SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission file number 0-26809
SHOPPING SHERLOCK, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 91-1962104
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
11201 S.E. 8th Street
Bellevue, Washington
98004
(Address of principal executive offices)
(425) 372-3060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all documents
and reports required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes | | No |X|
The number of outstanding common shares, $0.001 par value, of the
Registrant at September 30, 1999 was 9,000,000.
<PAGE>
SHOPPING SHERLOCK, INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended September 30, 1999
<TABLE>
Page
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<S> <C>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS...............................................................1
Consolidated Balance Sheets........................................................1
Consolidated Statements of Operations and Deficit..................................2
Consolidated Statements of Stockholders Equity.....................................3
Consolidated Statements of Cashflow................................................4
Notes to Consolidated Financial Statements.........................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................................7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................14
ITEM 5. OTHER INFORMATION................................................................14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................14
SIGNATURES .................................................................................15
</TABLE>
i
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHOPPING SHERLOCK, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 236,101 $ -
Accounts receivable and prepaids 73,153 -
------------ ------------
309,254 -
CAPITAL ASSETS, Net 86,224 -
------------ ------------
TOTAL ASSETS 395,478 -
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 21,911 -
Related party payables 39,003 -
------------ ------------
60,914 -
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.001 par value, 50,000,000 shares 9,000 1,000
authorized, 9,000,000 and 1,000,000 issued and
outstanding
Additional paid in capital 1,094,079 2,079
Deficit accumulated during the development stage (768,515) (3,079)
------------ ------------
334,564 -
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 395,478 $ -
------------ ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
1
<PAGE>
SHOPPING SHERLOCK, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 33,149 $ - $ 33,149 $ -
Cost of Sales 11,256 - 11,256 -
----------- ----------- ----------- -----------
Gross Profit 21,893 - 21,893 -
----------- ----------- ----------- -----------
Operating Expenses
Sales and Marketing 58,171 - 112,356 -
General and Administrative 166,985 2,079 425,299 2,079
Systems and Business development 102,215 - 239,539 -
Depreciation 11,268 - 18,468 -
----------- ----------- ----------- -----------
Total Operating Expenses 338,639 2,079 795,662 2,079
Operating Loss (316,746) (2,079) (773,769) (2,079)
Interest Earned 7,211 - 8,333 -
Net Loss for the Period (309,535) (2,079) (765,436) (2,079)
Deficit, Beginning of Period (458,980) (1,000) (3,079) (1,000)
Deficit, End of Period $(768,515) $ (3,079) $ (768,515) $ (3,079)
Net Loss Per Share - Basic and Diluted (0.05) (0.002) (0.12) (0.002)
Weighted Average Number of Shares
of Common Stock Outstanding 6,642,000 1,000,000 6,642,000 1,000,000
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
2
<PAGE>
SHOPPING SHERLOCK, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
Deficit
Accumulated
Common Stock during
------------ Additional Development
Shares Amount Paid in capital Stage Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shopping Sherlock, Inc. Activities
(Formerly known as AIDA Industries):
Issuance of Common Stock
for Cash 100,000 $ 100 $ 900 $ - $ 1,000
Net loss - - - (1,000) (1,000)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1985 100,000 100 900 (1,000) -
Activity January 1986 through
December 31, 1997 - - - - -
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 100,000 100 900 (1,000) -
Issuance of Common Stock
for Reinstatement Fees - 900,000 900 1,179 - 2,079
- --------------------------------------------------------------------------------------------------------------------------
July 20, 1998
Net loss - - - (2,079) (2,079)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,000,000 1,000 2,079 (3,079) -
Sale of Common Stock for Cash
