UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to _______
Commission File No. 0-22947
ADATOM.COM, INC.
----------------------------------
(Exact name of Small Business registrant in its charter)
Delaware 43-1771999
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
920 Hillview Court, Suite 190, Milpitas, CA 95035
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number,: (408) 935-7979
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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
ninety (90) days.
YES [X] NO [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 13, 2000 there were
18,413,877 shares outstanding of the Company's common stock.
1
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet as of September 30, 2000.......................... 3
Statement of Operations for the quarter and nine months ended
September 30, 2000 and 1999 .................................... 4
Statement of Cash Flows for the nine months ended
September 30, 2000 and 1999 ................................... 5
Notes to the Financial Statements .............................. 6
Item 2. Management's Discussion and Analysis or Plan of Operations....7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................36
Item 2. Changes in Securities and Use of Proceeds ...................36
Item 6. Exhibits and Reports on Form 8-K .......................... 37
SIGNATURES ......................................................... 38
EXHIBITS............................................................E-1
2
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
<TABLE>
<CAPTION>
ADATOM.COM, INC.
BALANCE SHEET
(unaudited)
September 30, 2000
---------------------------
Current assets:
<S> <C>
Cash $ 813,000
Accounts receivable 3,000
Notes from receivable franchisee 8,000
Inventory 0
Prepaid expenses and other 1,000
---------------------------
Total current assets 825,000
Other assets:
Fixed assets net 680,000
Investment joint venture 500,000
Deposits 32,000
Organization expense, net 32,000
Web development costs, net 0
---------------------------
Total other assets 1,244,000
---------------------------
Total Assets $ 2,069,000
===========================
Current Liabilities:
Accounts payable $ 267,000
Accrued payroll liability 384,000
Current lease contracts payable and notes 63,000
Customer deposits 55,000
Accrued expenses 2,053,000
Note payable to officers 548,000
Restructuring Reserve 984,000
---------------------------
Total current liabilities 4,354,000
Long-term liabilities 0
Total liabilities 4,354,000
Equity
Preferred stock, $.01 par value; authorized 5,000,000 shares,
issued and outstanding - 1,200 shares 1,200,000
Common stock $.01 par value; 50,000,000 authorized; 184,000
18,428,877 issued; 18,413,877 outstanding
Paid in capital 19,413,000
Accumulated Deficit (23,050,000)
Common stock notes receivable (17,000)
Treasury Stock - at cost (15,000 shares) (15,000)
---------------------------
Stockholder Equity (2,285,000)
---------------------------
Total Liability and Stockholder Equity $ 2,069,000
===========================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
<TABLE>
<CAPTION>
ADATOM.COM, INC.
STATEMENT OF OPERATIONS
(unaudited)
Three Months Thee Months Nine Months Nine Months
Ended September Ended September Ended Ended
30, 2000 30, 1999 September 30, September 30,
2000 1999
------------------------------------------------------------------
Operation expenses:
<S> <C> <C> <C> <C>
Selling, general and administrative $683,000 $257,000 $1,752,000 $446,000
------------------------------------------------------------------
Loss from operations (683,000) (257,000) (1,752,000) (446,000)
Other income (expense)
Miscellaneous income (expense) 2,000 1,000 4,000 40,000
Interest expense, net 0 (1,000) 7,000 (33,000)
------------------------------------------------------------------
2,000 0 11,000 7,000
Loss before discontinued operations (681,000) (257,000) (1,741,000) (439,000)
Discontinued operations
Loss from discontinued operations 1,799,000 769,000 4,943,000 1,464,000
Loss on abandonment of discontinued operations 1,727,000 0 1,727,000 0
------------------------------------------------------------------
Total loss on discontinued operations 3,526,000
769,000 6,670,000 1,464,000
Net Loss ($4,207,000) ($1,026,000) ($8,411,000) ($1,903,000)
==================================================================
Basic and diluted loss per share
Loss per share from continuing operations ($0.04) ($0.05) ($0.11) ($0.08)
Loss per share from discontinued operations ($0.21) ($0.15) ($0.42) ($0.29)
Net Loss ($0.25) ($0.20) ($0.53) ($0.37)
Weighted average number of
common shares outstanding 17,007,829 5,174,582 15,981,167 5,174,582
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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<TABLE>
<CAPTION>
ADATOM.COM, INC.
STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Ended Nine Months
September 30, 2000 Ended
September 30,
1999
------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (8,411,000) $ (1,903,000)
Adjustments To reconcile net (loss) to net
Cash provided (used) by operating activities:
Depreciation and amortization 774,000 24,000
Decrease (increase) in operating assets
Accounts receivable 74,000 (55,000)
Inventory 240,000 (30,000)
Prepaid expenses and other 165,000 (40,000)
Increase (decrease) in operating liabilities
Accounts payable 626,000 416,000
Accrued Expenses 384,000 (27,000)
Customer deposits (146,000) 36,000
------------------ ----------------
Net cash used by operating activities (6,294,000) (1,579,000)
Cash flows from investing activities:
Investment Joint Venture (CPTC) (500,000) 0
Payments received on franchisee notes receivable 1,000 2,000
Acquisition of fixed assets (340,000) (85,000)
------------------ ----------------
Net cash provided (used by investing activities) (839,000) (83,000)
Cash flows from financing activities:
Proceeds from sales and issuance of stock 7,296,000 0
Proceeds from notes and contracts payable 0 1,290,000
Proceeds from shareholder 0 554,000
Net borrowings on line of credit 0 (51,000)
Net borrowings from officers / stockholders 541,000 (6,000)
------------------ ----------------
Net cash provided by financing activities 7,837,000 1,787,000
Net increase (decrease) in cash 704,000 125,000
Cash and restricted cash, beginning of period 109,000 91,000
------------------ ----------------
Cash and restricted cash, end of period $ 813,000 $ 216,000
================== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year for:
Interest 0 48,000
</TABLE>
The accompanying notes are an integral part of these financial statements
5
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ADATOM.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying unaudited condensed financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and the
applicable rules of the Securities and Exchange Commission. Accordingly, the
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month periods ended September 30, 2000
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the financial statements and footnotes thereto included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Legal Proceedings
From time to time Adatom.com, Inc. (the Company) is subject to legal
proceedings and claims in the ordinary course of business, including claims
alleging infringement of trademarks, copyrights and other intellectual property
rights. The Company currently is not aware of any such legal proceedings or
claims that it believes will have individually or in the aggregate a material
adverse effect on its business, prospects, financial condition or operating
results. Please see Part II Item 1.
6
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Net Loss Per Share
Net loss per share basic and diluted is calculated using the weighted
average number of common shares outstanding during the period. Diluted net loss
per share excludes the impact of stock options and warrants, as the effect of
their inclusion is antidilutive as of the periods reported on.
Abandonment of B2C Business
Adatom.com, Inc. has decided to discontinue its retail operation to
focus exclusively on its international operations by attempting to leverage its
China partnerships. This discontinuance emphasizes the development of the
Company's relatively new China business, while concurrently reducing
expenditures related to the B2C internet superstore (www.adatom.com) and the
Company's B2B E-commerce Solution Program (AESP). The superstore and AESP, which
to date have been the predominant revenue sources but have not been profitable,
will be refocused primarily to liquidate existing inventory, and thereafter will
be available for licensing by Adatom's international partners and others. The
Company must generate sufficient revenues from its China business to cover
expenses even at its reduced level. No assurance can be given that the change in
the Company's operations as described herein will generate sufficient revenues
to make the Company profitable.
The estimated cost of closing down the operation and the write off
assets associated with the discontinued operation have been accrued and
reflected as part of the loss on abandonment.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Statements in this Form 10-QSB and the following "Management's
Discussion and Analysis or Plan of Operations" that are not statements or
descriptions of historical facts are forward-looking statements that are subject
to risks and uncertainties. Words such as "expect," "intends," "believes,"
"plans," "anticipates" and "likely" also identify forward-looking statements.
All forward-looking statements are based on current facts and analyses. Actual
results may differ materially from those currently anticipated due to a number
of factors including, but not limited to, history of operating losses,
anticipated future losses, competition, future capital needs, the need for
market acceptance, dependence upon third parties, disruption of vital
infrastructure and intellectual property rights, government regulation, and
other risks. See the section entitled "MANAGEMENT DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION -Risk Factors" for a discussion of some of those risks. All
forward-looking statements are made pursuant to the Private Securities
Litigation Reform Act of 1995. Additional information on factors that may affect
the business and financial results of the Company can be found in filings of the
Company with the Securities and Exchange Commission.
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report.
GENERAL
7
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Adatom.com, Inc. is a creator, enabler and operator of electronic
marketplaces worldwide, enabling the most direct interfaces between buyers and
sellers. Adatom has relationships in China, including strategic partnerships
with the China Product Trade Net Center, the Yangling Agricultural Hi-Tech
Industrial Demonstration Zone, the ShenZhen Bay Industrial, Education and
Research Center, the China Federation of Industrial Economics and the Shanghai
Longwu Fruit Company.
Adatom, Inc. launched an Internet website, www.ADATOM.COM, in October
1998. Early in 2000 we shifted the focus to Internet e-commerce, and attempted
to leverage our proprietary e-commerce infrastructure and efficient distribution
system to reach both the business-to-consumer ("B2C", the providing of services
by businesses to consumers through the Internet)and business-to-business ("B2B,"
the providing of services by businesses to other individual businesses through
the Internet) markets. We also developed and implemented a turnkey e-commerce
solution to provide individuals, companies, and organizations with "instant"
e-commerce capabilities, including back-end fulfillment, website development and
a full-scale e-commerce infrastructure, providing a comprehensive product mix of
name brand products for the individual, the home, and the office. These
operations generated revenue but were not profitable. As noted below these
operations were discontinued during the third quarter as we decided to emphasize
our China partnerships.
