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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER: 000-21729
THE VIALINK COMPANY
(Name of Small Business Issuer in its Charter)
DELAWARE 73-1247666
(State of Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Indemnification No.)
13155 NOEL ROAD, SUITE 800
DALLAS, TEXAS 75240
(Address of Principal Executive Offices) (Zip Code)
(972) 934-5500
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
(none)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes [X] No [ ]
As of November 11, 2000, the issuer had 21,461,288 outstanding shares of
Common Stock. This number, as well as all other share numbers in this Form
10-KSB reflect the 2-for-1 split of our common stock effected on March 28, 2000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VIALINK COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 8,616,305 $ 8,546,151
Short-term investments, held to maturity ...................... 6,479,443 --
Accounts receivable -- trade, net of allowance for
doubtful accounts of $41,000 and $92,000,
respectively ............................................... 122,796 330,080
Prepaid expenses and other current assets ..................... 868,112 811,643
------------ ------------
Total current assets .................................. 16,086,656 9,687,874
Furniture, equipment and leasehold improvements, net ............ 2,473,281 3,020,835
Software development costs, net ................................. 1,523,588 1,650,984
Deferred service fees ........................................... 3,046,302 1,543,725
Other assets .................................................... 108,762 91,685
------------ ------------
Total assets .......................................... $ 23,238,589 $ 15,995,103
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ...................... $ 2,236,521 $ 2,500,841
Deferred revenue .............................................. -- 93,486
Capital lease obligation, current ............................. -- 63,603
------------ ------------
Total current liabilities ............................. 2,236,521 2,657,930
Long-term liabilities:
Capital lease obligation, long-term ........................... -- 70,560
Convertible note .............................................. 4,230,720 7,139,918
------------ ------------
Total liabilities ..................................... 6,467,241 9,868,408
Stockholders' equity:
Common stock, $.001 par value; 150,000,000 shares
authorized; 9,784,822 and 21,423,688 shares issued and
outstanding, respectively .................................. 9,785 21,424
Additional paid-in capital .................................... 31,750,749 51,372,005
Unearned stock compensation ................................... (1,389,079) (639,683)
Accumulated deficit ........................................... (13,600,107) (44,627,051)
------------ ------------
Total stockholders' equity ............................ 16,771,348 6,126,695
------------ ------------
Total liabilities and stockholders' equity ............ $ 23,238,589 $ 15,995,103
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE VIALINK COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 129,860 $ 305,529 $ 355,258 $ 1,015,672
Operating expenses:
Customer operations ............................ 822,046 1,661,133 1,573,388 5,417,020
Development .................................... 944,729 1,327,397 1,315,395 4,850,186
Selling and marketing .......................... 852,357 2,328,685 1,563,179 8,085,979
General and administrative ..................... 1,483,268 3,984,860 3,739,270 10,470,514
Depreciation and amortization .................. 176,536 452,923 345,881 1,055,031
------------ ------------ ------------ ------------
Total operating expenses ............... 4,278,936 9,754,998 8,537,113 29,878,730
------------ ------------ ------------ ------------
Loss from operations ............................. (4,149,076) (9,449,469) (8,181,855) (28,863,058)
Interest expense, net ............................ (1,157,611) (337,013) (2,928,288) (2,288,305)
Gain on sale of assets ........................... 227,880 -- 1,262,921 124,419
------------ ------------ ------------ ------------
Net loss ......................................... (5,078,807) (9,786,482) (9,847,222) (31,026,944)
Other comprehensive income:
Unrealized gain on marketable securities, net
of tax.......................................... (603,536) -- 844,320 --
------------ ------------ ------------ ------------
Comprehensive loss ............................... $ (5,682,343) $ (9,786,482) $ (9,002,902) $(31,026,944)
============ ============ ============ ============
Net loss per common share --
Basic and diluted .............................. $ (0.40) $ (0.46) $ (0.83) $ (1.51)
============ ============ ============ ============
Weighted average common shares outstanding --
Basic and diluted .............................. 12,553,768 21,308,576 11,851,428 20,482,226
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE VIALINK COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED
---------------------------- PAID-IN STOCK ACCUMULATED
SHARES AMOUNTS CAPITAL COMPENSATION (DEFICIT) TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 ........ 9,784,822 $ 9,785 $ 31,750,749 $ (1,389,079) $(13,600,107) $ 16,771,348
Exercise of stock options
and warrants .................. 449,192 449 756,813 757,262
Stock issued under employee
stock purchase plan ........... 42,561 43 196,609 196,652
Issuance of stock options to
service providers ............. 849,646 849,646
Issuance of stock options to
employees ..................... 997,500 (997,500) --
Amortization of unearned
stock compensation ............ 1,746,896 1,746,896
Proceeds from issuance of
common stock, net ............. 1,161,018 1,161 15,166,639 15,167,800
Issuance of common stock for
services ...................... 80,817 81 1,663,954 1,664,035
Two-for-one stock split,
March 2000 (Note 7) ........... 9,905,278 9,905 (9,905) --
Net loss ........................ (31,026,944) (31,026,944)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 ....... 21,423,688 $ 21,424 $ 51,372,005 $ (639,683) $(44,627,051) $ 6,126,695
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE VIALINK COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (9,847,222) $(31,026,944)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ......................... 651,291 1,422,519
Gain on sale of assets ................................ (462,042) --
Amortization of unearned stock compensation ........... 462,727 1,746,896
Amortization of deferred service fee .................. 503,750 2,167,848
Non-cash interest expense on convertible debt ......... 3,050,707 2,909,198
Professional fees paid with common shares ............. -- 1,185,883
Write-off of deferred offering cost ................... -- 406,248
Increase (decrease) in cash for changes in:
Accounts receivable, net ............................ 68,520 (207,284)
Other receivables ................................... (39,322) 348,592
Prepaid expenses and other assets ................... (127,778) (10,046)
Accounts payable and other current liabilities ...... 675,592 542,181
------------ ------------
Net cash used in operating activities ............ (5,063,777) (20,514,909)
------------ ------------
Cash flows from investing activities:
Capital expenditures ..................................... (1,775,682) (990,269)
Collection on note receivable from sale of ijob .......... 800,000 --
Purchase of short-term investments ....................... (3,033,960) (1,524,698)
Proceeds upon maturity of short-term investments ......... 795,818 8,004,141
Investment in note receivable ............................ -- (265,000)
Capitalized expenditures for software development ........ (441,084) (494,885)
------------ ------------
Net cash provided by (used in) investing
activities .................................... (3,654,908) 4,729,289
Cash flows from financing activities: ...................... -- --
Proceeds from convertible debt ........................... 6,000,000 --
Proceeds from exercise of stock options, warrants
and stock purchase plans .............................. 2,362,849 953,914
Proceeds from issuance of common stock, net of
expenses .............................................. -- 15,167,800
Payments of capital lease obligations .................... (39,337) --
Payments of deferred offering costs ...................... (315,449) (406,248)
------------ ------------
Net cash provided by financing activities ........ 8,008,063 15,715,466
------------ ------------
Net decrease in cash and cash equivalents .................. (710,622) (70,154)
Cash and cash equivalents, beginning of period ............. 715,446 8,616,305
------------ ------------
Cash and cash equivalents, end of period ................... $ 4,824 $ 8,546,151
============ ============
Supplemental schedule of non-cash investment
activities:
Issuance of common stock for software development
services ............................................... $ -- $ 478,152
============ ============
Assets acquired under capital leases ..................... $ -- $ 134,163
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
We provide subscription-based, business-to-business electronic commerce
services that enable food industry participants to efficiently manage their
highly complex supply chain information. Our core service, syncLink(SM), allows
manufacturers, wholesalers, distributors, sales agencies (such as food brokers)
retailers and foodservice operators to communicate and synchronize item, price
and promotion information in a more cost-effective and accessible way than has
been possible using traditional electronic and paper-based methods. Our
additional services, which are all built on the syncLink foundation, include
clearLink(SM) for item movement data, distribuLink(SM) for chain pricing data
and sbtLink(SM) for scan-based trading.
