<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
[_] 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: 000-28069
INCHORUS.COM
(Exact name of registrant as specified in its charter)
Nevada 86-0891610
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2041 Mission College Boulevard, Suite 259, Santa Clara, CA 95054
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (408) 496-6668
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 28, 2000, the registrant had 9,976,365 shares of common stock,
$.001 par value per share, outstanding.
<PAGE>
INCHORUS.COM
CONTENTS
<TABLE>
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Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, December 31, 1999 (unaudited)
and March 31, 1999 4
Statements of Operations, Three and Nine Months
Ended December 31, 1999 (unaudited) and
December 31, 1998 (unaudited) 5
Statements of Cash Flows, Nine Months Ended
December 31, 1999 (unaudited) and December 31, 1998
(unaudited) 7
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
3
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InChorus.com
(formerly known as Softlink, Inc.)
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December, 31 March 31,
1999 1999
- ---------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 849,400 $ 307,500
Notes receivable 68,300 -
Accounts receivable, net of allowance for doubtful accounts
of $474,500 and $0, respectively 492,400 430,600
Inventories 152,200 39,600
Prepaid expenses and other current assets 199,900 83,500
- ---------------------------------------------------------------------------------------------------
Total Current Assets 1,762,200 861,200
Property and Equipment, net 157,000 54,300
Deposits and Other Assets 79,900 52,000
- ---------------------------------------------------------------------------------------------------
$ 1,999,100 $ 967,500
- ---------------------------------------------------------------------------------------------------
</TABLE>
4
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InChorus.com
(formerly known as Softlink, Inc.)
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
- ---------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 401,500 $ 79,700
Accrued liabilities 150,900 6,700
Deferred revenue 47,200 -
Obligations under capital lease 6,000 -
- ---------------------------------------------------------------------------------------------------
Total Current Liabilities 605,600 86,400
- ---------------------------------------------------------------------------------------------------
Commitments, Contingencies and Subsequent Events
Stockholders' Equity:
Convertible preferred stock $0.001 par value; 1,000,000 3,078,800
shares authorized; 300 shares issued and outstanding -
Common stock, $0.001 par value; 50,000,000 shares authorized;
9,394,380 and 9,363,130 shares issued and outstanding, 9,400 9,400
respectively
Additional paid-in capital 6,481,600 5,634,700
Accumulated deficit (5,419,700) (1,646,500)
- ---------------------------------------------------------------------------------------------------
4,150,100 3,997,600
Less: Treasury stock at cost (1,454,356 and 1,593,750 shares,
respectively) (2,738,800) (3,116,500)
Less: Notes receivable (17,800) -
- ---------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,393,500 881,100
- ---------------------------------------------------------------------------------------------------
$ 1,999,100 $ 967,500
- ---------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
InChorus.com
(formerly known as Softlink, Inc.)
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales, including license fee income $ 286,500 $ 166,500 $ 947,400 $ 502,000
Cost of Sales 203,200 11,700 379,200 46,800
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 83,300 154,800 568,200 455,200
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Research and development 315,600 98,800 675,100 161,100
Sales and marketing 1,055,900 155,700 1,692,000 505,800
General and administrative 506,600 350,500 1,500,200 510,700
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,878,100 605,000 3,867,300 1,177,600
- ----------------------------------------------------------------------------------------------------------------------------------
Loss From Operations (1,794,800) (450,200) (3,299,100) (722,400)
- ----------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 41,800 59,700 60,200 63,200
Interest expense (300) - (10,700) (2,500)
Other 600 - (6,600) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 42,100 59,700 42,900 60,700
- ----------------------------------------------------------------------------------------------------------------------------------
Loss Before Provision for Income Taxes (1,752,700) (390,500) (3,256,200) (661,700)
Provision for Income Taxes 4,100 - 35,000 800
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loss (1,756,800) (390,500) (3,291,200) (662,500)
Preferred Stock Dividends (52,500) - (482,000) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loss Available to Common Shareholders $(1,809,300) $ (390,500) $(3,773,200) $ (662,500)
- ----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share $ (0.23) $ (0.06) $ (0.48) $ (0.11)
- ----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted weighted-average common shares outstanding 7,914,800 6,280,700 7,833,000 6,210,500
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
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InChorus.com
(formerly known as Softlink, Inc.)