Recently, the Company has been advised by Nasdaq that it no longer
meets the requirements for listing on the Nasdaq SmallCap Market. Nasdaq held a
hearing on November 2, 2000 during which Adatom presented its plan for curing
and eliminating stated deficiencies regarding the listing of the Company's
stock. A decision is pending. (See "RISK FACTORS-IF WE CANNOT SATISFY NASDAQ'S
MAINTENANCE REQUIREMENTS, IT MAY DELIST OUR COMMON STOCK FROM ITS SMALLCAP
MARKET AND WE MAY NOT HAVE AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK. THE
ABSENCE OF AN ACTIVE TRADING MARKET WOULD LIKELY MAKE THE COMMON STOCK AN
ILLIQUID INVESTMENT" below).
Global Ecommerce Marketmaker Solutions (GEMS)
Adatom's role as a global ecommerce marketmaker is in its early
developmental stages. In March 2000, Adatom signed an exclusive joint venture
agreement with the China Product Trade Net Center(CPTNC) to form a US-China
marketplace. The CPTNC was formed by the Chinese government to facilitate the
systematic and efficient distribution of Chinese manufactured goods. A second
agreement was signed in April 2000 between Adatom and Yangling Agricultural
Hi-Tech Industrial Demonstration Zone (YAHIDZ) to develop and implement an
agricultural electronic marketplace to source and sell agricultural farm
machinery, seeds, fertilizer, pesticides and crops. Adatom has also signed a
third agreement with ShenZhen Bay Industrial, Education and Research Center
(SBIERC) to develop and facilitate an electronic marketplace with China Hi-Tech
Exchange Network and China IT Product Purchasing Net for international
e-commerce. Adatom.com signed a fourth agreement in May 2000 with China
Federation of Industrial Economics (CFIE), to establish and develop an
electronic marketplace for a marketing, sale, and distribution system between
China and the U.S. Present plans are for the GEMS revenues to begin to flow in
the fourth quarter of 2000.
8
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CHINA JOINT VENTURES
In March 2000, the Company signed an exclusive agreement with the China
Product Trade Net Center (CPTNC). The CPTNC is an organization officially
launched in 1997 with the support of several Chinese governmental and private
institutions to facilitate increased sales and ensure systematic and efficient
worldwide distribution of Chinese manufactured goods.
The CPTNC initiative covers both consumer and industrial goods and aims
to use Internet technology as its primary information and distribution medium.
The Company and the CPTNC will establish a joint venture company located in
Beijing, China, to work directly with the CPTNC. The joint venture company will
develop and implement the systems, Internet applications, services and support
to enable the marketing and sale of industrial and consumer goods produced in
China into the U.S. as well as goods produced in the U.S. into the Chinese
marketplace exclusively through Adatom.com.
The scope of this agreement includes the establishment of an electronic
business-to-business and business-to-consumer marketing, selling and
distribution system with back-end factory quality and level of service
standards. This electronic system will be accessible in both English and
Chinese. Additional support will be provided by subsidiary CPTNC organizations
including the centers for transportation, trade, Internet and method of
payments.
This joint venture is presently conducting business through manual
methods, receiving and sourcing products and service requests from both China
and the US. Implementation of the e-commerce network is in process and remains
subject to submission of a mutually acceptable business plan.
In August the Company was selected as an exclusive agent by the CPTNC,
to obtain a turn-key operation including equipment, technology and training for
the implementation of fiber optics production in China at an estimated cost of
$150,000,000 (150 million dollars) U.S.
In March 2000, the Company signed a cooperative agreement with Yangling
Agricultural Hi-Tech Industrial Demonstration Zone (YAHIDZ or Yangling) to among
other things develop and implement a Hi-Tech agricultural electronic
marketplace. YAHIDZ is a Chinese agricultural organization established in 1997
by the China National State council and 14 Chinese ministries, commissions and
provincial governments. In this joint effort, Adatom.com, Inc. is the exclusive
overseas e-commerce partner of YAHIDZ. Adatom and YAHIDZ will source, provide,
market and sell industrial and consumer agricultural products between the United
States and China. Adatom has received a Certificate of Approval from the Chinese
government for its exclusive partnership with YAHDIZ. This Certificate of
Approval is "for the establishment of enterprises with foreign investment in the
People's Republic of China." Significantly, in August 2000, Yangling was awarded
a full import/export license and a share of the national import/export quota for
agriculture. Yangling is only the second organization in China to have received
such a broad charter.
9
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Adatom.com has established a joint venture agreement with the ShenZhen
Bay Industrial, Education and Research Center (SBIERC) to develop and facilitate
an electronic marketplace with China Hi-Tech Exchange Network and China IT
Product Purchasing Net for international e-commerce. This electronic marketplace
will provide information on products and business opportunities related to
hi-tech products, electronics and information technology. In addition to the
e-commerce enablement, the cooperation will develop an online hi-tech education
platform and will establish a venture capital fund to invest in the activation
of Chinese hi-tech companies. Furthermore, a "Global Economic Network Forum"
will be instituted to educate and inform on economic strategy development,
industry orientation, new century network technology and human resources.
Located in South China, SBIERC is an high-tech industrial park that was founded
by city government officials of ShenZhen - the leader in China for industrial
products; the management team at Peking University - the top University in China
with a strong industrial sector; and Hong Kong Science and Technology University
- the most westernized hi-tech University in China. SBIERC will work exclusively
with Adatom and will contribute financial resources to enable the Company to
establish an instant e-commerce presence for SBIERC. The time table for
implementation of this joint venture has not been finalized, will require
various China business licenses and is also subject to mutually acceptable
business plan.
Adatom.com has established a joint venture agreement with China
Federation of Industrial Economics (CFIE) a national organization that oversees
and coordinates all Chinese trade associations. The network consists of hundreds
of trading associations such as the Electronic Association of China, The Chinese
Textile Association and the Chinese Toy Manufacturers Associations, etc. from
various industries and offers the best product prices on the market. CFIE is
expecting to enlist 50,000 members for Adatom in its first year and 100,000 the
following year. China Telecom and China Broadcasting will participate. CFIE is
unique as a national organization. They coordinate all Chinese trade
associations and most of the large companies in China are members.
On October 29, 2000 Adatom.com signed a joint venture agreement with
SHANGHAI QIFAN Co., Ltd., one of China's largest conglomerates. The pact with
SHANGHAI QIFAN Co., Ltd., which includes 21 companies under its corporate
umbrella, adds extensive access to China's markets for companies using Adatom's
wide ranging Internet network. SHANGHAI QIFAN, has been in business for 35 years
and owns an import/export company, a large produce market, a large
transportation center, one of China's largest cement warehouses, a rare earth
mineral and chemical trade operation and China's largest rice export base. The
agreement marks the first time SHANGHAI QIFAN has taken a U.S. trade partner.
SHANGHAI QIFAN's top executive, Mr. Bao Chi Fan, is one of the most decorated
and revered businessmen in China. His credits include twice being elected as a
"national hero" in the field of business, serving as vice president of the
Chinese Invention Association and teaching as a visiting professor at 10
universities and colleges.
DISCONTINUED OPERATIONS
On September 25, 2000, we announced the discontinuance of the Company's
retail operation to focus almost exclusively on international operations. This
restructuring emphasizes the development of our relatively new China business,
while at the same time significantly reducing expenditures related to the former
B2C
10
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Internet superstore and B2B E-commerce Solution Program (AESP). As part of this
restructuring, we decided to cancel all drop-shipped orders due to our analysis
of the marginal profitability of these orders versus the anticipated costs to
fulfill the orders. The superstore and AESP, which had been the predominant
revenue sources but had not been profitable, have been refocused to liquidate
existing inventory, and are now available for licensing. These actions will
result in an overall headcount reduction of 45% and anticipated total spending
reductions of approximately 55%.
We anticipate that this change in focus will enable us to focus almost
exclusively on developing our China business while achieving significant cost
reductions through a combination of workforce reduction and decreased marketing
expenditures associated with our former superstore and AESP operations. Our
China partners are government agencies or quasi-government agencies.
For the near future, the predominant focus of our China business will
be to match non-consumer buyers and sellers of a potentially wide variety of
goods to be both exported from and imported to China. Sales efforts are
presently being concentrated in various products in the following areas:
agriculture, consumer goods, automotive, computers, electronics, hardware,
household, industrial, office, personal, sports and toys. Adatom plans to take
temporary title to any such goods during the transit and delivery phases in
order to be able to charge a markup on the sold goods for its arrangement
efforts. The range of this markup is uncertain at this time due to lack of sales
and it is anticipated will vary depending on type, segment and category.
On October 17, 2000, we announced the launch of our new international
website focused on direct trade with China (www.adatomchina.com). The new Adatom
site focuses on bringing together U.S. and international buyers and sellers for
bi-directional trade with China.
Although the change in operations described above will reduce headcount
and expenses, we must generate sufficient revenues from our China business to
cover expenses even at our reduced level. No assurance can be given that the
change in our operations as described will generate sufficient revenues to make
us profitable.
OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report.
During the third quarter of 2000, the Company determined that
continuing the B2C business and the related B2B business was not in the best
long term interest of either the Company or its stockholders. While these lines
of business were projected to become profitable they would not do so quickly
enough to become self-supporting given the Company's cash position. The cost of
establishing and marketing its Adatom Ecommerce Solution Program (ESP) and
building brand name recognition through its superstore with affiliate programs
and agreements with web shopping portals was just too
11
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costly. During the third quarter the Company discontinued its major promotion of
free shipping on orders and noticed an immediate drop in orders.
The Company closely follows the evolution of commerce on the Internet.
With the growing importance of e-commerce market places and the integration of
global trade the Company has forged what it believes to be key relationships
with companies in China and has initiated an electronic market place for the
trading of consumer goods, industrial goods, agricultural products, and
commodities with a particular focus on China.
As a consequence of the non profitability of retail operations and the
agreements the Company has in place, the Company has decided to terminate its
retail operations in the US and focus exclusively on its trade with China and
other Global opportunities.
RESULTS OF OPERATIONS:
NINE MONTHS PERIODS ENDING SEPTEMBER 30, 2000 AND 1999.
In September 2000 the Company terminated the majority of the expenses
associated with its B2C business. This involved, among other things, laying off
25 individuals who were exclusively associated with the B2C business, reducing
the amount of space it rents to reflect the smaller staff, and canceling various
contracts with web portals. The Company will liquidate its inventory at prices
below cost and we are in the process of canceling orders and refunding payments.
