Form 10-KSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 1999.
[_] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________________ to ___________________
Commission file number: 0-23687
Stockgroup.com Holdings, Inc.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1379282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 500 - 750 W PENDER STREET
VANCOUVER BRITISH COLUMBIA CANADA V6C 2T7 A2
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (604) 331-0995
Former address: Suite 1000 789 W Pender Street, Vancouver,
British Columbia, Canada V6C 1H2
(Former name or address, if changed since last report)
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: [X] No: [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $2,044,273.00
The aggregate market value of common equity held by non-affiliates of the
registrant as of March 28, 2000 was $16,432,125.
<PAGE>
The number of shares outstanding of each of the registrant's common equity, as
of March 28, 2000 was 8,195,000.
Documents incorporated by reference:
Portions of the Registrant's definitive proxy statement, to be filed in
accordance with Rule 14a-101 with the Commission not later than 120 days after
the end of the fiscal year covered by this form, are incorporated by referance
to PART III hereof.
Transitional Small Business Disclosure Format (check one):Yes.[_]; No [x]
STOCKGROUP.COM HOLDINGS, INC.
FORM 10-K
For The Fiscal Year Ended December 31, 1999
INDEX
<TABLE>
<S> <C>
Part I
Item 1. Business......................................................... 2
Item 2. Properties....................................................... 6
Item 3. Legal Proceedings................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders.............. 6
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters.......................................................... 7
Item 6. Management's Discussion and Analysis of Results of Operations and
Financial Condition.............................................. 7
Risk Factors..................................................... 11
Item 7 Financial Statements ............................................ 29
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................ 47
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act................ 48
Item 10. Executive Compensation........................................... 50
Item 11. Security Ownership of Certain Beneficial Owners and Management... 50
Item 12. Certain Relationships and Related Transactions................... 51
Item 13. Exhibits and Reports on Form 8K ................................. 51
Signatures....................................................... 52
</TABLE>
i
<PAGE>
PART I
Item 1. Business
GENERAL
Stockgroup.com Holdings, Inc. ("stockgroup.com" or "the Company") was
incorporated under the laws of Colorado on December 6, 1994 under the name
I-Tech Holdings Group, Inc. ("I-Tech"), a United States non-operating company
registered on the NASD OTC Bulletin Board. The financial statements and
supporting information in this report are issued under the name of
Stockgroup.com but are a continuation of the financial statements and report of
operations of Stock Research Group, Inc. ("SRG"), a British Columbia corporation
which was incorporated on May 4, 1995. On March 11, 1999, pursuant to a reverse
acquisition, SRG acquired the net assets of I-Tech. This transaction is
considered a recapitalization of SRG for accounting purposes and an acquisition
of Stockgroup.com by SRG. Accordingly, the transaction has been accounted for as
a purchase of the net assets of Stockgroup.com by SRG, however Stockgroup.com
continues as the remaining legal entity. Prior to the reverse acquisition,
between 1995 and 1999, SRG had carried on active operations based on the
business model described below.
The consolidated financial statements included in this document are prepared in
U.S. Dollars and are prepared in accordance with accounting principles generally
accepted in the United States ("U.S. GAAP"). The comparative figures presented
in the consolidated financial statements are those of SRG, originally reported
in Canadian GAAP and Canadian Dollars. The comparative figures have been
retroactively restated to conform to the U.S. GAAP presentation adopted in the
current year. The comparative figures have been recast into U.S. Dollars in
accordance with FASB Statement No. 52, Foreign Currency Translation.
Stockgroup.com has offices in New York, San Francisco, Toronto, Calgary and
maintains its corporate headquarters in Vancouver. Focusing on news and
information for small cap and micro cap* investors, Stockgroup.com has created
an Internet investor information Community which brings together small cap
investors and companies and provides information on small cap market
developments. In October 1999 Stockgroup.com launched its next generation
Internet Community, www.smallcapcenter.com, which acts as a portal for investors
researching, analyzing, and discussing small cap stocks and markets.
In addition smallcapcenter.com provides extensive information on North American
publicly traded companies and showcases unbiased original financial news content
on small cap companies and markets. These news features are produced throughout
the trading day by Stockgroup.com's staff of professional financial journalists
and editors and this News Service is a significant draw for the investor viewers
who use smallcapcenter.com. Smallcapcenter.com is a comprehensive resource for
investors and provides detailed profiles of companies, industry news, stock
quotes and charts, daily market reports, news releases and other investment
research tools.
Stockgroup.com also specializes in providing public companies with Internet
marketing solutions and has developed a strong position as a niche marketer of
specialty investor relations oriented products. Smallcapcenter.com also
disseminates information about Stockgroup.com's corporate clients but does not
make any recommendations or provide special news coverage related to these
clients.
*'Small Cap' companies are defined as those which have a market capitalization
of US$750 million or less and `Micro Cap' companies are defined as those with a
market cap of US$50 million or less. Hereinafter in this document, Small Cap and
Micro Cap will be referred to collectively as 'Small Cap'.
CORPORATE OVERVIEW AND BACKGROUND
Our investment information on-line Internet Community has viewers in the
United States, Canada and abroad. The Community model is based on the creation
and fostering of an Internet site which provides members with a range of
services and content which are targeted toward a certain area of interest.
Community sites are generally designed to provide users with a stimulating
interactive experience which encourages them to return to the Community on a
frequent basis. The essence of the Community model is to provide an on-line home
which wins the loyalty of viewer members. Content is usually based around themes
of interest such as News, Business, Investing, Career Information, Travel,
Medical & Life Issues, Technology, Sports & Entertainment, etc. Generally, a
Community's revenues rely on the sale of advertising, e-mail commerce
arrangements and the sale of membership subscriptions for premium content or
other special services.
Our main website, www.smallcapcenter.com, acts as a portal for investors
researching, analyzing, and discussing micro and small cap stocks and markets.
This website provides newsworthy micro and small cap information to our investor
viewers as well as disseminating information about our corporate clients. This
information includes detailed profiles of companies, industry news, stock
quotes, charts, daily market reports, news releases and other investment tools.
Our Community is multi-tiered and includes both general interest and
industry-specific areas including: Computers/Telcomm; Consumer Goods; Energy;
Finance/Real Estate; Food & Beverage; Healthcare; Internet; Manufacturing;
Natural Resources; Services; and Transportation. We believe that we have become
a primary provider of timely, accurate investment information to
2
<PAGE>
micro and small cap investors.
We are also a provider of website design and Internet financial products and
marketing services for small and micro cap companies, a market segment that
traditionally has not had the same market profile as larger public companies.
Some of the specialty products we produce include private label quotes and
charts, database tools for building relationships with shareholders, "traffic"
reports which allow a company's management to assess the impact of website use
by its viewers, and design services and maintenance contracts.
Our industry is characterized by rapid technological change, new product
development and evolving industry standards. Inherent in our business are
various risks and uncertainties, including a limited operating history, a new
and unproven business model and the limited history of commerce on the Internet.
Our success may depend in part upon the emergence of the Internet as a
communications medium, prospective product development efforts and the
acceptance of our products and services by the marketplace. As part of our
strategic development plans, we invest significant resources in research and
development of new products and services.
Competition
There is intense competition to capture viewers on the Internet and many
financial information sites provide services which are similar in nature to
those offered on www.smallcapcenter.com. However, focusing on the small cap
niche allows Stockgroup.com to differentiate itself by avoiding direct
competition with large cap information providers such as TheStreet.com, the WSJ
Online, The Motley Fool and CBS Marketwatch.
Employees
As of December 31, 1999 we employed 66 people on a full-time basis. Of the
total, 29 were in design, programming, product research and development, 15 in
sales, marketing, and support, 10 in publishing (plus an additional 8 freelance
writers), and 12 in administration and finance. Stockgroup.com's success is
highly dependent on its ability to attract and retain qualified employees.
Competition for employees is intense in the Internet industry. To date, the
Company believes it has been successful in its efforts to recruit qualified
employees, but there is no assurance that it will continue to be as successful
in the future. None of the Company's employees are subject to collective
bargaining agreements. The Company believes relations with its employees are
good.
Regulatory issues
The Company is not subject to governmental regulation in its Internet
publishing efforts other than local state and municipal sales tax licenses.
Subsidiaries
Stockgroup.com has five subsidiaries. In Canada our British Columbia
subsidiaries are Stockgroup.com Media, Inc. and 579818 B.C. Ltd. and in the U.S.
we operate through Stockgroup.com, Ltd., a Nevada Corporation. Stockgroup.com
also owns two non-operating Bahamas corporations, Stockgroup.com (Bahamas) Ltd.
and Stockgroup.com International, Inc. which are currently dormant.
DESCRIPTION OF BUSINESS MODEL
The Company's business model is based on serving two complementary target
markets.
Target Market One - Small Cap Investors Seeking Reliable Information
Investors have difficulty obtaining timely, accurate investment information on
small and micro cap companies due to a lack of objective news sources. Most
media organizations, investment firms and brokerage houses tend to focus a
significant majority of their attention on larger public companies. As a result,
small and micro cap investors have not had access to the level of non-biased
3
<PAGE>
third party information or traditional sources of company research reports they
desire. This lack of information is coupled with the increasing shift of
investors from traditional retail brokerages to discount and on-line
alternatives. This shift has created an increased interest in personal
investment research on the part of individual investors. However, investor
interest in the small and micro cap sectors has not been accompanied by an
increased coverage of the small and micro cap sectors by traditional media,
traditional brokerage firms or alternative on-line and discount investment
service providers. As a result, investors have turned to other resources on the
Internet as a method of obtaining the timely financial information needed to
make small cap investment decisions.
Target Market Two - Small Cap Companies Seeking Better Exposure to Investors
As described above, small and micro cap companies do not receive the same
coverage as large public companies. Over the last few years, the Internet has
become a cost-effective solution to enhance their profile, but many small and
micro cap companies have lacked the skills and knowledge to take full advantage
of this opportunity. This had led to the outsourcing of Internet related
services. Requirements of small and micro cap companies are broad and range from
the design, development and maintenance of investor relations oriented websites
to the creation of effective on-line advertising campaigns. Stockgroup.com has
become a significant provider of these types of services.
Stockgroup.com does not act as a public relations or investor relations firm but
rather provides a suite of products and services.
The smallcapcenter.com Internet Investment Information Community
To meet the needs of its two complementary target markets, Stockgroup.com has
created www.smallcapcenter.com, an Internet information Community which provides
a wide range of services to investors interested in small and micro cap
companies and markets. A significant feature which differentiates
smallcapcenter.com from other financial websites is its on-line news reporting.
Stockgroup.com employs a staff of professional journalists who produce breaking
stories throughout the trading day on topics of interest to small and micro cap
investors. A major goal of our business model is to develop and expand this news
service into a world class news organization with bureaus and contributors
throughout North America. Services on the site are currently offered on a free
trial basis and we are projecting future revenues will arise from the conversion
of viewers of the site into purchasers of subscription based services.
By satisfying its viewers' investment information needs, Stockgroup.com seeks to
become the dominant single source of small and micro cap information on the
Internet.
STOCKGROUP.COM'S SOURCES OF REVENUE
Historically, Stockgroup.com has had three sources of revenue: (i) advertising
and media services;(ii) website design and development; and (iii)website
maintenance and marketing services. Additionally, Stockgroup.com has recently
commenced initiatives based on the sale of its technology platform and services
to other corporations who offer financial websites on the Internet.
Advertising and Media Services
Stockgroup.com derives revenue from corporate advertisers who see benefit in
presenting their products and services to smallcapcenter.com's Internet
audience. Many advertisers seek and are willing to pay premium rates to
advertise on
4
<PAGE>
smallcapcenter.com, due to its highly specific demographics and heavy traffic.
The investor demographic profile, which consists of well educated, technically
savvy, mid to high-income level earners and higher risk investors is very
attractive to numerous advertisers. Corporate advertisers have included such
companies as IBM, Microsoft, VISA, Solomon Smith Barney, Datek Securities,
Standard & Poors, CIBC, Bank of America, Charles Schwab, Intel, Ameritrade,
Quicken, The Toronto Stock Exchange, and Discover Brokerage. In addition,
Stockgroup.com provides advertising management services, essentially acting as
an on-line advertising agency providing advertisement design and placement
services for its clients. Stockgroup.com also places ads, as a function of
client budgets, on other web sites it believes will provide the client with the
greatest exposure to the investment community.
Website Design and Development
The Company offers specialized website design services and other web
services such as private label quotes and charts, database tools for building
relationships with shareholders and management "traffic" reports to track
investor usage of websites and inquiries. In addition, unlike other web hosting
and design companies, Stockgroup.com develops web sites with the investment
community in mind.
Stockgroup.com offers packages which can be tailored to include some or all of
its services and graphic design levels, depending on the needs and budget of
each client.
Website Maintenance and Marketing Services
As a means of providing small cap companies with greater exposure,
Stockgroup.com offers a maintenance service which keeps clients' websites
current and fresh. As part of this service we also link clients' sites to
Stockgroup.com's proprietary information Community and offer `rental' access to
Stockgroup.com's proprietary Email listing of over 35,000 investors.
Sale of Technology Platform and Services
Stockgroup.com is developing opportunities for the sale of its expertise in
the development of enterprise financial website platforms. One of these
initiatives involves a contract for the creation of AsiaXIS, a firm based in
Singapore dedicated to providing Internet financial information on the Southeast
Asian economic markets.
Research and Development
During 1998 and 1999 we have invested approximately $211,566 and $771,992
respectively on research and development related to new products and services
and the creation of www.smallcapcenter.com.
Forward-looking statements
Certain statements contained herein constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These forward-looking statements can be identified
by the use of predictive, future-tense or forward-looking terminology, such as
"believes," "anticipates," "expects," "estimates," "plans," "may," "intends,"
"will," or similar terms. These statements appear in a number of places in this
report and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operations, (ii) the Company's business and growth strategies, (iii)
the Internet and Internet commerce and (iv) the Company's financing plans.
5
<PAGE>
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors set
forth under "Risk Factors" and elsewhere in this report. The preceding
discussion of the financial condition and results of operations of the Company
should be read in conjunction with the financial statements and notes related
thereto included elsewhere in this report.
