UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2000
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 000-27189
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MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
NEVADA 88-0398103
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Employer Identification No.)
SUITE 201, 4199 LOUGHEED HIGHWAY, BURNABY, BRITISH COLUMBIA, CANADA V5C 3Y6
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(Address of principal executive offices)
(604) 320-7227
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(Issuer's telephone number)
SUITE 420 - 6450 ROBERTS STREET, BURNABY, BRITISH COLUMBIA, CANADA V5G 4E1
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Former name, former address and former fiscal year, if changed since last report
<PAGE>
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
12,263,357 common shares outstanding, as of July 21, 2000
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Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The Company's financial statements are stated in United States Dollars (US$) and
are prepared in accordance with United States Generally Accepted Accounting
Principles.
<PAGE>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000
<PAGE>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000
CONTENTS
--------
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 2
Statement of Changes in Stockholders' Equity 3
Statements of Operations 4
Statement of Cash Flows 5
Notes to the Financial Statements 6 - 10
<PAGE>
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2000 1999
(UNAUDITED)
<C> <S> <C> <C>
ASSETS
CURRENT
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,107 $ 717,195
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 41,522 18,667
Prepaid expenses and supplies . . . . . . . . . . . . . . . . 36,603 8,948
--------------------------
87,232 744,810
PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . 112,076 86,564
--------------------------
$ 199,308 831,374
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT
Accounts payable and accrued liabilities. . . . . . . . . . . $ 108,017 $ 136,980
Demand loans payable, non-interest bearing. . . . . . . . . . 22,913 210,000
-------------------------
130,930 346,980
LOANS PAYABLE (Note 3). . . . . . . . . . . . . . . . . . . . . - 805,000
-------------------------
130,930 1,151,980
STOCKHOLDERS' EQUITY (DEFICIT)
Share capital
Authorized
50,000,000 Common shares, par value $0.001
Issued
12,436,690 (1999 - 7,900,000) Common shares. . . . . . . 12,437 7,900
Additional paid-in capital. . . . . . . . . . . . . . . . . . 2,946,760 292,122
Deficit accumulated during the development stage. . . . . . . (2,886,819) (616,628)
Reduction for initial contribution of intellectual property . (4,000) (4,000)
-------------------------
68,378 (320,606)
-------------------------
$ 199,308 831,374
</TABLE>
The accompanying notes are an integral part of these consolidated
interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000
Deficit Reduction
Accumulated for Initial Total
Additional During the Contribution Stockholders'
Common Stock Paid-in Development of Intellectual Equity
Shares Amount Capital Stage Property (Deficit)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
2000 . . . . . . . . . . 7,900,000 $ 7,900 $ 292,122 $ (616,628) $ (4,000) $ (320,606)
Private placement
of common stock
on April 3, 2000
at a price of $1.50
per share (Note 3) . . . 86,665 87 129,913 - - 130,000
-------------------------------------------------------------------------------------------------
7,986,665 7,987 422,035 (616,628) (4,000) (190,606)
Settlement of loans
payable on
acquisition (Note 3) . . - - 1,275,000 - - 1,275,000
Adjustment for the
stockholders' equity
of the Company at
the acquisition date . . 4,450,025 4,450 (37,127) - - (32,677)
Stock option
compensation (Note 4) - - 1,286,852 - - 1,286,852
Net loss for the
period . . . . . . . . . - - - (2,270,191) - (2,270,191)
--------------------------------------------------------------------------------------------------
BALANCE, June 30,
2000 . . . . . . . . . . 12,436,690 $ 12,437 $ 2,946,760 $ (2,886,819) $(4,000) $68,378
</TABLE>
The accompanying notes are an integral part of these consolidated
interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Period from
June 25 1999
Three-month Six month (incorporation)
period ended period ended to June 30
June 30 June 30 2000
2000 2000 (cumulative)
<S> <C> <C> <C>
SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,888 $ 18,870 $ 18,870
COST OF SALES. . . . . . . . . . . . . . . . . . . . . . . . . . 5,952 14,078 14,078
-------------------------------------------
2,936 4,792 4,792
EXPENSES (Note 4)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 12,284 22,424 30,388
General and administration . . . . . . . . . . . . . . . . . . . 674,935 781,577 1,049,619
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . 42,829 77,993 142,900
Promotion and advertising. . . . . . . . . . . . . . . . . . . . 481,214 775,802 956,114
Research and development. . . . . . . . . . . . . . . . . . . . 510,453 623,422 721,751
1,721,715 2,281,218 2,900,772
LOSS FROM OPERATIONS (1,718,779) (2,276,426) (2,895,980)
INTEREST AND OTHER INCOME. . . . . . . . . . . . . . . . . . . . 1,251 6,235 9,161
NET LOSS FOR THE PERIOD $(1,717,528) $(2,270,191) $(2,886,819)
LOSS PER SHARE - basic and diluted $ . . . . . . . . . . . . . . (0.16) $ (0.24)
WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . . . . . . . . 10,989,833 9,369,917
</TABLE>
The accompanying notes are an integral part of these consolidated
interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Period from
June 25
1999
Six month (incorporation)
Period ended to June 30
June 30 2000
2000 (cumulative)
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period. . . . . . . . . . . . $ (2,270,191) $ (2,886,819)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation . . . . . . . . . . . . . . . . . . 22,424 30,388
Stock option compensation. . . . . . . . . . . . 1,286,852 1,298,874
Decrease (increase) in assets
Receivables. . . . . . . . . . . . . . . . . . (22,855) (41,522)
Prepaid expenses and supplies. . . . . . . . . . (27,655) (36,603)
Increase (decrease) in liabilities
Accounts payable and accrued liabilities . . . . (61,640) 75,340
-------------------------------
(1,073,065) (1,560,342)
FINANCING ACTIVITIES
Repayment of demand loans. . . . . . . . . . . . (290,000) (290,000)
Proceeds on demand loans . . . . . . . . . . . . 102,913 312,913
Proceeds of loan payable . . . . . . . .. . . . 600,000 1,689,000
Proceeds for common stock. . . . . . . . . . . . - 414,000
------------------------------
412,913 1,711,913
INVESTING ACTIVITY
Purchase of property and equipment . . . . . . . (47,936) (142,464)
INCREASE (DECREASE) IN CASH. . . . . . . . . . . (708,088) 9,107
CASH, beginning of period. . . . . . . . . . . . 717,195 -
CASH, end of period. . . . . . . . . . . . . . . $ 9,107 $ 9,107
SUPPLEMENTARY INFORMATION:
Non-cash investing and financing activities:
Acquisition of business and settlement of
debt in exchange for common stock in reverse
acquisition (Note 2) $ 1,242,323
Issuance of common stock for proceeds
advanced in 1999 . . . . . . . . . . . . . . $ 130,000
</TABLE>
The accompanying notes are an integral part of these consolidated
interim financial statements.
<PAGE>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2000
1. BASIS OF PRESENTATION AND CONTINUED OPERATIONS
The consolidated interim financial statements for the six-month period ended
June 30, 2000 included herein have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
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 such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading.