Some staff members remain who will assist with this effort and then will either
be transitioned into the new business or laid off.
The following table depicts staffing levels at each month end during
the third quarter 2000 and 1999. The staffing level for September is the number
of personnel left after the reduction in force.
<TABLE>
<CAPTION>
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TOTAL EMPLOYEES
(BOTH FULL & PART TIME) Q3-1999 Q3-2000 VARIANCE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
JULY 20 56 36
-----------------------------------------------------------------------------------------
AUGUST 30 55 25
-----------------------------------------------------------------------------------------
SEPTEMBER 31 33 2
-----------------------------------------------------------------------------------------
</TABLE>
During the next nine to twelve months the Company may hire a number of
additional employees who have experience with international trade to assist with
the development of the Chinese web site. Management will continue to monitor
cost and staffing to keep expenditures as low as possible consistent with
execution of the business plan.
The company recorded $1,727,000 of restructuring costs related to
inventory write-off, fixed asset write-off, leases and other obligations related
to the restructure announced on September 25, 2000 that will help the company
reduce costs, eliminate unprofitable B2C business and shorten the time to
profitability.
There have been no sales prior to the fourth quarter 2000 through our
China partnerships and thus there is no revenue shown on the Operating
12
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Statement. There are some costs shown both in 1999 and in 2000 on the line
Selling, general and administrative. These cost are corporate costs such as
legal, accounting, CPAs, and various administrative functions. There are however
costs in 2000 related to the setting up of the various joint venture agreements
mentioned elsewhere in this document and the functions necessary to launching
www.adatomchina.com which was begun in the third quarter. There are also costs
associated with sales activity and the bringing together of buyers and sellers.
These activities and will accelerate in the fourth quarter of 2000 and beyond.
The company reported a net loss of $681,000 or $(0.04) per share from
on-going operations together with a net loss of $1,799,000 or $(0.11) per share
from discontinued operations related to B2C business and a net loss of
$1,727,000 or $(0.10) per share resulting from its recently announced
restructuring. The total net loss for the period was $4,207,000 or $(0.25) per
share. Excluding the loss related to discontinued operations, the loss for the
third quarter was $681,000 or $(0.04) per share compared to a net loss of
$257,000 or $(0.05) per share for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company is dependent upon raising additional capital to finance our
current operations and future plans for expansion. In March 2000, we consummated
a private placement of 2,000,000 shares of our common stock yielding gross
proceeds of $4 million. In June, we consummated a private placement of 1,100
shares of Series A Convertible Preferred Stock yielding gross proceeds of $1.1
million. In September, we a) consummated private placements of 329,384 shares of
our common stock yielding gross proceeds of $250,000 and b) consummated a
private placement of 1,200 shares of Series B Convertible Preferred Stock
yielding gross proceeds of $1.2 million. During the third quarter we also used
our stock as method of settling some outstanding liabilities. The net amount of
the liabilities amounted to approximately $292,000. The net proceeds of these
three offerings plus the debt elimination was approximately $6,842,000. The
remaining proceeds of this capital have been completely committed.
On October 30, 2000 an agreement to purchase common stock was made
between Adatom.com and Mr. Li Yuanhao a private investor. Mr. Li, has agreed to
purchase 2,344,372 shares at a price of $1.2797 per share for a total infusion
of $3 million. This listing has not been closed as of the date hereof because,
among other things, a Nasdaq listing application needs to be filed. This
financing is expected to close by the end of November 2000. In addition the
Company issued a warrant to Mr. Li for 1,100,000 shares of common stock at a
price of $1.2813 per share as compensation for his efforts to secure the
Yangling Agricultural Hi -Tech Industrial Demonstration Zone cooperative
agreement.
At September 30, 2000, the Company had cash of approximately $813,000.
During the second and third quarters certain officers (see page E- 1 of this
document) loaned to the Company a total of $541,000 for payroll and working
capital. $10,000 was repaid to Mr. Jagannathan during October 2000 leaving
$531,000 as the net amount loaned to the Company by Officers.
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On October 31, 2000 all employees elected to defer compensation, in the
aggregate amount of approximately $190,000 for October, until such time as
additional funding was available.
Since its inception, our business has incurred significant losses, and
as of September 30, 2000, had an approximate accumulated deficit of $23,050,000.
As a result, there is an uncertainty about the Company's ability to continue as
a going concern, which was stated in our auditor's report on the Company's
financial statements for the 1999 fiscal year. The Company is expected to incur
operating losses for the foreseeable future.
We cannot be sure that the Company will generate sufficient revenues to
ever achieve or sustain profitability. The operations of the Company are still
subject to all the risks inherent in the establishment of a new business
enterprise, including the absence of a substantial operating history. The
likelihood of the success of the Company must be considered in light of the
uncertainties, expenses, and delays frequently encountered in connection with
the development of any new business.
CASH FLOW
There was a net increase in cash during the first nine months of 2000
of $704,000. Net cash used in operating activities primarily consisted of the
Company's net loss from discontinued operations of $6,670,000 and $1,752,000
from the on going operations for a total of approximately $8,422,000.
Additionally, accounts payable increased by $637,000, accrued expenses increased
by $384,000, inventory decreased by $240,000 as a result of the discontinuation
of the business. Customer deposits decreased by $146,000, and other sources of
cash equaled an increase of $165,000 resulting in net cash used in operations of
$6,294,000.
Net cash used in investing activities during the first nine months of
2000 was approximately $839,000, $500,000 of which was the Company's investment
in the CPTNC joint venture and $340,000 related to an increase of fixed assets.
Net cash from financing activities was $7,837,000 for first nine months
of 2000. In December 1999, Mr. Barton, the President and CEO made short-term
non-interest bearing loans in the amount of $500,000 to the Company for working
capital purposes. In February 2000, Adatom.com issued 172,057 shares of common
stock to Mr. Barton in settlement of $500,000 of these notes payable.
During March 2000, the Company executed documents for a private
placement of two million shares of common stock yielding proceeds of $4 million.
The sale was made to several accredited investors. The Company used the proceeds
for working capital, including the payment of accrued liabilities of
approximately $1.5 million.
During June the Company netted proceeds of $1,030,000 from the issuance
of Preferred Stock Series A. During August and September the Company consummated
private placements of 329,384 shares of our common stock yielding gross proceeds
of $250,000 plus the reduction of debt for common stock of $292,000. Also during
September the Company netted proceeds of $1,130,000 from the issuance of
convertible preferred Series B (discussed below).
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During September 2000, the Company issued 1,200 shares of its Series B
Convertible Preferred Stock. Each share of Preferred Stock has a stated value of
$1,000 and is convertible into common stock at a conversion price equal to 85%
of the average of the two lowest closing bid prices of the common stock on the
Nasdaq SmallCap Market over the ten trading days preceding the date of
conversion ("Market Price") subject to a maximum conversion price of 115% of the
Market Price on the issue date of September 27, 2000, or $0.7906. The number of
shares of common stock that may be acquired upon conversion is determined by
dividing the stated value of the number of shares of Preferred Stock to be
converted by the conversion price. Also, certain additional amounts calculated
on the basis of 6% of the stated value from September 27, 2000, the issue date
of the Preferred Stock, to the date of conversion would also be converted into
common stock using the same formula.
Since there is no minimum conversion price, the number of shares of
common stock that holders of preferred stock may acquire upon conversion would
simply continue to increase if the stock price declines. Since upon conversion
holders of Preferred Stock acquire common stock for at least a 15% discount to
the market price, they have an incentive to sell these shares of common stock at
market price either concurrently with, or shortly after, conversion, in order to
profit from the difference between the market price and the discounted
conversion price. The holders of the preferred stock also could engage in short
sales of our common stock, after delivering a notice of conversion to us, which
could contribute to a decline in the market price of the common stock and give
them the opportunity to profit from that decrease by covering their short
position with shares acquired upon conversion for at least a 15% discount to the
prevailing market price. The conversion of the preferred stock and subsequent
sale of a large number of shares of common stock acquired upon conversion during
periods when the market price of the common stock declines, or the possibility
of such conversions and sales, may exacerbate the decline or impede increases in
the market price of the common stock.
Mr. Barton made a non-interest-bearing loan on February 1, 2000 in the
amount of $200,000, also for working capital purposes. In March 2000 the
$200,000 was repaid. Mr. Barton made another loan to the Company of $200,000
during the month of May 2000. Michele Ware, Vice President of Global Sales made
a loan of $115,620 during the month of June. During the month of July, Mr.
Barton loaned the Company $105,000, Dr. Jagannathan the Executive Vice President
and Chief Technology Officer loaned the Company $10,000, and Ms. Ware loaned the
Company $20,000. During the month of August Ms. Ware loaned the Company $42,000.
During the month of September Mr. Barton loaned the Company $40,000 and Dr.
Jagannathan loaned the Company $9,000. During the month of October $10,000 was
repaid to Dr. Jagannathan. Total loans outstanding to officers of the Company
amount to $531,000 as of November 14, 2000 all of which are unsecured. Officers
have no commitment to make additional loans in the future. All of these loans
were outstanding as of September 30, 2000 and represent $541,000 of the net cash
provided by financing activities.
These items make up the balance of the $7,837,000 cash provided by
financing activities.
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The Company has signed an agreement with Mr. Li Yaunhao to purchase $3
million of the Company's stock and expects to receive these funds during
November 2000. We are proceeding with documentation and registration of a $30
million Equity Line of Credit.
Additional funds will be needed to grow the business. Adequate funds
for these and other purposes on terms acceptable to the Company, whether through
additional equity financing or other sources, may not be available when needed
or may result in significant dilution to existing stockholders. Furthermore, the
Company's losses and lack of tangible assets to pledge as security for debt
financing could prevent the Company from obtaining bank or similar debt
financing. Failure to obtain adequate financing would have a material adverse
effect on the Company and could result in cessation of the Company's business.
The Company estimates that it will require between $5 and $7 million in
additional capital to adequately implement its business plan and sustain and
expand its sales and marketing activities through December 31, 2001. The Company
cannot be sure that it will be able to raise these funds.