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (3,291,200) $ (662,500)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 19,200 4,600
Allowance for doubtful accounts 474,500 -
Compensation relating to stock options issued 606,700 150,300
Compensation relating to stock issued for services 20,900 -
Compensation relating to issuance of treasury stock - 108,300
Accrued interest on notes receivable (18,300) (59,500)
Changes in current operating assets and liabilities:
Accounts receivable (536,300) (290,100)
Inventories (112,600) (17,700)
Prepaid expenses and other current assets (116,400) -
Bank overdraft - 3,700
Accounts payable 321,800 20,600
Accrued expenses 144,200 18,300
Deferred revenue 47,200 -
Federal and State tax payable - 800
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (2,440,300) (723,200)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Payments to acquire property and equipment (114,900) (20,700)
Deposits and other assets (27,900) (2,000)
Payments for notes receivable (130,000) -
Proceeds from repayment of notes receivable 80,000 -
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (192,800) (22,700)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from note payable to shareholder 218,300 42,000
Principal payments on notes payable to shareholder (218,300) (50,000)
Proceeds from borrowing on notes payable 120,000 125,000
Principal payments on notes payable (120,000) (11,600)
Principal payments on capital lease obligations (1,000) -
Proceeds from issuance of convertible preferred stock 2,788,700 -
Proceeds from issuance of common stock 1,200 -
Proceeds from issuance of treasury stock 380,000 -
Proceeds from exercise of stock options 6,100 -
Payments received on notes receivable - 588,600
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 3,175,000 694,000
- ------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 541,900 51,900
Cash and Cash Equivalents, beginning of period 307,500 51,900
- ------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 849,400 $ -
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
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InChorus.com
(formerly known as Softlink, Inc.)
Notes to Financial Statements
(unaudited)
================================================================================
1. THE COMPANY
Softlink, Inc. (formerly Draco Technologies, Inc., a publicly traded
shell corporation) (the Company), a Nevada Corporation, was
incorporated on July 24, 1997.
On March 31, 1998 the Company completed the acquisition of 100% of the
outstanding common stock of Softlink, Inc., a California corporation,
(Softlink CA) in exchange for 2,873,145 shares of the Company's $.001
par value common stock. For accounting purposes, the acquisition has
been treated as the acquisition of the Company by Softlink CA with
Softlink CA as the acquiror (reverse acquisition). The historical
financial statements prior to March 31, 1998 are those of Softlink CA.
Since the Company prior to the reverse acquisition was a public shell
corporation with no significant operations, pro-forma information
giving effect to the acquisition is not presented. All shares and per
share data prior to the acquisition have been restated to reflect the
stock issuance as a recapitalization of Softlink CA. The 2,627,280
shares held by the shareholders of the Company prior to the
acquisition have been recognized as if they were issued in connection
with the acquisition of the Company by Softlink CA. On October 21,
1998, the Company's stock became publicly traded.
Softlink CA was incorporated on November 8, 1995. Softlink CA's
principal activities consist of developing e-mail enhancement
software, and licensing and marketing its products through wholesalers
and end-users located primarily in North America.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included.
8
<PAGE>
InChorus.com
(formerly known as Softlink, Inc.)
Notes to Financial Statements
(unaudited)
================================================================================
Operating results for the nine-month period ended December 31, 1999
are not necessarily indicative of the results that may be expected for
the year ending March 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in
the Company's registration statement on Form SB-2, filed February 8,
2000.
3. LICENSE AGREEMENT
On March 27, 1998, Softlink, Inc. entered into a license agreement
with an unrelated Japanese company ("the Licensee"), which provides
for the exclusive right to sell certain of Softlink, Inc.'s products
in Japan. The license agreement calls for the payment of a minimum
guarantee royalty by the licensee of $800,000 during the first fifteen
months and $1,200,000 during the next twelve months. During the nine
months ended December 31, 1999 and 1998, the Company recognized
$153,100 and $480,000, respectively. During the three months ended
December 31, 1999 and 1998, the Company recognized $0 and $160,000,
respectively. Included in accounts receivable as of December 31, 1999
and March 31, 1999 are $500,000 and $421,900, respectively, due from
the Licensee. Included in the allowance for doubtful accounts as of
December 31, 1999 is $250,000 relating to this receivable. Management
is continuing to assess the adequacy of the allowance for doubtful
accounts in consideration of anticipated payments against the balance
of the receivable.
4. SUBSEQUENT EVENTS
Subsequent to February 16, 2000, the effective date of the Company's
Form SB-2, the following subsequent events occurred:
In February 2000, the Company's board of directors canceled the
remaining 1,454,356 shares of treasury stock outstanding.
In February 2000, the Company changed its name from Softlink, Inc. to
InChorus.com.