These financial statements reflect all adjustments consisting of normal
recurring adjustments, which, in the opinion of management, are necessary for
fair presentation of the information, contained herein. It is suggested that
these interim financial statements be read in conjunction with the financial
statements of the Company for the years ended December 31, 1999 and 1998 and the
notes thereto included in the Company's Form 10-KSB Annual Report and financial
statements of Merlin Software Technologies Inc. for the period from June 25,
1999 (incorporation) to December 31, 1999 included in an 8-K current report.
The Company follows the same accounting policies in preparation of interim
reports.
Results of operations for the interim periods are not indicative of annual
results.
The Company was organized August 30, 1995, under the laws of the State of Nevada
as Austin Land & Development, Inc. On January 7, 2000, the Company changed its
legal name to Merlin Software Technologies International, Inc. in contemplation
of closing a share exchange agreement with the principal stockholders of Merlin
Software Technologies Inc., a Nevada company developing Linux-based software
utilities and other business management software. The acquisition closed on
April 26, 2000 (Note 2). At June 30, 2000, the Company is considered a
development stage company in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 7.
These accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. As at June 30,
2000, the Company has recognized minimal revenue and has accumulated operating
losses of approximately $2,900,000 since its inception. The continuation of the
Company is dependent upon the continuing financial support of creditors and
stockholders and obtaining long-term financing and achieving profitability.
Management plans to raise additional equity capital to provide additional
financing for operating and capital requirements of the Company. It is
management's intention to raise new equity financing of approximately $5 million
within the upcoming year. Amounts raised will be used for further development
of the Company's products, to provide financing for the marketing and promotion
of its products, to secure products and for other working capital purposes
including hardware and software upgrades. While the Company is expending its
best efforts to achieve the above plans, there is no assurance that any such
activity will generate funds that will be available for operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. These financial statements do not include any adjustments
that might arise from this uncertainty.
<PAGE>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2000
2. ACQUISITION OF MERLIN SOFTWARE TECHNOLOGIES INC.
Effective April 26, 2000, the Company acquired all of the issued and outstanding
shares of software developer Merlin Software Technologies Inc. ("Merlin Private
Co.") in exchange for 7,986,665 shares of the Company's common stock. Merlin
Private Co. is a Nevada company incorporated on June 25, 1999 for the purpose of
the development of Linux-based software utilities and other business management
software. At June 30, 2000, 7,813,332 Merlin Private Co. shares had been
exchanged leaving 173,333 shares to be exchanged.
The transaction was accounted for as a recapitalization using accounting
principles applicable to reverse acquisitions. Following reverse acquisition
accounting, financial statements subsequent to the closing date are presented
as a continuation of Merlin Private Co. The value assigned to common stock of
the Company on acquisition based on the fair value of the net assets of the
Company at the date of acquisition was $1,242,323. Net assets at the acquisition
date included $1,275,000 raised by the Company in an equity private placement
and loaned to Merlin Private Co. and settled in contemplation of closing the
acquisition and accounts payable of $32,677.
Pro-forma information assuming the acquisition occurred on January 1, 2000 is as
follows:
Revenue $ 18,870
Loss for the period $ (2,287,868)
Loss per share $ (0.22)
Also, in connection with the acquisition, the Company was required to issue
86,665 share purchase warrants (Note 3) and 781,000 stock options (Note 4) to
previous holders of warrants and options in Merlin Private Co. Options and
warrants were to be exchanged on a 1:1 basis under the same terms and conditions
as existed in Merlin Private Co. As a consequence of the exchange of stock
options, additional compensation expense was booked in the period in the amount
of $1,265,558 representing the difference in the value of stock options between
the date of exchange and the grant date (Note 4).
3. LOANS PAYABLE
a) Private placement proceeds in Merlin Private Co. in 1999 totaling
$130,000 did not bear interest. On April 3, 2000, Merlin Private Co. issued
86,665 units of Merlin Private Co. whereby each unit consisted of one share of
common stock of Merlin Private Co. and a warrant to purchase one share of Merlin
Private Co. common stock at a price of $2 per share until expiry in April 2002.
Under the terms of the Share Exchange Agreement, the common shares were
exchanged for common shares of the Company. Warrants are to be exchanged for
warrants of the Company on a 1:1 basis under similar terms as existed for
warrants in Merlin Private Co. The exchange of warrants has not occurred as
of June 30, 2000.
<PAGE>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2000
3. LOANS PAYABLE - CONTINUED
b) In contemplation of closing the acquisition, the Company previously
advanced $1,275,000 to Merlin Private Co. out of the proceeds of a $1,275,000
private placement received in December 1999 and January 2000. The amounts were
advanced on an unsecured, non-interest bearing basis with no specific terms of
repayment. The private placement resulted in the issuance of 850,000 units at
$1.50 per unit with each unit consisting of one share of common stock and one
warrant to purchase common stock until March 2002 at $2 per share. All warrants
remained outstanding at June 30, 2000.
On consolidation, the intercompany loan was settled and reclassified as
additional paid-in capital.
4. STOCK OPTIONS
On May 1, 2000, the Company's Board of Directors approved the Company's 2000
Stock Option Plan to be approved by the Company's stockholders at the Company's
annual general meeting. The Plan provides for the granting of stock options to
key employees and consultants to purchase up to 3,000,000 common shares of the
Company. Under the Plan, the granting of incentive and non-qualified stock
options, exercise prices and terms are determined by the Company's Board of
Directors. For incentive options, the exercise price shall not be less than the
fair market value of the Company's common stock on the grant date. (In the case
of options issued to an employee who owns stock possessing more than 10% of the
voting power of all classes of the Company's stock on the date of grant, the
option price must not be less than 110% of the fair market value of common stock
on the grant date.). Options granted are not to exceed terms beyond ten years
(5 years in the case of an incentive stock option granted to a holder of 10
percent of the Company's common stock). Options granted in substitution for
outstanding options of an acquired company may be issued with an exercise price
equal to the exercise price of the substituted option in the acquired company.
Unless otherwise specified by the Board of Directors, stock options shall vest
at the rate of 25% per year starting one year following the granting of options.
On April 24, 2000, the Company granted 48,000 stock options with a exercise
price of $1 per option expiring in April 2010. On May 1, 2000, the Company's
Board of Directors approved the granting of 781,000 stock options with an
exercise price of $1 per share to previous optionees of Merlin Private Co. and
expiring in 2001 and 2002. At June 30, 2000, 829,000 stock options remained
outstanding of which 443,600 were exercisable on that date. The options granted
vest over periods from immediately to 24 months.
Compensation expense was recorded for options granted in replacement for options
in Merlin Private Co. in the amount of $1,265,558 representing the difference in
value of options exchanged and was recorded as follows:
<PAGE>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2000
Expense Amount
General and administration $ 493,114
Promotion and advertising 433,861
Research and development 338,583
-------
$ 1,265,558
The Company also recorded in general and administration expense for 2000 an
amount of $21,294 related to the issuance of 48,000 options granted to a
consultant on April 24, 2000. The total amount is being amortized over the
vesting period.
5. COMMITMENTS
a) On June 20, 2000, the Company entered into a consulting agreement for
financial services. The contract expires on June 30, 2002 and provides for
compensation should the Company receive financing from any investor introduced
by the consultant. Compensation includes:
- payment of $100,000 and 300,000 shares of the Company's common stock in
2000;
- payment of $230,000 in 2001;
- payment of 100,000 shares of the Company's common stock should the Company
achieve a NASDAQ listing; and
- right of first refusal on additional financing in consideration for a
commission of 5% of such capital in cash and 5% in stock.
b) The Company entered into an agreement with an officer for services in
April 2000 which provides for, among other things, a payment of approximately
$46,000 and 100,000 shares of common stock should a change of control occur. In
March 2000, the Company previously entered into agreements with three other
officers. Amongst other matters, terms of these agreements require that the
Company pay to the officers amounts aggregating $672,000 plus 1.9 million shares
of common stock in the event of a change of control of the Company.