The Company currently estimates that a total investment of $20.0
million will be needed to fund the current joint ventures in China. The Company
is pursuing raising the necessary funds in Asian and European markets in
addition to US markets. To aid in that process the Company has engaged Lanzet
Global Securities, Corp. Lanzet Capital plans to introduce Adatom to small cap
money managers in the U. S. and Asia. The Company cannot provide any assurance
that it will be able to raise these funds.
RISK FACTORS
The risks described below are not the only ones facing our company.
Additional risks not presently, known to us or that we currently deem immaterial
may also impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading price of our
common stock could decline due to any of these risks.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. The future results and stockholder
values of the company may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Stockholders
are cautioned not to put undue reliance on any forward-looking statements. In
addition, the Company does not have any intention or obligation to update
forward-looking statements, even if new information, future events or other
circumstances have made them incorrect or misleading. For those statements, the
Company is relying on the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
The following important factors could affect the future results of the company,
and could cause results to differ materially from those expressed in such
forward-looking statements.
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WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES FOR THE FORESEEABLE
FUTURE.
Adatom, Inc. was incorporated in October 1996 but did not begin to
generate Internet revenues until October 1998 and did not commence its China
business until March 2000. Accordingly, we have had only a limited operating
history upon which to evaluate our business and prospects. We will encounter
risks and difficulties that are frequently encountered by early stage companies
in new and rapidly evolving markets. Many of these risks are described in more
detail in this section. If we are unsuccessful in addressing these risks and
uncertainties, our business, results of operations and financial condition will
be harmed. We have incurred significant losses and as of September 30 , 2000 the
accumulated deficit was $23,050,000. The accumulated deficit as of September 30,
1999 was $3,845,705. The Company incurred net losses of $2,173,000 for the
quarter ended March 31, 2000, and $2,030,000 for the quarter ended June 30,
2000,and $4,209,000 for the quarter ended September 30, 2000 of which $3,526,000
was related to discontinued operations. This is inclusive of the abandonment
charge of $1,727,000. Total losses for year to date September 30, 2000 are
$8,411,000 . The net loss for the quarter ended March 31, 1999 was $298,000, for
the quarter ended June 30, 1999 the loss was $585,000, and for the quarter ended
September 1999 the loss was $1,025,000. The total loss for year to date
September 30, 1999 was $1,903,000. There is an uncertainty about our ability to
continue as a going concern. We anticipate our losses will continue because we
intend to expend funds for the following items, in addition to other expenses:
o brand development, marketing and other promotional activities to
increase our revenue; and
o strategic relationship development.
Our ability to become profitable depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. If
we do achieve profitability, we cannot be certain that we would be able to
sustain or increase profitability on a quarterly or annual basis in the future.
We are an early stage company and expect to incur operating losses for the
foreseeable future as we incur significant operating expenses and research and
development expenses and make investments, to establish and enhance our Internet
capabilities. We may never generate sufficient revenues to achieve
profitability.
WE WILL NEED ADDITIONAL FINANCING TO FUND OUR BUSINESS AND THE FAILURE TO OBTAIN
FINANCING WOULD MOST LIKELY RESULT IN CESSATION OF OUR BUSINESS.
We are dependent upon raising additional capital for working capital
and to finance our future plans for expansion. We estimate that we will require
a minimum of $5 million to $7 million to adequately implement our business plan
and sustain and expand our sales and marketing activities through December 31,
2001. We have experienced negative cash flow from operations from our inception
and expect to experience significant negative cash flow from operations for the
foreseeable future. We may need additional funds to sustain and expand our sales
and marketing activities and arrangements, particularly if there is a shift in
the type of Internet
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services that are developed and ultimately receive customer acceptance. Adequate
funds for these and other purposes on terms acceptable to us, whether through
additional equity financing, debt financing or other sources, may not be
available when needed or may result in significant dilution to existing
stockholders.
Failure to obtain financing would most likely result in cessation of
our business. Our lack of net income and tangible assets to pledge has to date
prevented us from obtaining bank or similar debt financing, and will probably
continue to do so in the future. In their reports on the audits of our financial
statements for each of the years in the two-year period ended December 31, 1999,
our independent auditors included an explanatory paragraph in each of their
reports because of the uncertainty that we could continue in business as a going
concern. Any raise of additional capital will dilute all of our stockholders.
We estimate that approximately $55.5 million will be required to fund
the full implementation of the joint venture agreements signed with the Chinese
organizations.
OUR COMMON STOCK PRICE MAY BE VOLATILE.
The market price for our Common Stock is likely to be highly volatile
and subject to wide fluctuations in response to factors including the following:
o actual or anticipated variations in our quarterly operating results;
o announcements of technological innovations or new products or
services by us or our competitors;
o changes in financial estimates by securities analysts;
o conditions or trends in the Internet and/or online commerce
industries;
o changes in the economic performance and/or market valuations of
other Internet, online commerce or retail companies;
o announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o potential litigation.
The market prices of the securities of Internet-related and online
commerce companies have been especially volatile. Broad market and industry
factors may adversely affect the market price of our Common Stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of their stock, many companies have been the subjects of
securities class action litigation. If we were sued in a securities class
action, we could incur substantial costs and a diversion of management's
attention and resources could have an adverse affect on our stock price.
IF WE CANNOT SATISFY NASDAQ'S MAINTENANCE REQUIREMENTS, IT MAY DELIST OUR COMMON
STOCK FROM ITS SMALLCAP MARKET AND WE MAY NOT HAVE AN ACTIVE PUBLIC MARKET FOR
OUR COMMON STOCK. THE ABSENCE OF AN ACTIVE TRADING MARKET WOULD LIKELY MAKE THE
COMMON STOCK AN ILLIQUID INVESTMENT.
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Our common stock is quoted on the Nasdaq SmallCap Market. To continue
to be listed, we are required to maintain net tangible assets of $2,000,000 or a
market capitalization of $35 million and our common stock must maintain a
minimum bid price of $1.00 per share. From time to time our stock has had a
minimum bid price of less than $1.00 per share. Currently, the minimum bid price
for our common stock is below $1.00 and we may not be able to satisfy any of
these Nasdaq listing requirements in the future. If this occurs, trading in the
common stock would be conducted in the over-the-counter market in the so-called
"pink sheets" or, if available, the "OTC Bulletin Board Service." As a result,
an investor would likely find it significantly more difficult to dispose of, or
to obtain accurate quotations as to the value of, our shares. The Company
recently has been advised by Nasdaq that it no longer meets the requirements for
listing on the SmallCap Market.
Nasdaq held a hearing on November 2, 2000 to determine whether the
Company's stock should be delisted. Although our stock's bid price was slightly
above $1 per share at the time of the hearing, Nasdaq expressed concerns about
a) the fact that we had not sought prior approval of stockholders for the
issuance of our Series B Convertible Preferred Stock which might, under certain
circumstances, require the issuance of common stock equal to over 20% of the
common stock outstanding and certain other proposed investments which may
involve similar issuances at the over 20% level; b) our ability to meet the net
tangible assets test going forward. A decision from Nasdaq is pending.
The conversion of our convertible preferred stock may have consequences
that could cause Nasdaq to delist our common stock. The conversion of our
preferred stock and resale of the common stock acquired upon conversion, or the
possibility of the conversion of our preferred stock and resale of our common
stock, may depress or inhibit increases in the market price of our common stock.
Nasdaq also may delist our common stock if it deems it necessary to
protect investors and the public interest. If Nasdaq determines that the returns
on our convertible preferred stock are excessive compared with the returns
received by the holders of our common stock, and those excess returns were
determined to be egregious, Nasdaq could delist our common stock.
IF OUR COMMON STOCK IS DELISTED, IT MAY BECOME SUBJECT TO THE SEC'S "PENNY
STOCK" RULES AND MORE DIFFICULT TO SELL.
SEC rules require brokers to provide information to purchasers of
securities traded at less than $5.00 and not traded on a national securities
exchange or quoted on the Nasdaq Stock Market. If our common stock becomes a
"penny stock" that is not exempt from these SEC rules, these disclosure
requirements may have the effect of reducing trading activity in our common
stock and making it more difficult for investors to sell. The rules require a
broker--dealer to deliver a standardized risk disclosure document prepared by
the SEC that provides information about penny stocks and the nature and level of
risks in the penny market. The broker must also give bid and offer quotations
and broker and salesperson compensation information to the customer orally or in
writing before or with the confirmation. The SEC rules also require a broker to
make a special written determination that the penny
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stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction before a transaction in a penny stock.
RISK OF INTERNATIONAL EXPANSION.
We plan to expand our presence in foreign markets especially China. We
have relatively little experience in purchasing, marketing and distributing
products or services for these markets and may not benefit from any
first-to-market advantages. It will be costly to establish international
facilities and operations, promote our brand internationally, and develop
localized Web sites and stores and other systems. We may not succeed in our
efforts in these countries. If revenues from international activities do not
offset the expense of establishing and maintaining foreign operations, our
business prospects, financial condition and operating results will suffer. As
the international online commerce market continues to grow, competition in this
market will likely intensify.
In addition, governments in foreign jurisdictions may regulate Internet
or other online services in such areas as content, privacy, network security,
encryption or distribution. This may affect our ability to conduct business
internationally.
OUR BUSINESS MODEL HAS CHANGED FROM ITS PRIOR EMPHASIS ON INTERNET RETAILING TO
ITS CURRENT EMPHASIS ON OUR JOINT VENTURES IN CHINA
On September 25, 2000, we announced the restructuring of the Company to
focus almost exclusively on international operations. This restructuring
emphasizes the development of our relatively new China business, while at the
same time significantly reducing expenditures related to the former B2C Internet
superstore and B2B E-commerce Solution Program (AESP). As part of this
restructuring, we decided to cancel all drop-shipped orders due to our analysis
of the marginal profitability of these orders versus the anticipated costs to
fulfill the orders. The superstore and AESP, which had been the predominant
revenue sources but had not been profitable, have been refocused to liquidate
existing inventory, and are available for licensing. These actions will result
in an overall headcount reduction of 45% and anticipated total spending
reductions of approximately 55%.