Our objective is to become the industry-accepted electronic commerce
provider for synchronizing item, price and promotion information for the food
industry. We expect to continue our investment in marketing and sales
activities, and development of our viaLink services and customer support
services to facilitate our plan to penetrate the market and build recurring
revenues generated from subscriptions to our services. In order to implement
this strategy, we believe that we will need significant additional capital, and
we are seeking additional capital sources and potential technology, strategic
and marketing partners. Consequently, we resemble a development stage company
and face many of the inherent risks and uncertainties that development stage
companies face. Moreover, there can be no assurance, that our efforts will be
successful or that we will be able to obtain additional capital or partners on
commercially reasonable terms, if at all. Any failure to successfully obtain
additional capital or partners could have a material adverse effect on our
business, financial condition and results of operations, including our viability
as an enterprise. As a result of the high level of expenditures for investment
in technology development, implementation, customer support services, and
selling and marketing expenses, we expect to continue to incur losses in the
foreseeable future periods until such time, if ever, as the recurring revenues
from our services are sufficient to cover the expenses.
Our clients and customers range from small retailers and suppliers to large
corporations in the food industry and are geographically dispersed throughout
the United States and some foreign countries.
In April 2000, we formed viaLink International, Inc., a wholly owned
subsidiary. viaLink International is a Delaware corporation formed to include
our international operations. Our consolidated financial statements include the
accounts of viaLink International. All intercompany transactions and balances
have been eliminated in consolidation.
2. BASIS OF PRESENTATION
We have prepared the accompanying unaudited financial statements in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of our
management, the accompanying unaudited financial statements contain all
adjustments (consisting solely of normal recurring adjustments) considered
necessary to present fairly our financial position and results of operations and
cash flow. These interim unaudited financial statements should be read in
conjunction with the audited financial statements and related notes included in
our Annual Report on Form 10-KSB, for the year ended December 31, 1999, as filed
with the Securities and Exchange Commission on March 21, 2000.
Operating results for the nine month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2000.
3. DIVESTITURES
Effective September 1, 1998, we sold the assets related to our management
consulting and systems integration services (including our proprietary Retail
Services Application ("RSA") software) to The NetPlex Group, Inc. ("Consulting
Assets Sale"). We received $3.0 million in cash and 643,770 shares of NetPlex
preferred stock, with a market value of approximately $1.0 million at the date
of the sale.
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In conjunction with the Consulting Assets Sale, we entered into an earn-out
agreement that provides for quarterly cash payments aggregating up to $1.5
million based on revenues generated from the assets sold to NetPlex through
March 31, 2000. As of September 30, 2000, we have received $1.2 million of the
$1.5 million potential payments under the earn-out agreement. We are recognizing
amounts received under the earn-out agreement as gain on sale of assets in the
period received. During the nine months ended September 30, 2000, we recognized
a gain on sale of $124,419 for payments received.
Our financial statements do not include the assets and operations of the
consulting and systems integration assets.
4. RECONCILIATION FOR BASIC AND DILUTED EARNINGS PER SHARE ("EPS")
A reconciliation of the numerators and the denominators used in the
calculation of earnings (loss) per share is as follows for the three months and
nine months ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30,: SEPTEMBER 30,:
------------------------------ ------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic:
Net loss ....................................... $ (5,078,807) $ (9,786,482) $ (9,847,222) $(31,026,944)
Weighted average common shares outstanding ..... 12,553,768 21,308,576 11,851,428 20,482,226
------------ ------------ ------------ ------------
Loss per share ................................. $ (0.40) $ (0.46) $ (0.83) $ (1.51)
============ ============ ============ ============
Diluted:
Net loss ....................................... $ (5,078,807) $ (9,786,482) $ (9,847,222) $(31,026,944)
Weighted average common shares outstanding ..... 12,553,768 21,308,576 11,851,428 20,482,226
Add: Net effect of dilutive potential shares ... -- -- -- --
------------ ------------ ------------ ------------
12,553,768 21,308,576 11,851,428 20,482,226
------------ ------------ ------------ ------------
Loss per share ................................. $ (0.40) $ (0.46) $ (0.83) $ (1.51)
============ ============ ============ ============
</TABLE>
For the periods ended September 30, 2000, options to purchase 11,749,976
shares at a weighted average exercise price of $6.90 and warrants to purchase
40,000, 746,268, 768,492, 45,608 and 34,538 shares of common stock at $1.50,
$6.70, $12.06, $13.15 and $39.39, respectively, and 3,995,000 shares of common
stock to be issued upon the conversion of the note issued to Hewlett-Packard
were outstanding, but were not included in the computation of diluted earnings
per share because the effect of these outstanding options, warrants and stock
issuable upon conversion of debt would be antidilutive.
For the periods ended September 30, 1999, options to purchase 9,884,000
shares at a weighted average exercise price of $1.95 and warrants to purchase
2,527,400, 639,000 and 750,000 shares of common stock at $1.25, $1.50 and $2.00,
respectively, and 3,587,380 shares of common stock to be issued upon the
conversion of the note issued to Hewlett-Packard were outstanding, but were not
included in the computation of diluted earnings per share because the effect of
these outstanding options, warrants and stock issuable upon conversion of debt
would be antidilutive.
5. LONG-TERM DEBT
On February 4, 1999, the Company entered into a financing agreement and note
purchase agreement with Hewlett-Packard pursuant to which Hewlett-Packard
purchased a $6.0 million secured subordinated promissory note. This note bears
interest at 11.5% per annum, with interest payments deferrable to maturity in
February 2004. The Company received stockholders' approval at its 1999 annual
meeting to exchange the original note for a subordinated secured convertible
promissory note, convertible into common stock at the option of Hewlett-Packard
at a conversion price of $1.75 per share. The Company may prepay the note in
whole or in part beginning September 30, 2000. Additionally, the Company may
demand conversion at maturity. The closing of the purchase of the note occurred
as of February 5, 1999. At September 30, 2000, contractual interest of
$1,140,000 is included in the note payable balance as the amounts become
convertible with the note balance.
The Emerging Issues Task Force ("EITF") Issue 98-5 requires that beneficial
conversion features present in convertible securities should be recognized and
measured by allocating a portion of the proceeds equal to the value of that
feature to additional paid-in capital. The value of the beneficial conversion
feature in the note with Hewlett-Packard was approximately $20.0 million at the
commitment date. However, the value allocated to additional paid-in capital is
limited to the $6.0 million proceeds based on the prescribed accounting.
Accordingly, we have allocated the full amount of proceeds to the beneficial
conversion feature and recorded $6.0 million as additional paid-in capital at
the time of closing. This was accreted by charges to interest expense and
corresponding
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increases in long-term debt during the period from issuance of the note to
August 2000 when the note became convertible. Non-cash interest charges of
$395,000 and $1.0 million were recognized during the three months ended
September 30, 2000, and 1999, respectively. Non-cash charges of $2.4 million and
$2.6 million were recognized during the nine months ended September 30, 2000 and
1999, respectively.
6. INCOME TAXES
SFAS 109 requires that the Company record a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of the deferred tax asset depends on
the Company's ability to generate sufficient taxable income in the future. The
Company has recognized a full valuation allowance for the amount of net deferred
tax asset at December 31, 1999 and September 30, 2000 since the Company
resembles a development stage company and has no history of profitability.
7. COMMON STOCK
On March 1, 2000, the Company's board of directors declared a two-for-one
split of the common stock in the form of a stock dividend. Par value of the
common stock remained $0.001 per share. The stock split was effective March 28,
2000. Stockholders' equity accounts have been adjusted to reflect the
reclassification of an amount equal to the par value of the increase in issued
shares from additional paid-in capital to the common stock account.
On March 22, 2000, the Company entered into a Securities Purchase Agreement
pursuant to which i2 Technologies, Inc., Hewlett-Packard Company and Millennium
Partners, L.P. paid us an aggregate of $6.0 million as consideration for (1)
200,403 shares of our common stock and (2) warrants to purchase 31,866 shares of
our common stock at an exercise price of $39.39 per share. The warrants can be
exercised at any time on or before March 24, 2003. Additionally, we issued
warrants to purchase 2,844 shares of our common stock at an exercise price of
$42.20 to an investment bank as partial compensation for services rendered to us
as our financial advisor in connection with that transaction. All of these
warrants contain anti-dilution protection provisions.