Item 2. Description of Property
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND DOMAIN NAMES
The Company protects its intellectual property through a combination of
trademark and copyright law, trade secret protection and confidentiality with
its employees, customers, independent contractors and strategic partners. The
Company pursues the registration of its domain names, trademarks and service
marks in the United States and internationally. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which the Company's services and products are made available on-line.
The Company creates a majority of its content and obtains rights to use the
balance of its content from third parties. It is possible that the Company could
become subject to infringement actions based upon the content obtained from
these third parties. In addition, others may use this content and the Company
may be subject to claims from its licensors. The Company currently has no
patents or patents pending and does not anticipate that patents will become
significant part of its intellectual property in the future. The Company seeks
to enter into confidentiality agreements with its employees and independent
consultants and has instituted procedures to control access to and distribution
of its technology, documentation and other proprietary information and the
proprietary information of others from whom it licenses content. The steps the
Company takes to protect its proprietary rights may not be adequate and third
parties may infringe or misappropriate the Company's copyrights, trademarks,
service marks and similar proprietary rights. In addition, other parties may
assert claims of infringement of intellectual property or alter proprietary
rights against the Company. The legal status of intellectual property on the
Internet is currently subject to various uncertainties.
LEASEHOLD
The Company's corporate offices are composed of one floor of leased space
located in the center of Vancouver's business community. All of the Company's
offices are in good condition. The Company also leases sites in New York, San
Francisco, Toronto and Calgary. The Company's facilities are fully used for
current operations and expects that it will be seeking additional space in 2000.
EQUIPMENT
The Company has made a substantial investment in servers and computer
equipment required for its website and has dedicated staff assigned to
maintenance and support of these operations.
Item 3. Legal Proceedings
The Company is not a party to any pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
6
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock has been quoted for trading on the OTC BB since March 17,
1999. Accordingly, there has been a limited public market for our common stock.
The following table sets forth high and low bid prices for the common stock for
the periods ending March 31, 1999, June 30, 1999, September 30, 1999 and
December 31, 1999. These prices represent quotations between dealers without
adjustment for retail markup, markdown or commission and may not represent
actual transactions.
Quarter Ending: High Low Volume
March 31, 1999 $ 10.25 $ 6.00 3,339,000
June 30, 1999 $ 9.00 $ 3.125 4,859,200
September 30, 1999 $ 5.00 $ 2.125 3,297,500
December 31, 1999 $ 3.625 $ 1.312 1,927,700
On December 31, 1999, Stockgroup.com had 26 registered shareholders owning
8,195,000 shares.
We have not and do not foresee declaring any dividends now or into the
foreseeable future.
We have reserved, as of December 31, 1999, 2,000,000 shares of common stock
for issuance upon the exercise of non-qualified stock options.
Item 6. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS - FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31,
1998
1999 was the most significant period of growth and development in our
history. During the year, the Company expanded the scope of its news division by
hiring 10 journalistic professionals, including our Editor in Chief, David
Andelman. During 1999 we also expanded our productive capacity and developed and
launched www.smallcapcenter.com, our state of the art website dedicated to
serving the needs of small cap investors. This project required a significant
investment of resources and, along with other initiatives, resulted in the
addition of 31 new staff to our programming and design teams. The launch of
www.smallcapcenter.com also included the creation of our advertising image based
on the slogan `Where to find the next big thing'. The accompanying ad campaign
included commercials on media such as CNBC and print ads in The Wall Street
Journal, U.S. News and World Report and other major publications.
During the year, we also expanded our news bureau/sales office branch
network through the addition of offices in San Francisco and New York.
Supporting financing for our strategic plan was raised through private
placements of an aggregate cash proceeds of $5.4 million which were completed
after the Company went public in March.
Revenue
- --------------------------------------------------------------------------------
1999 was a year of record revenue for Stockgroup.com. During the year ended
December 31, 1999, we generated revenues of US$1,920,052 versus US$857,591 for
the year ended December 31, 1998. This represents a 123% increase in year over
year revenue.
A substantial part of growth in revenues was due to an increase in
Advertising and Media Services sales, which saw year over year growth of 393%.
Website Design and Development also saw gains, with an increase of 61% and
Website Maintenance and Marketing saw a marginal
7
<PAGE>
decrease of (12)%. Over the course of 1999 growth in Website services overall
was impacted by resources applied to the development of our new enterprise
financial news media Website www.smallcapcenter.com. In 2000, however, the
programming and design capacity we built up to complete the development of
www.smallcapcenter.com are being re-deployed to revenue generating projects and
should enhance our ability to expand sales.
We are seeking to increase revenues in 2000 based on implementation of our
strategic plan. As of year end 1999 we have hired Tim Bush, a 20 year veteran
sales professional, as our Vice President of Sales. Mr. Bush comes to
Stockgroup.com from Ingram Micro Inc., one of the world's largest wholesale
providers of technology products and services, where he was the Regional Sales
Director. During his time at Ingram Micro Inc., Mr. Bush's team averaged over
30% sales growth with sales in excess of CDN$400 million. Mr. Bush's immediate
mandate is to expand our sales staff and increase sales in New York, San
Francisco, Vancouver and other North American markets.
In Quarter I, 2000 the Company is also introducing its subscription news service
product through www.smallcapcenter.com and is continuing to increase its base of
journalists to support this product. In January, Stockgroup.com also introduced
a new product named InvestorMarketPlace which is generating strong demand from
the Company's clients.
As a consolidated entity, we saw Pro-Forma gross revenues decrease from
US$968,091 in 1997 to US$857,591 in 1998;
Operating Expenses
- --------------------------------------------------------------------------------
The development and launch of www.smallcapcenter.com had a major bearing on
the operating expenses incurred by Stockgroup.com during 1999. Cost of Revenues,
which include items such as data feed costs, Internet connectivity costs, some
of the costs of our Design team and third party advertising costs for
advertising purchased on behalf of clients, increased from $172,343 in 1998 to
$1,208,033 in 1999 representing and increase of 601%. These costs are required
to maintain the infrastructure which support the delivery of financial
information services on the Internet. In 1997 cost of revenues were $137,447.
Sales and Marketing costs also saw significant increases primarily as a
function of advertising purchases related to the launch of
www.smallcapcenter.com and went from $265,840 in 1998 to $2,454,473 in 1999, an
increase of 823%. Funds expended for advertising have provided us with reach to
viewers and are expected to continue to provide value over the longer term. In
1998 and 1997, we had not yet undertaken significant initiatives with respect to
Sales and Marketing and our expenses were largely related to our commissioned
sales staff. From 1997 to 1998, Sales and Marketing expenses increased from
$238,964 to $265,840 or an increase of 11.2%.
Product Development costs, which consist of salaries for programmers and
Design staff seconded to the development of www.smallcapcenter.com increased
from $117,453 in 1998 to $415,108 in 1999, an increase of 253%. We project that
expenses in this area will continue to grow as we hire more Internet design
specialists to deliver upon our anticipated expansion of website contract
commitments. With respect to year over year change between 1997 and 1998,
Product Development costs increased from $77,458 to $117,453, or an increase of
51.6% due to the addition of more programming staff.
General and Administrative costs also saw a large relative increase from
$443,201 in 1998 to $2,209,192 in 1999, or 398%. Notable expenses in this area
came as a result of the addition of two new offices, the moving of head office
to larger premises, amortization of expenses for employee stock options,
increased salaries and wages for new management and executive staff, and
increased legal and accounting fees and consulting fee charges related to our
launch as a public company. With respect G & A expenses, we project this expense
category will increase marginally during 2000. In 1998, G&A expenses increased
to $443,201 which represented a marginal increase of 5.5% from the $419,993
incurred in 1997.
Other Income and Income Taxes
- --------------------------------------------------------------------------------
We earned Interest and other income of $124,221 in 1999 primarily on
investment of our cash resources. Due to our net loss position, we did not incur
tax in 1999. At present we have tax
8
<PAGE>
loss carry forwards of $3,369,000 in the Canada which expire in 2006, and tax
loss carry forwards of $845,000 in the U.S. which expire in 2019.
Net Income
- --------------------------------------------------------------------------------
During 1999 we incurred a net loss of $(4,242,533) versus a net loss of
$(149,289) in 1998 and a profit of $74,213 in 1997. The loss incurred in 1999
was the result of our strategic investment in the development of our enterprise
financial website and supporting advertising program, the addition of
significant development capacity in our programming and design teams and the
initial investment in our editorial operations.
The most significant component of investment in 1999 was
www.smallcapcenter.com which was launched on October 5, 1999. Moving forward, we
anticipate further losses in 2000 and 2001 as we further develop
www.smallcapcenter.com and our Small Cap News Service. The news service is being
expanded in 2000 and includes a subscription component wherein viewers pay to
subscribe to premium quality unbiased original news stories on small cap
companies and markets delivered throughout the trading day.
Financial Condition
- --------------------------------------------------------------------------------
We ended 1999 with a cash position of $1,658,822. As we continue to expand
our operations and develop our Small Cap News Service to a global level, we will
require significant additional financial resources. Although we believe that we
will be able to raise additional capital, there can be no assurance that we will
we be successful in raising a sufficient amount of additional capital.
CORPORATE DEVELOPMENTS DURING THE YEAR
- --------------------------------------------------------------------------------
A synopsis of our corporate highlights for 1999 are as follows:
1. Reverse Acquisition completed
March 11, 1999, Stock Research Group, Inc. ("SRG") acquires I-Tech Holdings
Group, Inc. ("I-Tech")through a reverse takeover.
2. New US Subsidiary formed - Office launched in San Francisco
On April 2, 1999, we incorporated "Stockgroup.com, Ltd." as an operating
subsidiary, domiciled in the State of Nevada. On April 9, 1999,
Stockgroup.com, Ltd. was provided with a Certificate of Qualification to
transact business in the State of California and Stockgroup.com began
operations in California.
3. Private Placement
During the second quarter the company completed a private placement
totaling an aggregate of USD$5.4 million through the issuance of 900,000
common shares at USD $6.00 per share. These shares are deemed "restricted
shares" as that term is defined under U.S. securities law.
4. Marketing Initiatives
During the year, the Company entered into a series of advertising contracts
which provided it with significant exposure on the Yahoo!, Excite, and
Webcrawler Search engines. Under these agreements, banner ads which
showcased www.stockgroup.com and subsequently www.smallcapcenter.com appear
on these sites. Stockgroup.com also became the sponsor of terms such as
"small-cap," "micro-cap," and variations thereof for searches done by
visitors researching web sites, public companies, and investments through
these various search engine sites.
5. Advertising and Public Relations Initiative
As part of the launch of www.smallcapcenter.com, the Company retained New
York based RocketScience as its agency of record for an advertising and
brand-building awareness campaign. The agency was responsible for a variety
of advertising and marketing activities aimed at positioning
www.smallcapcenter.com as the premier brand in the micro- and small-cap
arena.
9
<PAGE>
6. Ernst & Young LLP named as new independent accountant
On July 7, 1999 the Board of Directors approved the appointment of Ernst &
Young LLP as the Company's new independent accountant. The Company selected
Ernst & Young due to its international branch network and expertise in the
audit of technology firms.
7. Southam Private Placement
The company completed a private placement with Southam, Inc. for the
issuance of 200,000 shares in exchange for advertising in Southam
publications. Southam, Inc. is a subsidiary of Hollinger International
(NYSE: HLR), a leading newspaper publishing company.
8. New York office opening
On September 1, 1999 we opened our New York branch. This office is home to
our Editorial News center and is also headquarters for our U.S. Operations.
9. Launch of smallcapcenter.com
On October 5, 1999 we launched our new on-line investment information
Community www.smallcapcenter.com. This event represented the culmination of
a significant investment of time and resources by the Company.
The launch of www.smallcapcenter.com and its national advertising campaign
marked two significant achievements in the implementation of the Company's
strategic plan. We believe the introduction of www.smallcapcenter.com has
solidified our position as a leading Internet content provider of micro-
and small-cap information. The look, feel, and functionality of
www.smallcapcenter.com represent a significant improvement in the features
offered on our previous www.stockgroup.com site. Additionally, the daily
real time editorial and news reporting and increased access to micro- and
small-cap company information not previously available on the Internet
characterize some of the features on the site.
Additionally, we believe our advertising campaign based around the slogan
"Where to Find The Next Big Thing" has significantly increased our profile
with investors in North America. To date, some of the prominent media
purchases we have made include full and partial page ads and/or commercials
in U.S. News & World Report, the Chicago Sun Times, the National Post,
CNBC, and the Wall Street Journal.
10. Board of Directors strengthened
At the Corporation's 1998 Annual General Meeting on October 7, 1999
shareholders voted to ratify the Corporation's appointees for the Board of
Directors. Our Board of Directors is now composed of the following persons:
Marcus New - Chairman & CEO
Louis deBoer II - President of MediaFutures, Inc.
David N.Caddey, B.Sc., M.Sc., - Vice President of MacDonald Dettwiler and
Associates
Craig Faulkner - Chief Technology Officer
Leslie Landes - President & Chief Operating Officer
11. Broadcast Service launched
During the fourth quarter we signed an agreement with Yahoo! Broadcast
(Nasdaq: YHOO) to deliver daily and weekly broadcasts, which are accessible
through Broadcast.com, Yahoo.com and www.smallcapcenter.com. Yahoo!
broadcasts smallcapcenter.com's daily updates on the small and micro cap
markets, called "Small Cap Snapshot," and weekly interviews with Wall
Street's leading small cap analysts. Additionally, through Yahoo!,
Stockgroup.com clients will be able to broadcast quarterly conference
calls, special events, live interviews and question and answer sessions.
The content is
10
<PAGE>
featured in several sections of the Business area on Yahoo! Broadcast and
will be archived for on-demand listening.