We anticipate that our restructuring will enable us to focus almost
exclusively on developing our China business while achieving significant cost
reductions through a combination of workforce reduction and decreased marketing
expenditures associated with its superstore and AESP operations. Our China
partners are government agencies or quasi-government agencies that have
information regarding the production abilities and commercial needs of a
significant number of Chinese businesses, and therefore can assist to varying
degrees in the matching of purchase and sale transactions. For the near future,
the predominant focus of our China business will be to match non-consumer buyers
and sellers of a potentially wide variety of goods to be both exported from and
imported to China. Adatom plans to take temporary title to any such goods during
the transit and delivery phases in order to be able to charge a markup on the
sold goods for its arrangement efforts. The range of this markup is uncertain at
this time due to lack of sales and it is anticipated will vary depending on
type, segment and category.
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Our relationship with our China partnerships to date has yielded one
order for steel from a U.S. steel buyer, which is currently pending delivery.
Other revenue opportunities with or through these partnerships have to date not
been consummated. Our current revenue opportunities encompass brokering a fiber
optics turnkey manufacturing capability, minerals trade to and from China,
consumer goods supply and agricultural exports to China.
On October 17, 2000, we announced the launch of our new international
website focused on direct trade with China (www.adatomchina.com). The new Adatom
site focuses on bringing together U.S. and international buyers and sellers for
bi-directional trade with China.
Although the change in operations described above will reduce headcount
and expenses, we must generate sufficient revenues from our China business to
cover expenses even at our reduced level. No assurance can be given that the
change in our operations as described will generate sufficient revenues to make
us profitable.
While we reduce our existing website operations, this portion of our
business will continue to be subject to the same risks to which it has
previously been subject, as discussed above and below.
Also, the shift in our business model makes us less diversified and
solely dependent on very few market segments.
WE FACE RISKS AND UNCERTAINTIES WITH RESPECT TO OUR PROPOSED JOINT VENTURES IN
CHINA.
Our agreements with the China Product Trade Net Center, ShenZhen Bay
Industrial Education and Research Center, China Federation of Industrial
Economics, and Yangling Agricultural Hi-Tech Industrial Demonstration Zone
contemplate the formation of joint ventures in China. We may not be successful
in establishing or funding any of these joint ventures. We may not succeed with
any of these joint ventures or in entering the China market, and each venture
will be subject to all of the risks attendant to a start-up business as well as
those specific to operating in China.
We will be subject to various risks relating to operating in China,
including:
o various new and unfamiliar regulatory requirements;
o the risks of being subject to a different legal system in which
prior court decisions may not have as much precedential value as in
common law countries;
o the risk of inadequate or inconsistent enforcement of intellectual
property rights;
o issues relating to currency exchange;
o fluctuations in exchange rates and restrictions on repatriation of
funds and earnings, as it is presently expected that most
transactions will be denominated in Chinese money;
o the risks associated with doing business in a country with a more
volatile economy;
o the effects of possible political and economic changes and
disruptions;
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o establishment of and change in government policies and regulations
regarding the use of the internet, including taxation, censorship
and personal privacy issues;
o possible longer accounts receivable payment cycles and difficulties
in collecting accounts receivable;
o cost of shipping, including transportation and insurance, tariffs
and other barriers;
o difficulties in staffing and managing foreign operations;
o potentially adverse tax consequences;
o additional unforeseen risks.
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition will be harmed.
WE DEPEND HEAVILY UPON MARKETING ARRANGEMENTS. WITHOUT THEM, OUR BUSINESS WILL
BE ADVERSELY AFFECTED.
To the extent we continue to operate our Internet retail operations, we
will rely heavily on certain marketing arrangements with other companies that
have websites to attract shoppers to purchase our products. We have entered into
marketing arrangements with a number of existing organizations with a definable
user base. Our ability to generate revenues from online commerce depends, among
other things, upon the increased traffic, purchases, advertising and
sponsorships that we generate through our marketing arrangements. We cannot be
sure that other companies will continue these relationships with us, or, if
continued that they will be on terms favorable to us. Our inability to enter
into new marketing arrangements or to maintain our existing arrangements would
have a material adverse effect on us.
WE RELY ON SUPPLIERS FOR OUR RETAIL MERCHANDISE AND SHIPMENTS TO CUSTOMERS. LOSS
OF THESE RELATIONSHIPS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We may continue to engage in our website retailing business while
developing our China initiative, our current suppliers may not continue to sell
merchandise to us on current terms. We may not be able to maintain our current
arrangements with suppliers or be able to establish new or extend current
supplier relationships to ensure acquisition of merchandise in a timely and
efficient manner and on acceptable commercial terms. Loss of these relationships
could have a material adverse effect on us. We also rely on most of our
suppliers to process and ship merchandise directly to customers and where
required to install merchandise on our customers' premises. We have limited
control over the shipping procedures of our suppliers, and shipments by these
suppliers have at times been subject to delays. If the quality of service
provided by such suppliers falls below a satisfactory standard or if our level
of returns exceeds our expectations, our business will be materially adversely
affected.
OUR FUTURE OPERATING RESULTS ARE UNPREDICTABLE AND FLUCTUATIONS IN OUR QUARTERLY
RESULTS MAY CAUSE VOLATILITY IN OUR STOCK VALUATION.
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As a result of our limited operating history, and especially as a
result of the recently announced change in our business model, it is difficult
to accurately forecast our net sales and we have limited meaningful historical
financial data upon which to base planned operating expenses. We are currently
liquidating our inventory at prices below our original cost, which will
negatively affect our level of revenues and profit margins. We base our current
and future expense levels on our operating plans and estimates of future net
sales, and our expenses are to a large extent fixed. Sales and operating results
are difficult to forecast because they generally depend on the volume and timing
of the orders we receive. As a result, we may be unable to adjust our spending
in a timely manner to compensate for any unexpected revenue shortfall. We may
also be unable to increase our spending and expand our operations in a timely
manner to adequately meet customer demand to the extent it exceeds our
expectations. We expect to experience significant fluctuations in our future
quarterly operating results due to a variety of factors, many of which are
outside of our control which include, without limitation:
o our ability to attract new customers at reasonable cost and at a
steady rate, retain existing customers, or encourage repeat
purchases and maintain customer satisfaction;
o seasonality;
o our inability to adequately maintain, upgrade and develop any
website we may maintain, transaction-processing systems or network
infrastructure;
o the announcement or introduction of new sites, services and products
by our competitors;
o price competition in the industry;
o the level of merchandise returns experienced by us;
o the level of traffic on our website;
o fluctuations in the amount of consumer and business spending;
o the failure to develop new strategic marketing relationships
pursuant to which our AdatomChina website can receive exposure to
traffic on third-party websites;
o increases in the cost of online or offline advertising;
o our ability to upgrade and develop our systems and infrastructure
and attract new personnel in a timely and effective manner or retain
existing personnel;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations, and
infrastructure;
o unexpected increases in shipping costs or delivery times;
o the level of use of the Internet and online services and increasing
customer acceptance of the Internet and other online services for
the purchase of products;
o technical difficulties, system downtime or Internet brownouts;
o changes in gross profit margins or product mix;
o effects of acquisitions and other business combinations and related
integration issues;
o failure to maintain good relationships with our business partners
and suppliers;
o government regulations related to use of the Internet for commerce;
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o general economic conditions and economic conditions specific to the
Internet, online commerce.
A number of factors will cause our gross margins to fluctuate in future periods,
including the mix of product sold by us, shipping and handling costs, the
liquidation of our present inventory below cost, the level of product returns
and the level of discount pricing and promotional activity. Any change in one or
more of these factors could materially and adversely affect our gross margins
and operating results in future periods. We expect that we will experience
seasonality in our business, reflecting commercial seasonality patterns. Due to
the foregoing factors, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance.
Additionally it is likely that in one or more future quarters our operating
results may fall below the expectations of securities analysts and investors. In
such event, the trading price of our common stock would likely be materially
adversely affected.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE THE GROWTH OF OUR BUSINESS.
Our ability to successfully implement our new business plan in a
rapidly evolving market requires an effective planning and management process.
We are in the process of installing new Enterprise Resource Planning (ERP)
systems with new Accounting and Financial Reporting Systems which should be
completed by the end of 2000. We anticipate expanding our financial and
management information systems to accommodate new data. If we fail to
successfully implement and integrate our new financial reporting and management
information systems with our existing systems or if we are not able to expand
these systems to accommodate our anticipated growth, we may not have adequate,
accurate or timely financial information. Our failure to have such information
would hinder our ability to manage our business and operating results. If we
grow rapidly, we will face additional challenges in upgrading and maintaining
our financial and reporting systems. A failure to successfully implement and
integrate these systems would adversely affect our business. We expect that we
will need to continue to improve our financial and managerial controls and
reporting systems and procedures. In addition, we will need to train and manage
our employee base to successfully implement our new business strategy.
Furthermore, we expect that we will be required to manage multiple relationships
with various customers and other third parties. To manage the expected growth of
our operations, we will be required to improve existing and implement new
transaction-processing, operational and financial systems, procedures and
controls. Further, we will be required to maintain and expand our relationships
with various merchandise manufacturers, distributors, Internet and other online
service providers and other third parties necessary to our business. If we are
unable to manage growth effectively, our business will be materially adversely
affected.
IF WE EXPERIENCE PROBLEMS WITH OUR THIRD PARTY SHIPPING SERVICES, WE COULD LOSE
CUSTOMERS.
For our website retailing business, we rely upon third-party carriers,
primarily UPS, for product shipments, including shipments to and from our
warehouse. We are therefore subject to the risks, including employee strikes and
inclement weather associated with these carriers' ability to provide delivery
services to meet our shipping needs. In addition, failure to deliver
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products to our customers in a timely manner would damage our reputation and
brand identity.
THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Our performance will be substantially dependent on the continued
services and on the performance of our senior management, particularly Richard
Barton, President, Chief Executive Officer, and Chairman of the Board, and
Sridhar Jagannathan, Chief Technical Officer and Executive Vice President. In
addition, Dr. Victor W. Nee, a member of our board of directors, has been the
key component of our China strategy, and introduces us to government officials
and others in China who are in a position to help us develop our business plans
in that country. Our performance would be substantially impacted by the loss of
his services.