On May 31, 2000, we entered into a Securities Purchase Agreement pursuant to
which RGC International Investors, LDC ("RGC") paid us an aggregate of $10.0
million as consideration for (1) 960,615 shares of our common stock and (2) a
warrant to purchase 768,492 shares of our common stock at initial exercise price
of $12.06 per share. The exercise price may be subject to certain adjustments
beginning one year from issuance, based on the market price of our common stock.
The warrants can be exercised at any time on or before May 21, 2003. Upon
closing of the transaction with RGC, we issued a warrant to purchase 45,608
shares of our common stock at an exercise price of $13.15 to an investment bank
as partial compensation for services rendered to us as our financial advisor in
connection with that transaction.
On June 15, 2000, we issued options and shares of our common stock described
in Note 8 below.
8. SETTLEMENT AGREEMENT
In December 1997, we entered into an agreement with Investor Awareness to
provide investor relations services. Subject to certain criteria in the
agreement, Investor Awareness would be granted an option to purchase 40,000
shares of our common stock at $1.5625 per share. On June 15, 2000, we entered
into a Settlement Agreement with Investor Awareness pursuant to which we issued
options to purchase 20,000 shares of our common stock to two principals of
Investor Awareness with an exercise price of $0.78125 and sold an aggregate of
20,000 additional shares of our common stock to these individuals as settlement
of a lawsuit alleging that we failed to issue the option under the terms of the
agreement. We have recorded an expense of $185,000 included in general and
administrative expense for the nine month period ended September 30, 2000,
representing the fair value the options issued.
9. SUBSEQUENT EVENT
In October 2000, we entered into a lease agreement with Hewlett-Packard to
expand our operations platform and hosting facilities. The lease term is 36
months and provides for equal monthly installments of $153,000 beginning once
installation is complete. We will work with Hewlett-Packard during the remainder
of 2000 and would expect the implementation to be complete in early 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements of our management's intentions, beliefs, anticipations,
expectations and similar expressions concerning future events or outcomes
contained in this Report constitute "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Any
forward-looking statements are made by us in good faith, pursuant to the
safe-harbor provisions of the Reform Act. As with any future event or outcome,
we cannot assure you that the events or outcomes described in forward-looking
statements made in this Report will occur or that the results of future events
or outcomes will not vary materially from those described in the forward-looking
statements. These forward-looking statements reflect our management's current
views and projections regarding economic conditions, industry environments and
our performance. Important factors that could cause our actual performance and
operating results to differ materially from the forward-looking statements
include, but are not limited to, changes in the general level of economic
activity in the markets served by us, introduction of new products or services
by competitors, sales performance, expense levels, interest rates, changes in
our financial condition, availability and terms of capital sufficient to support
our current and anticipated level of activity, delays in implementing further
enhancements to our services and our ability to implement our business
strategies.
Our expectations with respect to future results of operations that may be
embodied in oral and written forward-looking statements, including any
forward-looking statements that may be included in this Report, are subject to
risks and uncertainties that must be considered when evaluating the likelihood
of our realization of such expectations. Our actual results could differ
materially. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Additional Factors That May Affect
Future Results."
OVERVIEW
We provide subscription-based, business-to-business electronic commerce
services that enable food industry participants to efficiently manage their
highly complex supply chain information. Our core service, syncLink(SM), allows
manufacturers, wholesalers, distributors, sales agencies (such as food brokers),
retailers and foodservice operators to communicate and synchronize item, price
and promotion information in a more cost-effective and accessible way than has
been possible using traditional electronic and paper-based methods. viaLink's
additional services, which are all built on the syncLink foundation, include
clearLink(SM) for item movement data, distribuLink(SM) for chain pricing data
and sbtLink(SM) for scan-based trading.
We were originally formed in 1985 as Applied Intelligence Group, Inc. From
inception, our operations consisted primarily of consulting services related to
the planning, designing, building and installation of computerized information
management systems and computerized checkout or point-of-sale systems in the
retail and distribution industry. We also provided a Web-based human resource
recruiting application.
In 1993, we began the design and development of viaLink, an Internet-based
subscription service to complement our existing consulting business. We
introduced our syncLink service, formerly marketed and sold as Item Catalog, in
January 1997. In 1998, we made the strategic decision to focus primarily on our
viaLink services. As a result, we sold our management consulting and systems
integration assets to The NetPlex Group, Inc. in September 1998 and changed our
name to The viaLink Company in October 1998. In December 1998, we sold ijob, our
wholly-owned subsidiary which operated our Web-based human resources recruiting
application, to DCM Company.
Prior to 1999, we derived substantially all of our revenues from our
consulting and systems integration assets. As a result of the sales of our
management consulting and systems integration assets and ijob, we resemble a
development stage company because our planned principal operations have not yet
generated significant revenues. This fundamental change in our business is
extremely risky, and we cannot be certain that our strategic decision to shift
our focus from our historical businesses to our viaLink services ultimately will
be successful.
We expect to generate our future revenues primarily from monthly
subscriptions to our services. For use of our syncLink service, our customers
pay us either a flat monthly subscription rate or a rate based on the number
trading partners and the size and complexity of the trading relationships. Our
other services, distribuLink, clearLink (formerly Item Movement) and sbtLink,
are available for additional monthly subscription fees.
We also charge an implementation fee ranging from $1,200 for an on-line
implementation to over $100,000 for more complex supplier and retailer
installations. Our implementation fees are separately priced based on time and
materials. Implementation costs consist primarily of labor by technical support
personnel to configure customer data and establish a connection to our services.
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<PAGE> 10
Additionally, we receive revenues from the performance of certain Web-hosting
services, but we expect to reduce our focus and reliance on providing these
services in the future.
We recognize revenues for our subscription and Web-hosting services as they
are provided. Revenues collected in advance are deferred and recognized as
earned. Revenues for implementations are recognized as the stages of the
implementations are completed.
We reported a substantial loss from operations for the fiscal year ended
December 31, 1999 and for the three and nine months ended September 30, 2000,
and we expect to report substantial losses for the foreseeable future. The
extent of these losses will depend primarily on the amount of revenues generated
from implementations of and subscriptions to our viaLink services, which have
not yet achieved market acceptance or significant market penetration and the
amount of expenses incurred in generating these revenues. In order to achieve
market penetration, we expect to continue our high level of expenditures for
sales and marketing and development of our viaLink services. These expenses
substantially exceed our revenues, which to date have been minimal. As a result,
we expect to incur losses in future periods until such time as the recurring
revenues from these services are sufficient to cover expenses.
During the second quarter of 2000, we began the extension of our solution to
the food service industry, including hiring two key executives. Additionally, we
initiated our expansion into international markets by opening an office in
Australia as part of a joint venture with Cap Gemini Ernst & Young Australia
Pty, Ltd. We expect this expansion into the foodservice industry and
internationally will continue to be facilitated by leveraging our strategic
relationships and alliances.
RESULTS OF OPERATIONS
Revenues. Our revenues are comprised of revenues for subscriptions to our
services, implementation revenues and certain revenues for Web-hosting services.
We expect Web-Hosting revenues to continue to decrease in the future. The
following table sets forth for the periods indicated the components of revenue
included in our consolidated statements of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Subscription ............... $ 12,610 $ 128,258 $ 27,185 $ 348,809
Implementation ............. 48,850 111,121 103,798 464,663
Hosting .................... 68,400 66,150 224,275 202,200
------------ ------------ ------------ ------------
Total revenues ............. $ 129,860 $ 305,529 $ 355,258 $ 1,015,672
============ ============ ============ ============
</TABLE>
Customer Operations. Customer operations expense consists of personnel costs
associated with implementation, consulting and other services and costs of
operating, maintaining and accessing our technical operations and hosting
facilities. Customer operations expense also includes the cost of providing
support and maintenance to customers. Our customer operations expense increased
from $822,000 to $1.7 million for the three months ended September 30, 1999 and
2000, respectively, and from $1.6 million to $5.4 million for the nine months
ended September 30, 1999 and 2000, respectively. These increases are due
primarily to increased personnel costs for our implementation and customer
service teams and our expanded operations platform, including the hosting of our
technical operations by Hewlett-Packard. In October 2000 we entered into a lease
agreement with Hewlett Packard to expand our operations platform. We believe
this expanded platform will significantly increase the capacity and scalability
of our operations. We expect that the expanded platform will be complete during
the first quarter of 2001 and will result in increased operating lease and
hosting expenses when complete.