($.05/Share) 5,000,000 5,000 245,000 - 250,000
Sale of Common Stock for Cash
($1.00/Share) 1,000,000 1,000 999,000 - 1,000,000
Issuance of Common Stock
for Acquisition of Shopping
Sherlock - Delaware 2,000,000 2,000 (2,000) - -
Cash Contributed to Significant
Stockholder - - (150,000) - (150,000)
Net loss - - - (765,436) (765,436)
Balance, September 30, 1999 9,000,000 $ 9,000 $ 1,094,079 $ (768,515) $ 334,564
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
SHOPPING SHERLOCK, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited )
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (309,535) $ (2,079) $ (765,436) $ (2,079)
Depreciation 11,268 - 18,468 -
Changes in Non-Cash Working Capital:
Accounts Receivable and Prepaids (52,805) - (73,153) -
Accounts Payable (21,385) - 21,911 -
----------- ----------- ----------- -----------
Net Cash Used in Operating Activities (372,457) (2,079) (798,210) (2,079)
Cash Flows From Investing Activities
Distribution to Stockholder - - (150,000) -
Purchase of Furniture and Equipment (4,908) - (104,692) -
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities (4,908) - (254,692) -
Cash Flows from Financing Activities
Issuance of Common Stock for Cash - 2079 1,250,000 2,079
Increase in Related Party Payables 19,693 - 39,003 -
----------- ----------- ----------- -----------
Net Cash Used in Financing Activities 19,693 2,079 1,289,003 2,079
Increase in Cash for the Period (357,672) - 236,201 -
Cash, Beginning of Period 593,773 - - -
----------- ----------- ----------- -----------
Cash, End of Period $ 236,101 $ - $ 236,101 $ -
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
SHOPPING SHERLOCK, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS DESCRIPTION
Shopping Sherlock, Inc. ("the Company") was incorporated in the State of Florida
on August 17, 1984, under the name of AIDA Industries, Inc. ("AIDA"). From its
inception until July 20, 1998, there was no activity within AIDA. On July 20,
1998, AIDA amended its articles of incorporation to provide for a thousand to
one (1000:1) stock split. Following the stock split, AIDA applied for listing on
the OTC Bulletin Board. On March 24, 1999, AIDA changed its name to Shopping
Sherlock, Inc.
On May 26, 1999, the Company entered into an acquisition agreement with Shopping
Sherlock, Inc. ("SSI"), a corporation organized and incorporated in the State of
Delaware on January 20, 1999, for the purpose of developing and implementing an
Internet based retail business providing discounts and purchase rebates to its
customers. The Company acquired 100% of the common stock of SSI in exchange for
the issuance of 2,000,000 shares of the Company's common stock.
On February 4, 1999, SSI entered into a strategic marketing and operations
agreement with Premier Lifestyles International Corporation ("PLIC"), a direct
marketing and sales company, to provide certain Internet based services to
PLIC's existing customers. SSI paid PLIC a one-time fee of $150,000 upon signing
an agreement for access to its customer base. SSI received an advance of
$150,000 from the Company to pay the licensing fee to PLIC. SSI began operations
June 1, 1999, and had no prior operating activity.
The Company is a development stage company created to provide on-line consumer
goods, provide website and e-business services, and distribute and market rebate
shopping benefits. The Company plans to leverage its relationship with rebate
shopping club members and affinity groups to create an online rebate shopping
community.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company are unaudited
and include, in the opinion of management, all normal recurring adjustments
necessary to present fairly the consolidated balance sheets as of September 30,
1999, and the related statements of operations, stockholders equity and cash
flows for the period presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the related notes
thereto included in the third amendment to the Company's Registration Statement
on Form 10 filed with the Securities and Exchange Commission on November 8,
1999.
The Company's consolidated financial statements are prepared using the generally
accepted accounting principles applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business.
3. INCOME TAXES
As of September 30, 1999, the Company had net deferred tax assets of $260,248
primarily due to net operating loss carry forwards, which begin to expire in
2018. A 100% valuation allowance has been recorded against the deferred tax
asset as management has yet to establish that recovery of this asset is more
likely than not.