<PAGE>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2000
6. NEW ACCOUNTING PRONOUNCEMENTS
a) In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was issued.
SFAS No. 133 required companies to recognize all derivatives contracts as either
assets or liabilities on the balance sheet and to measure them at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standards on January 1, 2001 to affect its
financial statements.
b) In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 dealing with revenue recognition which is effective in the
fourth quarter of 2000. The Company does not expect its adoption to have a
material effect on the Company's financial statements.
c) In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of Accounting Principles Board Opinion No. 25.
The Company is required to adopt the Interpretation on July 1, 2000. The
Interpretation requires, among other things, that stock options have been
modified to reduce the exercise price be accounted for as variable. Adoption of
this standard is not expected to have a material effect on the financial
statements.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's financial statements and the notes thereto, included as part of this
Quarterly Report.
The consolidated financial statements for the six-month period ended June 30,
2000 previously filed with the Form 10-QSB on August 17, 2000 have been amended
to recognize as compensation expense the amount attributable to the increase in
value of the stock options previously granted by Merlin Software Technologies
Inc. and exchanged for stock options with similar terms in the capital of the
Company. The effect of the adjustment was to increase the net loss for the
six-month period by $1,265,558 to $2,270,191 and loss per share by $0.13 per
share to $0.24 per share. Net assets were unaffected by the adjustment.
Management believes recognition of such compensation complies with current
standards and related interpretations of the issue of stock compensation.
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "intends", "expects" and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995. Although the Company's management believes that the expectations
reflected in these forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Actual
results could vary materially from those expressed in those forward-looking
statements. Readers are referred to "Sales and Marketing", "Product
Development" and "Management's Discussion and Analysis or Plan of Operation"
sections contained in this Quarterly Report, as well as the factors described
below in the section entitled "Factors That May Affect the Company's Future
Results", which identify some of the important factors or events that could
cause the Company's and Merlin's actual results or performance to differ
materially from those contained in the forward looking statements.
ACQUISITION OF MERLIN SOFTWARE TECHNOLOGIES, INC.
As described in the Company's Form 10-QSB for the quarter ended March 31, 2000,
the Company acquired (the "Acquisition") all of the issued and outstanding
shares of Merlin Software Technologies, Inc. ("Merlin") as of April 26, 2000.
The Company continues the business operations of Merlin (see "Business of Merlin
Software Technologies, Inc." below).
The Company, Merlin and certain principal shareholders of Merlin entered into a
Share Exchange Agreement, dated April 3, 2000 (the "Share Exchange Agreement"),
that provided for, among other matters, the following:
- On April 26, 2000, the effective date of the Share Exchange (the
"Effective Date"), and without any further action on the part of the
shareholders of Merlin, all of the common shares of Merlin (an aggregate of
7,986,665) were available for exchange for an equal number of common shares of
the Company (the "Exchange Shares").
- The Exchange Shares were issued and continue to be available for issuance
from the treasury of the Company as fully paid and non-assessable shares, and
are free and clear of all liens, charges and encumbrances. After the Share
Exchange, the Exchange Shares will be "restricted shares" under Rule 144 of the
Securities Act and subject to certain hold periods of one (1) or more years
unless such common shares are registered under the Securities Act of 1933.
- Following the Effective Date, by virtue of the Share Exchange, all
outstanding warrants of Merlin (an aggregate of 86,665) were available for
exchange for an equal number of warrants, and the outstanding stock options of
Merlin (an aggregate of 781,000) were exchanged for an equal number of stock
options in the Company, as applicable (one warrant or stock option of the
Company for each warrant or stock option of Merlin). The terms applicable to
the Merlin warrants or stock options will be applicable to the warrants or stock
options of the Company.
<PAGE>
The exchange ratio of the Share Exchange was determined by the Company and
Merlin based on a variety of factors and does not bear any direct relationship
to the assets or results of operations of the Company and Merlin, or to any
other historically-based criteria of value. In determining such ratio,
consideration was given to, among other things, each of the Company's and
Merlin's prospects and earnings potential, its management and the risks
associated with an exchange of the common shares of Merlin. Additionally,
consideration was given to the general status of the economy, the history and
prospects of the e-commerce industry and other relevant factors.
Merlin has authorized 50,000,000 shares of common stock, par value US$0.001 per
common share, and had 7,986,665 common shares issued and outstanding prior to
the Acquisition. Merlin has also authorized 1,000,000 preferred shares, par
value $0.01 per preferred share, none of which are issued and outstanding.
The Company has authorized 50,000,000 common shares with par value US$0.001 per
common share, with 4,450,025 common shares issued and outstanding prior to the
Acquisition. Pursuant to the Share Exchange Agreement, the Company was required
to issue 7,986,665 common shares of the Company in exchange for all of the
issued and outstanding common shares of Merlin, and as of July 21, 2000, the
Company had an aggregate of 12,263,357 common shares issued and outstanding.
Following the exchange of all of the Merlin shares (146,666 of which have yet to
be tendered for exchange by the registered shareholders), the former
shareholders of Merlin will hold approximately 64% of the issued and outstanding
common shares of the Company.
All shareholders of Merlin and the Board of Directors of each of Merlin and the
Company consented to the Acquisition, and the Acquisition was completed on April
12, 2000, subject only to the share certificates, options and share purchase
warrants of the Company being issued to the former shareholders of Merlin, the
majority of which have now been exchanged. As noted above, the Effective Date
was April 26, 2000, being the date the Articles of Share Exchange were filed
with the Secretary of State for Nevada. Merlin is now a wholly owned subsidiary
of the Company.
BUSINESS OF MERLIN SOFTWARE TECHNOLOGIES, INC.
A detailed description of Merlin's business, which is now carried on by the
Company following the Acquisition, can be found in the Company's Form 10-KSB
Annual Report, filed on April 14, 2000.
PLAN OF OPERATION
The Company presently requires substantial financing to implement any of its
current sales and marketing, product development, research and development or
any other operational plans, all as described below. Although the Company has
been actively seeking financing to expand its operations, it has yet to obtain
any such financing and if it fails to obtain additional financing, it will be
required to significantly curtail its current operations.
Sales and Marketing
The Company wishes to achieve significant market share for its products
following the Acquisition through the utilization of methods already
demonstrated by a number of companies to be extremely successful. One such
method involves the distribution of free versions of the Company's products over
the Internet, which has already proven to be an excellent way to attract future
paying customers. Indeed, Linux itself has achieved its current market
acceptance primarily because it has always been freely available over the
Internet. Many other successful companies have used a similar model to
establish market share including Netscape, Winzip, Eudora, Pegasus and
Microsoft.