Development. Development expense includes personnel and contract labor costs
and professional fees incurred for product development, enhancements, upgrades,
quality assurance and testing. Our development expenses increased from $945,000
to $1.3 million for the three months ended September 30, 1999 and 2000,
respectively, and from $1.3 million to $4.9 million for the nine months ended
September 30, 1999 and 2000, respectively. These increases were due primarily to
an increase in personnel costs and professional fees for product development.
Additionally, $250,000 and $854,000 of non-cash service costs is included in
development expense for the three and nine month periods ended September 30,
2000, respectively, for the amortization of a portion of the fair value of the
warrants and options issued to Cap Gemini Ernst & Young, i2 Technologies and
other service providers, reflecting the development efforts provided.
Additionally, during the nine month period ended September 30, 2000, we incurred
professional fees of $1,186,000 which were paid with common stock in-lieu of
cash. We are utilizing and expect to increase our reliance on our alliance
partners and other vendors to advance our development efforts. We are currently
undertaking various projects to expand the
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functionality of our services, including internationalization, that we expect
will result in continued increases in these expenses for the foreseeable future.
Selling and Marketing. Selling and marketing expense consists primarily of
personnel costs, travel, promotional events, including trade shows, seminars and
technical conferences, advertising and public relations programs. Selling and
marketing expense increased from $852,000 to $2.3 million for the three months
ended September 30, 1999 and 2000, respectively, and from $1.6 million to $8.1
million for the nine months ended September 30, 1999 and 2000, respectively.
These increases were primarily due to the expansion of our sales, business
development and marketing team from four persons at January 1, 1999 to 21
persons at September 30, 2000 and our new marketing and advertising program to
promote our viaLink services. This new program, along with the increased
headcount resulted in an increase in advertising, travel and other professional
fees of approximately $900,000 and $3.8 million for the three and nine month
periods ended September 30, 2000, respectively, versus the prior year periods.
Additionally, selling and marketing expense includes $275,000 and $1.2 million
of non-cash service costs for the amortization of a portion of the fair value of
the warrants and options issued to Cap Gemini Ernst & Young, i2 Technologies and
other service providers reflecting the selling and marketing efforts provided
during the three and nine month periods ended September 30, 2000. We expect
selling and marketing costs to remain at the same levels in the fourth quarter
of 2000 and would expect the costs to increase again in the first quarter of
2001 in response to normal food industry trade activities.
General and Administrative (G&A). G&A expense consists primarily of the
personnel and other costs of the finance, human resources, administrative and
executive departments and the fees and expenses associated with legal,
accounting and other services. G&A expense increased from $1.5 million to $4.0
million for the three months ended September 30, 1999 and 2000, respectively,
and from $3.7 million to $10.5 million for the nine months September 30, 1999
and 2000, respectively. These increases in G&A expense are attributable
primarily to increased personnel costs for key executive and management staff
and the related increase in personnel expenses for the administrative
infrastructure built to support future operations. During the three and nine
month periods ended September 30, 2000, G&A expense also includes $1.6 million
and $2.1 million, respectively, related to the relocation of the executive
offices from Edmond, Oklahoma to Dallas, Texas. We do not anticipate these
expenses to recur at the same level in the fourth quarter of 2000. Additionally,
for the three and nine month periods ended September 30, 2000, G&A expense
includes $406,000 in deferred offering costs written-off upon withdrawal of a
registration statement relating to a previously proposed offering of our common
stock that we abandoned due to unfavorable market conditions. We anticipate that
our other G&A expenses will continue to increase in absolute dollars for the
foreseeable future as we continue our significant efforts to develop internal
processes and infrastructure to support the expected increase in operational
activity and scale.
Depreciation and Amortization. Depreciation and amortization expense
increased from $177,000 to $453,000 during the three months ended September 30,
1999 and 2000, respectively, and from $346,000 to $1.1 million for the nine
months ended September 30, 1999 and 2000, respectively. These increases reflect
the effect of capital expenditures in 1999 and 2000 for new computer hardware
and software to support the viaLink services.
Interest Expense, Net. Interest expense, net, decreased from $1.2 million to
$337,000 for the three month periods ended September 30, 1999 and 2000, and
decreased from $2.9 million to $2.3 million for the nine month periods ended
September 30, 1999 and 2000, respectively. These decreases reflect the
completion of the amortization of the beneficial conversion feature of the
convertible note as more fully discussed in Note 5 to the financial statements
and increases in interest income on short-term investments. Future interest
expense will be primarily comprised of stated interest on the convertible note
at 11.5% interest, net of interest income earned on cash equivalents and
short-term investments. Interest income on short-term investments was $36,000
and $232,000 for the three month periods, and $136,000 and $621,000 for the nine
month periods ended September 30, 1999 and 2000, respectively.
Gain on Sale of Assets. Gain on sale of assets decreased from $228,000 to
zero recorded for the three month periods ended September 30, 1999 and 2000 and
decreased from $1.3 million to $124,000 for the nine month periods ended
September 30, 1999 and 2000, respectively. Gain on sale of assets represents
income recognized under the earn-out agreement with NetPlex and during the nine
months ended September 30, 1999 reflects the recognition of the deferred gain of
$462,000 upon collection of the note receivable due to us in connection with the
sale of ijob. We have received approximately $1.2 million under the earn-out
agreement through September 30, 2000.
Tax Provision. Deferred tax assets and deferred tax liabilities are
separately recognized and measured at currently enacted tax rates for the tax
effect of temporary differences between the financial reporting and tax
reporting bases of assets and liabilities, and net operating loss and tax credit
carryforwards for tax purposes. A valuation allowance must be established for
deferred tax assets if it is not "more likely than not" that all or a portion
will be realized. We have established a full valuation allowance for the net
deferred tax assets as of December 31, 1999 and September 30, 2000, generated by
losses recorded in 1999 and during 2000. We will continue to
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provide a full valuation allowance for future and current net deferred tax
assets until such time as we believe it is more likely than not that the asset
will be realized.
Other Comprehensive Income. Other comprehensive income in 1999 includes an
unrealized gain of $844,000, representing the net increase in market value of
the 643,770 shares of NetPlex capital stock from January 1, 1999 to September
30, 1999 received as consideration from the sale of our consulting and systems
integration assets. These securities were sold in December 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our principal potential sources of liquidity are cash on hand, cash
generated from operations and cash provided from financing activities. As of
September 30, 2000, we had cash, cash equivalents and short-term investments of
$8.5 million.
During the nine months ended September 30, 2000, we used $20.5 million in
operating activities, reflecting a net loss of $31.0 million. Cash used in
operating activities also reflects $6.8 million for non-cash stock compensation
and interest expense for the conversion feature of the Hewlett-Packard note,
$1.4 million of depreciation and amortization, $1.2 million in professional fees
paid by issuing common shares, $406,000 write-off of deferred offering costs and
a $673,000 increase in cash provided by other working capital changes.
Net cash used in operating activities was $20.5 million for the nine months
ended September 30, 2000, compared to $5.1 million for the comparable period in
1999. This increase was due primarily to an increase in our net loss to $31.0
million for the nine months ended September 30, 2000 from $9.8 million for the
comparable period in 1999, as partially offset by an increase in non-cash
charges for depreciation and amortization, professional fees paid with common
shares and a write-off of deferred offering cost.
During the nine months ended September 30, 2000, investing activities
provided $4.7 million in net cash. This amount reflects $8.0 million received
upon the maturities of short-term investments, as partially offset by
reinvestment of $1.5 million and $1.5 million in capital expenditures and
capitalized software development costs.
During the nine months ended September 30, 2000, financing activities
provided net cash of $15.7 million, primarily the result of the issuance of 1.2
million shares of our common stock. Additionally, we received $954,000 in
proceeds from the exercise of outstanding stock options and warrants and
purchases under stock purchase plans, offset in part by approximately $406,000
of deferred offering costs subsequently written-off.