5
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4. NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of common stock outstanding. Per share information for all prior periods
have been adjusted to reflect the 1,000:1 stock split declared on July 20, 1998.
As of September 30, 1999, the Company had outstanding options to purchase
794,000 shares of common stock which were not included in the calculation of
loss per share as their effect was anti-dilutive.
5. BUSINESS COMBINATION
On May 26, 1999 the Company entered into an acquisition agreement by which the
Company acquired 100% of SSI in consideration of 2,000,000 of the Company's
common stock. At the time of acquisition, the controlling stockholder of SSI was
Richard Stewart and, as a result of the acquisition, Mr. Stewart became a
director and 20.0% stockholder of the Company. Mr. Stewart is also the President
and Chief Executive Officer of PLIC. Because of the common ownership between SSI
and PLIC, and the fact that the majority stockholder of SSI and PLIC will hold a
continuing equity position in the Company in excess of 10%, the marketing
agreement acquired has been assigned no value in the Company's financial
statements. The $150,000 paid to SSI has been recorded as a capital distribution
to stockholders in the financial statements of the Company.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Certain statements and information contained in this Report constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or developments in the Company's
industry, to differ materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking statements. Such risks
and uncertainties include, but are not limited to: the Company's limited
operating history, history of losses, risks associated with management of
growth, risks associated with the Internet, competition, product development
risks and risks of technological change, dependence on third party
relationships, the Company's ability to protect its intellectual property rights
as well as the other risks and uncertainties detailed in the third amendment to
the Company's Registration Statement on Form 10 filed with the Securities and
Exchange Commission on November 8, 1999. "We," "our," "us" and the "Company"
refer to Shopping Sherlock, Inc.
and our subsidiaries.
Overview
The Company was incorporated in Florida on August 17, 1984, under the name Aida
Industries, Inc. The Company began operations in January of 1999 and on March
24, 1999, changed its name from Aida Industries, Inc. to Shopping Sherlock, Inc.
On May 26, 1999, the Company acquired all the issued and outstanding capital
stock of Shopping Sherlock, Inc., a Delaware corporation that was unrelated to
the Company ("SSI"), whose sole asset is the Strategic Alliance Agreement with
Premier Lifestyles International Corporation ("PLIC"). Pursuant to the terms of
an Agreement and Plan of Reorganization among the Company, SSI, and Shopping
Acquisition Corp., a wholly-owned subsidiary of the Company ("Acquisition Sub"),
Acquisition Sub merged with and into SSI, and the stockholders of SSI, in
exchange for all the shares of SSI common stock held by them, received an
aggregate of 2,000,000 shares of the Company's common stock. At the time of the
acquisition, the controlling stockholder of SSI was Richard Stewart and, as a
result of the acquisition, Mr. Stewart became a director and 20% percent
stockholder of the Company. Mr. Stewart is also the President and Chief
Executive Officer of PLIC.
The Company is a development stage company that provides e-commerce services and
sells consumer products over the Internet. The Company was inactive from its
inception until the first quarter of 1999 when it initiated its software
development program, developed and launched its beta site and commenced its
e-Commerce Direct Marketing Organization "DMO" program. During the first nine
months of 1999, the Company's primary activities related to the:
o development of its primary and secondary server platforms;
o development of software for its online retail sites;
o design and construction of an electronic data interchange platform;
o development of the Company's website and e-business services Direct
Marketing Organization Platform ("DMO Platform") for one of its main
affinity groups;
o development of business processes;
o development of operating procedures and systems; and
o development of the Company's first online retail site,
www.usrebatewarehouse.com.
The Company has a limited operating history and remains in the early stages of
development. The Company has generated $33,149 in revenues through September
1999 through website hosting and e-business services. The revenue generated in
the third quarter was earned from the Company's sole e-business customer,
Essentially Yours Industries ("EYI"). Management anticipates the Company will
receive additional revenues by the end of the fourth quarter in 1999 from three
primary sources:
o Product sales from the Company's online store;
o Fees collected for website hosting and e-business services, including
web design, preparation of digital images and monthly fees from DMO
Platform agreements; and
o Rebates from its Strategic Alliance Agreement with PLIC.