Coupled with the free distribution of previous versions of its products over the
Internet, the Company will continue to offer commercial versions of its products
which are available for purchase directly from the Company's website at
www.merlinsoftech.com (the "Website"), at prices ranging from $69 to $89. The
Company is aggressively pursuing contractual arrangements with distributors,
resellers and other companies which will bundle its products together with the
Company's products. Commercial versions of PerfectBACKUP+ and HotWireFAX are
purchased with or without a printed manual and come with 1 year support and
maintenance service, including all updates and
<PAGE>
upgrades. For subsequent years, clients can purchase a subscription which
provides ongoing service, support, updates and upgrades.
The Company intends to continue to allocate $300,000 over the next six months to
position its major product, PerfectBACKUP+, in the industry and to increase its
market share in an expanding market. The promotion strategy is quite
comprehensive, and involves the hiring of three direct sales personnel augmented
by the distribution of advertising and promotional materials. In addition,
trade shows and "show and tells" will be part of the strategy. The Company
believes that the combination of the Website, advertising, trade shows and a
direct marketing campaign will be an effective manner via which to gain sales
for its products.
The Company's sales and marketing strategy is wholly dependent on the Company's
ability to raise further financing through the sale of its common shares or
securities convertible into its common shares. Although the Company has been
actively seeking financing to expand its operations, it has yet to obtain any
such financing and if it fails to obtain additional financing, it will be
required to significantly curtail its current operations, including its sales
and marketing plans.
The Company did not proceed with the aggressive advertising campaign as planned
during the first and second quarters of 2000 due to a change in its marketing
strategy. The campaign was to form part of the originally estimated $1,200,000
budgeted for marketing.
The Company did not enter into any further reseller and/or distributor
agreements during the second quarter of 2000. While revenues were still low,
sales of PerfectBACKUP+ increased each month during the second quarter. It is
not expected that there will be any revenues from HotWire FAX until the last
quarter of 2000.
The Website was significantly upgraded during the first quarter and arrangements
were made to improve the Website's visibility. The Company did not
substantially upgrade the Website during the second quarter.
Cash Requirements
The Company's cash requirements for the 12 months ending June 30, 2001 are
estimated at $3,000,000. The Company anticipates that it will be able to meet
these cash requirements by raising additional equity funds through private
placements. The cash requirements of $3,000,000 are based on the Company's
estimates for operational costs in the 12 months ended June 30, 2001.
The Company presently requires substantial financing to implement any of its
current sales and marketing, product development, research and development or
any other operational plans. Although the Company has been actively seeking
financing to expand its operations, it has yet to obtain any such financing and
if it fails to obtain additional financing, it will be required to significantly
curtail its current operations.
Research and Development
Merlin estimates that it expended $98,329 on the development of its current
software programs to December 31, 1999. During the six month period ended June
30, 2000, Merlin spent approximately $720,000 on the development of its software
products, primarily PerfectBACKUP+, including $340,000 of compensation recorded
on exchange of stock options. The Company anticipates that it will require
$600,000 to fund the continued development and enhancement of PerfectBACKUP+ and
HotWireFAX. The Company anticipates that it will expend $287,000 on the
continued development and enhancement of PerfectBACKUP+ and $313,000 on the
continued development and enhancement of HotWireFAX. The product development
for PerfectBACKUP+ and HotWire FAX was consolidated in the head office in
Burnaby, BC. Network services development also continues in the head office in
Burnaby, BC.
Continued development of the Company's product is wholly dependent on the
Company's ability to raise additional financing as stated above.
<PAGE>
Product Development
The computer software industry is characterized by rapid technological change
and is highly competitive in regard to timely product innovation. Accordingly,
the Company believes that its future success depends on its ability to enhance
current products that meet a wide range of customer needs and to develop new
products rapidly to attract new customers and provide additional solutions to
existing customers. In particular, the Company believes it must continue to
respond quickly to users' needs for broad functionality and ease of use.
The Company's strategy is to continue to enhance PerfectBackup+'s and
HotWireFAX's functionality through new releases and new feature development to
meet the continually advancing requirements of its customers. At the same time,
The Company may seek to acquire and develop new products to meet the needs of a
broader group of users.
The Option Source program, itself a product development project, was refined and
the Website was announced on March 28, 2000. All necessary legal documents were
posted on the Option Source website and links were created to relate the Option
Source project to the Website.
Employees
As of July 21, 2000, the Company had three full-time employees, including its
President and Chief Executive Officer (Robert Heller), its Vice President of
Sales and Secretary (Shelley Montgomery) and its Chief Financial Officer and
Treasurer (Trevor McConnell). Pursuant to the terms of the Acquisition, the
Company assumed all of Merlin's employees, which included 4 full-time employees,
4 full-time programmers, 5 consultants and 2 administration staff. During the
second quarter of 2000, the Company did not hire any further employees or
consultants.
On May 10, 2000, Shelley Montgomery resigned from her position as Treasurer of
both the Company and Merlin. As noted above, Ms. Montgomery remains the Vice
President of Sales of the Company and the Vice President of Marketing of Merlin.
In addition, on June 23, 2000, the Company appointed Ms. Montgomery Secretary of
both the Company and Merlin.
On May 10, 2000, Trevor McConnell was appointed Treasurer and Chief Financial
Officer of both the Company and Merlin by the respective Boards of Directors.
On May 22, 2000, the Board of Directors of the Company appointed Mr. McConnell a
director of the Company, and on June 23, 2000, Mr. McConnell was appointed a
director of Merlin.
On May 16, 2000, Martin Holt resigned as a director of the Company.
On June 23, 2000, Gary Heller resigned from his position as a director, Chief
Information Officer and Secretary of the Company, and as a director, Vice
President of Engineering and Secretary of Merlin.
Effective August 3, 2000, the Company closed its offices in Altamonte Springs,
Florida and Scottsdale, Arizona (collectively, the "US Offices"), and all of its
employees in the Florida office either resigned or were laid off, effective
August 3, 2000. The Company elected to close the US Offices in order to
consolidate its operations in an effort to conserve its limited financial
resources. The Company did not have the financial resources to continue to
operate three separate offices.
The Company intends to hire a number of individuals over the next twelve months
including a Chief Operating Officer, a Chief Technology Officer, a Vice
President Marketing, an OEM Sales Manager, a Channel Sales Manager, several
account managers, sales representatives, and several office and executive
assistants. As the Company presently requires substantial financing to
implement any of its current operational plans, including the hiring of
additional personnel, it will not be able to hire additional personnel until it
obtains such further financing. Although the Company has been actively seeking
financing to expand its operations, it has yet to obtain any such financing and
if it fails to obtain additional financing, it will be required to significantly
curtail its current operations.
<PAGE>
Purchase or Sale of Equipment
The Company does not anticipate that it will expend any significant amount of
money on equipment for its operations over the 12 month period ending June 30,
2001. However, the Company anticipates that it will make ongoing purchases of
computer hardware and software.
FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "intends", "expects" and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995. Although management believes that the expectations reflected in
these forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Actual results could vary
materially from those expressed in those statements. Readers are referred to
"Sales and Marketing", "Product Development" and "Management's Discussion and
Analysis or Plan of Operation" sections contained in this Quarterly Report, as
well as the factors described below in the section entitled "Factors That May
Affect the Company's Future Results", which identify some of the important
factors or events that could cause the Company's actual results or performance
to differ materially from those contained in the forward looking statements.
The following discussion relates to the factors which may substantially affect
the business to be carried on by the Company.