We have incurred operating losses and negative cash flow in the past and
expect to incur operating losses and negative cash flow for the foreseeable
future. We expect our spending to increase for the foreseeable future for
further technology and product development, sales and marketing expenditures and
other technology and database costs. We also expect to hire additional
management, development and support/service employees. To support our current
level of spending, we must obtain additional capital in the near term. We do not
currently have any firm commitments from third parties to provide capital to us.
Our future capital requirements will depend on our revenue growth,
profitability, working capital requirements, level of investment in long term
assets and other financing sources. Increases in these capital requirements or a
lack of revenue due to delayed or less than expected market acceptance of our
viaLink services would accelerate the use of our cash, cash equivalents and
short-term investments.
We are currently working, with the assistance of our financial advisors, to
address our future capital requirements. Although we expect that these efforts
will result in the procurement of capital in the near term, there can be no
assurance as to whether, when or the terms upon which any such capital may be
obtained. Any failure to timely obtain an adequate amount of additional capital
on commercially reasonable terms could have a material adverse effect on our
business, financial condition and results of operations, including our viability
as an enterprise.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, issued SFAS No.
133. SFAS No. 133, as amended, establishes new standards of accounting and
reporting for derivative instruments and hedging activities. SFAS No. 133
requires that all derivatives be recognized at fair value in the balance sheet,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. SFAS No. 133 will
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be effective for fiscal years beginning after June 15, 2000. We do not expect
SFAS No. 133 to have a material effect on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), providing the staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. SAB 101 becomes effective for
the fourth quarter of fiscal year 2000 for companies with fiscal years that end
on December 31, 2000. The cumulative effect of the adoption of SAB 101 will be
reported as an accounting change as of January 1, 2000 in our December 31, 2000
financial statements. We believe that the adoption of SAB 101 will not have a
material effect on the Company's financial position or results of operations.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider these factors that may affect future results,
together with all of the other information included in this Form 10-QSB, in
evaluating our business. The risks and uncertainties described below are those
that we currently believe may materially affect us. Additional risks and
uncertainties that we are unaware of or that we currently deem immaterial also
may become important factors that affect us.
Keep these risks in mind when you read "forward-looking" statements
elsewhere in this Form 10-QSB. These are statements that relate to our
expectations for future events and time periods. Generally, the words
"anticipate," "expect," "intend," and similar expressions identify
forward-looking statements. Forward-looking statements involve risks and
uncertainties, and future events and circumstances could differ significantly
from those anticipated in the forward-looking statements. Please see "Special
Cautionary Note Regarding Forward-Looking Statements" below in this Item 2.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO SUSTAIN AND GROW
OUR BUSINESS
We intend to continue our investment in and development of our services and
technology, expansion of our sales and marketing activities and expansion into
other industries and geographic markets. We have incurred operating losses and
negative cash flow in the past and expect to incur operating losses and negative
cash flow in the future. Our ability to fund our planned working capital and
capital expenditures will depend largely upon our ability to obtain sufficient
capital. Our future capital requirements will depend on a number of factors,
including our:
o Services achieving market acceptance;
o Services producing a sustainable revenue stream;
o Working capital requirements; and
o Level of our investment in and development of our services and
technology.
We may not be able to obtain the additional capital necessary to satisfy our
cash requirements or to implement our growth strategy successfully. If we obtain
additional capital, we cannot be certain that it will be on favorable terms. If
we cannot obtain adequate additional capital resources, we will be forced to
curtail our planned business expansion. We may also be unable to fund our
ongoing operations, including investment in and development of our services and
technology, expansion of our sales and marketing activities and expansion into
other industries and geographic markets. If we issue equity securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of our common stock.
DUE TO THE SALE OF OUR CONSULTING AND SYSTEMS INTEGRATION ASSETS AND THE SALE OF
OUR SUBSIDIARY, IJOB, INC. IN 1998, WE NEED TO REPLACE MOST OF OUR HISTORICAL
REVENUES WITH REVENUES FROM OUR VIALINK SERVICES.
We have historically derived substantially all of our revenues from
providing management consulting services and computer systems integration
services to the retail and wholesale distribution industries. In order to permit
us to focus our resources primarily on developing and marketing our viaLink
services, we sold the assets underlying our management consulting services and
computer systems integration services, and we sold our wholly-owned subsidiary,
ijob, Inc. We had previously generated over 90% of our total revenues from these
operations.
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As a result of these sales, we are now substantially dependent on revenues
generated from our viaLink services. Our viaLink services have achieved limited
market acceptance and, to date, have accounted for an insignificant amount of
our historical revenues. Consequently, we resemble a development stage company
and will face many of the inherent risks and uncertainties that development
stage companies face.
These risks include, but are not limited to, our:
o Need for our services to achieve market acceptance and produce a
sustainable revenue stream;
o Need to expand sales, support and product development capabilities;
o Need to manage rapidly changing operations;
o Dependence upon key personnel;
o Reliance on strategic alliances and relationships;
o Ability to obtain financing on acceptable terms; and
o Ability to offer greater value than our competitors.
Our business strategy may not successfully address these risks. If we fail
to recognize significant revenues to replace the revenues lost in these sales,
our business, financial condition and operating results would be materially
adversely affected.
WE ARE SUBSTANTIALLY DEPENDENT ON OUR VIALINK SERVICES. IF OUR VIALINK SERVICES
FAIL TO BECOME ACCEPTED BY THE FOOD INDUSTRIES, OUR BUSINESS WILL BE MATERIALLY
ADVERSELY AFFECTED.
Virtually all of our revenues for the foreseeable future will be derived
from implementation fees and subscription revenues from our viaLink services,
which may not achieve market acceptance. To date we have received an
insignificant amount of revenues from these services. The acceptance of our
syncLink service as an industry-wide shared database will depend upon
subscriptions from a large number of industry manufacturers, suppliers and
retailers. We cannot predict when a significant number of manufacturers,
suppliers and retailers will subscribe to our services, if ever. If our services
do not achieve market acceptance, or if market acceptance develops more slowly
than expected, our business, operating results and financial condition will be
seriously damaged.
A number of factors will determine whether our services achieve market
acceptance, including:
o Performance and functionality of our services;
o Ease of adoption;
o Satisfaction of our initial subscribers;
o Success of our marketing efforts;
o Success of our strategic relationships and alliances; and
o Continued acceptance of the Internet for business use.
The market for business-to-business electronic commerce services is evolving
rapidly. As the market evolves, customers, including our current customers, may
not choose our services.
WIDESPREAD INDUSTRY ADOPTION OF OUR SERVICES IS DEPENDENT UPON A CRITICAL MASS
OF LARGE NATIONAL ACCOUNTS SUBSCRIBING TO OUR SERVICES.
Our success depends on a significant number of large customers using our
services and linking with manufacturers, wholesalers and distributors over the
Internet through syncLink. To encourage purchasers to use our services, syncLink
must offer a broad range of
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product, price and promotion information from a large number of suppliers.
However, to attract suppliers to subscribe to syncLink, we must increase the
number of retailers who use our services. If we are unable to quickly build a
critical mass of retailers and suppliers, we will not be able to benefit from a
network effect where the value of our services to each subscriber significantly
increases with the addition of each new subscriber. Our inability to achieve
this network effect would reduce the overall value of our services to retailers
and suppliers and, consequently, would harm our business.
OUR SALES CYCLE CAUSES UNPREDICTABLE VARIATIONS IN OUR OPERATING RESULTS WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our customers often view the purchase of our services as a strategic
decision. As a result of the importance of this decision, the length of our
sales cycle is uncertain, which may cause our revenues and operating results to
vary from quarter to quarter. We spend considerable time and expense providing
information to prospective customers about the use and benefits of our services
without generating corresponding revenue. Our expense levels are relatively
fixed and there is substantial uncertainty as to when particular sales efforts
will begin to generate revenues.