7
<PAGE>
The Company anticipates that its product vendors will ship products directly to
customers of its online stores, typically within two to three weeks after a
customer places an order; however, some product shipments may take longer. The
Company expects that payment for those products sold through its Internet
websites will be made through credit card transactions.
The Company must raise additional funds as a result of the planned increase in
its operating expenditures to fund its marketing, advertising, merchandising,
business development and other related expenses. The Company anticipates that it
will require an additional $4.0 million to $7.5 million in order to fund its
operations over the next twelve months. The Company currently has sufficient
working capital to support its operations through January 2000, and it obtained
a short-term loan for approximately $150,000 in order to support its operations
until additional financing is available. From the proceeds of this $150,000
loan, the Company has advanced $75,000 in the form of a promissory note to a
third party. The Company is currently in negotiations with the borrower to
acquire certain assets of the borrower. There can be no assurance, however, that
such an agreement will be entered into by the Company and the borrower. The
Company is currently exploring additional financing alternatives, including the
possibility of a private equity offering. There can be no assurance, however,
that such financing will be available to the Company or, if it is, that it will
be available on terms acceptable to the Company. If the Company is unable to
obtain the financing necessary to support its operations, its may be unable to
continue as a going concern.
The Company has a limited operating history upon which to base an evaluation of
its business. The Company's business and prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
the early stages of development, particularly companies in new and rapidly
evolving markets such as electronic commerce. These risks include, but are not
limited to, rapid technological change, inability to manage growth, competition
from more established companies, dependence on suppliers, internal system
problems, risks relating to Year 2000 issues, inability to obtain sufficient
financing and an unproven business record.
On November 12, 1999, Jan Walter, the Company's Chief Technology Officer,
resigned to pursue other interests. The Company plans to replace the vacancy by
mid January 2000 and in the interim period Mitchell Eggers, the Company's Chief
Operating Officer, will also act as the Chief Technology Officer.
The Company recently engaged in negotiations with PLIC and Richard Stewart to
terminate the Strategic Alliance Agreement. As part of these negotiations, the
Company anticipates it will grant a license to PLIC to operate EYI's website
and, as a result, the Company will cease to receive revenues from this source.
As of September 30, 1999, the Company's revenues were derived solely from the
services it provided to EYI. There can be no assurance, however, that such an
agreement will be entered into by the Company and PLIC.
Results of Operations
The Company was formed on August 17, 1984, but did not commence operations until
January 1999. The Company incurred expenses of $1,000 during the initial
incorporation in 1984, and did not incur any further expenses until 1998 when
$2,079 was incurred by the Company for professional fees in preparing audited
financial statements. Accordingly, discussions of periods prior to January 1999
have not been included.
All operations of the Company were conducted through the Company from January
1999 to May 31, 1999. In May 1999, the Company acquired SSI, which had been
inactive from its inception to May 31, 1999. On June 1, 1999, the Company has
transferred all of its operations to SSI. The Company accounted for the
acquisition of SSI at nil value because of the common ownership between the
Company, SSI and PLIC. SSI's only asset at the time of acquisition was the
Strategic Alliance Agreement with PLIC signed on February 4, 1999. SSI's cost
for the agreement was a $150,000 cash payment to PLIC. Because of the common
ownership between SSI and PLIC, the $150,000 payment is treated as a
preferential distribution to stockholders and is recorded in the consolidated
financial statements as a reduction in equity.
8
<PAGE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenue. The Company generated revenue of $33,149 for the three months ended
September 30, 1999 and no revenue for the three months ended September 30, 1998.