Our Vice President of Operations joined us during the last half of
1999, as did our former Controller, who has resigned but will continue to be
available to the Company periodically as a consultant. Several others have
joined during the year 2000, including our new Chief Financial Officer who also
serves as our new Controller. Our future success depends on these individuals
effectively working together with our original management team. Other than the
President, none of our officers or key employees is bound by an employment
agreement for any specific term. Our relationships with these officers and key
employees are at will. We do not have any "key person" life insurance policies
covering any of our employees. Our performance depends on our ability to
compensate, retain and motivate our officers and key employees. The loss of the
services of any of our executive officers or other key employees could have a
material adverse effect on us. Our future success also depends on our ability to
identify, attract, hire, train, retain and motivate other highly skilled
officers and technical, managerial, editorial, sales, marketing and customer
service personnel who are familiar with the specifics of our business, including
Internet operations and international trading. Competition for such personnel is
intense, and we may not be able to successfully attract, compensate, assimilate,
or retain sufficiently qualified personnel. This inability could have a material
adverse effect on us.
WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS AND PROPRIETARY RIGHTS, WHICH WOULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We regard our copyrighted material,
service marks, trademarks, trade secrets, and similar intellectual property as
critical to our success, and rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers, partners and others to protect our proprietary rights. We have the
registered trademarks "Adatom" and "Discovering New Shopping Dimensions" in the
United States and have a trademark application pending for the mark "Adatom Home
Dimensions." We cannot be sure that we will be able to secure significant
protection for these trademarks. It is possible that our competitors or others
will adopt product or service names similar to "Adatom" and our other
trademarks, thereby impeding our ability to build brand identity and possibly
leading to customer confusion. We generally have entered into agreements
containing confidentiality and non-disclosure
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provisions with our employees and consultants and have limited access to and
distribution of our software, documentation and other proprietary information.
We cannot be sure that the steps taken by us will prevent misappropriation of
our technology or that agreements entered into for that purpose will be
enforceable. Notwithstanding the precautions taken by us, it might be possible
for a third party to copy or otherwise obtain and use our software or other
proprietary information without authorization or to develop similar software
independently. Policing unauthorized use of our technology is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted. The laws of China and other countries may afford us little or no
effective protection of our intellectual property. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available online. In the
future, we may also need to file lawsuits to enforce our intellectual property
rights, protect our trade secrets, and determine the validity and scope of the
proprietary rights of others. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of resources,
which could have a material adverse effect on us. We also rely on a variety of
technology that is licensed from third parties, including our database and
Internet server software, which is used in our web site to perform key
functions. These third party technology licenses may not continue to be
available to us on commercially reasonable terms. Our loss of or inability to
maintain or obtain upgrades to any of these technology licenses could result in
delays in completing our proprietary software enhancements and new developments
until equivalent technology could be identified, licensed or developed and
integrated. Any such delays would have a material adverse effect on us.
PROTECTION OF DOMAIN NAME IS UNCERTAIN.
We currently hold various Web domain names relating to our brand,
including the "ADATOM.com" domain name. Governmental agencies and their
designees generally regulate the acquisition and maintenance of domain names.
For example, in the United States, the National Science Foundation has appointed
Network Solutions, Inc. as the current exclusive registrar for the ".com",".net"
and ".org" generic top-level domains. The regulation of domain names in the
United States and in foreign countries is subject to change. Such changes in the
United States are presently expected to include a transition from the current
system to a system that is controlled by a non-profit corporation and the
creation of additional top-level domains. Governing bodies may establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we may be unable
to acquire or maintain relevant domain names in all countries in which we
conduct business. Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value
of our trademarks and other proprietary rights.
WE MAY EXPERIENCE CAPACITY CONSTRAINTS DUE TO OUR RELIANCE ON INTERNALLY
DEVELOPED TRANSACTION-PROCESSING SYSTEMS.
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If we suffer any system interruptions that result in the unavailability
of our service on the Internet or reduced order fulfillment capability, such
interruptions would reduce the volume of goods sold and the attractiveness of
our product offerings. We have experienced periodic system interruptions, which
we believe will continue to occur from time to time. The satisfactory
performance and reliability of our service on the Internet,
transaction-processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain customers. Our revenues depend
on the number of visitors who access our Internet website and the volume of
orders we fulfill. We expect that our revenues in the future will depend more
heavily on our ability to develop and expand our joint venture initiatives in
China by intermediating the sale of goods to and from the Chinese market. There
will be a significant need to upgrade and expand internationally the capacity of
our Internet services as the business develops. Our inability to add additional
software and hardware or to develop and upgrade further our existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic to our websites or increased sales volume through our
transaction-processing systems may cause unanticipated system disruptions,
slower response times, degradation in levels of service and impaired quality and
speed of order fulfillment, any of which could have a material adverse effect on
us.
As we expand into the Business to Enterprise ("B2E," the providing of
services by businesses to entire industries through the Internet) arena, we will
need to maintain a website which supports these efforts. To this end, on October
17, 2000, we announced the launch of our new international website focused on
direct trade with China (www.adatomchina.com). The new Adatom site focuses on
bringing together U.S. and international buyers and sellers for bi-directional
trade with China. There can be no assurance that the new website will accomplish
its objective and generate profitable Business to Enterprise orders.
OUR BUSINESS MAY SUFFER IF OUR SYSTEMS FAIL OR IF THE SYSTEMS OF OUR BUSINESS
PARTNERS FAIL.
We presently have limited redundant systems. We do not have a complete
disaster recovery plan and carry limited business interruption insurance to
compensate us for losses that may occur. Despite our implementation of network
security measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays, loss of data or the inability to accept and fulfill customer orders. Our
ability to successfully receive and fulfill orders and provide high-quality
customer service largely depends on the efficient and uninterrupted operation of
our computer and communications hardware systems. Our systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. In
addition, any disruptions of those web sites or at the web sites of other
companies where we market goods or have a website link could have a material
adverse effect on us and the volume of sales generated. The occurrence of any of
the foregoing risks could have a material adverse effect on us.
IF WE ARE NOT ABLE TO SUSTAIN RAPID TECHNOLOGICAL CHANGES, OUR BUSINESS MAY
SUFFER.
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We may not successfully use new technologies effectively or adapt our
proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. Our failure to adapt in a timely
manner for technical, legal, financial or other reasons, to changing market
conditions or customer requirements, could have a material adverse effect on us.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online service. The Internet
and the online commerce industry are characterized by rapid technological
change, changes in user and customer requirements and preferences, frequent new
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render our existing Internet
services and proprietary technology and systems obsolete. Our success will
depend, in part, on our ability to license leading technologies useful in our
business, enhance our existing services, develop new services and technology
that address the increasingly sophisticated and varied needs of our prospective
customers, and respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
YEAR 2000 UPDATE
Through the first nine months of the calendar year 2000, we have not
experienced any significant problems associated with the Year 2000 issue.
Although it appears that the Year 2000 issue will not have a significant adverse
affect on us, we continue to monitor the Year 2000 compliance of our internal
systems. Undetected errors in our internal systems that may be discovered in the
future could have a material adverse affect on our business, operating results
or financial condition.
OUR BUSINESS STRATEGY REQUIRES CONTINUED GROWTH OF ONLINE COMMERCE, ESPECIALLY
IN THE BUSINESS TO ENTERPRISE SEGMENT. IF ON-LINE COMMERCE DOES NOT CONTINUE TO
GROW, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.
Our future revenues and any future profits are substantially dependent
upon the widespread acceptance and use of the Internet and online services as a
significant medium of commerce by businesses in seeking to buy and sell goods
and services both nationally and internationally. Rapid growth in the use of and
interest in the Internet and online services is a recent phenomenon, and we
cannot be sure that acceptance and use will continue to develop or that a
sufficiently broad base of users will adopt, and continue to use, the Internet
and online services as a medium of commerce. We rely on those who have
historically used traditional means of commerce to acquire the goods and raw
materials they need and to sell the goods they produce. For us to be successful,
these users must accept and utilize novel ways of conducting business and
exchanging information. Moreover, critical issues concerning the commercial use
of the Internet, such as ease of access, security, privacy, reliability, cost
and quality of service, remain unresolved and may affect the growth of Internet
use or the attractiveness of conducting commerce online. In addition, the
Internet and online services may not be accepted as a viable commercial
marketplace for reasons relating to the adequacy of technology. To the extent
that the Internet and online services continue to experience significant growth,
we cannot be sure that the infrastructure of the Internet and online services
will prove adequate to
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support increased user demands. Difficulties with the telecommunications used to
support the Internet or online services also could result in slower response
times and adversely affect usage of the Internet.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Barriers to entry
are minimal, and current and new competitors can launch new websites at a
relatively low cost. In our new business strategy, we will compete with existing
companies such as China.com Corporation, MeetChina.com, Click2China, Ariba,
Inc., Commerce One, Inc. and Alibaba.com. In our Internet retailing business we
currently or potentially compete with a variety of other companies, including
"brick and mortar" retailers such as Macys, J.C. Penney's, Nordstrom's, and
Target; catalog retailers; vendors or manufacturers that currently sell certain
of their products directly online and others.
Many of our current and potential traditional competitors have longer
operating histories, larger customer or user bases, greater brand recognition
and significantly greater financial, marketing and other resources than us. Many
of these current and potential competitors can devote substantially more
resources to marketing, sales efforts and website and systems development than
we can. In addition, our online competitors may be acquired by, receive
investments from or enter into other commercial relationships with larger,
well-established and well-financed companies as use of the Internet and other
online services increases. Many of our competitors may be able to secure
merchandise from manufacturers on more favorable terms, fulfill customer orders
more efficiently and adopt more aggressive pricing or inventory availability
policies, and devote greater resources to marketing than we can. Our online
competitors are able to use the Internet as a marketing medium to reach
significant numbers of potential customers. Finally, new technologies and the
expansion of existing technologies may direct customers to other online sources,
and may increase competition. Increased competition may result in reduced
operating margins, loss of market share and a diminished brand franchise. New
technologies and the expansion of existing technologies may increase the
competitive pressures on us.