Prospective customers of our services often require long testing and
approval processes before making a purchase decision. The process of entering
into a subscription arrangement with a potential customer may involve lengthy
negotiations. Our sales cycle has been and may continue to be unpredictable. Our
sales cycle is also subject to delays because we have little or no control over
customer-specific factors, including customers' budgetary constraints and
internal acceptance procedures. Because our technology must often be integrated
with the products and services of other vendors, there may be a significant
delay between entering into a subscription agreement and generation of revenues
from the agreement. The length of the sales cycle makes it difficult to
accurately forecast the quarter in which our implementation and subscription
services will occur. This may cause our revenues from those services to be
delayed from the expected quarter to a subsequent quarter or quarters.
We also have a limited implementation services backlog, which makes revenues
in any quarter substantially dependent upon agreements entered into in that
quarter. Because of these factors, our revenues and results of operations in any
quarter may not meet market expectations or be indicative of future performance
and it may be difficult for you to evaluate our prospects. Our failure to meet
these expectations would likely cause the market price of our common stock to
decline.
WE DO NOT HAVE AN ADEQUATE HISTORY WITH THE RECENT CHANGE IN OUR PRICING
STRUCTURE FOR OUR SYNCLINK SERVICES TO PREDICT OUR REVENUE OR OPERATING RESULTS,
WHICH MAY PREVENT INVESTORS FROM ASSESSING OUR PROSPECTS.
Previously, we priced our syncLink service for retailers based on the number
of suppliers from whom they received data and for suppliers based on the number
of retailers that subscribed to their data. We recently introduced a new pricing
structure for our syncLink services pursuant to which retailers pay us a flat
monthly subscription rate and suppliers can either pay a flat subscription rate
or pay us based on the number of retailers that subscribe to their data. We
believe the changes in the pricing structure will result in accelerating the
network effect critical to achieving long-term revenue growth. However, we do
not have an adequate history with this new pricing structure to be able to
predict customers' acceptance of this arrangement or to forecast our revenue or
operating results accurately.
BECAUSE OUR CUSTOMERS MAY NOT RENEW THEIR SUBSCRIPTIONS, OUR REVENUES MAY NOT
INCREASE AS ANTICIPATED.
We have only recently made our services available and we do not have a
history of customers renewing their subscriptions with us. If a significant
portion of our customers do not renew their subscriptions for our services, our
revenues could decline and our business could be harmed.
WE DEPEND ON SUPPLIERS FOR THE SUCCESS AND ACCURACY OF OUR SERVICES.
We depend on suppliers to subscribe to our services in sufficient and
increasing numbers to make our services attractive to retailers and,
consequently, other suppliers. In order to provide retailers accurate data, we
rely on suppliers to update their item, price and promotion information stored
in our database. We cannot guarantee that the item, price and promotion
information available from our services will always be accurate, complete and
current, or that it will comply with governmental regulations. Incorrect
information could expose us to liability if it harms users of our services or
result in decreased adoption and use of our services.
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WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT FUTURE OPERATING LOSSES.
We have a history of operating losses, and we expect to incur net losses for
the foreseeable future. We incurred net operating losses of approximately $2.9
million in 1997, $1.5 million in 1998 and $13.8 million in 1999. As of September
30, 2000, we had an accumulated deficit of approximately $45.0 million
representing the sum of our historical net losses. We expect to expend
significant resources to aggressively develop and market our services into an
unproven market. Therefore, we expect to have negative cash flow and net losses
from operations for the foreseeable future. We may never generate sufficient
revenues to achieve or sustain profitability or generate positive cash flow.
THE UNPREDICTABILITY OF OUR QUARTER-TO-QUARTER RESULTS COULD CAUSE OUR STOCK
PRICE TO BE VOLATILE OR DECLINE.
Our future operating results may vary significantly from quarter to quarter
due to a variety of factors, many of which are outside our control. Our expense
levels are based primarily on our estimates of future revenues and are largely
fixed in the short term.
Due in large part to our uncertainty regarding the success of our services,
we cannot predict with certainty our quarterly revenues and operating results.
We may be unable to adjust spending rapidly enough to compensate for any
unexpected revenue shortfall caused by factors such as delayed or lack of market
acceptance of our services. Further, we believe that period-to-period
comparisons of our operating results are not necessarily a meaningful indication
of future performance, especially in light of the significant changes in our
business that we have undertaken. It is possible that in one or more future
quarters, our results may fall below the expectations of securities analysts or
investors. If this occurs, the trading price of our common stock would likely be
volatile or decline.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has been volatile in the past and may
be volatile in the future. The market price of our common stock may be
significantly affected by various factors, including but not limited to:
o Fluctuations in our operating results;
o Changes in financial estimates by securities analysts or our failure to
perform in line with these estimates;
o Timing of large national customers subscribing to our services;
o Changes in market valuations of other technology companies;
o Announcements by us or our potential competitors relating to significant
technical innovations, acquisitions, strategic alliances and
relationships, joint ventures or investments;
o Departures of key personnel;
o Ability to obtain financing on acceptable terms;
o Fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology sector; and
o Downturns in the general economy.
IF OUR STRATEGIC ALLIANCES AND RELATIONSHIPS DO NOT PRODUCE THE ANTICIPATED
BENEFITS OR IF WE ARE UNABLE TO ENTER INTO ADDITIONAL FUTURE ALLIANCES AND
RELATIONSHIPS, OUR SERVICES MAY NOT ACHIEVE MARKET ACCEPTANCE.
Our business depends substantially on developing and maintaining strategic
alliances and relationships to develop, market and sell our services. We believe
our current and future strategic alliances and relationships will help us to
validate our technology, facilitate broad market acceptance of our services and
enhance our sales and marketing. Our current strategic alliances and
relationships may not provide the benefits we expect or the access to new
customers we anticipate, and they may not be sustained on favorable terms, if at
all. Further, we may not be able to enter into successful new strategic
alliances and relationships in the future. If we are unable to develop key
alliances and relationships or maintain and enhance existing alliances and
relationships, our business, operating results and financial condition would be
harmed.
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A PROMISSORY NOTE WE ISSUED TO HEWLETT-PACKARD HAS LEVERAGED US CONSIDERABLY,
CAUSING FINANCIAL AND OPERATING RISK, AND MAY RESULT IN SIGNIFICANT DILUTION TO
OUR STOCKHOLDERS.
As a result of our issuing a $6.0 million subordinated secured convertible
promissory note to Hewlett-Packard, our debt service requirements will increase
substantially when we are required to repay the note in February 2004. The
degree to which we are leveraged could materially adversely affect our ability
to obtain future financing and could make us more vulnerable to industry
downturns, general economic downturns and competitive pressures. Our ability to
meet our debt obligations will be dependent upon our future performance, which
will be subject to financial, business and other factors affecting our
operations. Additionally, beginning in August 2000, all principal and interest
due under the note may be converted into shares of our common stock at $1.75 per
share, a substantial discount from our current stock price, which would result
in substantial dilution to our stockholders.
WE ARE DEPENDENT UPON THE OPERATION OF HEWLETT-PACKARD'S DATA CENTER FOR THE
TIMELY AND SECURE DELIVERY OF OUR SERVICES.
We use Hewlett-Packard's data center as the host for our services. We are
dependent on our continued relationship with Hewlett-Packard and on their data
center for the timely and secure delivery of our services. If Hewlett-Packard's
data center fails to meet our expectations in terms of reliability and security,
our ability to deliver our services will be seriously harmed, resulting in the
potential loss of customers and subscription revenue. Furthermore, if our
relationship with Hewlett-Packard were terminated, we would be forced to find
another service provider to host our services. The transition to another service
provider could result in interruptions of our services and could increase the
cost of providing our services.
OUR SINGLE-SITE INFRASTRUCTURE AND SYSTEMS MAY BE VULNERABLE TO NATURAL
DISASTERS AND OTHER UNEXPECTED EVENTS, AND LOSSES WE INCUR AS A RESULT OF THESE
EVENTS COULD EXCEED THE AMOUNT OF INSURANCE WE CARRY.
The performance of our server and networking hardware and software
infrastructure is critical to our business, reputation and ability to provide
high quality services and attract and retain users of our services. We depend on
our single-site infrastructure and systems which are located at a secure,
underground Hewlett-Packard facility in Atlanta, Georgia. Any disruption to this
infrastructure resulting from a natural disaster or other event could result in
an interruption in our services. These interruptions, if sustained or repeated,
could impair our reputation, the quality of our services and our ability to
attract and retain users of our services.