12. Editor-in-Chief appointed
In December Stockgroup.com appointed David A. Andelman as Editor-in-Chief
of its news operations. Mr. Andelman has three decades of experience in
news and broadcasting, most recently as News Editor at Bloomberg, following
international financial markets, media and communications, securities and
investment banking, real estate, insurance and finance. Before joining
Bloomberg, Mr. Andelman served as Washington correspondent for CNBC, Paris
correspondent for CBS News (CBS: NYSE), and a bureau chief and
correspondent for the New York Times (NYT: NYSE). He is a graduate of
Harvard College and the Columbia University Graduate School of Journalism.
Mr. Andelman's mandate is to develop a world class news organization
focused on small cap companies and markets and he has been actively
recruiting a team of seasoned financial reporters and editors in New York.
DEVELOPMENTS SINCE YEAR END
1. Stockgroup.com expands into Asia
On January 18, 2000, the Company entered into a contract in Singapore which
expands our operations into Asia and entails the development of an
enterprise financial site for Asia Exchange Information Service Pte Ltd.
(AsiaXIS). AsiaXIS was formed by Form Holdings Ltd. (FORM.SP - Bloomberg)
and SMB United Limited (SMBU.SP) and will include an equity interest from
Stockgroup.com Holdings Inc. Both Form Holdings Ltd. and SMB United are
publicly traded on the Singapore Stock Exchange. SMB United Limited has
annual sales in excess of Singapore$77 million and net income in excess of
Singapore$8.2 million. Form Holdings recently underwent a restructuring
during which George Thia, the former managing director for Merrill Lynch
International Bank Ltd., was appointed CEO. Form is now diversifying into
financial information companies and music publishing businesses.
Under the terms of the agreement, Stockgroup.com will receive approximately
US$1,500,000 for development of the initial site in Singapore. The
agreement also provides for AsiaXIS to develop 13 additional financial
enterprise sites throughout Asia, Australia and New Zealand. The Company
will be paid a licensing fee for its technology, a development fee for
building and customizing each additional financial enterprise site, ongoing
maintenance and support fees and royalties for each of the markets that
AsiaXIS enters. The Company has also secured access to the content that
will be created by AsiaXIS in its international news development. As part
of the contract, Stockgroup.com has agreed to acquire an equity position of
19.4% in AsiaXIS for US$500,000.
AsiaXIS's first Web site will be dedicated to the coverage of the Stock
Exchange of Singapore. Over the course of the next 18 months, AsiaXIS will
expand its coverage of other major stock markets such markets as Hong Kong,
Taipei and Tokyo.
RISK FACTORS
The following factors should be considered carefully in evaluating the
Company and its business.
Our limited operating history makes the evaluation of our current business and
the forecasting of our future results difficult.
We have a limited operating history upon which an evaluation of us, our
current business and our prospects can be based, each of which must be
considered in light of the risks, expenses and problems frequently encountered
by all companies in the early stages of development, and particularly by such
companies entering new and rapidly developing markets like the Internet.
Risks related to the Internet may affect our success.
There are many risks associated with operations on the Internet that may
adversely affect our success. Such risks include, without limitation, the
following:
11
<PAGE>
o the lack of broad acceptance of the Community model on the Internet
o the possibility that the Internet will fail to achieve broad acceptance as
an advertising and commercial medium
o our inability to attract or retain viewers or to generate significant
advertising revenues or subscription service revenues from our corporate
clients
o a new and relatively unproven business model
o our ability to anticipate and adapt to a developing market
o the failure of our network infrastructure (including its servers, hardware
and software) to efficiently handle its Internet traffic
o changes in laws that adversely affect our business
o our ability to manage effectively our rapidly expanding operations,
including the amount and timing of capital expenditures and other costs
relating to the expansion of our operations
o the introduction and development of different or more extensive Communities
by our direct and indirect competitors of, including those with greater
financial, technical and marketing resources
o our inability to maintain and increase levels of traffic on our Web site
o our inability to attract, retain and motivate qualified personnel
Our recent revenue growth may not continue in the future.
There can be no assurance that the revenue growth we have experienced in
recent periods will continue or increase. Our limited operating history makes
the prediction of future results difficult or impossible and, therefore, our
recent revenue growth should not be taken as an indication of any growth that
can be expected in the future. Furthermore, our limited operating history leads
us to believe that period-to-period comparisons of our operating results may not
be meaningful and that the results for any period should not be relied upon as
an indication of future performance. To the extent that revenues do not grow at
anticipated rates, our business, results of operations and financial condition
would be materially and adversely affected.
We anticipate losses for the foreseeable future.
We have not achieved profitability in the current period and we anticipate
that we will continue to incur net losses for the foreseeable future. The extent
of these losses will depend, in part, on the amount of our growth in revenues
from advertising sales, client product and marketing services and sales revenues
and subscription fees from new services. As of December 31, 1999, we had an
accumulated deficit of $(4,259,711). We expect that our operating expenses will
increase significantly during the next several years, especially in the areas of
sales and marketing, product development and general and administrative
expenses. Thus, we will need to generate increased revenues to achieve
profitability. To the extent that increases in our operating expenses precede or
are not subsequently followed by corresponding increases in revenues, or that we
are unable to adjust operating expense levels accordingly, our business, results
12
<PAGE>
of operations and financial condition would be materially and adversely
affected. There can be no assurance that we will ever achieve or sustain
profitability or that our operating losses will not increase in the future.
Our future success is dependent on continued growth in use of and commercial
viability of the Internet.
Our future success is substantially dependent upon continued growth in the
use of the Internet. To support advertising sales, and product and marketing
services sales revenues on www.smallcapcenter.com, the Internet's recent and
rapid growth must continue, and use of the Internet must become widespread. None
of these can be assured. The Internet may prove not to be a viable information
communications medium and information marketplace. Additionally, due to the
ability of consumers to easily compare prices of similar products or services on
competing Web sites, gross margins for the services marketed by us may narrow in
the future and, accordingly, our revenues may be materially negatively impacted.
If use of the Internet does not continue to grow, our business, results of
operations and financial condition would be materially and adversely affected.
Additionally, there are several issues that could lead to resistance
against the acceptance of the Internet as a viable commercial marketplace. To
the extent that the Internet continues to experience significant growth in the
number of users and the level of use, there can be no assurance that its
technical infrastructure will continue to be able to support the demands placed
upon it. The necessary technical infrastructure for significant increases in
electronic news dissemination and e-commerce related to it, such as a reliable
network backbone, may not be timely and adequately developed. In addition,
performance improvements, such as high-speed modems, may not be introduced in a
timely fashion. Furthermore, security and authentication concerns with respect
to transmission over the Internet of confidential information, such as credit
card numbers, may remain. Also, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols required to
handle increased levels of activity, or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services could result in slower response times and adversely affect usage of the
Internet. To the extent the Internet's technical infrastructure does not
effectively support the growth that may occur, our business, results of
operations and financial condition would be materially and adversely affected.
Our business model and acceptance of our products is unproven in the developing
market in which we operate.
Our business model is new and relatively unproven. The model depends upon
our ability to generate multiple revenue streams by diversifying our product
offerings. To be successful, we must, among other things, develop and market
products and services that achieve broad market acceptance by its users,
advertisers and client subscriber companies. There can be no assurance that any
Internet Community, including www.smallcapcenter.com, will achieve broad market
acceptance. Accordingly, no assurance can be given that our business model will
be successful or that it can sustain revenue growth or be profitable.
The market for our products and services is new, rapidly developing and
characterized by an increasing number of market entrants. As is typical of any
new and rapidly evolving market, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty and
risk. Moreover, because this market is new and rapidly evolving, it is difficult
to predict its future growth rate, if any, and its ultimate size. If the market
fails to develop, develops more slowly than expected or becomes saturated with
13
<PAGE>
competitors, or if our products and services do not achieve or sustain market
acceptance, our business, results of operations and financial condition would be
materially and adversely affected.
If our efforts to achieve a strong brand identity are not successful, our
business and operating results will be materially adversely affected.
We believe that establishing and maintaining brand identity is a critical
aspect of efforts to attract and expand our viewer base, Internet traffic and
advertising and commerce relationships. Furthermore, we believe that the
importance of brand recognition will increase as low barriers to entry encourage
the proliferation of Internet sites. In order to attract and retain viewers,
advertisers and subscriber clients, and in response to competitive pressures, we
intend to increase our financial commitment to the creation and maintenance of
brand loyalty among these groups. We plan to accomplish this, although not
exclusively, through advertising campaigns in several forms of media, including
television, print, online media, and other marketing and promotional efforts. If
we do not generate a corresponding increase in revenue as a result of our
branding efforts or otherwise fail to promote our brand successfully, or if we
incur excessive expenses in an attempt to promote and maintain our brand, our
business, results of operations and financial condition would be materially and
adversely affected.
Promotion and enhancement of the smallcapcenter.com brand will also depend,
in part, on our success in providing a high-quality "Community Experience." Such
success cannot be assured. If viewers, users, advertisers and commerce vendors
do not perceive Smallcapcenter.com's Community experience to be of high quality,
or if we introduce new services or enter into new business ventures that are not
favorably received by such parties, the value of our brand could be diluted.
Such brand dilution could decrease the attractiveness of Smallcapcenter.com to
such parties, and could materially and adversely affect the Company's business,
results of operations and financial condition.
We rely significantly on advertising revenues, the level of which is difficult
to predict and will depend on the amount of "traffic" on our website
and advertisers' acceptance of the internet - based advertising medium.
We derive a significant portion of our revenues from the sale of
advertisements on our site, and expect to continue to do so for the foreseeable
future. Our business model therefore is highly dependent on the amount of
"traffic" on Smallcapcenter.com, which has a direct effect on our advertising
revenues. We are in the early stages of implementing our international branch
network and our advertising sales programs, which, if not successful, could
materially and adversely affect our business, results of operations and
financial condition.
Our ability to generate significant advertising revenues will depend, in
part, on our ability to create new advertising programs without diluting the
perceived value of our existing programs. Our ability to generate advertising
revenues will depend also, in part, on advertisers' acceptance of the Internet
as an attractive and sustainable medium, the
14
<PAGE>
development of a large base of users of our products and services, the effective
development of Web site content that provides user demographic characteristics
that will be attractive to advertisers, and government regulation. The adoption
of Internet-based advertising, particularly by those advertisers that have
historically relied upon traditional advertising media, requires the acceptance
of a new way of conducting business and exchanging information. There can be no
assurance that the market for Internet advertising will continue to emerge or
become sustainable. If the market develops more slowly than expected, our
business, results of operations and financial condition could be materially and
adversely affected.
The Internet as an advertising medium has not been available for a
sufficient period of time to gauge its effectiveness as compared with
traditional advertising media. No standards have been widely accepted for the
measurement of the effectiveness of Internet-based advertising, and there can be
no assurance that any such standards will become widely accepted in the future.
Additionally, no standards have been widely accepted to measure the number of
unique users or page views related to a particular site. Internet advertising
rates are based in part on third-party estimates of users of an Internet site.
Such estimates are often based on sampling techniques or other imprecise
measures, and may materially differ from our estimates. There can be no
assurance that advertisers will accept our or other parties' measurements of
impressions. The rejection by advertisers of such measurements could have a
material adverse effect on our business, results of operations and financial
condition.
The sale of Internet advertising is subject to intense competition that has
resulted in a wide variety of pricing models, rate quotes and advertising
services. This has made it difficult to project future levels of advertising
revenues and rates. It is also difficult to predict which pricing models, if
any, will achieve broad acceptance among advertisers. As described above, to
date, we have based our advertising rates on providing advertisers with a
guaranteed number of impressions, and any failure of our advertising model to
achieve broad market acceptance, would have a material adverse effect on our
business, results of operations and financial condition.
A majority of our advertising contracts are of a short-term nature and the level
of advertising purchases in the future is uncertain.
To date, substantially all of our advertising contracts have been for terms
averaging one to three months in length, with relatively few longer-term
advertising contracts. Many of our advertising customers have limited experience
with Internet advertising, have not devoted a significant portion of their
advertising expenditures to Internet advertising and may not believe Internet
advertising to be effective relative to traditional advertising media. There can
be no assurance that our current advertisers will continue to purchase
advertisements on www.smallcapcenter.com.
If the advertisers' guaranteed minimum view run times on our Website are not
met, we will be required to provide additional run times following the contract
terms which may limit our advertising inventory.
Our contracts with advertisers typically guarantee the advertiser or
sponsor either a minimum view run time during which the ad will be seen by users
of smallcapcenter.com; or, a minimum number of "impressions," or
"click-throughs," or times that a sponsorship or advertisement is seen by users
of smallcapcenter.com. To the extent that minimum view run times, or impression
or click-through levels are not achieved for any reason, we may be required to
"make good" or provide additional impressions after the contract term, which may
adversely affect the availability of advertising inventory and which could have
a material adverse effect on our business, results of operations and financial
condition.
15
<PAGE>
Specifically, the process of managing advertising within a large,
high-traffic Web site such as ours is an increasingly important and complex
task. If we do not manage this task in an efficient and appropriate manner, our
financial performance may be impaired. To the extent that we encounter system
failures or material difficulties in the operation of our systems, we could be
unable to deliver banner advertisements and sponsorships through our site. Any
extended failure of, or material difficulties encountered in connection with,
our advertising management system may expose the company to further "make good"
obligations with our advertisers, which, by displacing salable advertising
inventory, among other consequences, would reduce revenues and could have a
material adverse effect on our business, results of operations and financial
condition.
The increased use by consumers of software programs which remove advertising
from their desktops could have an adverse affect on our advertising revenues.
"Filter" software programs that limit or remove advertising from an
Internet user's desktop are available to consumers. Widespread adoption or
increased use of such software by users or the adoption of such software by
certain Internet access providers could have a material adverse effect upon the
viability of advertising on the Internet and, as we rely significantly on
advertising revenues, on our business, results of operations and financial
condition.
Potential fluctuations in our operating results and quarterly fluctuations may
adversely affect our trading price.
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are outside our control. See "Our Limited
Operating..." and "Our Recent Revenue Growth...". As a strategic response to
changes in the competitive environment, we may from time to time make certain
pricing, service or marketing decisions or acquisitions that could have a
material short-term or long-term adverse effect on our business, results of
operations and financial condition. See "If our efforts to achieve a strong
brand identity..."