Revenue during the three months ended September 30, 1999 included $20,000 from
website design and development and $13,149 from e-business services. All revenue
is derived from the Company's sole e-business customer EYI.
Cost of Revenue. The Company incurred $11,256 of cost of revenue for the three
months ended September 30, 1999 and no cost of revenue for the three months
period September 30, 1998. The cost of revenue consists of employee compensation
related to website design and a development project that the Company completed
in the quarter.
Technical and System Development Expenses. Technical and system development
expenses were $102,215 for the three months ended September 30, 1999 compared
with no expenses for the three months ended September 30, 1998. Technical and
system development expenses consist primarily of expenses incurred for the
development and maintenance of the software required to support the Company's
online stores, including employee compensation and the cost of developing and
improving store content, Internet connectivity, operations and reporting. The
significant costs were payroll and consulting expenses of $78,091 for the three
months ended September 30, 1999 relating to the design of its information and
electronic data interchange systems. Data communication expenses were $15,646
for the three months ended September 30, 1999 relating to bandwidth and network
equipment. The Company expects that technical and system development expenses
will continue to increase for the foreseeable future.
Sales and Marketing Expenses. Sales and marketing expenses for the three months
ended September 30, 1999 were $58,171 compared with no expenses for the three
months ended September 30, 1998. Sales and marketing expenses consist of costs
associated with designing and marketing the Company's online stores. The
increase primarily reflected the commencement of the Company's e-commerce
activities in January 1999, an increase in the number of employees and
preliminary development of the Company's promotional materials. Payroll expenses
relating to merchandising, helpdesk, graphic design, advertising and promotion
department employees were $38,666 for the three months ended September 30, 1999.
Travel expenses for conventions and presentations were $6,668 for the three
months ended September 30, 1999. The Company expects that sales, advertising and
marketing expenses will continue to increase significantly for the foreseeable
future as it continues to expand its operations.
General and Administrative Expenses. General and administrative expenses consist
of management compensation, rent, professional services, telephone expense,
travel and other general corporate expenses. General and administrative expenses
were $166,985 for the three months ended September 30, 1999 compared with $2,079
of expenses for the three months ended September 30, 1998. This increase
reflected the hiring of additional management, increased facilities charges and
substantially increased activity levels to support the expansion of the
Company's operations, all of which were undertaken in early 1999. Payroll
expenses relating to management and administrative personnel were $40,200 in the
three months ended September 30, 1999. Professional fees were $63,306 in the
three months ended September 30, 1999 reflecting the cost of raising funds,
signing of agreements, and completing the registration document. General office
expenses, including rent, telephone and courier expenses, were $34,102 for the
three months ended September 30, 1999. Travel and accommodation expenses were
$19,175 in the three months ended September 30, 1999.
Income Taxes. Shopping Sherlock has not generated any taxable income to date and
therefore has not paid any federal income taxes since inception. Deferred tax
assets created primarily from net operating loss carryforwards have been fully
reserved as management is unable to conclude that future realization is more
likely than not.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenue. The Company generated revenue of $33,149 for the nine months ended
September 30, 1999 and no revenue for the nine months ended September 30, 1998.
Revenue during the nine months ended September 30, 1999 included $20,000 in
gross revenue from website design and development and $13,149 in net revenue
from e-business services. All revenue is derived from the Company's sole
e-business customer.
9
<PAGE>
Cost of Revenue. The Company incurred $11,256 of cost of revenue for the nine
months ended September 30, 1999 and no cost of revenue for the nine months
period September 30, 1998. The cost of revenue consists of employee compensation
related to website design and a development project that the Company completed
in the quarter.