WE MAY ENTER NEW BUSINESS CATEGORIES.
We may choose to expand our operations by developing new departments or
product categories, promoting new or complementary products or sales formats,
expanding the breadth and depth of products and services offered or expanding
our market presence through relationships with third parties. In addition, we
may pursue the acquisition of new or complementary businesses, products or
technologies. We may not be successful in our efforts to expand our operations,
and potential customers may not react favorably to these efforts. Furthermore,
any new department or product category that is launched by us but not favorably
received by consumers could damage our brand or reputation. An expansion of our
business in this manner would also require significant additional expenses and
expose us to additional inventory risk and development, operations and editorial
resources and would strain our management, financial and operational resources.
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WE FACE FULFILLMENT OPERATIONS RISKS.
Our success depends on our ability to rapidly fulfill orders. We must
be able to source product to fulfill demand. This may require us to perform many
tasks manually until automated systems are developed to handle these tasks. This
may adversely effect the speed of fulfillment and, consequently, customer
satisfaction and the likelihood we will receive future orders.
WE FACE RISKS FROM THE TEMPORARY OWNERSHIP OF GOODS WE BROKER, SIMILAR TO THOSE
OF A COMMON CARRIER
When we receive an order from a business to purchase goods or sell
goods and identify a interested party, we take title to the goods while they are
in transit. Part of our profit derives from a markup or commission we charge the
parties to the transaction. While we hold title to the goods, we are subject to
all the risks of ownership, which include among others:
o the risk of loss from fire or other casualty or acts of God, theft,
deterioration, and damage during shipping;
o the risk of adverse claims of title to merchandise or prior superior
liens on the merchandise;
o the risk of failure of the merchandise to conform to contractual
specifications;
o the risk of liability for defective merchandise;
o the risk of the insolvency or bankruptcy of the buyer or seller, as
the case may be;
o the risk of failure by the commercial common carriers we use to
deliver merchandise to the ultimate purchaser; and
o the risk of failure to timely deliver merchandise, resulting in
partial or complete spoilage, and other risks.
Currently, we have no insurance covering us against loss or liability from any
of these risks but plan to seek such policies on an as-needed basis. There can
be no assurance that any such insurance, if obtained, will be sufficient to
protect us from these risks.
OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED IF THE SECURITY MEASURES WE
HAVE IMPLEMENTED TO PROTECT CONFIDENTIAL INFORMATION PROVE TO BE INADEQUATE.
Advances in computer capabilities, new discoveries in the field of
cryptography, or other developments may result in a compromise or breach of the
algorithms used by us to protect customer transaction data. Any compromise of
our security could have a material adverse effect on our reputation and on us.
We rely on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential information, such as customer credit card numbers.
A party who is able to circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations. Furthermore,
our servers may be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. We may be required to expend significant
additional capital and other resources to protect against such security breaches
or to alleviate problems caused by such breaches. Our business may be adversely
affected if our security
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measures do not prevent security breaches and we cannot assure that we can
prevent all security breaches.
GROWING CONCERNS ABOUT THE USE OF "COOKIES" AND DATA COLLECTION MAY LIMIT OUR
ABILITY TO DEVELOP USER PROFILES.
Our current technology uses small files of information, commonly known
as "cookies", on a user's hard drive to collect information about our customers'
movements through our Website. Most Internet browsers allow users to modify
their browsers settings to prevent cookies from being stored on their hard
drive, and small minorities of users are currently choosing to do so. Users can
also delete cookies from their hard drive at any time. Some Internet
commentators and privacy advocates have suggested limiting or eliminating the
use of cookies. The reduction or limitation in the use of cookies could:
o reduce the effectiveness of our technology to gather data on our
customers;
o require us to switch to other potentially less effective technology
in order to gather demographic or behavioral information; and
o require us to expend financial and technological resources,
originally allocated to other purposes, to create alternatives that
might be unsuccessful.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION.
Due to the increasing popularity and use of the Internet and other
online services, it is possible that a number of laws and regulations may be
adopted with respect to the Internet covering issues such as user privacy,
pricing, content, copyrights, distribution and quality of products and services.
We are not currently subject to regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to access to online commerce. The
adoption of any additional laws or regulations may decrease the growth of the
Internet or other online services, which could, in turn, decrease the demand for
our products and services and increase our cost of doing business, or otherwise
have a material adverse effect on us. Moreover, the applicability to the
Internet and other online services of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes and personal
privacy is uncertain and may take years to resolve. In addition, as our service
is available over the Internet in multiple states and foreign countries, and as
we sell to customers residing in such states and foreign countries, such
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in each such state and foreign country. We could be subject
to taxes and penalties for failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other online services could have a material
adverse effect on us.
Congress has enacted the Children's Online Privacy Protection Act of
1998 (COPPA) and the Federal Trade Commission ("FTC") has issued rules to
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implement COPPA. The main goal of COPPA and the rule is to protect the privacy
of children using the Internet. Under the FTC's rules, certain commercial
websites must obtain parental consent before collecting, using, or disclosing
personal information from children under 13. The statute and rule apply to
commercial websites and online services directed to, or that knowingly collect
information from, children under 13. To inform parents of their information
practices, these sites are required to provide notice on the site and a separate
notification to parents about their policies with respect to the collection, use
and disclosure of children's personal information. With certain statutory
exceptions, sites will also have to obtain "verifiable parental consent" before
collecting, using or disclosing personal information from children. Websites
have six months from the rule's April 21, 2000 effective date to comply. A
website operator must post a clear and prominent link to a notice of its
information practices on its home page and at each area where personal
information is collected from children. The notice must state the name and
contact information of all operators, the types of personal information
collected from children, how such personal information is used, and whether
personal information is disclosed to third parties. The notice also must state
that the operator is prohibited from conditioning a child's participation in
activity on the child's disclosing more personal information than is reasonably
necessary. In addition, the notice must state that the parent can review and
have deleted the child's personal information, and refuse to permit further
collection or use of the child's information. The COPPA regulations could reduce
our ability to engage in direct marketing. The cost to the Company of complying
with COPPA is not known and it is not clear what impact the regulations will
have on the Company.
In addition, governments in foreign jurisdictions may regulate Internet
or other online services in such areas as content, privacy, network security,
encryption or distribution. This may affect our ability to conduct business
internationally. For example, the European Union recently enacted its own
privacy regulations. The European Union Directive on the Protection of Personal
Data, which became effective in October 1998, fosters electronic commerce by
establishing a stable framework to ensure both a high level of protection for
private individuals and the free movement of personal data within the European
Union. The EU and the U.S. Department of Commerce are currently negotiating an
agreement under which the privacy policies of American businesses may be deemed
to be adequate under the EU Directive. Until such time as an agreement is
reached, the EU has voluntarily agreed to a moratorium on enforcement of the EU
Directive against U.S. businesses. The European legislation and its adoption via
any agreement could adversely affect our ability to expand our sales efforts to
Europe by limiting how information about us can be sent over the Internet in the
EU and limiting our efforts to collect information from European users.
WE MAY BE SUBJECT TO SALES AND OTHER TAXES.
We do not currently collect sales or other similar taxes for physical
shipments of goods into states other than California. However, one or more
local, state or foreign jurisdictions may seek to impose sales tax collection
obligations on us. For example, the California legislature passed a bill in 2000
imposing sales tax on Internet sales, but the governor of California vetoed this
bill. No assurance can be given that the legislature will not reintroduce such a
bill or that such a bill will not eventually be enacted
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into law. In addition, any new operation in states outside California could
subject our shipments in such states to state sales taxes under current or
future laws. If one or more states or any foreign country successfully asserts
that we should collect sales or other taxes on the sale of our products, it
could adversely affect our business.
WE MAY BE LIABLE FOR INFORMATION RETRIEVED FROM THE INTERNET.
Due to the fact that material may be downloaded from web sites and
subsequently distributed to others, there is a potential that claims will be
made against us for negligence, copyright or trademark infringement or other
theories based on the nature and content of such material. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or may not be adequate to cover all costs incurred in defense of
potential claims or to indemnify us for all liability that may be imposed. Any
costs or imposition of liability that is not covered by insurance or in excess
of insurance coverage could have a material adverse effect on us.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS.
Other parties may assert infringement or unfair competition claims
against us. We cannot predict whether third parties will assert claims of
infringement against us, or whether any future assertions or prosecutions will
adversely affect our business. If we are forced to defend against any such
claims, whether they are with or without merit or are determined in our favor,
then we may face costly litigation, diversion of technical and management
personnel, or product shipment delays. As a result of such a dispute, we may
have to develop non-infringing technology or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms acceptable to us, or at all. If there is a successful claim
of product infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis, it
could adversely affect our business.
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL
STOCKHOLDER VOTES AND OUR MANAGEMENT AND AFFAIRS.
Our executive officers, directors and 5% or greater stockholders, and
their respective affiliates, in the aggregate, own approximately 47% of our
outstanding common stock. As a result, they could act together to control all
matters submitted to stockholders for approval (including the election and
removal of directors and any merger, consolidation or sale of all or
substantially all of our assets). Accordingly, such concentration of ownership
may delay, defer or prevent a change in control, impede a merger, consolidation,
takeover or other business combination involving us or discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
us. This could, in turn, have an adverse effect on the market price of our
common stock.
ADDITIONAL FINANCING FOR OUR OPERATIONS COULD ADVERSELY AFFECT HOLDERS OF OUR
COMMON STOCK.
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We may issue common stock or debt or equity securities convertible into
shares of common stock to obtain additional financing if required. Any
additional financing may result in substantial dilution to current holders of
our common stock.
CONVERSION OF OUR PREFERRED STOCK, EXERCISE OF OUR OUTSTANDING WARRANTS AND
OPTIONS AND SUBSEQUENT PUBLIC SALE OF OUR COMMON STOCK WHILE ITS MARKET PRICE IS
DECLINING MAY RESULT IN FURTHER DECREASES IN ITS PRICE.