We derive a significant portion of our revenues from the sale of
advertising under short-term contracts, averaging one to three months in length.
As a result, our quarterly revenues and operating results are, to a significant
extent, dependent on advertising revenues from contracts entered into within the
quarter, and on our ability to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. See "We rely significantly on advertising
revenues..."; "A majority of our advertising contracts..."; "If the advertisers'
guaranteed minimum view run times...".
The foregoing factors, in some future quarters, may lead our operating
results to fall below the expectations of securities analysts and investors. In
such event, the trading price of our common stock would likely be materially and
adversely affected.
We are controlled by our officers, directors and entities affiliated with them.
In the aggregate, ownership of our shares by Management represent
approximately 45% of our issued and outstanding shares of common stock. These
stockholders, if acting together, will be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combinations
transactions.
16
<PAGE>
Our future performance is dependent on key personnel.
Our performance is substantially dependent on the performance of our senior
management and key technical personnel. In particular, our success depends on
the continued efforts of our senior management team, especially our Chief
Executive Officer, Marcus New and our President, Leslie Landes. The loss of the
services of any of our executive officers or other key employees could have a
material adverse effect on our business, results of operations and financial
condition. Although several senior management personnel have substantial share
and/or stock options interests, with the exception of our President Leslie
Landes, we do not have employment agreements in place with our senior management
or employees.
Our future success also depends on our continuing ability to retain and
attract highly qualified technical, editorial and managerial personnel. We
anticipate that the number of our employees will increase significantly in the
next 12 months. Wages for managerial and technical employees are increasing and
are expected to continue to increase in the foreseeable future due to the
competitive nature of this job market. There can be no assurance that we will be
able to retain our key managerial and technical personnel or that it will be
able to attract and retain additional highly qualified technical and managerial
personnel in the future. We have experienced difficulty from time to time in
attracting the personnel necessary to support the growth of our business, and
there can be no assurance that we will not experience similar difficulty in the
future. The inability to attract and retain the technical and managerial
personnel necessary to support the growth of our business, due to, among other
things, a large increase in the wages demanded by such personnel, could have a
material adverse effect upon our business, results of operations and financial
condition.
A majority of our senior management is inexperienced in managing a public
company.
Our recent growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources. To
manage our potential growth, we must continue to implement and improve our
operational and financial systems, and must expand, train and manage its
employee base. Our President and Vice President Finance joined us during August
and November 1998, respectively. In addition, we have yet to fill several key
senior management posts. Furthermore, the members of our current senior
management (other than the President) have not had any previous experience
managing a public company or a large operating company. There can be no
assurance that we will be able to effectively manage the expansion of our
operations, that our systems, procedures or controls will be adequate to support
our operations or that our management will be able to achieve the rapid
execution necessary to fully exploit the market opportunity for our products and
services. Any inability to manage growth effectively could have a material
adverse effect on our business, results of operations and financial condition.
We must enhance and develop www.smallcapcenter.com to remain competitive.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of www.smallcapcenter.com and develop
other products and services. Enhancements of or improvements to the Web site may
contain undetected programming errors that require significant design
modifications, resulting in a loss of customer confidence and user support and a
decrease in the value of our brand name recognition.
17
<PAGE>
We plan to develop and introduce new features and functions, such as
increased capabilities for user personalization and interactivity. This will
require the development or licensing of increasingly complex technologies. There
can be no assurance that we will be successful in developing or introducing such
features and functions or that such features and functions will achieve market
acceptance or enhance our brand name recognition. Any failure to effectively
develop and introduce new features and functions, or the failure of such new
features and functions to achieve market acceptance, could have a material
adverse effect on our business, results of operations and financial condition.
We also plan to develop and introduce new products and services. There can
be no assurance that we will be successful in developing or introducing such
products and services or that such products and services will achieve market
acceptance or enhance our brand name recognition. Any failure on our part to
effectively develop and introduce these products and services, or the failure of
such products and services to achieve market acceptance, could have a material
adverse effect on our business, results of operations and financial condition.
The internet industry is characterized by rapid technological change which may
affect our ability to respond to the evolving demands of our market place.
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards and customer demands,
and frequent new product introductions and enhancements. These market
characteristics are exacerbated by the emerging nature of the market and the
fact that many companies are expected to introduce new Internet products and
services in the near future. Our future success will depend in significant part
on its ability to continually improve the performance, features and reliability
of the site in response to both evolving demands of the marketplace and
competitive product and service offerings, and there can be no assurance that we
will be successful in doing so. In addition, the widespread adoption of
developing multimedia enabling technologies could require fundamental and costly
changes in our technology and could fundamentally affect the nature, viability
and measurability of Internet-based advertising, which could adversely affect
our business, results of operations and financial condition.
We may be unable to accommodate increased consumer traffic on our website, which
would limit our ability to increase advertising sales and achieve market
acceptance.
A key element of our strategy is to generate a high volume of user traffic.
Our ability to attract advertisers and to achieve market acceptance of our
products and services, and our reputation, depend significantly upon our
performance and our network infrastructure (including our servers, hardware and
software). Any system failure that causes interruption or slower response time
of our products and services could result in less traffic to the Website and, if
sustained or repeated, could reduce the attractiveness of our products and
services to advertisers and licensees. An increase in the volume of user traffic
could strain the capacity of our technical infrastructure, which could lead to
slower response time or system failures, and could adversely affect the delivery
of the number of impressions that are owed to advertisers and thus our
advertising revenues. In addition, as the number of users of
www.smallcapcenter.com increase, there can be no assurance that our technical
infrastructure will be able to grow accordingly, and we face risks related to
our ability to scale up to the expected viewer levels while maintaining superior
performance. Any failure of our server and networking systems to handle current
or higher volumes of traffic would have a material adverse effect on our
business, results of operations and financial condition.
18
<PAGE>
We may suffer system failures on our Website which could result in negative
publicity, reduce volume of our advertising sales and adversely affect our
market acceptance.
We are also dependent upon third parties to provide potential users with
Web browsers and Internet and online services necessary for access to the site.
In the past, users have occasionally experienced difficulties with Internet and
online services due to system failures, including failures unrelated to our
systems. Any disruption in Internet access provided by third parties could have
a material adverse effect on our business, results of operations and financial
condition. Furthermore, we are dependent on hardware and software suppliers for
prompt delivery, installation and service of equipment used to deliver our
products and services.
Our operations are dependent in part upon our ability to protect our
operating systems against damage from human error, fire, floods, power loss,
telecommunications failures, break-ins and similar events. We do not presently
have redundant, multiple-site capacity in the event of any such occurrence. Our
servers are also vulnerable to computer viruses, break-ins and similar
disruptions from unauthorized tampering with our computer systems. The
occurrence of any of these events could result in the interruption, delay or
cessation of service, which could have a material adverse effect on our
business, results of operations and financial condition. In addition, our
reputation and the smallcapcenter.com brand could be materially and adversely
affected.
There are security risks to our network.
Experienced programmers ("hackers") have attempted on occasion to penetrate
our network security. We expect that these attempts, some of which have
succeeded, will continue to occur from time to time. Because a hacker who is
able to penetrate our network security could misappropriate proprietary
information or cause interruptions in our products and services or do other
damage, we may be required to expend significant capital and resources to
protect against or to alleviate problems caused by such parties. Additionally,
we may not have a timely remedy against a hacker who is able to penetrate our
network security. Such purposeful security breaches could have a material
adverse effect on our business, results of operations and financial condition.
In addition to purposeful security breaches, the inadvertent transmission of
computer viruses could expose us to a material risk of loss or litigation and
possible liability.
In offering certain payment services for some products and services, we
could become increasingly reliant 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. Advances in computer capabilities, discoveries in the field
of cryptography and other discoveries, events, or developments could lead to a
compromise or breach of the algorithms that our licensed encryption and
authentication technology used to protect such confidential information. If such
a compromise or breach of our licensed encryption authentication technology
occurs, it could have a material adverse effect on our business, results of
operations and financial condition. We may be required to expend significant
capital and resources and engage the services of third parties to protect
against the threat of such security, encryption and authentication technology
breaches or to alleviate problems caused by such breaches. Concerns over the
security of Internet transactions and the privacy of users may also inhibit the
growth of the Internet generally, particularly as a means of conducting
commercial transactions.
19
<PAGE>
We may not be able to compete successfully against current and future
competitors.
The market for viewers, corporate subscribers and Internet advertising is
new and rapidly evolving, and competition for viewers and advertisers, as well
as competition in the information dissemination market, is intense and is
expected to increase significantly. Barriers to entry are relatively
insubstantial and we may face competitive pressures from many additional
companies both in the United States, Canada and abroad.
We believe that the principal competitive factors for companies seeking to
create Communities on the Internet are critical mass (i.e., depth of content and
range of features of interest to viewers), functionality of the Web site, brand
recognition, viewer affinity and loyalty, broad demographic focus and open
access for visitors. In the future, Internet communities may be developed or
acquired by companies currently operating other Communities or by Web
directories, search engines, shareware archives and content sites, and by
commercial online service providers, Internet Service Providers and other
entities, certain of which may have more resources than us. We compete for users
and advertisers with other content providers and with thousands of Web sites
operated by individuals, the government and educational institutions. In
addition, we could face competition in the future from traditional media
companies, such as newspaper, magazine, television and radio companies, a number
of which, including The Walt Disney Company ("Disney"), CBS Corporation ("CBS")
and The National Broadcasting Company ("NBC"), have recently made significant
acquisitions of or investments in Internet companies.
We believe that the principal competitive factors in attracting advertisers
include the amount of traffic on our Web site, brand recognition, customer
service, the demographics of the Community's members and users, our ability to
offer targeted audiences and the overall cost effectiveness of the advertising
medium offered by us. We believe that the number of Internet companies relying
on Internet-based advertising revenue, as well as the number of advertisers on
the Internet and the number of users, will increase substantially in the future.
Accordingly, we will likely face increased competition, resulting in increased
pricing pressures on its advertising rates, which could have a material adverse
effect on the company.
Many of our existing and potential competitors, including companies
operating Web directories and search engines, and traditional media companies,
have longer operating histories in the Internet Market, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than ours. Such competitors may be able to
undertake more extensive marketing campaigns for their brands and services,
adopt more aggressive advertising pricing policies and make more attractive
offers to potential employees, distribution partners, e-commerce companies,
advertisers and third-party content providers. Furthermore, our existing and
potential competitors may develop Communities that are equal or superior in
quality to, or that achieve greater market acceptance than,
www.smallcapcenter.com. There can be no assurance that we will be able to
compete successfully against its current or future competitors or that
competition will not have a material adverse effect on our business, results of
operations and financial condition.
20
<PAGE>
Additionally, the Internet information market is new and rapidly evolving,
and competition among information providers is expected to increase
significantly. There can be no assurance that Web sites maintained by our
existing and potential competitors will not be perceived by advertisers as being
more desirable for placement of advertisements than smallcapcenter.com. In
addition, many of our current advertising customers and some of its corporate
clients have established relationships with certain of our existing or potential
competitors. There can be no assurance that we will be able to retain or grow
our viewer base, traffic levels and advertising customer base at historical
levels, or that competitors will not experience better retention or greater
growth in these areas than us. Accordingly, there can be no assurance that any
of our advertising customers or corporate client companies will not sever or
will elect not to renew their agreements with us, the result of which could have
a material adverse effect on our business, results of operations and financial
condition.
We have a strong dependence on relationships with suppliers and carriers. If
these relationships are not maintained, our business and financial condition
will be adversely affected.
We are and will continue to be dependent on a number of third-party
relationships to increase traffic on www.smallcapcenter.com and thereby generate
advertising revenues, maintain the current level of service and variety of
content for our viewers, and meet future milestones. We are also dependent on
other Web site operators that provide links to smallcapcenter.com.
Most of our arrangements with third-party Internet sites and other
third-party service providers do not require future minimum commitments to use
our services or to provide access or links to our services or products, are not
exclusive and are short-term or may be terminated at the convenience of the
other party. Moreover, we do not have agreements with the majority of other Web
site operators that provide links to smallcapcenter.com, and such Web site
operators may terminate such links at any time without notice to us. There can
be no assurance that third parties regard their relationship with us as
important to their own respective businesses and operations, that they will not
reassess their commitment to us at any time in the future or that they will not
develop their own competitive services or products.
There can be no assurance that we will be able to maintain relationships
with third parties that supply us with software or products that are crucial to
our success, or that such software or products will be able to sustain any
third-party claims or rights against their use. Furthermore, there can be no
assurance that the software, services or products of those companies that
provide access or links to our services or products will achieve market
acceptance or commercial success. Failure of one of these third parties could
have a material adverse effect on our business, results of operations and
financial condition. In particular, the elimination of a pre-installed bookmark
on a Web browser that directs traffic to our Web site could significantly reduce
traffic on our Web site, which would have a material adverse effect on our
business, results of operations and financial condition.
Additional financing will be required by us as we expect negative operating cash
flow for the next fiscal year. Such financing if obtained by us will result in
the issuance of additional securities and may not be available on terms
favorable to us.
We expect that we will continue to experience negative operating cash flow
for the foreseeable future as a result of significant spending on advertising,
infrastructure and our global expansion program. Accordingly, to carry out these
plans we will need to raise additional funds in a timely manner in order to fund
our anticipated expansion and new enhanced services or products, respond to
competitive pressures or acquire complementary products, businesses or
technologies. Additional funds will have to be raised through
21
<PAGE>
the issuance of equity or convertible debt securities, which mean that the
percentage ownership of our current stockholders will be reduced, stockholders
will experience additional dilution and such securities may have rights,
preferences or privileges senior to those of the holders of the common stock. We
do not have any contractual restrictions on our ability to incur debt and,
accordingly, we could incur significant amounts of indebtedness to finance our
operations. Any such indebtedness could contain covenants, which would restrict
our operations. There can be no assurance that additional financing if and when
needed will be available on terms favorable to us, or at all. If adequate funds
are not available or are not available on acceptable terms, it would have a
material adverse effect on our ability to fund our expansion, take advantage of
acquisition opportunities, develop or enhance services or products or respond to
competitive pressures.