Technical and System Development Expenses. Technical and system development
expenses were $239,539 for the nine months ended September 30, 1999 compared
with no expenses for the nine months ended September 30, 1998. Technical and
system development expenses consist primarily of expenses incurred for the
development and maintenance of the software required to support the Company's
online stores, including employee compensation and the cost of developing and
improving store content, Internet connectivity, operations and reporting. The
significant costs were payroll and consulting expenses of $165,755 for the nine
months ended September 30, 1999 relating to the design of its information and
electronic data interchange systems. Data communication expenses were $15,646
for the nine months ended September 30, 1999 relating to bandwidth and network
equipment. The Company expects that technical and system development expenses
will continue to increase for the foreseeable future.
Sales and Marketing Expenses. Sales and marketing expenses for the nine months
ended September 30, 1999 were $112,356 compared with no expenses for the nine
months ended September 30, 1998. Sales and marketing expenses consist of costs
associated with designing and marketing the Company's online stores. The
increase primarily reflected the commencement of the Company's e-commerce
activities in January 1999, an increase in the number of employees and
preliminary development of the Company's promotional materials. Payroll expenses
relating to merchandising, helpdesk, graphic design, advertising and promotion
department employees were $66,009 for the nine months ended September 30, 1999.
Travel expenses for conventions and presentations were $7,696 for the nine
months ended September 30, 1999. The Company expects that sales, advertising and
marketing expenses will continue to increase significantly for the foreseeable
future as it continues to expand its operations.
General and Administrative Expenses. General and administrative expenses consist
of management compensation, rent, professional services, telephone expense,
travel and other general corporate expenses. General and administrative expenses
were $425,299 for the nine months ended September 30, 1999 compared with $2,079
of expenses for the nine months ended September 30, 1998. This increase
reflected the hiring of additional management, increased facilities charges and
substantially increased activity levels to support the expansion of the
Company's operations, all of which were undertaken in early 1999. Payroll
expenses relating to management and administrative personnel were $133,416 in
the nine months ended September 30, 1999. Professional fees were $136,402 in the
nine months ended September 30, 1999 reflecting the cost of raising funds,
signing of agreements, and completing the Company's registration document.
General office expenses, including rent, telephone and courier expenses, were
$61,106 for the nine months ended September 30, 1999. Travel and accommodation
expenses were $56,106 in the nine months ended September 30, 1999.
Income Taxes. Shopping Sherlock has not generated any taxable income to date and
therefore has not paid any federal income taxes since inception. Deferred tax
assets created primarily from net operating loss carryforwards have been fully
reserved as management is unable to conclude that future realization is more
likely than not.
Liquidity and Capital Resources
As at September 30, 1999, the Company's consolidated cash position was $236,101
and the consolidated working capital was $248,340.
Since inception, the Company has financed its operations solely from capital
contributions from stockholders. During the nine months ended September 30, 1999
the Company received proceeds of $1,250,000 from the sale of common stock. The
Company currently has sufficient working capital to support its operations
through January 2000, and it recently obtained a short-term loan for
approximately
10
<PAGE>
$150,000 in order to support its operations until additional financing is
available. From the proceeds of this $150,000 loan, the Company has advanced
$75,000 in the form of a promissory note to a third party. The Company is
currently in negotiations with the borrower to acquire certain assets of the
borrower. There can be no assurance, however, that such an agreement will be
entered into by the Company and the borrower. The Company is also currently
exploring additional financing alternatives, including the possibility of a
private equity offering of between $4.0 million to $7.5 million before January
2000 to fund the Company's working capital requirements for the next twelve
months. There can be no assurance, however, that such financing will be
available to the Company or, if it is, that it will be available on terms
acceptable to the Company. If the Company is unable to obtain the financing
necessary to support its operations, it may be unable to continue as a going
concern.
Net cash used in operating activities was $798,210 for the nine months ended
September 30, 1999, including a net loss of $765,436. The Company's current
operating expenditures are approximately $100,000 per month and the Company
plans to increase its operating expenditures to $500,000 a month in order to
expand its operations. The Company begun generating revenues in August of 1999
and anticipates that cash flow from operations will be sufficient to fund its
cash requirements by December 2000.