In March 2000, two shareholders converted an aggregate of 96 shares of
preferred stock and accrued dividends into 1,351,043 shares of common
stock, in addition to what they had already converted in January 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT
LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS
OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES",
"INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON
THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED
BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-QSB
ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED THE COMPANY'S RESULTS
AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN
THE FORWARD-LOOKING STATEMENTS.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
Overview
We provide rich media email message creation services and software that
bring life to online communication with voice, sound, animation and graphics. We
develop and market software products that use our proprietary technology to
allow businesses and consumers to communicate through text, voice, sound,
annotation and animation.
We were incorporated in November 1995 as Softlink, Inc., a California
corporation ("Softlink California") and shipped our first product, eMail
VOICELink, in August 1997. For the period from inception through December 1997,
our revenue was minimal and our operating activities related primarily to the
development of our infrastructure and our first products.
In March 1998, Softlink California entered into a reorganization with Draco
Technologies, Inc., a Nevada corporation. Under the reorganization, the
stockholders of Softlink California received approximately 0.6745344 shares of
common stock of Draco Technologies, Inc. in exchange for each of their shares of
Softlink California, and Softlink California became a wholly-owned subsidiary of
Draco. Draco then changed its name to Softlink, Inc.
We began the marketing and promotion of our products when we introduced our
second product, PowerLink, a precursor of eMail inChorus, in November 1997.
10
<PAGE>
Beginning in 1998, we also focused on recruiting personnel and raising capital.
To date, our revenues have been derived primarily from the licensing of our
products. We are attempting to increase sales of our software to complement our
licensing revenue; however, we believe that it is too early to determine whether
this business model will be successful in the future.
We also intend to broaden our business in 2000 by offering turnkey
multimedia email services. These services would transfer to us the
responsibility for constructing and disseminating multimedia messages on behalf
of our customers. We would be competing against production and advertising
companies in this market, and we may not compete effectively with these current
or future service providers based on price, performance or other features. We
expect to devote significant engineering, marketing, sales and customer support
resources to enhance the competitiveness and cost-effectiveness of these
services; however, to date we have not devoted substantial resources to this
effort. Once commenced, these actions may divert resources from our other
products and services and may thus harm our core eMail VOICELink and eMail
inChorus business.
Due to the fact that we were founded in November 1995 and commercially
released version 1.0 of our first product, eMail VOICELink, in August 1997, we
have a limited operating history, and we face all of the risks and uncertainties
encountered by early stage companies such as the need to establish our
credibility with customers, advertising and other service providers, and
prospective strategic partners. There can be no assurance that we will be able
to overcome some of these obstacles; if we do not, we may be unable to achieve
our business goals and raise sufficient capital to expand our business.
Results Of Operations
The following table sets forth the percentage relationship to net sales of
principal items contained in our Consolidated Statements of Operations for the
nine months ended December 31, 1999 and 1998, respectively. It should be noted
that percentages discussed throughout this analysis are stated on an approximate
basis. Our revenues, gross margins and other operating results may vary
significantly from quarter to quarter. The fluctuations may be due to a number
of factors, many of which are beyond our control, including actions of our
competitors, market acceptance of our products, changes in pricing and margins,
and unanticipated costs. Given our limited operating history, we believe that an
analysis of our cost and expense categories as a percentage of net sales is not
meaningful.
11
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales, including license fee income 100% 100% 100% 100%
Cost of sales 71 7 40 9
---- ---- ---- ----
Gross profit 29 93 60 91
Operating expenses 656 363 408 235
---- ---- ---- ----
Loss from operations (627) (270) (348) (144)
Other income (expense) 15 35 4 12
---- ---- ---- ----
Loss before provision for income taxes (612) (235) (344) (132)
Provision for income taxes 1 0 3 0
---- ---- ---- ----
Net loss (613%) (235%) (347%) (132%)
---- ---- ---- ----
</TABLE>
Three Months Ended December 31, 1999 and 1998
Net sales for the three months ended December 31, 1999 were $286,500,
compared to net sales of $166,500 for the three months ended December 31, 1998.
The increase reflects expanded sales efforts for our eMail VOICELink and eMail
inChorus products offset by a decrease in licensing fees. The sales of VOICELink
and inChorus are subject to product returns from distributors. In the three
months ended December 31, 1999, we received no revenues from licensing as
compared to licensing revenues of $160,000, or 96%, of revenues for the three
months ended December 31, 1998. Included in accounts receivable as of December
31, 1999 was $500,000 due from NIC Ltd. for licensing fees. Of this amount,
$250,000 was offset by an increase in allowance for doubtful accounts.