Future acquisitions of other business entities by us would entail numerous risks
and uncertainties which could have an adverse affect on its operations and
financial condition.
As part of our business strategy, we expect to review acquisition prospects
that would complement our existing business, augment the distribution of our
Community or enhance our technological capabilities. Future acquisitions by us
could result in potentially dilutive issuance's of equity securities, large and
immediate write-offs, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially and adversely affect our business, results of operations
and financial condition.
Furthermore, acquisitions entail numerous risks and uncertainties,
including difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired companies, the
diversion of management's attention from other business concerns, the risks of
entering geographic and business markets in which we have no or limited prior
experience and the potential loss of key employees of acquired organizations.
We have not made any acquisitions in the past. No assurance can be given as
to our ability to successfully integrate any businesses, products, technologies
or personnel that might be acquired in the future, and our failure to do so
could have a material adverse effect on our business, results of operations and
financial condition.
We may be unable to protect the intellectual property rights upon which our
business relies, which could harm our competitiveness and cause customer
confusion.
We regard substantial elements of our Web site and underlying technology as
proprietary and attempt to protect them by relying on intellectual property
laws, including trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. We also
generally enter into confidentiality agreements with our employees and
consultants and in connection with our license agreements with third parties. We
seek to control access to and distribution of our technology, documentation and
other proprietary information. Despite these precautions, it may be possible for
a third party to copy or otherwise obtain and use our proprietary information
without authorization or to develop similar technology independently. We are
pursuing the registration of our trademarks in the United States and
internationally. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are
22
<PAGE>
distributed or made available through the Internet, and policing unauthorized
use of our proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any of our proprietary rights. There can be no assurance
that the steps taken by us will prevent misappropriation or infringement of its
proprietary information, which could have a material adverse effect on our
business, results of operations and financial condition.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation might result in
substantial costs and diversion of resources and management attention.
Furthermore, there can be no assurance that our business activities will not
infringe upon the proprietary rights of others, or that other parties will not
assert infringement claims against us, including claims that by directly or
indirectly providing hyperlink text links to Web sites operated by third
parties, we have infringed upon the proprietary rights of other third parties.
Moreover, from time to time, we may be subject to claims of alleged infringement
by us of the trademarks, service marks and other intellectual property rights of
third parties. Such claims and any resultant litigation, should it occur, might
subject us to significant liability for damages, might result in invalidation of
our proprietary rights and, even if not meritorious, could result in substantial
costs and diversion of resources and management attention and could have a
material adverse effect on our business, results of operations and financial
condition.
We currently license from third parties certain technologies incorporated
into www.smallcapcenter.com. As we continue to introduce new services that
incorporate new technologies, we may be required to license additional
technology from others. There can be no assurance that these third-party
technology licenses will continue to be available to us on commercially
reasonable terms, if at all. Additionally, there can be no assurance that the
third parties from which we currently license our technology will be able to
defend their proprietary rights successfully against claims of infringement. As
a result, any inability on our part to obtain any of these technology licenses
could result in delays or reductions in the introduction of new services or
could adversely affect the performance of our existing services until equivalent
technology can be identified, licensed and integrated.
It is unclear how any existing and future laws enacted will be applied to the
Internet industry and what effect such laws will have on us.
A number of legislative and regulatory proposals under consideration by
federal, state, provincial, local and foreign governmental organizations may
lead to laws or regulations concerning various aspects of the Internet,
including, but not limited to, online content, user privacy, taxation, access
charges, liability for third-party activities and jurisdiction. Additionally, it
is uncertain how existing laws will be applied by the judiciary to the Internet.
The adoption of new laws or the application of existing laws may decrease the
growth in the use of the Internet, which could in turn decrease the demand for
our services, increase our cost of doing business or otherwise have a material
adverse effect on our business, results of operations and financial condition.
23
<PAGE>
There can be no assurance that the United States, Canada or foreign nations
will enact legislation or seek to enforce existing laws prohibiting or
restricting certain content from the Internet. Prohibition and restriction of
Internet content could dampen the growth of Internet use, decrease the
acceptance of the Internet as a communications and commercial medium, expose us
to liability, and/or require substantial modification of www.smallcapcenter.com,
and thereby have a material adverse effect on our business, results of
operations and financial condition.
Internet user privacy has become an issue both in the United States, Canada
and abroad. We cannot predict the exact form of the regulations that the Federal
Trade Commission may adopt. There can be no assurance that the United States,
Canada or foreign nations will not adopt additional legislation purporting to
protect such privacy. Any such action could affect the way in which we are
allowed to conduct our business, especially those aspects that involve the
collection or use of personal information, and could have a material adverse
effect on our business, results of operations and financial condition.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state, provincial and local
level and by certain foreign governments that could impose taxes on the sale of
goods and services and certain other Internet activities. Recently, the Internet
Tax Freedom Act was signed into law, placing a three-year moratorium on new
state and local taxes on certain aspects of Internet commerce. However, there
can be no assurance that future laws imposing taxes or other regulations on
commerce over the Internet would not substantially impair the growth of
e-commerce and as a result have a material adverse effect on our business,
results of operations and financial condition.
Certain local telephone carriers have asserted that the growing popularity
and use of the Internet has burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission (the "FCC") to impose access fees on
internet service providers and on-line service providers. If such access fees
are imposed, the costs of communicating on the Internet could increase
substantially, potentially slowing the growth in use of the Internet, which
could in turn decrease demand for our services or increase our cost of doing
business, and thus have a material adverse effect on our business, results of
operations and financial condition.
Although our servers are located in the Province of British Columbia, the
governments of other provinces, states and foreign countries might attempt to
take action against us for violations of their laws. There can be no assurance
that violations of such laws will not be alleged or charged by provincial, state
or foreign governments and that such laws will not be modified, or new laws
enacted, in the future. Any of the foregoing could have a material adverse
effect on our business, results of operations and financial condition.
We may be exposed to liability for information retrieved from or transmitted
over our websites or for products sold over our websites.
Because materials may be downloaded by the online or Internet services
operated or facilitated by us or the Internet access providers with which we
have relationships and that material may be subsequently distributed to others,
there is a potential that claims will be made against us for defamation,
negligence, copyright or trademark infringement or other theories based on the
nature and content of such materials. Such claims have been brought against
providers of online services in the past. Such claims could be material in the
future. In addition, the increased attention focused upon liability issues and
legislative proposals could materially impact the overall growth of Internet
use.
24
<PAGE>
We could also be exposed to liability with respect to third-party
information that may be accessible through our Web sites, or through content and
materials that may be posted by viewers on discussion forums offered by us. Such
claims might include, among others, that, by directly or indirectly providing
hyperlink text links to Web sites operated by third parties or by providing
discussion forums for viewers, we are liable for copyright or trademark
infringement or other wrongful actions by such third parties through such Web
sites. It is also possible that, if any third-party content information provided
on our Web site contains errors, third parties could make claims against us for
losses incurred in reliance on such information.
We offer e-mail service, which is provided by a third party. Such service
may expose us to potential risk, such as liabilities or claims resulting from
unsolicited e-mail ("spamming"), lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail service.
We also enter into agreements with advertisers and commerce partners under
which we are entitled to receive a commission or share of any revenue from the
purchase of goods and services through direct links from our Web site. Such
arrangements may expose us to additional legal risks and uncertainties,
including pursuant to regulation by local, provincial, state, federal and
foreign authorities and potential liabilities to consumers of such products and
services, even if we do not ourselves provide such products or services. There
can be no assurance that any indemnification provided to us in our agreements
with these parties, if available, will be adequate.
Even to the extent such claims do not result in liability to us, we could
incur significant costs in investigating and defending against such claims. The
imposition on us of potential liability for information carried on or
disseminated through our systems could require us to implement measures to
reduce its exposure to such liability, which may require the expenditure of
substantial resources and limit the attractiveness of our services to members
and users.
Our general liability insurance may not cover all potential claims to which
we are exposed or may not be adequate to indemnify us for all liability that may
be imposed. Any imposition of liability that is not covered by insurance or is
in excess of insurance coverage could have a material adverse effect on our
business, results of operations and financial condition.
Our strategy to commence international operations and other expansions expose us
to several risks that could have an adverse affect on our business, results of
operations and financial condition.
A part of our strategy is to expand our sales offices network throughout
the United States, Canada and international markets. There can be no assurance
that our products or services will become widely accepted for corporate clients,
advertising in the U.S., Canada or any international markets. In addition, we
expect that the success of any additional foreign operations we initiate in the
future will also be dependent upon local service providers and/or partners. If
revenues from international ventures are not adequate to cover the investments
in such activities, our business, results of operations and financial condition
could be materially and adversely affected. We may experience difficulty in
25
<PAGE>
managing international operations as a result of difficulty in locating
effective foreign service providers and/or partners, competition, technical
problems, local laws and regulations, distance and language and cultural
differences, and there can be no assurance that we or our international partners
will be able to successfully market and operate in foreign markets. We also
believe that, in light of substantial anticipated competition, it will be
necessary to aggressively market our products and services into the United
States and international markets in order to effectively obtain market share,
and there can be no assurance that we will be able to do so. There are certain
risks inherent in doing business on an international level, such as unexpected
changes in regulatory requirements, trade barriers, difficulties in staffing and
managing foreign operations, fluctuations in currency exchange rates, longer
payment cycles in general, problems in collecting accounts receivable,
difficulty in enforcing contracts, political and economic instability, seasonal
reductions in business activity in certain other parts of the world and
potentially adverse tax consequences. There can be no assurance that one or more
of such factors will not have a material adverse effect on our future
international operations and, consequently, on our business, results of
operations and financial condition.
Year 2000 issues may materially affect our business.
The Year 2000 issue is the potential for system and processing failures of
date-related data and the result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the Year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We may be affected by Year 2000 issues related to non-compliant information
technology systems or non-information technology systems operated by us or by
third parties. We have substantially completed assessment of our internal and
external (third party) information technology systems and non-information
technology systems. At this point in our assessment, we are not currently aware
of any Year 2000 problems relating to systems operated by us or by third parties
that would have a material effect on our business, results of operations or
financial condition, without taking into account our efforts to avoid such
problems. Based on our assessment to date, we do not anticipate that costs
associated with remediating our non-compliant information technology systems or
non-information technology systems will be material, although there can be no
assurance to such effect.
To the extent that our assessment is finalized without identifying any
additional material non-compliant information technology systems operated by us
or by third parties, the most reasonably likely worst case Year 2000 scenario is
the failure of one or more of our vendors of hardware or software or one or more
providers of non-information technology systems to us to properly identify any
Year 2000 compliance issues. We believe that the primary business risks, in the
event of such failure,would include, but not be limited to, lost advertising
revenues, increased operating costs, loss of customers or persons accessing our
Web site, or other business interruptions of a material nature, as well as
claims of mismanagement, misrepresentation, or breach of contract, any of which
could have a material adverse effect on our business, results of operations and
financial condition.
Any significant deterioration in the general economic conditions would have an
adverse effect on our business, result of operations or financial condition.
26
<PAGE>
Time spent on the Internet by individuals, purchases of new computers and
purchases of membership subscriptions to Internet sites are typically
discretionary for consumers and may be particularly affected by adverse trends
in the general economy. The success of our operations depends to a significant
extent upon a number of factors relating to discretionary consumer spending,
including economic conditions (and perceptions of such conditions by consumers)
affecting disposable consumer income such as employment, wages and salaries,
business conditions, interest rates, availability of credit and taxation, for
the economy as a whole and in regional and local markets where we operate. There
can be no assurance that consumer spending will not be adversely affected by
general economic conditions, which could negatively impact our results of
operations or financial condition. Any significant deterioration in general
economic conditions or increases in interest rates may inhibit consumers' use of
credit and cause a material adverse effect on our revenues and profitability. In
addition, our business strategy relies on advertising by and agreements with
other Internet companies. Any significant deterioration in general economic
conditions that adversely affected these companies could also have a material
adverse effect on our business, results of operations and financial condition.
If the trading price of our common stock remains volatile, the long-term trading
price may be adversely affected regardless of our performance and a class action
litigation may be instituted against us which would have an adverse effect on
our business, results of operations and financial condition.
The trading price of our common stock has been volatile and may continue to
be subject to wide fluctuations in response to quarterly variations in operating
results, announcements of technological innovations or new products and services
by us or our competitors, changes in financial estimates by securities analysts,
the operating and stock price performance of other companies that investors may
deem comparable to ours and other events or factors. In addition, the stock
market in general, and the market prices for Internet-related companies in
particular, have experienced extreme volatility that often has been unrelated to
the operating performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of our common stock,
regardless of our operating performance. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such company. Such
litigation, if instituted, whether or not successful, could result in
substantial costs and a diversion of management's attention and resources, which
would have a material adverse effect on our business, results of operations and
financial condition.
The value and transferability of our shares may be adversely impacted by the
limited Trading market for our shares, the Penny Stock Rules and future share
issuances.
There is a limited market for our common stock.
No assurance can be given that a market for our common stock will be
sustained or that the common stock will continue to be quoted on the NASD's Over
the Counter Bulletin Board.
The sale or transfer of our common stock by shareholders may be subject to the
so-called "Penny Stock Rules."
Under Rule 15g-9 of the Exchange Act, a broker or dealer may not sell a
"penny stock" (as defined in Rule 3a51-1) to or effect the purchase of a penny
stock by any person unless:
27
<PAGE>
(a) such sale or purchase is exempt from Rule 15g-9;
(b) prior to the transaction the broker or dealer has (1) approved the
person's account for transaction in penny stocks in accordance with
Rule 15g-9, and (2) received from the person a written agreement to
the transaction setting forth the identity and quantity of the penny
stock to be purchased; and
(c) the purchaser has been provided an appropriate disclosure statement as
to penny stock investment.