The Company incurred capital expenditures of $104,692 in the six months ended
September 30, 1999. These expenditures are primarily for computer equipment and
furniture and fixtures associated with the Company's continued new employee
growth, new facilities and continued systems development.
The Company has entered into a lease for its office space located in Bellevue,
Washington. The Company's future minimum payments on the lease are $10,338 for
the remainder of 1999, $41,352 for 2000 and $10,338 for the first three months
of 2001.
The Company currently has no commitments for any credit facilities such as
revolving credit agreements or lines of credit that could provide additional
working capital. Based on its existing capital resources, the Company believes
that it will be able to fund operations through January 2000. The Company's
capital requirements depend on several factors, including the success and
progress of product development programs, the resources devoted to developing
products, the extent to which products achieve market acceptance, and other
factors. The Company anticipates that it will require substantial additional
financing to fund its working capital requirements. There can be no assurance,
however, that additional funding will be available or, if available, that it
will be available on terms acceptable to the Company. If adequate funds are not
available, it may not be able to continue servicing its existing e-business
services client, EYI, or to develop new clients in the e-business services
segment. In addition, the Company would likely be required to stop development
on its Internet websites and cease operations altogether. There can be no
assurance that the Company will be able to raise additional cash if its cash
resources are exhausted. The Company's ability to arrange such financing in the
future will depend in part upon the prevailing capital market conditions as well
as the Company's business performance.
The Company has been in the development stage since its inception. It has had no
significant operating revenue to date, has accumulated losses of $768,515, and
will require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses. This raises substantial doubt as to the Company's ability
to continue as a going concern.
Non-Qualified Stock Options
As of September 30, 1999, the Company had outstanding non-qualified stock
options to purchase 794,000 shares issued to various employees, consultants and
directors pursuant to the 1999 option plan. The options entitle holders to
purchase common stock at a price of $5 or $6 depending on which year the options
vest.
Market Risk
Market risk inherent in financial instruments outside the financial statements
is considered immaterial.
11
<PAGE>
Year 2000 Issue
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (i.e. December 31, 1999 would appears as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming will default to 01/01/1900 instead of 01/01/2000, and
calculations using or reporting the date will not be correct and errors will
arise. To prevent this from occurring, information systems need to be updated to
ensure they recognize the Year 2000.
Since March 1999, the Company has been assessing its exposure to risks relating
to the Year 2000 issue. These analysis and remediation issues are addressed in a
four-phase plan of action.
Phase I - Inventory and Risk Assessment. This Phase requires an inventory and
assessment of the business and information systems used by the Company,
including desktop hardware and software, network hardware and software, and
telephone systems. The Company uses Intel-based PC desktop products. In
connection with a review of this hardware the Company has determined that all
systems are Year 2000 compliant and contain four digit date codes. In addition
the Company uses "off the shelf" software for desktop applications. The
Company's existing products are all Year 2000 compliant and contain four digit
date codes. As a result, the Company believes it has completed this Phase. The
Company's Internet websites are Year 2000 compliant. The Company utilizes
software produced by Red Hat, Inc., T.c.X. DataKonsult A.B., and the Apache
Group. Red Hat, Inc. has advised the Company that it has been certified as Year
2000 compliant by an independent third party. The other parties have advised the
Company that they are also Year 2000 compliant. The Company has made every
effort to use this software in a way that is Year 2000 compliant. The Company
does not have a formalized contingency plan in case the software provided by
these companies fails on January 1, 2000, or February 29, 2000. However, the
Company has tested its software to be compatible with other systems and believes
that it can switch with minimal effort and disruption should it need to.
Phase II - Remediation Cost Estimation. This Phase involves the analysis of each
Year 2000 compliance issue, determination of how such risks will be remediated
and the cost of such remediation. As indicated, the Company does not anticipate
needing to replace any additional hardware or software. Because of the Company's
limited operating history, it has not incurred significant time or expense in
connection with transferring data to any upgraded desktop software. The Company
believes it has completed this Phase.