Management is continuing to assess the adequacy of the allowance for doubtful
accounts in consideration of anticipated payments against the balance of the
receivable. Cost of sales increased to $203,200 for the three months ended
December 31, 1999 from $11,700 for the comparable period in 1998, due to
increased production of our products.
Operating expenses increased to $1,878,100 for the three months ended
December 31, 1999, compared to $605,000 for the three months ended December 31,
1998. The increase was comprised of growth in all components of our operating
expenses such as research and development, sales and marketing and general and
administrative expenses. Research and development expenditures increased to
$315,600 for the three months ended December 31, 1999 compared to $98,800 for
the three months ended December 31, 1998, due primarily to costs associated with
the development of new versions of our existing products and the design and
development of new products. Sales and marketing expenses increased to
$1,055,900 in the three months ended December 31, 1999 compared to $155,700 for
the comparable period in 1998, due to expanded marketing efforts for our eMail
VOICELink and eMail inChorus software introduced at the end of fiscal 1998.
These efforts included hiring additional sales personnel and participation in
trade shows. General and administrative expenses increased to $506,600 for the
three months ended December 31, 1999 compared to $350,500 for the three months
ended December 31, 1998, due primarily to the expansion of our infrastructure
through the hiring of additional personnel and management and the lease of
additional facilities.
Our interest income decreased to $41,800 for the three months ended
December 31, 1999, compared to $59,700 for the three months ended December 31,
1998. The decrease was due to decreased average balances of cash and cash
equivalents in the first three months of fiscal 2000.
As a result of these factors, we incurred a net loss of $1,756,800 for the
three months ended December 31, 1999 compared to a net loss of $390,500 for the
three months ended December 31, 1998. Net loss available to common shareholders
for the three months ended December 31, 1999 equaled $1,809,300 due to the
accrual of $52,500 in dividends on outstanding shares of preferred stock.
Nine Months Ended December 31, 1999 and 1998
Net sales for the nine months ended December 31, 1999 were $947,400,
compared to net sales of $502,000 for the nine months ended December 31, 1998.
The increase reflects expanded sales efforts for our eMail VOICELink and eMail
inChorus products offset by a decrease in licensing fees. The sales of VOICELink
and inChorus are subject to product returns from distributors. In the nine
months ended December 31, 1999, $153,100, or 16%, of our revenues consisted of
licensing revenues as compared to licensing revenues of $480,000, or 96%, of
revenues for the nine months ended December 31, 1998. Included in accounts
receivable as of December 31, 1999 was $500,000 due from NIC Ltd. for licensing
fees. Of this amount, $250,000 was offset by an increase in allowance for
doubtful accounts. Management is continuing to assess the adequacy of the
allowance for doubtful accounts in consideration of anticipated payments against
the balance of the receivable. Cost of sales increased to $379,200 for the nine
months ended December 31, 1999 from $46,800 for the comparable period in 1998,
due to increased production of our products.
Operating expenses increased to $3,867,300 for the nine months ended
December 31, 1999, compared to $1,177,600 for the nine months ended December 31,
1998. The increase was comprised of growth in all components of our operating
expenses such as research and development, sales and marketing and general and
administrative expenses. Research and development expenditures increased to
$675,100 for the nine months ended December 31, 1999 compared to $161,100 for
the nine months ended December 31,
12
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1998, due primarily to costs associated with the development of new versions of
our existing products and the design and development of new products. Sales and
marketing expenses increased to $1,692,000 in the nine months ended December 31,
1999 compared to $505,800 for the comparable period in 1998, due to expanded
marketing efforts for our eMail VOICELink and eMail inChorus software introduced
at the end of fiscal 1998. These efforts included hiring additional sales
personnel and participation in trade shows. General and administrative expenses
increased to $1,500,200 for the nine months ended December 31, 1999 compared to
$510,700 for the nine months ended December 31, 1998, due primarily to the
expansion of our infrastructure through the hiring of additional personnel and
management and the lease of additional facilities.
Our interest income decreased slightly to $60,200 for the nine months
ended December 31, 1999, compared to $63,200 for the nine months ended December
31, 1998. The increase was due to slightly decreased average balances of cash
and cash equivalents in the first nine months of fiscal 2000.