The Securities and Exchange Commission adopted regulations that generally
define a penny stock to be any equity security other than a security excluded
from such definition by Rule 3a51-1. Such exemptions include, but are not
limited to (1) an equity security issued by an issuer that has (i) net tangible
assets of at least US$2,000,000, if such issuer has been in continuous
operations for at least three years, (ii) net tangible assets of at least
US$5,000,000, if such issuer has been in continuous operation for less than
three years, or (iii) average revenue of at least US$6,000,000 for the preceding
three years; (2) except for purposes of Section 7(b) of the Exchange Act and
Rule 419, any security that has a price of US$5.00 or more; and (3) a security
that is authorized or approved for authorization upon notice of issuance for
quotation on the NASDAQ Stock Market, Inc.'s Automated Quotation System. It is
likely that shares of common stock, assuming a market were to develop therefore,
will be subject to the regulations on penny stocks; consequently, the market
liquidity for the common stock may be adversely affected by such regulations
limiting the ability of broker/dealers to sell our common stock and the ability
of shareholders to sell their securities in the secondary market.
It is our intention to issue more shares. Sales of substantial amounts of
common stock (including shares issuable upon the exercise of stock options), or
the perception that such sales could occur, could materially adversely affect
prevailing market prices for the common stock and the ability of Stockgroup.com
to raise equity capital in the future.
Moreover, our shares may only be sold or transferred by our shareholders in
those jurisdictions in which an exemption for such "secondary trading" exists or
in which the shares may have been registered.
We have not declared any dividends since inception, and have no present
intention of paying any cash dividends on our common stock in the foreseeable
future. The payment by us of dividends, if any, in the future, rests with the
discretion of our Board of Directors and will depend, among other things, upon
our earnings, our capital requirements and our financial condition, as well as
other relevant factors.
If issued, the shares reserved for future issuance, may cause the current
stockholders to suffer an equity dilution.
We have reserved, as of December 31, 1999, 2,000,000 shares of common stock
("Shares") for issuance upon the exercise of non-qualified stock options. Such
amount of Shares represents a potential equity dilution of 24.41% based upon the
number of outstanding Shares at December 31,1999.
Potential Future 144 Sales may impact the value of our stock
As of December 31, 1999, of the shares of our common stock authorized,
there were issued and outstanding 8,195,000 of which 5,000,000 are "restricted
shares" as that term is defined under the Securities Act, and in the future may
be sold in compliance with Rule 144 of the Securities Act, or pursuant to a
Registration Statement filed under the Act. Rule 144 provides, in essence, that
a person holding restricted securities for a period of 1 year may sell those
securities in unsolicited brokerage transactions or in transactions with a
market maker, in an amount equal to the greater of (i) 1% of our outstanding
common stock or (ii) the average weekly trading volume for the four week period
prior to the proposed date of sale, every 3 months. Additionally, Rule 144
requires that an issuer of securities make available adequate current public
information with respect to the issuer. Such information is deemed available if
the issuer satisfies the reporting requirements of Sections 13 or 15(d) of the
Exchange Act and of Rule15c2-11 thereunder. Rule 144 also permits, under certain
circumstances, that sale of shares by a person who is not an affiliate (and has
not been an affiliate for the 90 day period preceding the proposed sale) of the
company and who has satisfied a 2 year holding period without any quantity
limitation and whether or not there is adequate current public information
available.
28
<PAGE>
Item 7. Financial Statements and Supplementary Data
STOCKGROUP.COM HOLDINGS, INC.
(formerly I-Tech Holdings Group, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
AUDITORS' REPORT
To the Shareholders of
Stockgroup.com Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Stockgroup.com
Holdings, Inc. as at December 31, 1999 and the related consolidated statements
of operations, shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of Stockgroup.com Holdings, Inc. for each
of the two years in the period ended December 31, 1998, were audited by other
auditors whose report dated February 28, 1999, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Stockgroup.com
Holdings, Inc. as at December 31, 1999 and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
Vancouver, Canada, /s/ERNST & YOUNG LLP
January 28, 2000 Chartered Accountants
29
<PAGE>
Stockgroup.com Holdings, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at December 31 (expressed in US dollars)
1999 1998
$ $
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS [notes 7 and 8]
Current
Cash and cash equivalents [note 3] 1,658,822 --
Accounts receivable (net of allowances for doubtful
accounts of $20,786 in 1999 and $60,139 in 1998) [note 4] 855,170 98,818
Due from shareholder [note 5] 31,973 --
Prepaid expenses 887,223 39,005
- ---------------------------------------------------------------------------------------------------------
Total current assets 3,433,188 137,823
- ---------------------------------------------------------------------------------------------------------
Due from shareholder [note 5] -- 18,033
Property and equipment, net [note 6] 440,368 57,720
- ---------------------------------------------------------------------------------------------------------
3,873,556 213,576
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current
Bank indebtedness [note 7] 21,004 101,077
Accounts payable 732,392 51,712
Accrued payroll liabilities 126,566 15,837
Deferred revenue 230,545 41,702
Current portion of long-term debt [note 8] -- 8,260
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 1,110,507 218,588
- ---------------------------------------------------------------------------------------------------------
Due to shareholder -- 12,069
- ---------------------------------------------------------------------------------------------------------
Total liabilities 1,110,507 230,657
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies [note 9]
Shareholders' equity (deficiency) [note 10]
Common stock, no par value 6,761,483 97
Authorized shares - 75,000,000
Issued and outstanding shares - 8,195,000 in 1999
and 3,660,000 in 1998
Preferred stock, non-voting, no par value -- --
Authorized shares - 5,000,000
Issued and outstanding - nil in 1999 and 1998
Additional paid-in capital 261,277 --
Accumulated deficit (4,259,711) (17,178)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficiency) 2,763,049 (17,081)
- ---------------------------------------------------------------------------------------------------------
3,873,556 213,576
=========================================================================================================
</TABLE>
See accompanying notes
30
<PAGE>
Stockgroup.com Holdings, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31
<TABLE>
<CAPTION>
(expressed in US dollars)
1999 1998 1997
$ $ $
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Revenues 1,920,052 857,591 968,091
Cost of revenues 1,208,033 172,343 137,447
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 712,019 685,248 830,644
- -------------------------------------------------------------------------------------------------------------------------
EXPENSES
Sales and marketing 2,454,473 265,840 238,964
Product development 415,108 117,453 77,458
General and administrative 2,209,192 443,201 419,993
- -------------------------------------------------------------------------------------------------------------------------
5,078,773 826,494 736,415
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (4,366,754) (141,246) 94,229
Interest income 123,260 -- --
Other income (expense) 961 (42,845) 2,813
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,242,533) (184,091) 97,042
Income tax provision (recovery) [note 11] -- (34,802) 22,829
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) (4,242,533) (149,289) 74,213
=========================================================================================================================
Basic and diluted earnings (loss)
per share [note 10] (0.60) (0.04) 0.02
=========================================================================================================================
</TABLE>
See accompanying notes
31
<PAGE>
Stockgroup.com Holdings, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended December 31 (expressed in US dollars)
Retained Total
Common stock Additional earnings shareholders'
amount paid-in capital (accumulated equity
Common stock deficit)
# of shares $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,660,000 97 -- 57,898 57,995
Net income -- -- -- 74,213 74,213
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,660,000 97 -- 132,111 132,208
Net loss -- -- -- (149,289) (149,289)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 3,660,000 97 -- (17,178) (17,081)
Issuance of common stock pursuant to private placement [note 10] 240,000 402,451 -- -- 402,451
Deemed issuance of common stock pursuant to
reverse acquisition [notes 1 and 10] 3,120,000 672 -- -- 672
Issuance of common stock pursuant to a consulting
agreement [note 10] 75,000 450,000 -- -- 450,000
Issuance of common stock pursuant to private placements,
net of share issue costs of $167,737 [note 10] 900,000 5,232,263 -- -- 5,232,263
Issuance of common stock pursuant to an advertising
agreement [note 10] 200,000 676,000 -- -- 676,000
Compensation related to grant of stock options [note 10] -- -- 261,277 -- 261,277
Net loss -- -- -- (4,242,533) (4,242,533)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 8,195,000 6,761,483 261,277 (4,259,711) 2,763,049
===================================================================================================================================
</TABLE>
See accompanying notes
32
<PAGE>
Stockgroup.com Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (expressed in US dollars)
1999 1998 1997
$ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) (4,242,533) (149,289) 74,213
Add (deduct) non-cash items
Depreciation and amortization 85,601 19,459 13,619
Provision for doubtful accounts (39,352) 44,715 (599)
Consulting services received for common stock 450,000 -- --
Advertising services received for common stock 676,000 -- --
Compensation expense on stock options 261,277 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(2,809,007) (85,115) 87,233
Net changes in non-cash working capital
Accounts receivable (717,000) (19,539) (83,388)
Due from shareholder (13,940) -- --
Prepaid expenses (848,218) (2,312) (26,237)
Accounts payable 678,080 43,144 7,865
Accrued liabilities 110,729 (10,524) 7,300
Income taxes payable -- (199) (20,821)
Deferred revenue 188,843 (39,993) 52,637
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (3,410,513) (114,540) 24,589
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 5,634,714 -- --
(Repayments) proceeds on bank indebtedness (80,073) 75,825 --
(Repayments) proceeds on long-term debt (8,260) (17,105) 50,618
(Repayments to) advances from shareholders (12,069) 6,010 4,022
Due to (from) related company -- 39,186 (39,186)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 5,534,312 103,916 15,454
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (468,249) (21,092) (41,002)
Net cash acquired in reverse acquisition 3,272 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities (464,977) (21,092) (41,002)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,658,822 (31,716) (959)
Cash and cash equivalents, beginning of year -- 31,716 32,675
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 1,658,822 -- 31,716
===================================================================================================================================
Supplemental disclosure of cash flow information
Interest paid 10,500 4,100 1,500
Income taxes paid -- -- 29,800
====================================================================================================================================
</TABLE>
See accompanying notes
33
<PAGE>
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
[a] Nature of business and continuing entity
Stockgroup.com Holdings, Inc. ("Stockgroup.com") is a leading provider of
Internet financial news and information services focusing on the North American
small-cap and micro-cap markets. Stockgroup.com was incorporated under the laws
of Colorado on December 6, 1994 under the former name of I-Tech Holdings Group,
Inc. ("I-Tech"), a United States non-operating company registered on the NASD
OTC Bulletin Board.
These consolidated financial statements are issued under the name of
Stockgroup.com but are a continuation of the financial statements of Stock
Research Group Inc. (`SRG"), a British Columbia corporation which was
incorporated on May 4, 1995. On March 11, 1999, pursuant to a reverse
acquisition, SRG acquired the net assets of I-Tech.
[b] Reverse acquisition of Stockgroup.com
Pursuant to a share exchange agreement dated March 11, 1999, the shareholders of
SRG sold their 100% interest in SRG to Stockgroup.com in consideration for
3,900,000 shares of Stockgroup.com which represented a controlling interest of
approximately 56%. This transaction is considered a recapitalization of SRG and
an acquisition of Stockgroup.com (the accounting subsidiary/legal parent) by SRG
(the accounting parent/legal subsidiary). Accordingly, the transaction has been
accounted for as a purchase of the net assets of Stockgroup.com by SRG in these
consolidated financial statements.
In these consolidated financial statements, SRG's assets and liabilities are
included at their historical carrying amounts. Operating results to March 11,
1999 are those of SRG. For purposes of the acquisition, the fair value of the
net monetary assets of Stockgroup.com of $672 is ascribed to the 3,120,000
previously outstanding common shares of Stockgroup.com deemed to be issued in
the acquisition as follows:
$
- ----------------------------------------------------------------------------
Net assets acquired
Cash 3,272
Accounts payable 2,600
- ----------------------------------------------------------------------------
672
Deemed consideration
3,120,000 shares of Stockgroup.com 672
============================================================================
34
<PAGE>
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (cont'd.)
[c] Basis of presentation and comparative amounts
These consolidated financial statements are presented in U.S. dollars and are
prepared in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP").
The comparative figures presented in the consolidated financial statements are
those of SRG, originally reported on by other auditors in Canadian GAAP and
Canadian dollars. The comparative figures have been retroactively restated to
conform to the U.S. GAAP presentation adopted in the current year. The
comparative figures have been recast into U.S. dollars in accordance with FASB
Statement No. 52, Foreign Currency Translation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Stockgroup.com
Holdings, Inc. (the "Company") and its wholly owned subsidiaries, Stockgroup.com
Media Inc. (British Columbia, Canada) (formerly Stock Research Group Inc.) and
Stockgroup.com, Ltd. (Nevada, United States). All significant intercompany
accounts and transactions have been eliminated.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Foreign exchange
The reporting currency and the functional currency of the Company during the
fiscal year ended December 31, 1999 is the U.S. dollar. The accounts of the
Company's Canadian subsidiary are translated into U.S. dollars such that
monetary assets and liabilities are translated at exchange rates in effect at
the balance sheet date and non-monetary items are translated at exchange rates
prevailing at the transaction date. Operating revenues and expenses are
translated at average exchange rates prevailing during the year. Any
corresponding foreign exchange gains and losses are included in income.
35
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Foreign currency transactions are translated into U.S. dollars at the rate of
exchange in effect at the date of the transaction. Foreign currency balances of
monetary assets and liabilities are translated using the rate of exchange in
effect at the balance sheet date. Foreign exchange gains and losses on
transactions during the year and on the year end translation of the accounts are
included in income.
Cash equivalents
Cash equivalents consist of short-term deposits with original maturities of
ninety days or less and are recorded at amortized cost.
Property and equipment
Property and equipment are carried at cost less depreciation and amortization.
Depreciation and amortization are provided at the following annual rates with
one-half of the depreciation and amortization provided in the year of
acquisition:
Computer equipment 30% declining balance
Computer software 100% straight line
Office furniture and equipment 20% declining balance
Leasehold improvements 20% straight line
Income taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates. A valuation allowance is provided against deferred tax assets for which
it is more likely than not that the asset will not be realized.
Fair value of financial instruments
The Company's financial instruments consist principally of cash and cash
equivalents, accounts receivable, bank indebtedness, accounts payable and
long-term debt. The carrying values of all financial instruments approximate
fair value due to their short-term maturities.