THE COMPANY MAY NOT BE SUCCESSFUL IN THE OPEN SYSTEMS MARKET
The future success of the Company's business is substantially dependent on its
ability to generate revenues from its product offerings. During the quarter
ended June 30, 2000, the Company did not enter into any further distribution or
reseller agreements to distribute or bundle PerfectBackup+. The Company
considers that such agreements are significant to its continued operations,
there can be no assurance that the Company will be successful in its efforts to
generate revenues from these agreements. Additionally, the software application
market is characterized by rapid technological growth and intense competition.
The Company may not have the financial or personnel resources to effectively
capitalize on, and continue with, its early and limited success in this market.
THE COMPANY IS DEPENDENT ON RESELLERS AND IF THE COMPANY IS NOT SUCCESSFUL IN
EXPANDING ITS DISTRIBUTION CHANNELS, ITS ABILITY TO GENERATE REVENUES WILL BE
HARMED
The Company's growth will be dependent on its ability to expand its third-party
distribution channels to market, sell and distribute its various software
products. The Company intends to invest significant resources in the
development of these distribution channels. The Company has only limited
experience in marketing its products through distributors and resellers.
Additionally, the Company will have no control over its third-party
distributors. There can be no assurance that the Company will be successful in
its efforts to generate revenue from these distribution channels, nor can there
be any assurance that it will be successful in recruiting new organizations to
represent it and its software products.
Merlin has entered into various distribution and reseller agreements to
distribute and/or bundle its software products. While the Company believes that
these arrangements will be beneficial, there can be no assurance that the
Company will be able to deliver its products to these companies in a timely
manner or that these companies will license its products in volumes anticipated
by the Company. Further, these agreements, together with the agreements are the
Company's only significant distribution agreements to date. While the Company's
strategy is to enter into additional agreements with resellers and distributors,
it may not be able to successfully attract additional vendors to distribute its
products. Any such failure would result in the Company having expended
significant resources with little or no return on its investment, which would
significantly harm its business.
These additional investments and responsibilities will require the Company to
expend substantial resources and may require it to divert employees from other
projects to provide the support services and development efforts required to
provide products and services to these third party vendors and other new third
parties, if any.
<PAGE>
THE COMPANY'S MARKET IS SUBJECT TO INTENSE COMPETITION AND CONTINUED COMPETITION
IN ITS MARKET MAY LEAD TO A REDUCTION IN ITS PRICES, FUTURE REVENUES AND MARKET
SHARE
The Company may experience intense competition from other software development
companies and the market is rapidly changing. The Company believes that its
ability to compete successfully depends on a number of factors, including the
performance, price and functionality of its products relative to those of its
competitors. Most of the Company's competitors are larger and have greater
financial, technical, marketing, support and other resources. As a result, they
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements than the Company. In addition, the software industry is
characterized by low barriers to entry. There can be no assurance that the
Company's current competitors or any new market entrants will not develop
software products that offer significant performance, price, or other advantages
over the Company's products. In addition, operating system vendors could
introduce new or upgrade existing operating systems or environments that include
similar software programs to those offered by the Company, which could render
its products obsolete and unmarketable. The Company may not be able to
successfully compete against current or future competitors which could
significantly harm its business.
THE COMPANY ANTICIPATES THAT A SIGNIFICANT PORTION OF ITS REVENUES WILL BE
DERIVED FROM TWO PRODUCTS AND IF EITHER OF THOSE PRODUCTS FAIL TO ACHIEVE AND
MAINTAIN MARKET ACCEPTANCE, THE COMPANY'S BUSINESS MAY BE SIGNIFICANTLY HARMED
The Company expects that a substantial portion of its future revenue will be
derived from the sale of two products: PerfectBACKUP+ and HotWireFAX. The
Company expects that these products and their extensions and derivatives will
account for a majority, if not all, of the Company's revenue for the foreseeable
future. Broad market acceptance of these products is, therefore, critical to its
future success. Failure to achieve broad market acceptance of these products, as
a result of competition, technological change, or otherwise, would significantly
harm its business. The Company's future financial performance will depend in
significant part on the successful development, introduction and market
acceptance of these two products and their respective product enhancements.
There can be no assurance that the Company will be successful in marketing
either of these products or any new products, applications or product
enhancements, and any failure to do so would significantly harm its business.
THE MARKET FOR THE COMPANY'S PRODUCTS IS CHARACTERIZED BY RAPID TECHNOLOGICAL
CHANGE AND THE COMPANY MAY NOT BE ABLE TO DEVELOP OR MARKET NEW PRODUCTS TO
RESPOND TO SUCH CHANGE
The market for the Company's products is characterized by rapid technological
developments, evolving industry standards and rapid changes in customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards, or changes in customer requirements could
render the Company's existing products obsolete and unmarketable. As a result,
its success depends upon the Company's ability to continue to enhance existing
products, respond to changing customer requirements and rapidly develop and
introduce new products that keep pace with technological developments and
emerging industry standards.
Additionally, other operating systems, such as Windows NT, may significantly
affect deployment of Unix and Linux systems for business critical applications.
A significant portion of the Company's revenue will be derived from Unix and
Linux based computer systems for the foreseeable future. A significant decline
in sales of Unix and Linux-based systems would decrease the demand for the
Company's products and would significantly harm its business. Finally, the
Company may not be successful in developing and marketing, on a timely basis,
product enhancements or new products that respond to technological change or
evolving industry standards, the Company may experience difficulties that could
delay or prevent the successful development, introduction and sale of these
products, and any such new products or product enhancements may not adequately
meet the requirements of the marketplace and achieve market acceptance.
There can be no assurance that the Company will be successful in developing and
marketing new features or products that respond to technological change or
evolving industry standards, that it will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of any
new features or products, or that its new features or products will adequately
meet the requirements of the marketplace and achieve market
<PAGE>
acceptance. Additionally, the Company's product development staff will be under
increased pressure to offer its products that operate on different vendor's
Linux and Unix based operating systems. Due to the complexity of the product, it
is extremely difficult to fully test PerfectBACKUP+ and HotWireFAX in all
possible environments and, although the Company employs a continual effort to
assure a quality product, there is no assurance that errors will not be found in
the released commercial product resulting in delays of new feature development.
If the Company is unable, due to lack of resources or for technological or other
reasons, to develop and introduce new features and products in a timely manner
in response to changing market conditions or customer requirements, its
business, operating results and financial condition will be materially adversely
affected.
THE COMPANY HAS A HISTORY OF LOSSES AND ANTICIPATES FURTHER SIGNIFICANT LOSSES
AND CANNOT ASSURE THAT IT WILL ACHIEVE PROFITABILITY
The Company has incurred operating losses since inception and, as a result, the
Company cannot be certain that it will generate any revenue or revenues
sufficient to achieve profitability. The Company expects to continue to incur
significant losses for the foreseeable future and these losses may be higher
than its current losses. The Company cannot be certain when or if it will
achieve profitability. Failure to generate revenues or significant revenues or
to become and remain profitable may adversely affect the market price or the
Company's common stock and its ability to raise capital and continue operations.
FURTHER CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
Since inception, the Company has financed its operations through sales of equity
securities. The Company does not currently have sufficient capital resources to
maintain its current operations. The Company requires substantial additional
financing to continue its current operations, to implement its current plans to
expand its operations and fund its long-term product development. The Company
has been actively seeking financing to expand its operations. If any planned
financing fails to close and the Company is unable to obtain alternative
financing as needed, its long-term product development and commercialization
programs would be delayed or prevented and the Company may be required to
curtail its operations.