As of September 30, 2000, we had outstanding 1,200 shares of Preferred
Stock. Each share of Preferred Stock has a stated value of $1,000 per share and
is convertible into common stock at a conversion price equal to 85% of the
average of the two lowest closing bid prices of the common stock on the Nasdaq
SmallCap Market over the ten trading days preceding the date of conversion
("Market Price") subject to a maximum conversion price of 115% of the Market
Price on the issue date of September 27, 2000, or $.7906. The number of shares
of common stock that may be acquired upon conversion is determined by dividing
the stated value of the number of shares of Preferred Stock to be converted by
the conversion price. Also, certain additional amounts calculated on the basis
of 6% of the stated value from September 27, 2000, the issue date of the
Preferred Stock, to the date of conversion would also be converted into common
stock using the same formula. Since there is no minimum conversion price, the
number of shares of common stock that holders of preferred stock may acquire
upon conversion would simply continue to increase if the stock price declines.
Since upon conversion holders of Preferred Stock acquire common stock for at
least a 15% discount to the market price, they have an incentive to sell these
shares of common stock at market price either concurrently with, or shortly
after, conversion, in order to profit from the difference between the market
price and the discounted conversion price. The holders of the preferred stock
also could engage in short sales of our common stock, after delivering a notice
of conversion to us, which could contribute to a decline in the market price of
the common stock and give them the opportunity to profit from that decrease by
covering their short position with shares acquired upon conversion for at least
a 15% discount to the prevailing market price. The conversion of the preferred
stock and subsequent sale of a large number of shares of common stock acquired
upon conversion during periods when the market price of the common stock
declines, or the possibility of such conversions and sales, may exacerbate the
decline or impede increases in the market price of the common stock. In
addition, we have other warrants and stock options exercisable at various prices
for a total of, respectively, 6,530,402 and 1,194,550 shares of common stock.
OTHER ISSUANCES OF PREFERRED STOCK COULD ADVERSELY AFFECT EXISTING HOLDERS OF
OUR COMMON STOCK.
Under our certificate of incorporation, our Board of Directors may,
without further stockholder approval, issue up to an additional 4,998,900 shares
of preferred stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of common stock. We could use new classes of preferred stock as a method
of discouraging, delaying or preventing a change in persons that control us. In
particular, the terms of the preferred stock could effectively
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restrict our ability to consummate a merger, reorganization, sale of all or
substantially all of our assets, liquidation or other extraordinary corporate
transaction without the approval of the holders of the preferred stock. We could
also create a class of preferred stock with rights and preferences similar to
those of our outstanding convertible preferred stock, which could result in
substantial dilution to holders of our common stock or adversely affect its
market price.
CONVERSION OF OUR OUTSTANDING PREFERRED STOCK AND THE EXERCISE OF OUR
OUTSTANDING WARRANTS AND STOCK OPTIONS AND SUBSEQUENT PUBLIC SALE OF OUR COMMON
STOCK WILL RESULT IN SUBSTANTIAL DILUTION TO EXISTING STOCKHOLDERS.
Existing stockholders will experience substantial dilution in their
percentage ownership of our common stock if the preferred stock is converted and
warrants and stock options are exercised.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
On August 30, 2000 a lawsuit was filed against the Company for non payment of
goods and services in the amount of $85,609.19, by Wallop Marketing Group Inc.,
a California company. While the Company acknowledges that some monies are due,
the total amount is in dispute. It is felt by management that this suit will be
resolved. (WALLOP MARKETING GROUP INC. v. ADATOM.COM, INC., case number 414086,
Superior Court of California County of San Mateo, filed August 30, 2000).
On October 10, 2000, a lawsuit was filed against the Company for non payment of
services in the amount of $58,325, by MySimon, Inc., an Internet portal which
the Company formerly used. The Company is evaluating the merits of this
litigation. It is felt by management that this suit will be resolved. (MYSIMON,
INC., v. ADATOM.COM, INC., County of Santa Clara, October 10, 2000).
Item 2. Changes in Securities and Use of Proceeds
In addition to transactions previously reported, the foregoing transactions were
done under Section 4(2) of the Securities Act of 1933 based, among other things,
on representations and warranties made by the investors, the small numbers of
investors solicited and the absence of any advertising or general solicitation
in the process of raising funds.
(i) On July 13, 2000, the Company issued a warrant to purchase up
to 810,000 shares of common stock to Swartz Private Equity,
LLC at an exercise price which varied depending on the market
price of the Company's common stock, in return for a
commitment to engage in a private equity transaction with the
Company. The warrant included a net exercise feature and
certain registration rights for the underlying common stock.
Pursuant to the terms of the arrangements under which the
warrant was issued, on August 23, 2000, the Company canceled
the warrant;
(ii) On August 31, 2000 the Company issued a Warrant for 100,000
shares of common stock to Global Impact Communications, as
compensation under a public relations agreement with the
Company;
(iii) On September 14, 2000, the Company entered into separate
subscription agreements for the sale of 149,254 shares of its
common stock to Jessup & Lamont and 74,626 shares of its
common stock to Frank Madkins, for aggregate proceeds of
$150,000;
(iv) On September 27, 2000, the registrant issued to private
investors 1,200 shares of its Series B Convertible Preferred
Stock. The gross purchase price of the Preferred Stock was
$1,200,000. The proceeds of this capital have been completely
committed. The
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registrant also issued to investors warrants to purchase
272,725 common shares at an exercise price of $.89375 per
share and warrants to purchase 272,725 common shares at an
exercise price of $.825 per share and issued to the placement
agent in the transaction a warrant to purchase 54,545 common
shares at an exercise price of $.825 per share. The warrants
expire on September 27, 2005.
(v) The Company entered into the following transactions with
affiliates:
<TABLE>
<CAPTION>
------------------------------------ -------------------------------------------------------------------
AFFILIATE NATURE OF TRANSACTION
------------------------------------ -------------------------------------------------------------------
<S> <C>
Richard S. Barton Loan of $15,085.92 to Company authorized by Board of Directors on
Chairman and Chief Executive September 21, 2000 and funded on September 8, 2000
Officer
------------------------------------ -------------------------------------------------------------------
Richard S. Barton Loan of $20,000 to Company authorized by Board of Directors on
September 21, 2000 and funded on September 15, 2000
------------------------------------ -------------------------------------------------------------------
Richard S. Barton Loan of $4,719.23 to Company authorized by Board of Directors on
September 21, 2000 and funded on September 21, 2000
------------------------------------ -------------------------------------------------------------------
David Cannon Board resolutions of September 1, 2000 authorizing issuance of
Vice President 100,000 shares of common stock to David Cannon in repayment of
Information Technology amounts owed to WebMediaMasters, a company previously owned by
and Web Design Mr. Cannon. These shares have not yet been issued.
------------------------------------ -------------------------------------------------------------------
Ralph K. Frasier Issuance of 105,504 common shares to Ralph K. Frasier for
Director $100,000 at a 15% discount to market price, authorized by Board
of Directors on September 8, 2000, along with piggyback registration
rights. These shares have not yet been issued.
------------------------------------ -------------------------------------------------------------------
Sridhar Jagannathan Loan of $8,710.02 to Company authorized by Board of Directors on
Chief Technology August 31, 2000 and funded on August 15, 2000
Officer
Executive Vice
President and
Secretary
------------------------------------ -------------------------------------------------------------------
Sridhar Jagannathan Warrant for 300,000 common shares, exercisable from August 31,
2003 to August 31, 2006
------------------------------------ -------------------------------------------------------------------
Sridhar Jagannathan Warrant for 200,000 common shares, exercisable from August 31,
2005 to August 31, 2008
------------------------------------ -------------------------------------------------------------------
</TABLE>
(vi) On October 30, 2000 the Company issued a warrant for 1,100,000
shares of common stock to Mr. Li Yaun Hao as compensation for
his efforts to secure the Yangling Agricultural Hi-Tech
Industrial Demonstration Zone cooperative agreement.
Item 6. Exhibits and Reports on Form 8-K.
37
<PAGE>
(a) List of Exhibits. An Exhibit Index has been filed starting on
page E-1 of this Report and is incorporated herein by
reference.
(b) Reports On Form 8-K.
Registrant filed Current Reports on Form 8-K dated September 5, September 25 and
September 27, 2000 (Items 5 and 7, as to all three reports).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Adatom.com, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADATOM.COM, INC.
Date: November 14, 2000
/s/ Richard S. Barton
-------------------------
By: Richard S. Barton
President and Chief Executive Officer
38
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.44 Subscription Agreement for shares of common stock to be
purchased by Jessup & Lamont dated September 14, 2000
4.45 Subscription Agreement for shares of common stock to be
purchased by Frank Madkins dated September 14, 2000
4.46 Warrant issued to Global Impact Communications for
100,000 shares of common stock, dated August 31, 2000
4.47 Securities Purchase Agreement relating to sale of Common
Stock to Li Yuan Hao, dated October 30, 2000
4.48 Registration Rights Agreement relating to sale of Common
Stock to Li Yuan Hao, dated October 30, 2000
4.49 Promissory Note issued to Richard Barton for $15,085.92
dated September 8, 2000
4.50 Promissory Note issued to Richard Barton for $20,000
dated September 15, 2000
4.51 Promissory Note issued to Richard Barton for $4,719.23
dated September 21, 2000
4.52 Promissory Note issued to Sridhar Jagannathan for
$8,710.02 dated August 16, 2000
4.53 Warrant dated August 31, 2000 issued to Sridhar
Jagannathan for 300,000 shares of common stock,
exercisable from August 31, 2003 to August 31, 2006
4.54 Warrant dated August 31, 2000 issued to Sridhar
Jagannathan for 200,000 shares of common stock,
exercisable from August 31, 2005 to August 31, 2008
4.55 Warrant dated October 30, 2000 issued to Li Yaun Hao for
1,100,000 shares of common stock
10.26 Joint Venture Agreement with Shanghai Qifan Co., Ltd.,
dated October 29, 2000
10.27 Offer Letter from the registrant to Tuan V. Phan, dated
September 20, 2000
27 Financial Data Schedule
E-1