As a result of these factors, we incurred a net loss of $3,291,200 for the
nine months ended December 31, 1999 compared to a net loss of $662,500 for the
nine months ended December 31, 1998. Net loss available to common shareholders
for the nine months ended December 31, 1999 equaled $3,773,200 due to a deemed
dividend of $403,200 on the issuance of warrants in connection with the
preferred stock offering, and the accrual of $78,800 in dividends on outstanding
shares of preferred stock.
Income Taxes
At December 31, 1999 and March 31, 1999, Softlink had deferred tax assets
of $2,376,800 and $651,600, respectively, principally arising from net operating
loss carryforwards available to offset future taxable income. As management
cannot determine that it is more likely than not that Softlink will realize the
benefit of these assets, a 100% valuation allowance has been established.
Liquidity And Capital Resources
Our working capital requirements have been financed over the past two
years through private placements of common and preferred stock and, to a lesser
extent, from borrowings from principal stockholders. In the nine months ended
December 31, 1999 and 1998, financing activities generated $3,175,000 and
$694,000, respectively, of cash. As of December 31, 1999, we had approximately
$849,400 in cash and cash equivalents, an increase from $307,500 of cash and
cash equivalents at March 31, 1999, but a decrease from $1,785,500 in cash and
cash equivalents at September 30, 1999. Our accounts receivable equaled $492,400
at December 31, 1999 (net of an allowance of $474,500 for doubtful accounts), as
compared to $430,600 at March 31, 1999, due primarily to amounts due under the
license agreement with NIC, Ltd.
13
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Operating activities utilized $2,440,300 in cash for the nine months ended
December 31, 1999, while investing activities utilized $192,800 during the same
period.
In August 1999, we completed a private placement in which we issued 300
shares of preferred stock and warrants to purchase an aggregate of 390,000
shares of common stock. The warrants, which have exercise prices ranging from
$2.25 to approximately $2.44 per share, expire in August 2004. We received net
proceeds, after placement agent commissions and expenses, of $2,788,700 from
this private placement.
Our independent certified public accountants have issued a report on our
audited financial statements with an explanatory paragraph regarding our ability
to continue as a going concern. Our continuation as a going concern is
dependent upon our ability to obtain additional financing or refinancing as may
be required, and ultimately upon our ability to attain profitability.
We need working capital to execute our business plan and, in the future,
we may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. We do not have any present
understanding, nor are we having any discussions relating to any such
acquisition or investment. Any such acquisition or investment could harm our
operating results or cause our stock price to decline because:
- the amount of time and level of resources required to successfully
integrate the acquired company's business operation could be substantial;
- challenges in assimilating personnel, organizational structure, and
technology could cause significant delays in executing other key areas of our
business plan;
- the key personnel of the acquired company may decide not to work for
us, which could result in the loss of key technical or business knowledge to us;
and
- we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
stockholders.
We believe that our current cash and cash equivalents will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
through April 2000. If cash generated from operations is insufficient to satisfy
our liquidity requirements after that date, we may seek to sell additional
equity or debt securities or to obtain a credit facility. In February 2000, we
entered into a letter of intent with a third party to act as an agent for a
placement of our securities; however, at the present time, that private
placement has not been consummated and we have not entered into any other
arrangements or understandings with respect to any such financings. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. The incurrence of indebtedness would result in an
14
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increase in our fixed obligations and could result in operating covenants that
would restrict its operations. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all. If financing is
not available when required or is not available on acceptable terms, we may be
unable to develop or enhance our products or services. In addition, we may be
unable to take advantage of business opportunities or respond to competitive
pressures. Any of these events could have a material and adverse effect on our
business, results of operations and financial condition.
Impact Of The Year 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. Although as of February 29, 2000, we experienced no
------------------
material technical problems related to the year 2000, we shall continue to seek
verification from our key vendors, distributors and suppliers that they are year
2000 compliant or, if they are not presently compliant, to provide a description
of their plans to become so. To the extent that vendors failed to provide
certification that they were year 2000 compliant by October 1999, we planned to
terminate and replace these relationships. To date, however, none of our systems
have needed to be revised or replaced.
We are conducting an internal assessment of all material information
technology and non-information technology systems at our headquarters. Until we
complete the assessment, we will not know whether these systems are or will
continue to be year 2000 compliant.
Costs. To date, we have not incurred any material costs in identifying or
-----
evaluating year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and year 2000 compliance matters
generally. These expenses are included in our capital expenditures budget and
are not expected to be material to our financial position or results of
operations. These expenses, however, if higher than anticipated, could have a
material and adverse effect on our business, results of operations and financial
condition.