PENNY STOCK RULES
The Company's common shares are subject to rules promulgated by the SEC relating
to "penny stocks," which apply to companies whose shares are not traded on a
national stock exchange or on the NASDAQ system, trade at less than $5.00 per
share, or who do not meet certain other financial requirements specified by the
SEC. These rules require brokers who sell "penny stocks" to persons other than
established customers and "accredited investors" to complete certain
documentation, make suitability inquiries of investors, and provide investors
with certain information concerning the risks of trading in the such penny
stocks. These rules may discourage or restrict the ability of brokers to sell
the Company's common shares and may affect the secondary market for the
Company's common shares. These rules could also hamper the Company's ability to
raise funds in the primary market for the Company's common shares.
NATURE OF THE COMPANY'S PRESENT OPERATIONS
The success of the Company's proposed plan of operation will depend to a great
extent on the operations, financial condition, and management of Merlin. Merlin
has a limited operating history, as it was incorporated on June 25, 1999. As a
result, the Company cannot ensure that it will be a commercially or economically
viable business operation. It will face all of the risks inherent in a new
business, the majority of which are beyond the control of the management of both
the Company and Merlin.
INTERNET AVAILABILITY
Historically, Merlin's business was based on the sale of the official versions
of PerfectBACKUP+. Using a standard telephone connection, a user can currently
download previous releases of PerfectBACKUP+ from the Internet free of charge.
Although the distribution of free older versions of PerfectBACKUP+ over the
Internet has proved to be an excellent way in which to attract future paying
customers, the Company would prefer users to purchase the
<PAGE>
official versions. To avoid significant download time, users can purchase the
shrink-wrapped version of PerfectBACKUP+. Any resulting decrease in product
revenue as a result, if significant, could have a material adverse effect on the
Company's business, operating results and financial condition.
DIFFICULTIES IN DEPLOYING THE COMPANY'S PRODUCTS
Deployment of the Company's products often involves a significant commitment of
resources, financial and otherwise, by its customers. The deployment process
can be lengthy due to the size and complexity of the Company's products and the
need to purchase and install new applications. If the Company fails to attract
and retain services personnel, the failure of companies with which Merlin has
relationships to commit sufficient resources towards deploying its products, or
a delay in deployment for any other reason could result in dissatisfied
customers. This could have a material adverse effect on the Company's
reputation and on the Merlin brand, which in turn could materially adversely
affect the Company's business, operating results and financial condition.
LIMITED OPERATING HISTORY/EARLY STAGE COMPANY
Merlin was incorporated on June 25, 1999 and the Company commenced its current
operations on January 7, 2000, and accordingly, both the Company and Merlin have
a relatively limited operating history upon which potential investors in the
Company can evaluate its business and prospects. Investors must consider the
Company's prospects in light of the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets.
FLUCTUATION OF QUARTERLY RESULTS/DIFFICULTY IN FORECASTING QUARTERLY RESULTS
Due to the limited operating histories of the Company, and the unpredictability
of the software industry generally, the Company's predicted revenue and net
income (loss) may fluctuate significantly from quarter to quarter and, as a
result, are difficult to forecast. The Company bases its current and projected
future expense levels in part on its estimates of future revenue. The Company's
expenses are to a large extent fixed in the short term. It may not be able to
adjust its spending quickly if revenues fall short of the Company's
expectations. Accordingly, a revenue shortfall in a particular quarter would
have a disproportionate adverse effect on the Company's net income (loss) for
that quarter. Further, the Company may make pricing, purchasing, service,
marketing, acquisition or financing decisions that could adversely affect its
business, operating results and financial condition. The Company's quarterly
operating results will fluctuate for many reasons, including:
- the Company's ability to retain existing customers, attract new customers
and satisfy its demand;
- changes in gross margins of current and future products and services;
- the timing of the release of upgraded versions of the Company's products;
- introduction of new products and services by the Company or its
competitors;
- changes in the market acceptance of Linux and Unix-based operating systems
and software programs;
- changes in the usage of the Internet and online services;
- timing of upgrades and developments in the Linux kernel and other open
source software products;
- the effects of acquisitions and other business combinations, including
one-time charges, goodwill amortization and integration expenses or
difficulties; and
- technical difficulties or system downtime affecting the Internet or the
Website.
For these reasons, investors should not rely on period-to-period comparisons of
the Company's financial results to forecast its future performance. The
Company's future operating results may fall below expectations of securities
<PAGE>
analysts or investors, which would likely cause the trading price of the
Company's common stock to decline significantly.
STRAIN ON RESOURCES AS A RESULT OF RAPID GROWTH
Since the Company's incorporation, it has experienced a period of rapid growth
and expansion which in the past has placed a significant strain on its
resources. The Company expects that its anticipated growth will further strain
management, operational and financial resources. The Company's management team
has had limited experience managing a rapidly growing company on either a public
or private basis. To accommodate its anticipated growth, the Company must:
- improve existing and implement new operational and financial systems,
procedures and controls;
- hire, train and manage additional qualified personnel, including sales and
marketing, professional services and software engineering and development
personnel; and
- effectively manage multiple relationships with its customers, suppliers
and other third parties.
The Company may not be able to install and implement adequate operational and
financial systems, procedures and controls in an efficient and timely manner,
and the Company's current or planned systems, procedures and controls may not be
adequate to support its future operations. The difficulties associated with
installing and implementing these new systems, procedures and controls may place
a significant burden on management and internal resources. In addition, if the
Company grows internationally, as it intends, it will have to expand its
worldwide operations and enhance its communications infrastructure. Any delay
in the implementation of, or any disruption in the transition to, new or
enhanced systems, procedures or controls could adversely affect the Company's
ability to accurately forecast sales demand, manage our supply chain, and record
and report financial and management information on a timely and accurate basis.
The Company's inability to manage growth effectively could have a materially
adverse effect on its business, operating results and financial condition.
KEY EMPLOYEES
The Company recently closed its two offices in the United States and was unable
to persuade its employees located in those offices to move to its head office
location in Burnaby, BC. Accordingly, the Company is immediately required to
replace a significant number of its development personnel in order to implement
its plan of operation and to continue to develop its software products.
The Company's future success depends on the continued services of its key
officers, including Robert Heller (President and CEO), Shelley Montgomery (Vice
President of Sales and Secretary), and Trevor McConnell (Chief Financial Officer
and Treasurer). The loss of the technical knowledge and industry expertise of
any of these people could seriously impede the Company's success. Moreover, the
loss of one or a group of the Company's key employees, particularly to a
competitor, and any resulting loss of customers to a competitor could materially
adversely affect the Company's business, operating results and financial
condition.