Phase III - Remediation. This Phase includes the replacement or correction of
any necessary business or information systems. This Phase is complete for both
the information technology systems and the non-information technology business
systems of the Company.
Phase IV - Remediation Testing. This Phase includes the future date testing of
all remediation efforts made in Phase III to confirm that the changes made bring
the affected systems into compliance, no new problems have arisen as a result of
the remediation, and that all new systems which replaced non-compliant systems
are Year 2000 compliant regardless of whether vendors represent that such
systems are Year 2000 complaint. The Company believes it has completed this
Phase and is therefore Year 2000 compliant.
Third Party Relationships. Even if the internal systems of the Company are not
materially affected by the Year 2000 problem, the Company's business, financial
condition and results of operations could be materially adversely affected by
disruption in the operation of enterprises with which the Company interacts. The
Company currently relies or plans to rely on third-party companies in connection
with the distribution of products contemplated to be sold over its Internet
websites, credit card processing and other business functions. In addition, the
Company intends to rely upon PLIC to provide additional marketing and support
services for the Company. The Company has made inquiries of all third parties
with which it does business and, to date, has received responses from
approximately 80% of such parties that their systems are Year 2000 compliant. Of
this percentage, approximately 75% have provided us written confirmation of
their compliance. The Company has not yet received responses from PLIC.
12
<PAGE>
The Company believes that the expected cost and availability of resources to
recover information not properly processed after December 31, 1999, will not
exceed $20,000. However, there can be no assurance that the Company's Year 2000
remediation efforts or those of third parties will be properly and timely
completed, and the failure to do so could have a material adverse effect on the
Company, its business, results of operation, and its financial condition. In
particular, the Company has not yet completed its assessment of the Year 2000
readiness of its significant third-party service providers. Completion of this
assessment may result in the identification of additional issues, which could
have a material adverse effect on the Company's results of operations. In
addition, important factors that could cause results to differ materially
include, but are not limited to, the ability of the Company to successfully
identify systems which have a Year 2000 issue, the nature and amount of
remediation effort required to fix the affected system, and the costs and
availability of labor and resources to successfully address the Year 2000
issues.
The worst-case scenario pertaining to the Year 2000 issue would be an overall
failure of the Internet, electronic and telecommunications infrastructure. In
addition, the systems and services provided by the Company's third-party vendors
may fail to be Year 2000 compliant despite their representations to the
contrary. The failure by these entities or systems to be Year 2000 compliant
could result in a systemic failure beyond the Company's control, which could
also prevent users from accessing the Company's Internet websites, which would
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company is continuing to formulate its Year 2000 contingency plans. The
Company views its dependence on critical suppliers and the Internet as its
primary exposure to potential Year 2000 concerns. The Company will continue to
evaluate potential alternatives to reduce its dependence on those suppliers, and
secure alternate supplies in the event that any supplier experiences significant
business interruption as a result of Year 2000 or other concerns.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including some types of
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS 133 is effective for fiscal years beginning
after June 15, 2000 and must be applied to instruments issued, acquired, or
substantively modified after December 31, 1997. The Company does not expect the
adoption of the accounting pronouncement to have a material effect on its
financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that it does not have any material exposure to interest or
commodity risks. The Company is exposed to economic and political changes in
international markets where the Company competes, such as inflation rates,
recession, foreign ownership restrictions, domestic and foreign government
spending, budgetary and trade policies and other external factors over which the
Company has no control.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
quarter covered by this report.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on its behalf by the undersigned
thereunto duly authorized.
SHOPPING SHERLOCK, INC.
December 23, 1999 /s/ PHILIP GARRETT
-------------------------------------
Philip Garratt, Chief Executive Officer
December 23, 1999 /s/ PATRICK MCGRATH
-------------------------------------
Patrick McGrath, Chief Accounting Officer
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