ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of the
Company should be read in conjunction with the financial statements and the related notes
thereto included elsewhere in this quarterly report for the three months and six months
ended December 31, 1999. This quarterly report contains certain forward-looking statements
and the Company's future operating results could differ materially from those discussed
herein. Certain statements contained in this Report, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and the like,
constitute "forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include, but are
not limited to, the factors discussed under the caption "Risk Factors" below, and are
discussed in more detail in the Risk Factors section of the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1999. Given these uncertainties, readers
are cautioned not to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to announce publicly the results of
any revisions of the forward-looking statements contained or incorporated by reference
herein to reflect future events or developments.
INTRODUCTION
C-ME.com was founded in 1996 and provides Internet turnkey solutions to streamline
retailers' merchandise sourcing (front-end) activities. The Company's solutions include
its proprietary Internet Sourcing Networks ("ISN") -- private extranets that link the
Company's retail partners with their vendors. The ISN provides retailers with a desktop
solution to reduce the cost of front-end merchandise sourcing activities while expanding
the retailer's vendor base. Other services include the Virtual Trade Show ("VTS"), - a
product showcase that allows retail buyers to quickly search vendors' products, the
Wholesale Auction Center ("WAC") (planned launch: Spring 2000 ) - a place where vendors
list closeouts, odd lots in bulk quantity and allows smaller retailers, jobbers and others
instant access, and the Factory Outlet Mall ("FOM") (planned launch: Spring 2000), a place
where manufacturers sell goods directly to consumers, which includes a full e-commerce
package consisting of secure credit card transaction processing and shopping cart functions
including automatic calculation of freight and sales tax, Currently, C-ME.com's retail
partners include Factory 2-U Stores (NASDAQ:FTUS) and Burlington Coat Factory
(NYSE:BCF).
The Company has developed an Internet-based turnkey solution for business-to-business
eCommerce that enables retailers to organize, automate and significantly reduce the cost
of their merchandise sourcing activities by connecting directly with their retail
merchandise suppliers around the globe.
Accumulated Losses
From its inception in 1996 through December 31, 1999, the Company has generated an
accumulated deficit of $2,198,874. Since its inception, the Company has incurred
substantial costs to develop its technology; to create, introduce and enhance its sourcing
solution; to establish marketing and distribution relationships; to recruit and train a
sales and marketing group and to build an administrative organization. The Company's
prospects must be considered in light of its operating history, and of the risks, expenses
and difficulties frequently encountered by companies in their early stage of development,
particularly companies in new, unproved and rapidly evolving markets. The limited operating
history of the Company makes the prediction of future results of operations difficult or
impossible and therefore, there can be no assurance that the Company will grow or that it
will be able to achieve or sustain profitability. The Company's success depends to a
significant degree upon the Company's ability to raise additional capital, and upon
continued contributions of key management, sales, marketing, and finance personnel,
certain of whom would be difficult to replace. The loss of the services of any of the
key personnel or the inability to attract or retain qualified management and other
personnel in the future, or delays in hiring required personnel, could have a material
adverse effect on the Company's business, operating results or financial condition. Also,
the Company's success is highly dependent on its ability to execute in a timely manner its
new sales and marketing plan, of which no assurance can be made.
RESULTS OF OPERATION
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
The following discussion sets forth information for the three months ended December 31,
1999 compared with the three months ended December 31, 1998. This information has been
derived from unaudited interim financial statements of the Company contained elsewhere in
the quarterly report and reflects, in Management's opinion, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the results of
operations for these periods. Results of operations for any interim period are not
necessarily indicative of results to be expected from the full fiscal year.
Net Loss
The Company recorded a net loss of $227,658 for the three months ended December 31, 1999
as compared to a net loss of $107,356 for the same period last year. The increase in net
loss is primarily attributable to the increase in general and administrative expenses.
Operating Revenue
Total revenues for the three months ended December 31, 1999 increased $17,020, or 117% ,
to $31,525 from $14,505 in the three months ended December 31, 1998. This increase is
primarily attributable to the increase in subscribers' fees. Revenue consisted primarily of
fees paid by users of the Company's VTS and web design services.
Cost of Revenue
Cost of revenues increased $1,514 to $29,139 for the three months ended December 31,
1999, compared to $27,625 for the same period last year. The increase in cost of revenue
represents an increase in the cost of providing customers with quality services.
Operating Expenses
The Company's operating expenses for the three months ended December 31, 1999, totaling
$281,900, consisted of $29,139 for the cost of revenue and $252,761 for general
administration and selling expenses, as compared to $134,677 in 1998, representing an
increase of $147,223 from the three months ended December 31, 1998. The general and
administrative expenses increased primarily due to an increase in administrative costs
from personnel additions.
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
The following discussion sets forth information for the six months ended December 31,
1999 compared with the six months ended December 31, 1998. This information has been
derived from unaudited interim financial statements of the Company contained elsewhere in
the quarterly report and reflects, in Management's opinion, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the results of
operations for these periods. Results of operations for any interim period are not
necessarily indicative of results to be expected from the full fiscal year.