COMPETITION - LINUX AND UNIX-BASED PRODUCTS AND TOOLS
The market for Linux and Unix-based products and tools is new, rapidly evolving
and intensely competitive. The Company expects competition to persist and
intensify in the future. The Company expects the number of suppliers of Linux
and Unix-based software applications to grow as Linux and Unix-based operating
systems gain increased market share from its competition. In addition, there
are a number of companies with large customer bases and greater financial
resources and name recognition, such as Sun Microsystems, Corel and Cygnus
Solutions, that have indicated a growing interest in the market for Linux and
Unix-based products and tools. These companies may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies, and
offer more attractive terms to their customers than the Company. Barriers to
entry are minimal and accordingly, it is possible that new competitors or
relationships among competitors may emerge and rapidly acquire significant
market share. These companies may be able to leverage their existing service
organizations and provide higher levels of support
<PAGE>
on a more cost-effective basis than the Company. If the Company is not able to
compete successfully with current or future competitors, its business, operating
results and financial condition will be materially adversely affected.
ESTABLISHMENT AND MAINTENANCE OF BUSINESS RELATIONSHIPS
The Company's success depends on its ability to continue to establish and
maintain distribution, reseller and other collaborative relationships with
industry-leading hardware manufacturers, distributors, software vendors and
enterprise solutions providers in order to offer products and services to a
larger customer base than the Company could otherwise reach through direct sales
and marketing efforts. The Company must develop and expand its distribution
channels through relationships with original equipment manufacturers (OEMs) and
value-added resellers (VARs). If the Company is unable to maintain its existing
relationships or enter into additional relationships, it will have to devote
substantially more resources to the distribution, sale and marketing of its
products than it otherwise intends to, as a result of which, the Company's
business, operating results and financial condition may be materially adversely
affected.
The Company's existing relationships do not, and any future relationships may
not, afford the Company any exclusive marketing or distribution rights. The
companies with which The Company currently has such relationships are free to
pursue alternative technologies and to develop alternative products in addition
to or in lieu of its products, either on their own or in collaboration with
others, including the Company's competitors. The Company cannot guarantee that
its resellers and distributors will market the Company's products effectively or
continue to devote the resources necessary to provide effective sales, marketing
and technical support. In order to support and develop leads for the Company's
distribution channels, it plans to expand its field sales and support staff
significantly. The Company cannot guarantee that it will be able to
successfully complete this internal expansion, that the revenue generated from
this expansion will exceed its cost or that the Company's expanded sales and
support staff will be able to compete successfully against the significantly
more extensive and better-funded sales and marketing operations of many of our
current or potential competitors. The Company's inability to effectively manage
the expansion of its sales and support staff, or its programming staff, would
materially adversely affect the Company's business, operating results and
financial condition.
INTERNATIONAL EXPANSION
The Company plans to continue to expand its presence in foreign markets, as was
started by Merlin through its agreements with such companies as Italsel SRI
(Italy), G.T. Enterprises (India) and Hanmi Information & Communications Co.
Ltd. (Korea). The Company has little experience in marketing and distributing
products or services for these markets and there can be no assurance that any
revenues will be generated as a result of such agreements. As the Company
expands its international operations, it will face a number of additional risks
associated with the conduct of business overseas, including:
- difficulties relating to the management and administration of a globally-
dispersed business;
- fluctuations in exchange rates;
- the burdens of complying with a wide variety of foreign laws;
- the uncertainty of laws and enforcement in certain countries relating to
the protection of intellectual property rights;
- reductions in business activity during the summer months in Europe and
certain other parts of the world;
- export controls;
- multiple and possibly overlapping tax structures;
- changes in import/export duties and quotas; and
<PAGE>
- economic or political instability in some international markets.
NEW BUSINESS COMBINATIONS/ALLIANCES
The Company may expand its operations or market presence by entering into
business combinations, investments, joint ventures or other strategic alliances
with other companies. These transactions create risks such as:
- difficulty assimilating the operations, technology and personnel of the
combined companies;
- disruption of the Company's ongoing business;
- problems retaining key technical and managerial personnel;
- one-time in-process research and development charges and ongoing expenses
associated with amortization of goodwill and other purchased intangible assets;
- potential dilution to the Company's stockholders;
- additional operating losses and expenses of acquired businesses; and
- impairment of relationships with existing employees, customers and
business partners.
The Company's inability to address these risks could have a materially adverse
effect on its business, operating results and financial condition.
COMPETITION FOR SKILLED PERSONNEL
The Company recently closed its two offices in the United States and was unable
to persuade its employees located in those offices to move to its head office
location in Burnaby, BC. Accordingly, the Company is immediately required to
replace a significant number of its development personnel in order to implement
its plan of operation and to continue to develop its software products.
The Company's future performance also depends upon its ability to attract and
retain highly qualified programming, technical, sales, marketing and managerial
personnel. There is intense competition for skilled personnel, particularly in
the field of software engineering. If the Company does not succeed in retaining
its personnel or in attracting new employees, its business could suffer
significantly.
NEED FOR CONTINUED DEVELOPMENT AND MAINTENANCE OF THE INTERNET'S INFRASTRUCTURE
The success of the Company's Internet strategy will depend in large part on the
continued development and maintenance of the infrastructure of the Internet.
Because global commerce and the online exchange of information is new and
evolving, the Company cannot predict with any certainty that the Internet will
be a viable commercial marketplace in the long term. The Internet has
experienced, and it may continue to experience, significant growth in number of
users and amount of traffic. To the extent that the Internet continues to
experience an increased number of users, frequency of use or increased bandwidth
requirements of users, it may not be able to support the demands placed upon it
by such growth, and its performance and reliability may suffer. Furthermore, the
Internet has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and could face similar outages and
delays in the future. Any outage or delay could affect the level of Internet
usage, as well as the level of traffic on the Website. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols to handle increased levels of activity or due to
increased governmental regulation. If the necessary infrastructure, standards
or protocols or complementary products, services or facilities are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, operating results and financial condition could be
materially adversely affected.
<PAGE>
Fire, floods, hurricanes, tornadoes, earthquakes, power loss, telecommunications
failures, break-ins and similar events could damage the Company's computer
hardware systems. In addition, although the Company has implemented network
security measures, its servers are vulnerable to computer viruses, electronic
break-ins, human error and other similarly disruptive problems which could
adversely affect its systems and the Website. Although the Company has tried to
prevent unauthorized access to its systems, it cannot eliminate this risk
entirely. The Company's business could be adversely affected if its systems
were affected by any of these occurrences. The Company's insurance policies may
not adequately compensate it for any losses that may occur due to failures or
interruptions in the Company's systems. It does not presently have any
secondary "off-site" systems or a formal disaster recovery plan. The Website
must accommodate a high volume of traffic and deliver frequently updated
information. The Website has in the past experienced slower response times or
decreased traffic for a variety of reasons. These occurrences have not had a
material impact on the Company' s business. These types of occurrences in the
future, however, could materially adversely affect its reputation and brand name
and could cause users to perceive the Website as not functioning properly.
Under these circumstances, the Company's customers could choose another website
or other methods to obtain Linux or Unix-related information.
POSSIBILITY OF PRODUCT DEFECTS
Despite testing, errors may be found in the Company's products after
commencement of commercial shipments. If errors are discovered, the Company may
not be able to successfully correct them in a timely manner or at all. Errors
and failures in the Company's products could result in a loss of, or delay in,
market acceptance of its products and could damage its reputation and ability to
convince commercial users of the benefits of Linux or Unix-based operating
systems and other open source software products. In addition, the Company may
need to make significant expenditures of capital resources in order to eliminate
errors and failures. Although the license agreements with the Company's
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims, it is possible that these provisions may
not be effective or enforceable under the laws of some jurisdictions. In
addition, the Company's insurance policies may not adequately limit its exposure
with respect to this type of claim. A product liability claim, even if
unsuccessful, could be costly and time consuming. Claims related to the
occurrence or discovery of these types of errors or failures could have a
materially adverse effect on the Company's business, operating results and
financial condition.