Our systems and operations may be vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. We do not have a formal disaster recovery plan or alternative provider
of hosting services. In addition, our business interruption insurance may not be
sufficient to compensate us for losses that could occur. Any system failure that
causes an interruption in services could result in fewer transactions and, if
sustained or repeated, could impair our reputation and the attractiveness of our
services or prevent us from providing our services entirely.
THE ROYALTIES WE MUST PAY TO CAP GEMINI ERNST & YOUNG AND I2 TECHNOLOGIES COULD
ADVERSELY AFFECT OUR ABILITY TO BECOME PROFITABLE.
Pursuant to an alliance agreement, we must pay Cap Gemini Ernst & Young a
royalty of 7% of our total revenues, subject to certain exceptions, until May
2001. Upon meeting specified milestones relating to significant Cap Gemini Ernst
& Young clients becoming our customers, these royalty payments to Cap Gemini
Ernst & Young will continue in perpetuity.
Pursuant to a separate alliance agreement, we must pay i2 Technologies a
royalty of 5% of syncLink and Chain Pricing subscription services revenues over
the term of the agreement through December 31, 2003. The royalty payments we are
obligated to pay could inhibit our ability to become profitable and could have
an adverse effect on our operating results and financial condition.
WE EXPECT TO FACE INCREASED COMPETITION. IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, OUR BUSINESS WILL BE HARMED.
Currently, we do not know of any direct competition for our electronic
commerce services. However, we believe direct competition for our services will
develop and increase in the future. If we face increased competition, we may not
be able to sell our viaLink services on terms favorable to us. Furthermore,
increased competition could reduce our market share or require us to reduce the
price of our services.
To achieve market acceptance and thereafter to increase our market share, we
will need to continually develop additional services and introduce new features
and enhancements. Our potential competitors may have significant advantages over
us, including:
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o Significantly greater financial, technical and marketing resources;
o Greater name recognition;
o Broader range of products and services; and
o Larger customer bases.
Consequently, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements.
WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE.
The Web-based electronic commerce market is characterized by rapid changes
due to technological innovation, evolving industry standards and changes in
subscriber needs. Our future success will depend on our ability to continue to
develop and introduce a variety of new services and enhancements that are
responsive to technological change, evolving industry standards and customer
requirements on a timely basis. We cannot be certain that technological
developments and products and services our competitors introduce will not cause
our existing services, and new technologies in which we invest, to become
obsolete.
OUR OPERATING RESULTS MAY BE HARMED IF BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
OVER THE INTERNET DOES NOT CONTINUE TO GAIN ACCEPTANCE, PARTICULARLY IN THE FOOD
INDUSTRY.
Our ability to achieve market acceptance depends upon the consumer packaged
goods, grocery and food service industries' widespread acceptance of the
Internet as a vehicle for business-to-business electronic commerce. There are a
number of critical issues concerning commercial use of the Internet, including
security, reliability, cost, quality of service and ease of use and access.
Organizations that have already invested substantial resources in other means of
exchanging information may be reluctant to implement Internet-based business
strategies. We cannot assure you that Internet-based information management
utilizing viaLink, or any other product, will become widespread. If the Internet
fails to become widely accepted by the consumer packaged goods, grocery and food
service industries, our subscribers may be forced to use private communications
networks which would materially adversely affect our operating results.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN OUR PRODUCTS MAY RESULT IN LOSS
OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS.
Errors or defects in our database or software may result in loss of revenues
or delay in market acceptance of our services and could materially adversely
affect our business, operating results and financial condition. Applications
such as ours may contain errors or defects, sometimes called "bugs,"
particularly when first introduced or when new versions or enhancements are
released. Despite our testing, current versions, new versions or enhancements of
our products may still have defects and errors after commencement of commercial
operation. As a result of "bugs" in our database or software, customers may
experience data loss, data corruption or other business disruption, which could
subject us to potential liability.
PERFORMANCE PROBLEMS WITH OUR DATABASE OR SOFTWARE COULD SUBJECT US TO PRODUCT
LIABILITY CLAIMS WHICH, WHETHER OR NOT SUCCESSFUL, COULD MATERIALLY ADVERSELY
AFFECT OUR BUSINESS.
Our subscribers depend on our database to provide, access, manage and share
item, pricing and promotion information in an efficient and cost-effective
manner. Any errors, defects or other performance problems with our database,
software or services could result in financial or other damages to our
subscribers. A product liability claim, whether or not successful, could damage
our reputation and our business, operating results and financial condition. Our
service agreements with our subscribers typically contain provisions designed to
limit our exposure to potential liability claims. However, these contract
provisions may not preclude all potential claims. Product liability claims in
excess of insurance limits could require us to spend significant time and money
in litigation or to pay significant damages.
THE SECURITY OF OUR DATABASE COULD BE BREACHED, WHICH COULD DAMAGE OUR
REPUTATION AND DETER CUSTOMERS FROM USING OUR SERVICES.
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We must protect our computer systems and networks from break-ins, security
breaches and other disruptive problems associated with the unauthorized use of
the Internet. Our database and services may be vulnerable to break-ins and
similar security breaches that jeopardize the security of the information stored
in our database and transmitted through our computer systems and networks and
those of our subscribers. In addition, we could, in the future, be subjected to
denial of service, vandalism and other attacks on our systems by Internet
hackers. Due to the highly proprietary information that we retain in our
database, any security breach could adversely affect our ability to attract and
retain subscribers, damage our reputation and subject us to litigation.
Moreover, the security and privacy concerns of potential subscribers, as well as
concerns related to computer viruses, may inhibit the marketability of our
services.
Our services contain security protocols. We have also contracted with
third-party providers to provide security protocols for the transmission of data
over the Internet. Although we intend to continue our current security efforts
and to implement security technology and operational procedures to prevent
break-ins, damage and failures, these security efforts may fail. Our insurance
coverage may be insufficient in certain circumstances to cover claims that may
result from these events.
WE EXPECT OUR PLANNED AGGRESSIVE GROWTH TO STRAIN OUR RESOURCES.
We intend to expand our operations rapidly in the foreseeable future to
pursue existing and potential market opportunities. If this rapid growth occurs,
it will place significant demands on our management and operational resources.
We will need to hire additional sales and marketing, research and development
and technical personnel to increase and support our sales. We will also need to
hire additional support and administrative personnel, expand our customer
service capabilities, contract for third-party implementation resources and
expand our information management systems. From time to time, we have
experienced, and we expect to continue to experience, difficulty in hiring and
retaining talented and qualified employees. Our failure to attract and retain
the highly trained technical personnel that are essential to our product
development, marketing, service and support teams may limit the rate at which we
can generate revenue and develop new products or product enhancements. In order
to manage our growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. If we fail to implement and
improve these systems, our business, operating results and financial condition
may be materially adversely affected.
WE ARE EXPANDING INTO INTERNATIONAL MARKETS, WHICH WILL CAUSE OUR BUSINESS TO
BECOME SUSCEPTIBLE TO ADDITIONAL RISKS.
As part of our strategy, we are expanding our presence and the sales of our
services outside the United States. Conducting international operations subjects
us to risks we do not face in the United States including:
o Currency exchange rate fluctuations;
o Unexpected changes in regulatory requirements;
o Longer accounts receivable payment cycles and difficulties in collecting
accounts receivables;
o Difficulties in managing and staffing international operations;
o Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
o The burdens of complying with a wide variety of foreign laws and
regulatory requirements;
o Reduced protection for intellectual property rights in some countries; and
o Political and economic instability.
Each country may have unique operational characteristics in each of their
CPG, grocery and food service industries that may require significant
modifications to our existing services. In addition, we have limited experience
in marketing, selling and supporting our services in foreign countries.
Development of these skills may be more difficult or take longer than we
anticipate, especially due to language barriers, currency exchange risks and the
fact that the Internet may not be used as widely in other countries, and the
adoption of electronic commerce may evolve slowly or may not evolve at all. As a
result, we may not be successful in marketing our services to retailers and
suppliers in markets outside the United States.
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OUR SUCCESS IS SUBSTANTIALLY DEPENDENT ON OUR ABILITY TO RETAIN AND ATTRACT KEY
PERSONNEL.