Net Loss
The Company recorded a net loss of $344,449 for the six months ended December 31, 1999
as compared to a net loss of $229,295 for the same period last year. The increase in net
loss is primarily attributable to the increase in general and administrative expenses.
Operating Revenue
Total revenues for the six months ended December 31, 1999 increased $9,635, or 30% , to
$41,675 from $32,040 in the six months ended December 31, 1998. This increase is
primarily attributable to the increase in subscribers' fees. Revenue consisted primarily of
fees paid by users of the Company's VTS and web design services.
Cost of Revenue
Cost of revenues decreased $7,769 to $52,591 for the six months ended December 31, 1999,
compared to $60,360 for the same period last year. The majority of the decrease of the cost
of revenue represents a decrease in variable operating costs.
Operating Expenses
The Company's operating expenses for the six months ended December 31, 1999, totaling
$426,974 , consisted of $52,591 for the cost of revenue and $374,383 for general
administration and selling expenses, as compared to $278,402 in 1998, representing an
increase of $148,572 from the six months ended December 31, 1998. The general and
administrative expenses increased primarily due to an increase in administrative costs
from the additions to our management team.
Status of Operations
The Company's current business plan focuses on retailers and forming strategic retail
relationships. Pursuant to this plan, the Company is planning to utilize the marketing
power of its retail partners to attract subscriptions from their vendors. In order to
attract vendors, the Company is adding additional services, such as the Virtual Trade
Show ("VTS"), the Wholesale Auction Center ("WAC"), and the Factory Outlet Mall ("FOM").
The WAC and the FOM are both planned to be launched in the Spring 2000.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied significantly in the past and will likely
vary significantly in the future. We believe that period-to-period comparisons of our
results of operations are not meaningful and should not be relied upon as indicators of
future performance. Our operating results could fall below the expectations of securities
analysts or investors in some future quarter or quarters. Our failure to meet these
expectations would likely adversely affect the market price of our Common Stock.
Our quarterly operating results may vary depending on a number of factors, including:
demand for our solution and services; actions taken by our competitors, including new
product introductions and enhancements; ability to scale our network and operations
infrastructure; ability to develop, introduce and market new solutions and enhancements
to our existing solution on a timely basis; changes in our pricing policies or those of
our competitors; ability to expand our sales and marketing operations, including hiring
additional sales personnel; size and timing of sales of our solution and services;
success in maintaining and enhancing existing relationships and developing new
relationships with strategic partners; ability to control costs; technological changes in
our markets; deferrals of customer subscriptions in anticipation of new enhancements or
features of our solution; customer budget cycles and changes in these budget cycles; and
general economic factors.
We have increased our operating expenses substantially, and plan to continue to do so,
to expand our sales and marketing operations, fund greater levels of product development,
increase general and administrative support, develop new partnerships, increase our
professional services and support capabilities and improve our operational and financial
systems. If our revenues do not increase along with these expenses, our business,
operating results and financial condition could be seriously harmed and net losses in a
given quarter could be even larger than expected. In addition, because our expense levels
are relatively fixed in the near term and are based in part on expectations of our future
revenues, any decline in our revenues to a level that is below our expectations would have
a disproportionately adverse impact on our operating results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balances decreased by $ 532,024 , from $ 2,095,465 as of June 30,
1999, to $ 1,563,441 as of December 31, 1999 primarily due to losses from operations.
Management estimates the monthly cash "burn rate" to be approximately $100,000 per
month. As of December 31, 1999 cash balances are approximately $1.6 million, or 16 times
the currently estimated monthly burn rate.
Management believes that current cash balances and cash flows from operations, if any,
will be sufficient to meet present growth strategies and related working capital and
capital expenditure requirements for at least the next 12 months. Without the proceeds
from future offerings, its cash resources would be sufficient to fund the operations under
the current plan for the near future. The current plan contemplates significant increases
in spending when compared to the historical expenditures. Management currently anticipates
the need to raise additional capital prior to achieving positive cash flows from operations
through the issuance of additional debt or equity securities. The forecast of the period of
time through which the financial resources will be adequate to support operations is a
forward-looking statement that involves risks and uncertainties. The actual funding
requirements may differ materially from this as a result of a number of factors including
the plans to fully support the ISN and the launch of the WAC and the FOM, and investments
in systems infrastructure and staffing. We may require substantial working capital to fund
our business and we may need to raise additional capital prior to this time or thereafter.
We cannot be certain that additional funds will be available on satisfactory terms when
needed, if at all. If we are unable to raise additional necessary capital in the future,
we may be required to curtail our operations significantly. Raising additional equity
capital would have a dilutive effect on existing stockholders.
