or another ASP-based product offered by the Company, or make
it inaccessible to clients or vendors. Although language in its user agreement
places responsibility with users to protect VSN from such threats, the Company
may be required to expend significant capital and other resources to protect
against the threat of security breaches or to alleviate problems caused by
breaches. To the extent that the Company's activities may involve the storage
and transmission of exclusive information, such as credit card numbers, security
breaches could expose the Company to a risk of loss or litigation and possible
liability. Despite provisions to the contrary in its user agreements, the
Company's security measures may be inadequate to prevent security breaches, and
the Company's business could be seriously impacted if they are not prevented.
GOVERNMENT REGULATION: As Internet commerce continues to grow, the risk
that federal, state or foreign agencies will adopt regulations covering issues
such as user privacy, pricing, content and quality of products and services,
increases. It is possible that legislation could expose companies involved in
electronic commerce to liability, which could limit the growth of electronic
commerce generally. Legislation could dampen the growth in Internet usage and
decrease its acceptance as a communications and commercial medium. If enacted,
these laws, rules or regulations could limit the market for the Company's
services.
One or more states, furthermore, may seek to impose sales tax collection
obligations on out-of-state companies like the Company that engage in or
facilitate electronic commerce throughout numerous states. These proposals, if
adopted, could substantially impair the growth of electronic commerce and could
adversely affect the Company's opportunity to derive financial benefit from
these activities.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are currently no legal proceedings involving the Company, and none
threatened. However, because of the rapidly changing environment surrounding the
Internet, and the rapid pace with which new businesses enter or attempt to enter
Internet related businesses, it is possible that disagreements will develop
regarding business names, relationships, markets, technologies, and other
subjects. Any future disagreement could lead to legal action.
Item 2. CHANGES IN SECURITIES
During the period December 1, 1999 to February 24, 2000, the Company sold
2,802,000 shares of Series 1-A Convertible Preferred Stock to 46 accredited
investors for $7,005,000 less offering costs. Each share of preferred stock is
initially convertible into one share of common stock at the election of the
holder, upon an underwritten public offering with aggregate proceeds to the
Company of at least $10 million or upon the election of a majority of the
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outstanding shares of preferred stock. No underwriters were used. Offering
costs included transfer agent fees, printing costs, legal fees and commissions
or finders' fees. The offering was a private placement made in accordance with
Regulation D. All of the purchasers were accredited investors. No form of
general solicitation or general advertising was used for any offer or sale. The
investors represented their intention to acquire the shares for investment
purposes only, and not with a view to resale or distribution, and appropriate
restrictive legends were placed on each stock certificate issued pursuant to
this offering.
In connection with the sales of the Series 1-A Convertible Preferred Stock,
the Company issued or will issue warrants to purchase an aggregate 386,691
shares of common stock at exercise prices ranging from $2.00 to $6.00 as
additional finder's fees and commissions and for other services in connection
with the offering. No underwriters were used, and no commissions were paid.
The warrants were issued, or will be issued, to five consultants and as a
private placement exempt from registration under Section 4(2) of the Securities
Act. The warrant holders represented their intention to acquire the warrants
for investment purposes only, and not with a view to resale or distribution, and
appropriate stop transfer instructions and restrictive legends indicating the
transfer restrictions will be placed on each warrant and each stock certificate
when issued. Each investor had ample access to the kind of information from the
Company that a registration statement would include.
Item 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the three months ended
April 30, 2000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended April 30, 2000, there were no matters
submitted to a vote of security holders.
Item 5. OTHER INFORMATION
RECENT SALE OF UNREGISTERED SECURITIES
During the period November 1999 to February 2000, the Company issued or
committed to issuing warrants to purchase an aggregate of 985,985 shares of
common at exercise prices which range from $2.00 to $25.00 in exchange for
financial consulting and distribution and marketing services. No underwriters
were used, and no commissions were paid. The warrants were issued or will be
issued as a private placement exempt from registration under Section 4(2) of the
Securities Act. The warrant holders represented their intention to acquire the
warrants for investment purposes only, and not with a view to resale or
distribution, and appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions will be placed on each warrant and each
stock certificate when issued. Each warrant holder had ample access to the kind
of information from the Company that a registration statement would include.
On February 23, 2000, the Company granted options to purchase an aggregate
of 125,000 shares of common stock to an executive officer exercisable at $2.50
per share. No underwriters were used, and no commissions were paid. The grants
were a private placement exempt from registration under Section 4(2) of the
Securities Act. The option grants were made under written compensatory
contracts. Appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions will be placed on each stock certificate
when issued.
On April 3, 2000, the Company granted options to purchase an aggregate of
100,000 shares of common stock to an executive officer exercisable at $3.00 per
share. No underwriters were used, and no commissions were paid. The grants
were a private placement exempt from registration under Section 4(2) of the
Securities Act. The option grants were made under written compensatory
contracts. Appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions will be placed on each stock certificate
when issued.
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Item 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
There are no exhibits in this report.
REPORTS ON FORM 8-K
Report on Form 8-K - Change in Registrant's Certifying Accountant, filed on
February 14, 2000.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VSOURCE, INC.
By: /s/ Robert C. McShirley
----------------------------
Robert C. McShirley
President and Chief Executive Officer
(Principal Executive Officer)
Date: June 14, 2000
By: /s/ Sandford T. Waddell
----------------------------
Sandford T. Waddell
Chief Financial Officer and Secretary
(Principal Accounting Officer)
Date: June 14, 2000
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