Risks. Although as of February 29, 2000 we experienced no material
-----
technical problems related to the year 2000, there can be no assurance that we
will not discover year 2000 compliance problems in our systems that will require
substantial revisions or replacements. In the event that the operational
facilities that support our business are not year 2000 compliant, we may be
unable to deliver goods or services to our customers. In addition, there can be
no assurance that third-party software, hardware or services
15
<PAGE>
incorporated into our material systems will not need to be revised or replaced,
which could be time-consuming and expensive. Our inability to fix or replace
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs and other business interruptions, any
of which could have a material and adverse effect on our business, results of
operations and financial condition. Moreover, the failure to adequately address
year 2000 compliance issues in our software, hardware or systems could result in
claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be year
2000-compliant. The failure by these entities to be year 2000-compliant could
result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material and adverse effect on our business, results of operations and financial
condition.
Contingency Plan. As discussed above, we are engaged in an ongoing year
----------------
2000 assessment and do not currently have a contingency plan to deal with the
worst case scenario that might occur if technologies on which we depend are not
year 2000-compliant and fail to operate effectively after the year 2000. The
results of our year 2000 compliance evaluation and the responses received from
distributors, suppliers and other third parties with which we conduct business
will be taken into account in determining the need for and nature and extent of
any contingency plans.
If our present efforts to address the year 2000 compliance issues discussed
above are not successful, or if distributors, suppliers and other third parties
with which we conduct business do not successfully address such issues, our
users could seek alternate suppliers of our products and services. Any material
year 2000 problem could require us to incur significant unanticipated expenses
to remedy and could divert our management's time and attention, either of which
could have a material and adverse effect on our business, operating results and
financial condition.
Effects Of Inflation
Due to relatively low levels of inflation in 1997, 1998 and 1999, inflation
has not had a significant effect on our results of operations since inception.
Recent Accounting Pronouncements
On October 27, 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2, "Software Revenue Recognition", which
provides guidance on when revenue should be recognized and in what amounts for
licensing, selling, leasing, or otherwise marketing computer software. If the
software arrangement does not require significant production, modification, or
customization of software,
16
<PAGE>
revenue should be recognized when all of the following criteria are met:
- persuasive evidence of an arrangement exists;
- delivery has occurred;
- the vendor's fee is fixed or determinable; and
- collectibility is probable. The adoption of SOP No. 97-2 did not have a
material impact on our consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Software for Internal Use", which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of SOP No. 98-
1 did not have a material impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Historically,
we have not used derivatives and therefore this new pronouncement is not
applicable.
Risks Related to Our Operations
We have a history of losses, and we expect losses for the foreseeable future.
Since our inception in November 1995, we have incurred substantial losses.
Our net loss equaled approximately $620,800 for the year ended March 31, 1998,
approximately $1,015,900 for the year ended March 31, 1999, and approximately
$3,291,200 for the nine months ended December 31, 1999. As of December 31,
1999, we had an accumulated deficit of approximately $5,419,700.
We anticipate that our expenses relating to developing, marketing and
supporting our current and future products and services will increase
substantially in the future. Accordingly, for the foreseeable future we expect
to experience additional losses as these increased expenses exceed our total
revenues. These additional losses will increase our accumulated deficit.
The report of BDO Seidman, LLP on our consolidated financial statements for
the year ended March 31, 1999 contains an explanatory paragraph indicating that
our
17
<PAGE>
accumulated deficit and net losses raise substantial doubt about our ability
to continue as a going concern. This going concern qualification may adversely
affect our perception by prospective customers and suppliers, as well as by the
financial community.
Our revenues currently depend on one product family.
To date, we have generated nearly all of our revenues from our eMail
VOICELink and eMail inChorus family of products. We expect that our current
eMail VOICELink and eMail inChorus family of software products and software
products in the future will continue to account for a substantial majority of
our revenues for the foreseeable future. Therefore, our future financial
performance is dependent, in significant part, upon the successful development,
introduction and customer acceptance of new and enhanced versions of eMail
VOICELink and eMail inChorus and of related new products and services that we
may develop. We cannot assure you that we will be successful in upgrading eMail
VOICELink and eMail inChorus or that we will successfully develop new products
and services, or that any new product or service will achieve market acceptance.
For more information on the sources of our revenues, please see the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Our revenues are also dependent on one licensing customer and licensing revenue.