The Company believes that its current working capital will be sufficient to meet its
working capital requirements. The Company is actively seeking equity investments. If such
efforts are unsuccessful, the Company will need to reduce operating spending significantly,
which would materially and adversely affect the Company's business. Subsequent to the end
of the second quarter, the Company moved its headquarters and operations from Alhambra,
California to Pasadena, California. There was no significant impact on operations or cash
flow from the move. The Company currently does not have a bank credit line. The Company
does not intend to pay cash dividends with respect to capital stock in the foreseeable
future.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and Exchange
Commission (including this Form 10-QSB) may contain statements, which are not historical
facts, so-called "forward-looking statements". These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company's actual future results may differ significantly from those stated in
any forward-looking statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market acceptance,
litigation, intellectual property rights, risks in product and technology development,
product competition, limited number of customers, key personnel, potential transactions
and other risk factors detailed in this Quarterly Report on Form 10-QSB and in the
Company's other Securities and Exchange Commission filings.
The discussions of the Company's business and activities set forth in this report and in
other past and future reports and announcements by the Company may contain forward-looking
statements and assumptions regarding future activities and results of operations of the
Company. In light of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, the Company hereby identifies the following factors which could cause
actual results to differ materially from those reflected in any forward looking statement
made by or on behalf of the Company: reliance on collaborative retail partners, market
acceptance of Company products and services; changing business conditions or technologies
in the industry, which could affect demand for the Company's products and services; the
impact of competition; problems with technology; product development schedules; and
regulatory factors beyond the Company's control.
RISK FACTORS
We are an early-stage company with a limited operating history
The Company is an early-stage company. It is using an unproved business model and can not
guarantee that the business model is appropriate to the implementation of its business
plan.
We expect to depend on revenue from our Internet Sourcing Networks, Virtual Trade
Show, Wholesale Auction Center and web design and hosting.
The Company expects to depend primarily on revenue from the complete implementation of the
Internet Sourcing Networks ,Wholesale Auction Center, and Factory Outlet Mall, and on
revenue from the existing Virtual Trade Show, and continuing revenue from web site design
and hosting for our subscribers. The Internet Sourcing Network has not generated any
revenue and there is no guarantee that it will generate revenue in the future. The
Wholesale Auction Center and Factory Outlet Mall are in development; there is no guarantee
either of these services will be implemented or generate any revenue. The Virtual Trade
Show and web site design and hosting have generated revenue in the past. However, there
is no guarantee that these services will continue to generate revenue or that that revenue
will meet our expectations.
We have a history of operating loss and are not profitable.
The Company has a history of operating losses. We have not been profitable in our history,
and do not expect to be profitable in the near future. In addition, there is no guarantee
that the Company will ever be profitable.
We have not proved the revenue or profit potential of our business model.
Because the business model is unproven, both the revenue and profit potential of the
Company are uncertain. If the Company meets its revenue expectations, there is no
guarantee that the Company will be profitable or that costs will not continue to exceed
revenue.
We face intense competition from many entities.
The business to business e-commerce marketplace is highly competitive. Although the
Company believes it has several key advantages, the barrier to entry is not significant.
We have identified and continue to identify numerous companies that are better funded, have
more experience and more significant resources that have entered or are planning to enter
business-to-business e-commerce. Should these companies decide to enter our niche, there
is no guarantee that we will be able to effectively compete with them.
We are dependent on our foreign alliances.
The Company is dependent upon its ability to establish and maintain successful foreign
alliances. If we are not able to establish and maintain such alliances, we will not be
able to implement the business plan in its current configuration which will affect both
our revenue stream and profit potential. In addition, the Company faces the political
sovereign risks of conducting international business including risks of changing economic
conditions in the Pacific Rim which may have a material adverse effect on our ability to
provide global merchandise sourcing to our retail partners.
We are dependent on market demand for an acceptance of our services.
Much of the Company's success is dependent upon aggregating a critical mass of subscribing
vendors and establishing and maintaining strong relationships with retail partners. If
market demand and acceptance for our services is not in line with the Company's
expectations, it is likely that the Company's revenue will not meet its expectations.
We are dependent on relationships with key retail partners, and the ability to create
more such relationships.
Our business model is retailer-centric. Successful implementation of it is predicated on
our ability to create and nurture strong partnerships with retailers. If we are unable to
maintain existing partnerships or establish new partnerships with retailers our revenue and
profitably will not meet our expectations. Although the Company believes it can create and
maintain the necessary relationships, there is no guarantee that it will.
We depend on the reliability and continuity of our services.
As a service provider, the Company is dependent upon the continued reliability of its
Internet Sourcing System, Virtual Trade Show, software and hardware. Although we have
reliable systems in place, and have not had any problems providing quality service, there
is no guarantee that the Company will be able to continue to provide reliable services.
We depend on continued service and software development.
The Company is dependent upon continued service and software development to maintain the
quality and reliability of its services and to continue to grow. We are dependent on the
ability to keep trade secrets and obtain patents on business processes as well as on the
ability to develop new processes to meet our customers' sourcing needs.
We depend upon key members of management.
The implementation of our business plan and our continued success relies on key members of
the management team and sales, marketing, and finance personnel. There is no guarantee
that these employees will continue to work for the Company. In addition, there is no
guarantee that the Company will be able to replace these employees with personnel of
similar caliber, should they not be able to work, or decide not to work for the Company.