36
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Revenue recognition
The Company's revenue is derived from various services, resulting in the
following types of revenue recognition:
> Website design and development is recognized upon customer acceptance.
> Website maintenance and marketing is recognized on a pro-rata basis over
the term of the contract.
> Advertising and media services is recognized on a pro-rata basis over the
term of the contract.
Deferred revenue consists of deposits paid in advance of services rendered.
Advertising costs
Advertising costs are expensed in the period incurred and are included as a
component of sales and marketing expenses. Advertising expense for the years
ended December 31, 1999, 1998 and 1997 was $1,670,000, $23,000 and $80,000
respectively.
Product development expenditures
Product development expenditures, which are primarily related to website
development, are expensed in the period incurred.
Stock-based compensation
The Company accounts for fixed stock-based awards to employees in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and has adopted the disclosure-only
alternative of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Accordingly, compensation expense for stock options issued to employees is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
37
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Earnings per share
Basic earnings (loss) per share is computed based on the weighted average number
of common shares outstanding during each year. Diluted earnings (loss) per share
is computed based on the weighted average number of common shares outstanding
during each year, plus the dilutive potential of options outstanding during the
year, in accordance with FASB Statement No. 128, Earnings Per Share.
Comprehensive income
The Company follows FASB Statement No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and displaying comprehensive income
and its components in the consolidated financial statements. For the years ended
December 31, 1999, 1998 and 1997, the Company did not have any components of
comprehensive income.
Recent accounting pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes new standards for
recording derivatives in interim and annual financial statements. This statement
requires recording all derivative instruments as assets or liabilities, measured
at fair value. Statement No. 133, as amended by FASB Statement No. 137, is
effective for fiscal years beginning after June 15, 2000. Management has not
determined the impact, if any, that the adoption of the new statement will have
on the consolidated results of operations or financial position of the Company.
3. CASH AND CASH EQUIVALENTS
1999 1998
$ $
- ------------------------------------------------------------------------
Cash 13,822 --
Short-term deposits 1,645,000 --
- ------------------------------------------------------------------------
1,658,822 --
========================================================================
38
<PAGE>
3. CASH AND CASH EQUIVALENTS (cont'd.)
The short-term deposits are issued by a major Canadian chartered bank. The
effective interest rates on the short-term deposits existing at year-end range
from 5.21% to 5.48%. Interest income earned on short-term deposits for the years
ended December 31, 1999, 1998 and 1997 was $123,260, $nil and $nil respectively.
4. ACCOUNTS RECEIVABLE
Included in accounts receivable is an amount of $575,000 due from one customer
representing 67% of the total balance. Management's best estimate as at December
31, 1999 is that the realization of this amount is probable. Because of the
uncertainties inherent in this estimation process, management's estimate of
credit loss on this account may change in the near term. No other customers
represented greater than 10% of the total balance in any other year.
5. DUE FROM SHAREHOLDER
Amounts due from shareholder consist of $12,850 [1998 - $nil] in short-term
advances and a $19,123 [1998 - $18,033] non-interest bearing loan. The loans and
advances are expected to be repaid in the next fiscal year.
39
<PAGE>
6. PROPERTY AND EQUIPMENT
Accumulated Net book
Cost amortization value
$ $ $
- --------------------------------------------------------------------------------
1999
Computer equipment 360,552 85,571 274,981
Computer software 24,074 12,037 12,037
Office furniture and equipment 146,595 21,608 124,987
Leasehold improvements 31,596 3,233 28,363
- --------------------------------------------------------------------------------
562,817 122,449 440,368
================================================================================
1998
Computer equipment 74,100 30,386 43,714
Computer software -- -- --
Office furniture and equipment 20,097 6,425 13,672
Leasehold improvements 371 37 334
- --------------------------------------------------------------------------------
94,568 36,848 57,720
================================================================================
7. BANK INDEBTEDNESS
1999 1998
$ $
- --------------------------------------------------------------------------------
Operating line of credit -- 75,825
Demand loan 21,004 25,252
- --------------------------------------------------------------------------------
21,004 101,077
================================================================================
The Company has an approved operating line of credit of $500,000 bearing
interest at prime plus 1/4%. Interest expense for the years ended December 31,
1999, 1998 and 1997 was $8,400, $1,300 and $nil respectively.
The demand loan bears interest at prime plus 1%, is repayable in blended monthly
principal and interest payments of $635, and is due December 31, 2002. Interest
expense for the years ended December 31, 1999, 1998 and 1997 was $1,800, $1,800
and $1,100 respectively.
Bank indebtedness is collateralized by a general security agreement on all
assets of the Company. The weighted average effective prime rate for 1999 was
6.44% [1998 - 6.60%].
40
<PAGE>
8. LONG-TERM DEBT
Long-term debt consisted of a special term loan bearing interest at prime plus
1%, repayable in blended monthly principal and interest payments of $800, due
December, 1999. The loan was collateralized by a general security agreement on
all assets of the Company. Interest expense for the years ended December 31,
1999, 1998 and 1997 was $300, $1,000 and $400 respectively.
9. COMMITMENTS AND CONTINGENCIES
[a] The Company has operating lease commitments with respect to office premises
with minimum annual payments as follows:
$
----------------------------------------------------------------------
2000 350,000
2001 339,000
2002 278,000
2003 256,000
2004 and thereafter 655,000
----------------------------------------------------------------------
1,878,000
======================================================================
Net rental expense included in general and administrative expenses for the
years ended December 31, 1999, 1998 and 1997 was $204,000, $72,000 and $48,000
respectively.
[b] The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties will be fully resolved.
41
<PAGE>
10. SHAREHOLDERS' EQUITY
Stock split
During 1998, SRG effected a split of its common stock on the basis of 18,300
common shares for each common share outstanding. This increased the outstanding
share capital to 3,660,000 common shares which has been restated as the opening
common stock as if the split had happened at the beginning of the periods
presented.
Issuance of common stock pursuant to private placement
During January and February of 1999, the Company completed a private placement
to certain institutions and individuals for the issuance of 240,000 common
shares at $1.68 per share for net cash proceeds of $402,451.
Issuance of common stock pursuant to reverse acquisition
By a share exchange agreement dated March 11, 1999, the Company entered into a
series of transactions whereby 3,900,000 issued and outstanding shares of SRG
were exchanged for 3,900,000 shares of 579818 B.C. Ltd. a Canadian subsidiary of
Stockgroup.com. The exchanged shares are convertible into shares of
Stockgroup.com through a trustee, Stocktrans Inc., who holds the exchangeable
shares of the parent in trust for the Company pursuant to a voting and exchange
agreement giving the SRG shareholders effective control over Stockgroup.com. For
purposes of the reverse acquisition, the fair value of the net assets of
Stockgroup.com of $672 is ascribed to the 3,120,000 previously outstanding
common shares of Stockgroup.com deemed to be issued in the acquisition.
Issuance of common stock for consulting services
On March 15, 1999, the Company issued 75,000 shares in exchange for consulting
services provided in respect of the reverse acquisition. The transaction was
recorded at a fair value of $450,000 based on an average closing price of the
stock in the first week of trading subsequent to the reverse acquisition.
Issuance of common stock pursuant to private placement
During the spring and summer of 1999, the Company completed a private placement
to certain institutions and individuals for the issuance of 900,000 common
shares at $6.00 per share for net cash proceeds of $5,232,263.
42
<PAGE>
10. SHAREHOLDERS' EQUITY (cont'd.)
Issuance of common stock for advertising services
On September 17, 1999 the Company completed a private placement with a media
company for the issuance of 200,000 common shares in exchange for advertising
services. The transaction was recorded at a fair value of $676,000 based on the
closing price of the stock on the day of the agreement.
Earnings (loss) per share
The following table sets forth the computation of earnings (loss) per share:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) for the year (4,242,533) (149,289) 74,213
Weighted average number of common shares
used in computation 7,055,151 3,660,000 3,660,000
Basic and diluted earnings (loss) per share (0.60) (0.04) 0.02
============================================================================================
</TABLE>
For the year ended December 31, 1999, all of the Company's common shares
issuable upon the exercise of stock options were excluded from the determination
of diluted earnings (loss) per share as their effect would be anti-dilutive.
Prior to the reverse acquisition described in note 1, the deemed number of
common shares outstanding is equal to the common shares issued to the
shareholders of SRG adjusted to take into account the effect of the change in
the number of issued shares of SRG in the earlier periods.
1999 Incentive Stock Option Plan
The Company's 1999 Incentive Stock Option Plan ("1999 Plan"), which became
effective March 11, 1999 (the "Plan Effective Date"), is available to directors,
employees and consultants, and is intended to serve as the successor equity
incentive program to the 1999 Incentive Stock Option Plan of Stock Research
Group, Inc. ("1999 SRG Plan").
Under the 1999 SRG Plan, 1,441,300 options, representing 1,441,300 common shares
were granted in February, 1999. In March 1999, outstanding options under the
1999 SRG Plan were incorporated into the 1999 Plan, and no further grants may be
made under the 1999 SRG Plan. The incorporated options will continue to be
governed by their existing terms, unless the Plan Administrator elects to extend
one or more features of the 1999 Plan to those Options.
43
<PAGE>
10. SHAREHOLDERS' EQUITY (cont'd.)
Under the 1999 Plan, a total of 2,000,000 common shares have been authorized for
issuance. Such share reserve consists of (i) the number of shares issued under
the 1999 SRG Plan incorporated into the 1999 Plan on the Plan Effective Date;
and (ii) an additional increase of 558,700 shares of common stock.
Options issued under the 1999 Plan generally begin vesting one year after grant,
at which time vesting occurs in equal installments of one-fifth of the grant
total per year for a period of five years. Options immediately become
exercisable once vested. Any options which do not vest as the result of a
grantee leaving the Company are cancelled and the shares underlying them are
returned to the reserve. The Board has the authority to vary the vesting
provisions of grants at its discretion.
Activity under the 1999 Plan is set forth below:
<TABLE>
<CAPTION>
Options outstanding
---------------------------------------------------------
Shares Weighted
available for Number of Price per average
grant shares share exercise price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 -- -- -- --
Additional shares reserved 2,000,000 -- -- --
Options granted (1,827,800) (1,827,800) 0.01 - 5.625 $ 1.855
Options canceled 44,500 44,500 2.50 - 5.625 $ 3.921
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 216,700 1,783,300 0.01 - 4.437 $ 1.803
========================================================================================================================
</TABLE>
The weighted average remaining contractual life and weighted average exercise
price of options outstanding and of options exercisable as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Number of remaining average average
Shares contractual exercise Shares exercise
Outstanding life (years) price exercisable price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Range of exercise prices
$0.01 - 0.94 745,800 4.58 $0.809 -- --
$1.50 - 1.75 128,500 5.96 $1.609 -- --
$2.25 - 2.937 784,000 5.26 $2.506 5,000 2.500
$3.00 - 4.437 125,000 5.59 $3.530 -- --
=======================================================================================================================
</TABLE>
44
<PAGE>
10. SHAREHOLDERS' EQUITY (cont'd.)
The Company recorded $261,277 in compensation expense in the year ended December
31, 1999 for the difference between the exercise price of certain of the
Company's options granted under the 1999 SRG Plan and the fair market value of
the underlying common stock on the date of grant. This amount has been recorded
as additional paid-in capital.
A total of 107,600 of the outstanding options are performance based and vest
equally in 2000 and 2001 if the Company achieves predetermined annual revenues.
These options are classified as variable, whereby, compensation expense is
measured as the excess, if any, of the quoted market price of the Company's
stock at the measurement date over the amount the employee must pay to acquire
the stock. With variable options, the measurement date is established when it
appears probable that the Company will meet the performance targets. Because of
the uncertainty of achieving the annual revenue targets, no compensation expense
has been recorded.
Pro forma disclosure of the effect of Stock Based Compensation Plan
Pro forma information regarding results of operations and net income (loss) per
share is required by FASB Statement No. 123 for stock-based awards to employees
as if the Company had accounted for such awards using a valuation method
permitted under Statement No. 123. The value of the Company's stock-based awards
granted to employees in 1999 have been valued using the Black-Scholes option
pricing model. Among other things, the Black-Scholes model considers the
expected volatility of the Company's stock price, determined in accordance with
Statement No. 123, in arriving at an option valuation.
The fair value of the Company's stock-based awards granted to employees in 1999
was estimated assuming no expected dividends, a weighted average expected life
of 4.55 years, a risk free interest rate of 5.06% and an expected volatility of
151%. The weighted average fair value of options granted during 1999 was $1.701.
For pro forma purposes, the estimated value of the Company's stock-based awards
to employees is amortized over the vesting period of the underlying options. The
results of applying Statement No. 123 to the Company's stock-based awards to
employees would approximate the following:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported (4,242,533) (149,289) 74,213
Pro forma (5,091,330) (149,289) 74,213
Basic and diluted earnings (loss) per share
As reported (0.60) (0.04) 0.02
Pro forma (0.72) (0.04) 0.02
==========================================================================================================
</TABLE>
45
<PAGE>
11. INCOME TAXES
The Company is subject to United States federal and state income taxes at an
approximate rate of 40%. The Company's Canadian subsidiary is subject to
Canadian federal and provincial taxes of approximately 45%. For 1998 and prior
years, the Company qualified as a Canadian Controlled Private Corporation and
was subject to a lower tax rate of 22%. The Company is no longer eligible for
this low tax rate.
The reconciliation of the provision (recovery) for income taxes at the United
States federal statutory rate compared to the Company's income tax expense is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense (recovery) at U.S. statutory rates (1,698,000) (74,000) 39,000
Lower (higher) effective income taxes of
Canadian subsidiary (170,000) 33,000 (18,000)
Net operating losses not recognized for
accounting purposes 1,856,000 -- --
Non-deductible expenses 12,000 6,198 1,829
- --------------------------------------------------------------------------------------
Current income tax expense (recovery) -- (34,802) 22,829
======================================================================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
- --------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards 1,856,000 --
Valuation allowance (1,856,000) --
- --------------------------------------------------------------------------------------
Net deferred tax asset -- --
======================================================================================
The tax loss carryforwards expire as follows:
$
- --------------------------------------------------------------------------------------
Canada
2006 3,369,000
U.S.