Our future performance depends on the continued service of our key senior
management team, Smalltalk programmers and sales personnel. The loss of the
services of one or more of our key personnel, in particular Lewis B. Kilbourne,
our Chief Executive Officer, could seriously harm our business. On October 1,
1998, we entered into an employment agreement with Dr. Kilbourne. This agreement
has a three-year term, with year-to-year renewals. We do not maintain a key man
life insurance policy for Dr. Kilbourne. Our future success also depends on our
continuing ability to attract, hire, train and retain a substantial number of
highly skilled managerial, technical, sales, marketing and customer support
personnel. Competition for qualified personnel is intense, and we may fail to
retain our key employees or to attract or retain other highly qualified
personnel.
IF WE MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES OR ADDITIONAL
ALLIANCE ARRANGEMENTS, OUR MANAGEMENT'S ATTENTION MAY BE DIVERTED FROM OUR
OPERATIONS, WE MAY INCUR ADDITIONAL LIABILITIES AND WE MAY NOT SUCCESSFULLY
INTEGRATE ACQUIRED OPERATIONS.
In the future we may acquire additional businesses, products and
technologies, or enter into joint ventures or alliance arrangements that could
complement or expand our business. Management's negotiations of potential
acquisitions or joint ventures and alliance agreements and management's
integration of acquired businesses, products or technologies could divert their
time and resources. Any future acquisitions could require us to issue dilutive
equity securities, incur debt or contingent liabilities, amortize goodwill and
other intangibles or write-off in-process research and development and other
acquisition-related expenses. Further, we may not be able to successfully
integrate any acquired business, product or technology into our existing
operations or retain the key employees of the acquired business. If we are
unable to fully integrate an acquired business, product or technology, we may
not receive the intended benefits of that acquisition.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.
Our success is in part dependent upon our proprietary software technology.
Companies in the software industry have experienced substantial litigation
regarding intellectual property. Our subscription agreements contain provisions
prohibiting the unauthorized use, copying and transfer of our proprietary
information. We own no patents; rather, we rely on a combination of trade
secret, copyright and trademark laws as well as non-disclosure and
confidentiality agreements to protect our proprietary technology. However, these
measures provide only limited protection, and we may not be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights.
Any litigation to enforce our intellectual property rights may divert
management resources and may not be adequate to protect our business. We also
could be subject to claims that we have infringed the intellectual property
rights of others. In addition, we may be required to indemnify our subscribers
for similar claims made against them. Any claims against us or any claims we may
seek to bring against others could require us to spend significant time and
money in litigation, pay damages, develop new intellectual property or acquire
licenses to intellectual property that is the subject of the infringement
claims. These licenses, if required, may not be available on acceptable terms.
Intellectual property claims against us could have a material adverse effect on
our business, operating results and financial condition.
WE DEPEND ON THIRD-PARTY TECHNOLOGY FOR USE IN OUR PROPRIETARY TECHNOLOGY. IF WE
ARE UNABLE TO CONTINUE TO USE THESE SOFTWARE LICENSES, OUR BUSINESS MAY BE
MATERIALLY ADVERSELY AFFECTED.
We currently, and in the future we expect to continue to, license or
otherwise obtain access to intellectual property of third parties. We rely upon
software that we license from third parties, including software that is
integrated with our internally developed software to perform key functions as
part of our service offerings. These third-party software licenses may not
continue to be available to us on commercially reasonable terms. The loss of, or
inability to maintain or obtain, any of these software licenses, could result in
delays in our ability to provide our services or in reductions in the services
we provide until we integrate equivalent software that we develop internally or
that we identify and license from a third-party. Any delay in product
development or in providing our services could damage our business, operating
results and financial condition.
OUR CUSTOMER BASE IS CONCENTRATED AND OUR SUCCESS DEPENDS IN PART ON OUR ABILITY
TO RETAIN EXISTING CUSTOMERS AND SUBSCRIBERS.
If one or more of our major customers were to substantially reduce or
terminate their use of our services, our business, operating results and
financial condition would be harmed. In 1999, we derived 70% of our total
revenues from our five largest customers. Our
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largest customer in 1999 accounted for approximately 27% of our total revenues.
The amount of our revenues attributable to specific customers is likely to vary
from year to year. We do not have long-term contractual commitments with any of
our current subscribers, and our subscribers may terminate their contracts with
little or no advance notice and without significant penalty. As a result, we
cannot be certain that any of our current subscribers will be subscribers in
future periods. A subscriber termination would not only result in lost revenue,
but also the loss of subscriber references that are necessary for securing
future subscribers.
THE PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR FUTURE
SALE.
Sales of a substantial number of shares of common stock could adversely
affect the market price of the common stock and could impair our ability to
raise capital through the sale of equity securities. As of September 30, 2000,
we had outstanding 21,423,688 shares of common stock. Of these shares:
o 17,367,070 shares are freely tradable without restriction or further
registration under the Securities Act unless purchased by our
"affiliates;" and
o 4,056,618 shares of common stock are "restricted securities" as defined in
Rule 144 of the Securities Act.
An additional 3,736,190 shares of common stock are issuable upon the
exercise of currently exercisable options. Substantially all shares issued
following the exercise of these options will be freely tradable.
An additional 768,492 shares of common stock are issuable upon the exercise
of currently exercisable warrants. These warrants are subject to certain
exercise price reset provisions that, after one year from the date of issuance,
could result in an additional warrants to purchase 714,390 shares of common
stock which would be immediately exercisable. All of the shares issued upon the
exercise of these warrants will be freely tradable.
An additional 40,000 shares of common stock are issuable upon the exercise
of currently exercisable warrants. All of the shares issued upon the exercise of
these warrants will be freely tradable.
Pursuant to the $6.0 million subordinated secured convertible promissory
note we issued to Hewlett-Packard, Hewlett-Packard may convert the note into
shares of our common stock at a conversion price of $1.75 per share beginning in
August 2000. Hewlett-Packard is also entitled to request the registration of
66,801 shares of our common stock purchased by them and 10,622 shares of our
common stock currently issuable to them upon the exercise of a warrant we issued
to them in connection with a private placement.
Pursuant to our agreement with Cap Gemini Ernst & Young, Cap Gemini Ernst &
Young is entitled to request the registration of 750,000 shares of our common
stock which were purchased by them upon the exercise of a warrant.
Pursuant to our agreements with i2 Technologies, i2 Technologies is entitled
to request the registration of 1,052,337 shares of our common stock which were
purchased by them and 756,930 shares of common stock issuable to them upon
exercise of the warrants.
Pursuant to our agreement with AGE Investments, Inc., we have granted AGE
unlimited piggyback registrations rights prior to March 22, 2005 with respect to
the 48,280 shares of our common stock issuable upon exercise of the warrants we
issued to AGE.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR
IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws, including those
relating to our classified board and our ability to offer "blank check"
preferred stock, could have the effect of discouraging, delaying or preventing a
merger or acquisition that a stockholder may consider favorable. We are also
subject to the anti-takeover laws of Delaware which may discourage, delay or
prevent someone from acquiring or merging with us, which may adversely affect
the market price of our common stock.
This Form 10-QSB contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "intend," "anticipate,"
"believe," "estimate," "continue" and other similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, make projections of our future results of operations or of our
financial condition or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are
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not able to accurately predict or control. The factors listed in the sections
captioned "Additional Factors That May Affect Future Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as any cautionary language in this Form 10-QSB, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following instruments are included as exhibits to the report. Exhibits
incorporated by reference are so indicated.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
3.1 Amended and Restated Bylaws
3.2 Bylaw Amendment
27 Financial Data Schedule
</TABLE>
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE VIALINK COMPANY
(Registrant)
By: /s/ LEWIS B. KILBOURNE
--------------------------------
Lewis B. Kilbourne
Chief Executive Officer
Date: November 14, 2000
By: /s/ J. ANDREW KERNER
--------------------------------
J. Andrew Kerner
Senior Vice President, Finance
Chief Financial Officer
(principal financial and
accounting officer)
Date: November 14, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Bylaws
3.2 Bylaw Amendment
27 Financial Data Schedule
</TABLE>