INFRINGEMENT CLAIMS
The Company may be subject to future litigation based on claims that its
products infringe the intellectual property rights of others. Claims of
infringement could require that the Company reengineer its products or seek to
obtain licenses from third parties in order to continue offering its products.
In addition, an adverse legal decision affecting the Company's intellectual
property, or the use of significant resources to defend against this type of
claim, could materially adversely affect the Company's business, operating
results and financial condition.
TRADEMARK PROTECTION
There is no assurance that patent, copyright and trademark registration or
protection for the Company's intellectual property will be available, and
therefore the Company may have little or no protection for its intellectual
property assets, comprising the main business assets of the Company.
The Company's software technology, business tools, consumer products and its
other intellectual property are important to the Company's continued operations
and success. The Company's efforts to protect this intellectual property may
not be adequate. Unauthorized parties may infringe upon or misappropriate its
software technology, business tools and consumer products or other proprietary
information. In the future, litigation may be necessary to protect and enforce
the Company's intellectual property rights or to determine the validity and
scope of its intellectual property, which could be time consuming and costly.
The Company could also be subjected to intellectual property infringement claims
as the numbers of competitors grows. These claims, even if not meritorious,
could be expensive and divert the Company's attention from its continued
operations. If the Company becomes liable to any third parties for such claims,
it could be required to pay a substantial damage award or to develop comparable
non-infringing intellectual property and systems.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company knows of no material, active or pending legal proceedings against
it, nor is the Company involved as a plaintiff in any material proceedings or
pending litigation. There are no proceedings in which any director, officer or
affiliate of the Company, or any registered or beneficial shareholder is an
adverse party or has a material interest adverse to the Company.
ITEM 2. CHANGES IN SECURITIES.
Share Exchange with Merlin Software Technologies, Inc.
Pursuant to the Share Exchange Agreement, the Company acquired all of the issued
and outstanding common shares of Merlin in exchange for the issuance of an
aggregate of 7,986,665 common shares of the Company. These common shares have
now been issued to the former shareholders of Merlin (with the exception of a
total of 146,666 common shares which have not yet been tendered by certain
shareholders of Merlin) relying on Section 4(2), Rule 506 of Regulation D and
Regulation S of the Securities Act of 1933, as applicable. As part of the Share
Exchange, the Company has also agreed to issue 86,665 share purchase warrants
and 781,000 stock options to the former shareholders of Merlin relying on
Section 4(2), Rule 506 of Regulation D and Regulation S of the Securities Act of
1933, as applicable. Although the Share Exchange was effective on April 26,
2000, the Company has not yet issued the warrants to the former warrant holders
of Merlin.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On May 5, 2000, Hank Barber was appointed to the Company's Board of Directors.
Also on May 5, 2000, the Company amended its Bylaws, expanding the number of
directors on the Board of Directors to between one and twelve (from between one
and five).
On May 10, 2000, Shelley Montgomery resigned from her position as Treasurer of
both the Company and Merlin. Ms. Montgomery remains the Vice President of Sales
of the Company and of Merlin.
On May 10, 2000, Trevor McConnell was appointed Treasurer and Chief Financial
Officer of both the Company and Merlin by the respective Boards of Directors.
On May 16, 2000, Martin Holt resigned as a director of the Company.
On May 22, 2000, the Board of Directors of the Company appointed Trevor
McConnell a director of the Company.
On June 23, 2000, the Board of Directors of Merlin appointed Trevor McConnell a
director of Merlin.
On June 23, 2000, Gary Heller resigned from all of his positions (including as
an officer and a director), of both the Company and Merlin, effective July 7,
2000.
On June 23, 2000, the Board of Directors of both the Company and Merlin
appointed Shelley Montgomery Secretary of each of the Company and Merlin.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports of Form 8-K
On April 5, 2000 and April 13, 2000, the Company filed a Form 8-K/A and a Form
8-K/2A with respect to the change in its independent accountants. The Company's
Board of Directors approved the change of accountants to BDO Dunwoody, LLP on
March 20, 2000. During the Company's two most recent fiscal years, and any
subsequent interim periods preceding the change in accountants, there were no
disagreements with Barry Friedman, P.C., CPA on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
procedure. The report on the financial statements prepared by Barry Friedman,
P.C., CPA, for either of the last two years did not contain an adverse opinion
or a disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principals. The decision to change accountants was
based on the appointment of new directors to the Company's Board of Directors.
Barry Friedman, P.C., CPA provided the Company with a letter addressed to the
SEC stating that he agreed with the statements made in the Form 8-K/2A. The
Company has engaged the firm of BDO Dunwoody LLP as of March 20, 2000. BDO
Dunwoody LLP was not consulted on any matter relating to accounting principles
to a specific transaction, either completed or proposed or the type of audit
opinion that might be rendered on the Company's financial statements.
On July 7, 2000, the Company filed a Current Report on Form 8-K announcing the
resignation of Hank Barber from the Company's Board of Directors effective June
25, 2000.
Consolidated Financial Statements Filed as a Part of the Quarterly Report
The Company's consolidated financial statements include:
Balance Sheets
Statements of Changes in Stockholders' Equity
Statement of Operations
Statements of Cash Flows
Notes to the Financial Statements
Exhibits Required by Item 601 of Regulation S-B
(3) Articles of Incorporation and By-laws:
3.1 Articles of Incorporation of the Company (incorporated by reference
from the Company's Form 10-SB Registration Statement, filed August
31, 1999)
3.2 Bylaws of the Company (incorporated by reference from the Company's
Form 10-SB Registration Statement, filed August 31, 1999)
3.3 Certificate of Amendment to Articles of Incorporation of the
Company, dated January 7, 2000 (incorporated by reference from the
Company's Form 10-KSB Annual Report, filed April 14, 2000)
3.4 Corporate Charter of the Company, dated March 27, 2000
(incorporated by reference from the Company's Form 10-KSB Annual
Report, filed April 14, 2000)
3.5 Articles of Incorporation of Merlin, dated June 25, 1999
(incorporated by reference from the Company's Form 10-KSB Annual
Report, filed April 14, 2000)
<PAGE>
3.6 Bylaws of Merlin, dated June 25, 1999 (incorporated by reference
from the Company's Form 10-KSB Annual Report, filed April 14,
2000)
3.7 Corporate Charter of Merlin, dated June 25, 1999 (incorporated by
reference from the Company's Form 10-KSB Annual Report, filed April
14, 2000)
(10) Material Contracts
10.1 Share Exchange Agreement, dated April 3, 2000, between the
Company, Merlin, Robert Heller, Gary Heller and Shelley Montgomery
(incorporated by reference from the Company's Form 10-KSB Annual
Report, filed April 14, 2000)
(27) Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MERLIN SOFTWARE TECHNOLOGIES
INTERNATIONAL, INC.
By: /s/ Robert Heller
Robert Heller, President and CEO/Director
Date: November 9, 2000
By: /s/ Trevor McConnell
Trevor McConnell, Chief Financial Officer
and Treasurer/Director
Date: November 9, 2000