2019 845,000
- --------------------------------------------------------------------------------------
4,214,000
======================================================================================
</TABLE>
46
<PAGE>
12. SEGMENTED INFORMATION
The Company operates in one industry segment and derives its revenue from the
following services:
1999 1998 1997
$ $ $
- --------------------------------------------------------------------------------
Website design and development 343,928 214,085 255,991
Website maintenance and marketing 347,243 394,350 364,808
Advertising and media services 1,228,881 249,157 347,292
- --------------------------------------------------------------------------------
1,920,052 857,511 968,091
================================================================================
During 1999, the Company had one customer whose revenue represented 35% of total
revenue. No other customers represented greater than 10% of the revenue in any
other year.
Predominantly all of the Company's revenues are generated in Canada based on the
location of customers. The majority of the Company's property and equipment are
located in Canada.
13. SUBSEQUENT EVENTS
On January 18, 2000, the Company entered into a contract in Singapore which
expands the Company's operation into Asia and entails the development of an
enterprise financial site for Asia Exchange Information Service Pte Ltd.
(AsiaXIS). Under the terms of the agreement, the Company will receive
approximately US$1,500,000 for development and upgrade of the initial site in
Singapore. The agreement also provides for AsiaXIS to develop 13 additional
financial enterprise sites throughout Asia, Australia and New Zealand. The
Company will be paid a licensing fee for its technology, a development fee for
building and customizing each additional financial enterprise site, ongoing
maintenance and support fees and royalties for each of the markets that AsiaXIS
enters. The Company has also secured access to the content that will be created
by AsiaXIS in its international news development. As part of the contract, the
Company has agreed to acquire an equity position of 19.4% in AsiaXIS for
US$500,000.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On July 7, 1999, the Board of Directors of Stockgroup.com approved the
retention of the firm of Ernst & Young LLP as principal independent accountant
to perform the examination of its financial statements as of December 31, 1999,
and for the year then ended, effective with the resignation of Dale Matheson,
Carr-Hilton, the former independent accountant, which occurred on July 8, 1999.
Dale Matheson, Carr-Hilton had been principal independent accountant for Stock
Research Group, Inc., which was acquired by us on March 11, 1999. Dale Matheson,
Carr-Hilton had performed audit services for the three most recent fiscal years
ended December 31, 1998, 1997 and 1996, and had expressed unqualified opinions
on such financial statements. In connection with those audits and through July
8, 1999, there were no disagreements between us and Dale Matheson, Carr-Hilton
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of Dale Matheson, Carr-Hilton would have caused them to make
reference in their reports to the subject matter of the disagreements.
We requested Dale Matheson, Carr-Hilton to furnish us with a letter
addressed to the Securities and Exchange Commission stating whether such firm
agrees with the statements made above and, if not, stating the respects in which
they do not agree. Such letter is attached as an exhibit in the Form 8K filing
made by us regarding this matter on July 7, 1999.
47
<PAGE>
There were no disagreements with accountants on accounting and financial
disclosure matters.
Part III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth, as of December 31, 1999, the name, age and
position of the Company's directors, executive officers and other significant
employees.
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Marcus A. New............ 28 Chairman of the Board; Chief Executive Officer
David Caddey............. 49 Director
Louis deBoer II.......... 47 Director
Leslie Landes............ 54 Director, President and Chief Operating Officer
Craig Faulkner........... 29 Director, Chief Technology Officer
David Andelman........... 53 Editor in Chief
John H. Dawe, CFA........ 40 Vice President Finance, Secretary & Treasurer
Tim Bush ................ 44 Vice President Sales
</TABLE>
The backgrounds of our Directors, Officers and significant employees are as
follows:
Marcus New, Founder, Chairman of the Board and CEO
Marcus New is the founder, Chairman and Chief Executive Officer of Stockgroup.
Mr. New formed the vision for Stockgroup in 1995 and developed the company from
an idea to the dominant single source for small cap information on the Internet.
Over the last five years he has grown the company by re-investing profits earned
and has successfully built a substantial corporate client roster based on
development of his ideas for Internet marketing. Similar to other successful
Internet pioneers, Mr. New created Stockgroup based on identification of the
ways in which the Internet could be used to provide services which were not
otherwise available.
Over the last two years Mr. New has aggressively marketed Stockgroup across
North America and in Europe and has attracted a high profile senior management
team to implement his vision for Stockgroup.
David N. Caddey, B.Sc., M.Sc., Director
Mr. Caddey has been a Director of the Company since inception and has over 26
years experience in the business and program management field. He currently
serves as an Executive Vice President of MacDonald Dettwiler and Associates.
MacDonald Dettwiller is a subsidiary of Orbital Sciences Corp. (NYSE: ORB), a
space technology and satellite services company that designs, manufactures,
operates and markets a broad range of space products and services. Mr. Caddey is
also the General Manager of the company's Space Missions Group where he is
responsible for managing the construction of the Radarsat-2 spacecraft and
associated ground infrastructure program, valued at over $350 million, as well
as the construction of the Space Station Mobile Servicing System.
From 1994 to 1998, Mr. Caddey worked as a Vice President and General Manager of
the Space and Defense Systems Business Area. In this capacity, he was
responsible for marketing and sales, project management, technical management
and post delivery support. From 1990 to 1994 he served as Vice President and
General Manager of Geo-information Systems where he managed the development of
Radarsat I Ground Segment
48
<PAGE>
Program.
Louis deBoer II, Director
Mr. deBoer has over 20 years experience in the strategic development of national
media programming, advertising sales and content development. Mr. deBoer spent
17 years at HBO culminating in the positions of Executive Vice President of HBO
Inc. and President of its International division, where he played an
instrumental role in helping negotiate and broker deals that significantly
increased the company's presence in its International markets. Currently Mr.
deBoer serves as President at MediaFutures, Inc. with clients in the Internet
and cable broadcasting industries. He provides strategic counsel for such
companies as Hearst New Media, Cox Enterprises, Rainbow Programming as well as
several emerging growth companies.
Prior to forming MediaFutures, he was Chief Executive Officer at New Century
Network, an online company formed by a consortium of the nine leading US
newspaper organizations, including, Advance Communications, Cox Communications,
The Chicago Tribune, Hearst, Gannett, Knight-Ridder, Inc., The New York Times,
The Washington Post and Times-Mirror. At New Century Networks, Mr. deBoer
managed the team of experts that aggregated content and marketed and sold space
to over 150 newspaper Web sites.
Leslie A. Landes, Director, President and Chief Operating Officer
Leslie Landes, President and Chief Operating Officer, has been with the Company
since August 1998 and has been an advisor to the Company since inception. Mr.
Landes previously founded Landes Enterprises Limited, a privately held interim
turnaround management consulting company that advised and counseled clients in
several industries including telecommunications and technology on issues ranging
from mergers and acquisitions to international marketing campaigns.
Prior to forming Landes Enterprises in 1992 Mr. Landes spent 13 years with the
Jim Pattison Group, Canada's third largest privately held company with sales in
excess of $3 Billion and over 13,000 employees. He served as President of The
Jim Pattison Sign Group, Outdoor Group, and Communications Group, which included
radio and television stations and paid subscription print publications.
Ultimately he was appointed President of Jim Pattison Industries Ltd. and Senior
Vice President of the parent Jim Pattison Group, responsible for the groups
acquisitions and divestitures, and with involvement in the management of the
groups 50 diversified companies. He successfully initiated and completed the
acquisition of strategically important companies in a number of diverse
industries in which the Group was active. Under his direction the sign group was
built into the largest electric sign company in the world.
Craig Faulkner, Director, Chief Technology Officer
Mr. Faulkner is one of the founding partners of Stockgroup.com.
Mr. Faulkner's skill and knowledge of database-to-web solutions brings a history
of innovative and dynamic solutions. Early in his career, Mr. Faulkner led
Stockgroup.com to co-develop one of the first portfolio tracking tools,
LivequoteSRG, based 100 percent on the use of Java.
Mr. Faulkner has managed both sales and production professionals. As General
Manager for TASP International, he was responsible for the recruiting, training
and direction of more than 20 sales associates. Currently, Mr. Faulkner manages
the programming and information management team at Stockgroup.com, initiates
solutions with data and hardware vendors, while maintaining a senior management
role and board membership.
Under Mr. Faulkner's direction, Stockgroup.com has implemented a sophisticated
blend of both Sun Solaris and Microsoft NT solutions. Stockgroup.com's main site
is hosted on IBM Netfinity servers, while client sites are hosted on Sun
Enterprise machines.
49
<PAGE>
David Andelman, Editor in Chief
David A. Andelman is a leading international journalist and communications
professional who has spent more than 30 years in print and broadcast media, most
recently as news editor of Bloomberg News.
He began his career as a domestic and foreign correspondent and bureau
chief for The New York Times in the U.S., Southeast Asia and Eastern Europe. For
seven years he served as European correspondent for CBS News, based in Paris and
as Washington correspondent for CNBC before joining Bloomberg in 1995. He is the
author of two books, and has written articles for such magazines as Harper's,
The Atlantic, The New Republic and Readers Digest. He is a graduate of Harvard
College and the Columbia University Graduate School of Journalism, and is a
member of the Council on Foreign Relations.
On December 15, 1999 Stockgroup.com appointed Mr. Andelman as Editor in
Chief. Mr. Andelman has the responsibility of building a world class news
service devoted to the small cap sector. Mr. Andelman is based in
Stockgroup.com's New York office.
John H. Dawe, CFA, Vice President Finance, Secretary & Treasurer
John Dawe joined Stockgroup.com in 1998 as Vice President Finance,
Secretary and Treasurer. Mr. Dawe holds the Chartered Financial Analyst
designation and brings over 16 years experience in the investment brokerage and
financial services community. During his career he has held senior marketing,
treasury and business development positions and established a successful
consulting practice specializing in strategic analysis and marketing services
for the financial services industry. His career has focused on both corporate
finance and financial marketing. He has held senior positions with Pemberton
Securities (now part of RBC Dominion Securities), The Pacific Corporate Trust
Company and served as Treasurer of Canada's fourth largest Credit Union, Pacific
Coast Savings. In this position he managed $1.1 billion and generated the sale
of over $100 million of mortgaged-backed securities and institutional mortgage
asset sale.
Tim Bush, Vice President Sales
Tim Bush has been managing professional sales teams in major corporations
for the past 14 years. He has a proven track record of rapidly growing
sustainable business at high customer service levels. He began his career by
progressing quickly in sales and branch sales management at ComputerLand in
1983. At the end of his 8 years he had regional responsibility for major and
corporate account sales. Previous to joining Stockgroup.com, Mr. Bush was a
Regional Sales Director for one of the world's largest computer products and
services distributors, Ingram Micro Inc. Prior to that he was Regional Sales
Director for computer distributor Merisel . As a Regional Sales Director for the
past 8 years, his team's have averaged over 30% sales growth with sales in
excess of $400 MM and have consistently enjoyed a dominant market share position
and high customer retention and satisfaction.
Item 10. Executive Compensation
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
50
<PAGE>
Item 12. Certain Relationships and Related Transactions
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with Rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
Part IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT AND FILING REFERENCE
- -------------- -------------------------------------------
2.1 Share Exchange and Share Purchase Agreement dated March 11,
1999 effecting a change in control of Registrant -
incorporated by reference to Form 8K filed March 19, 1999,
Form 8K/A filed March 24, 1999 and Form 8K/A filed May 10,
1999
3.1 Articles of incorporation & Bylaws - incorporated by
reference to Form 10SB12G filed January 29, 1998
4.1 1999 Stock Incentive Plan - incorporated by reference to
Form S-8 filed November 16, 1999
9.1 Exchange and Voting Agreement incorporated by reference to
Form 8K filed March 19, 1999
11.1 Statement re: computation of per share earnings - filed
herewith in Note 10 to financial statements
23.1 Consent of experts or counsel - filed herewith below as Item
23.1
27.1 Financial data schedule - filed herewith below
No reports on Form 8-K have been filed within the last quarter
51
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Stockgroup.com Holdings, Inc.
(Registrant)
Dated: March 29, 2000
By:
/s/ Marcus A. New
- ------------------------------------------------
Marcus A. New, Chairman, Chief Executive Officer
/s/ David Caddey
- ------------------------------------------------
David Caddey, Director
/s/ Louis deBoer II
- ------------------------------------------------
Louis deBoer II, Director
/s/ Leslie Landes
- ------------------------------------------------
Leslie Landes, Director, President
& Chief Operating Officer
/s/ Craig Faulkner
- ------------------------------------------------
Craig Faulkner, Director, Chief Technology Officer
/s/ John H. Dawe, CFA
- ------------------------------------------------
John H. Dawe, CFA, Vice President Finance,
Secretary and Treasurer
52
<PAGE>
Item 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Annual Report on Form 10-KSB of Stockgroup.com
Holdings, Inc. of our report dated January 28, 2000 with respect to the
Company's consolidated financial statements for the year ended December 31,
1999.
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-91043) pertaining to the 1999 Incentive Stock Option Plan of
Stockgroup.com Holdings, Inc., and in the related prospectuses, of our report
dated January 28, 2000 with respect to the consolidated financial statements of
Stockgroup.com Holdings, Inc. included in the Annual Report on Form 10-KSB for
the year ended December 31, 1999.
Vancouver, Canada, /s/ ERNST & YOUNG LLP
January 28, 2000. Chartered Accountants
F-1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,658,822
<SECURITIES> 0
<RECEIVABLES> 855,170
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,433,188
<PP&E> 440,368
<DEPRECIATION> 85,601
<TOTAL-ASSETS> 3,873,556
<CURRENT-LIABILITIES> 1,110,507
<BONDS> 0
0
0
<COMMON> 6,761,483
<OTHER-SE> (3,998,434)
<TOTAL-LIABILITY-AND-EQUITY> 3,873,556
<SALES> 1,920,052
<TOTAL-REVENUES> 2,044,273
<CGS> 1,208,033
<TOTAL-COSTS> 6,286,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,242,533)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,242,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,242,533)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