For the nine months ended December 31, 1999 and the year ended March 31,
1999, approximately $153,100 and $640,000, respectively, or 16.2% and 87.5%,
respectively, of our net sales were derived from licensing revenue from one
customer, NIC Ltd. In addition, we had accounts receivable from NIC Ltd. of
$500,000 and $421,900 at December 31, 1999 and March 31, 1999 respectively. In
the quarter ended December 31, 1999, we increased our allowance for doubtful
accounts to $474,500 due to concerns regarding the collectability of the NIC
receivable. The loss of this customer, or the inability to collect in full the
receivable from this customer could have a material and adverse effect on our
business, results of operations or financial condition. Although we are seeking
to increase our sales of software products, we expect that a substantial
majority of our revenues for the foreseeable future will be derived from the
licensing of our software products.
We are changing our business model from one focused on licensing to one focused
on sales of software. This new model is unproven.
Our core business model has focused on licensing software designed to
enable our customers to enhance their email communications with voice and rich
media features. To date, substantially all of our revenue has been derived from
licensing of our software. We are attempting to increase sales of our software
to complement our licensing revenue; however, we believe that it is too early to
determine whether this business model will be successful in the future.
18
<PAGE>
We also intend to broaden our business by offering turnkey rich media
email message creation services. These services would transfer to us the
responsibility for constructing and disseminating rich media messages on behalf
of our customers. We would be competing against production and advertising
companies in this market, and we may not compete effectively with these current
or future service providers based on price, performance or other features. We
expect to devote significant engineering, marketing, sales and customer support
resources to enhance the competitiveness and cost-effectiveness of these
services. These actions may divert resources from our other products and
services and may thus harm our core eMail VOICELink and eMail inChorus business.
Rich media email is a new and evolving business, competes with other methods of
online communication, and may not receive widespread acceptance.
Rich media email is in its very early stages of development. Like many
new businesses, it is characterized by rapidly evolving technologies, quickly
changing marketing and sales strategies, multiple and aggressive market
participants, fluctuating demand and uncertain market acceptance for products
and services. Businesses and consumers have the option of using other methods of
online communication, including video and audio streaming. These methods may
receive greater acceptance than our multimedia email model. Multimedia email is
also heavily dependent on the success of the Internet, which itself is a
relatively new medium with an unpredictable future.
We are growing rapidly, and effectively managing our growth may be difficult.
We are currently experiencing a period of significant expansion. In order
to execute our business plan, we must continue to grow significantly by
expanding our product line and hiring new employees. This growth will strain our
management, resources and systems. Our ability to compete effectively and manage
future growth, if any, will require us to implement and improve our operational,
financial and management information systems on a timely basis and to attract,
hire, train and retain additional personnel. If we cannot effectively manage our
growth, our business could be harmed.
The loss of the services of one or more of our key personnel or our failure to
hire, integrate or retain other qualified personnel could disrupt our business.
We depend upon the continued services and performance of our executive
officers and other key employees, particularly William Yuan, our President and
Chief Executive Officer, Johnson Lee, our Chairman, and Edmund Leung, our Chief
Technical Officer. We currently maintain key person life insurance on Messrs.
Yuan, Lee and Leung; however, the loss of the services of any of them could
materially and adversely affect our business. Competition for qualified
personnel in technology is intense and we may not be able to retain or hire
necessary personnel.
19
<PAGE>
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant.
Although as of February 29, 2000, we have experienced no material technical
problems related to the year 2000 we are currently assessing any remaining
impact of the year 2000 issue on our business and operations. We have not
devised a year 2000 contingency plan. The failure of our internal systems, or
any material third-party systems, to be year 2000 compliant could have a
material and adverse effect on our business, results of operations and financial
condition.
We believe that the current versions of our eMail VOICELink and eMail
inChorus products are year 2000 compliant. However, we cannot assure you that
our products will not experience year 2000 problems in the future. Any such
problems could result in a decrease in sales of our products, an increase in the
allocation of our resources to address year 2000 problems of our customers
without additional revenue and an increase in litigation costs relating to
losses suffered by our customers due to year 2000 problems.
To date, we have not incurred any material costs in identifying or
evaluating year 2000 compliance issues. However, we may fail to discover year
2000 compliance problems in our systems that will require substantial revisions
or replacements. There can be no assurance that third-party software, hardware
or services incorporated into our material systems will not need to be revised
or replaced, which could be time-consuming and expensive. Our inability to fix
or replace third-party software, hardware or services on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on our
business, results of operations and financial condition. Moreover, the failure
to adequately address year 2000 compliance issues in our software, hardware or
systems could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming to
defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be or continue to be year 2000 compliant. The failure
by these entities to be year 2000 compliant could result in a systemic failure
beyond our control, including, for example, a prolonged Internet,
telecommunications or electrical failure, which could also prevent us from
delivering our services to our users, decrease the use of the Internet or
prevent users from accessing our services, any of which would have a material
and adverse effect on our business, results of operations and financial
condition.
20
<PAGE>
We are heavily reliant on third parties for order fulfillment and any delays or
other problems in fulfillment could adversely affect our business.
We are heavily reliant on the ability of Pakpro and Russ Thill, our
fulfillment houses, to package and ship orders of our software products. Growth
in the volume of orders for our products may strain the capacity of our
fulfillment houses, and delays or other problems with order fulfillment could
have a material and adverse effect on our business.
Some of the information in this quarterly report contains forward-looking
statements.
Some of the information in this quarterly report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
- discuss our expectations about our future performance;
- contain projections of our future operating results or of our future
financial condition; or
- state other "forward-looking" information.
We believe it is important to communicate our expectations to our stockholders.
There may be events in the future, however, that we are not able to predict
accurately or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this quarterly report, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 9, 1999, the Securities and Exchange Commission issued a formal
Order Directing Private Investigation and Designating Officers to Take Testimony
in the Matter of Softlink, Inc. and Certain Other Companies.
21
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The private order empowers the SEC enforcement staff to investigate whether
inChorus.com, its employees or associates:
- made misleading statements regarding projected financial revenues of
inChorus.com;
- purchased or sold securities of inChorus.com while in possession of
material non-public information; and
- offered or sold securities through the use or medium of prospectuses or
similar means while no registration statement was in effect.
The private order also authorizes the staff to investigate possible similar
violations by another unrelated, unaffiliated company. In connection with the
private order, the SEC has issued a subpoena duces tecum to which we have
responded. On January 7, 2000, the SEC issued subpoenas compelling the testimony
of Mr. Johnson Lee, a member of our board of directors and our Chairman, Mr.
William Yuan, a member of our board of directors and our Chief Executive Officer
and Mr. Edmund Leung, a member of our board of directors and our Chief Technical
Officer and Secretary. All of these individuals intend to comply with the
subpoenas and cooperate with the SEC in connection with this matter.
The SEC has not advised us that inChorus.com, our employees or affiliates
are presently or will be the subject of any enforcement action by the SEC. To
the best of our knowledge, there are presently no other material pending legal
proceedings to which we or any of our subsidiaries is a party or to which any of
our property is subject and, to the best of our knowledge, no such actions
against us are contemplated or threatened.
From time to time, we are involved in legal proceedings incidental to our
business. We believe that these pending actions, individually and in the
aggregate, will not have a material adverse effect on our financial condition,
and that adequate provision has been made for the resolution of such actions and
proceedings.
22
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In October 1999, we issued options to purchase 200,000 shares of common
stock to one of our officers. The exercise price per share was $1.45. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933 and
Rule 701 promulgated under the Securities Act of 1933 and was made without
general solicitation or advertising. The recipient was a sophisticated investor
with access to all relevant information necessary to evaluate the investment,
and who represented to us that the shares were being acquired for investment.
In December 1999, we issued an aggregate of 20,250 shares of common stock
to four officers and 19 employees as bonus compensation for services rendered by
them. The issuances were made in reliance on Section 4(2) of the Securities Act
of 1933, and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate the investment, and who represented to us that the shares
were being acquired for investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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 quarter ended December 31,
1999.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INCHORUS.COM
Date: March 27, 2000 By: /s/ Ralph G. Coan, Jr.
-----------------------
Ralph G. Coan, Jr.
Vice President, Finance and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
24
<PAGE>
INCHORUS.COM
EXHIBIT INDEX
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF INCHORUS.COM AT DECEMBER 31, 1999 AND FOR
THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 849,400
<SECURITIES> 0
<RECEIVABLES> 560,700
<ALLOWANCES> 474,500
<INVENTORY> 152,500
<CURRENT-ASSETS> 1,762,200
<PP&E> 157,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,999,100
<CURRENT-LIABILITIES> 605,600
<BONDS> 0
0
3,078,800
<COMMON> 9,400
<OTHER-SE> 6,481,600
<TOTAL-LIABILITY-AND-EQUITY> 1,999,100
<SALES> 947,400
<TOTAL-REVENUES> 947,400
<CGS> 379,200
<TOTAL-COSTS> 3,867,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (42,900)
<INCOME-PRETAX> (3,256,200)
<INCOME-TAX> 35,000
<INCOME-CONTINUING> (3,291,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,773,200)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
