<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 September 30, 2000
[_] 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 September 30, 2000 we had 11,526,310 shares of common stock, $.001 par
value per share, outstanding and 105 shares of preferred stock, $.001 par value
per share outstanding.
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INCHORUS.COM
TABLE OF CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Balance Sheets (unaudited) 1
Consolidated Statements of Operations (unaudited) 3
Consolidated Statements of Stockholders Deficiency (unaudited) 4
Consolidated Statements of Cash Flows (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
EXHIBIT 27.1
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
======================================================================================================
September 30, March 31,
2000 2000
------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 16,200 $1,995,900
Due from related party 93,400 700,000
Accounts receivable, net of allowance for doubtful accounts
of $112,900 and $672,200 39,000 1,400
Inventories 34,200 98,100
Prepaid expenses and other current assets 197,000 154,600
------------------------------------------------------------------------------------------------------
Total Current Assets 379,800 2,950,000
Property and Equipment, net 158,700 157,000
Investments 149,200 --
Deposits and Other Assets 140,200 181,600
------------------------------------------------------------------------------------------------------
$ 827,900 $3,288,600
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
==================================================================================================
September 30, March 31,
2000 2000
--------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficiency
Current Liabilities:
Accounts payable $ 783,700 $ 524,300
Accrued liabilities 386,100 207,000
Deferred revenue 10,100 734,700
Convertible notes payable 1,919,200 --
Notes payable to related parties 68,500 --
Obligations under capital lease, current portion 5,300 6,800
--------------------------------------------------------------------------------------------------
Total Current Liabilities 3,172,900 1,472,800
Convertible Notes Payable -- 1,878,800
Obligations under capital lease, net of current portion 30,800 25,900
--------------------------------------------------------------------------------------------------
Total Liabilities 3,203,700 3,377,500
--------------------------------------------------------------------------------------------------
Commitments, Contingencies and Subsequent Events
Stockholders' Deficiency:
Convertible preferred stock $0.001 par value; 1,000,000
shares authorized; 105 and 159 shares issued and outstanding 831,800 1,264,400
Common stock, $0.001 par value; 59,000,000 shares authorized;
11,526,310 and 10,261,714 shares issued and outstanding 11,500 10,300
Additional paid-in capital 8,129,800 7,542,100
Accumulated deficit (11,348,900) (8,887,900)
--------------------------------------------------------------------------------------------------
(2,375,800) (71,100)
Less: Notes receivable -- (17,800)
--------------------------------------------------------------------------------------------------
Total Stockholders' Deficiency (2,375,800) (88,900)
--------------------------------------------------------------------------------------------------
$ 827,900 $ 3,288,600
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
License fee revenue, including $750,000 and $1,000,000
from related party for quarter ended September 30, 2000
and six months ended September 30, 2000 $ 762,100 $ 60,900 $ 1,024,600 $ 214,000
Product and service revenue, including $62,700 and
$119,000 from related party for quarter ended
September 30, 2000 and six months ended September 30, 2000 112,900 275,400 253,700 446,900
-------------------------------------------------------------------------------------------------------------------------
Total Revenue 875,000 336,300 1,278,300 660,900
Cost of Sales 121,700 119,000 210,000 176,000
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Gross Profit 753,300 217,300 1,068,300 484,900
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Operating Expenses:
Research and development 279,000 172,000 600,900 359,500
Sales and marketing 983,800 403,500 1,604,600 636,100
General and administrative 511,900 590,500 1,075,200 993,600
-------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,774,700 1,166,000 3,280,700 1,989,200
-------------------------------------------------------------------------------------------------------------------------
Loss From Operations (1,021,400) (948,700) (2,212,400) (1,504,300)
-------------------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income -- 17,500 14,300 18,400
Interest expense (61,600) (10,400) (124,300) (10,400)
Other 5,800 -- 5,800 (7,200)
-------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (55,800) 7,100 (104,200) 800
-------------------------------------------------------------------------------------------------------------------------
Loss Before Provision for Income Taxes (1,077,200) (941,600) (2,316,600) (1,503,500)
Provision for Income Taxes 75,000 30,100 100,800 30,900
-------------------------------------------------------------------------------------------------------------------------
Net Loss $(1,152,200) $ (971,700) $(2,417,400) $(1,534,400)
Preferred Stock Dividends (19,300) (998,900) (43,500) (998,900)
-------------------------------------------------------------------------------------------------------------------------
Net Loss Available to Common Shareholders (1,171,500) (1,970,600) (2,460,900) (2,533,300)
-------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share $ (0.10) $ (0.25) $ (0.23) $ (0.32)
-------------------------------------------------------------------------------------------------------------------------
Basic and diluted weighted-average common shares
outstanding 11,287,200 7,909,600 10,909,700 7,856,700
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Stockholders' Deficiency
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------------- ----------------------- Paid-in Accumulated Notes
Shares Amount Shares Amount Capital Deficit Receivable Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, March 31, 159 $ 1,264,400 10,261,714 $ 10,300 $ 7,542,100 $ (8,887,900) $(17,800) $ (88,900)
2000
Issuance of common -- -- 10,000 -- 17,300 -- -- 17,300
stock as employee
bonus
Exercise of common -- -- 120,000 100 73,100 -- -- 73,200
stock options
Dividend in arrears - -- -- -- 43,600 (43,600) -- --
convertible
preferred stock
Conversion of
preferred stock and
accrued (54) (432,600) 1,041,146 1,000 431,600 -- -- --
dividends to
common stock
Repurchase and -- -- (6,550) -- (17,800) -- 17,800 --
retirement of common
stock
Issuance of stock as -- -- 100,000 100 39,900 -- -- 40,000
penalty to investors
Net loss -- -- -- -- -- (2,417,400) -- (2,417,400)
------------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 105 $ 831,800 11,526,310 $ 11,500 $ 8,129,800 $(11,348,900) $ -- $(2,375,800)
2000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended September 30, 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (2,417,400) $ (1,534,400)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 37,800 11,700
Allowance for doubtful accounts (559,300) 19,500
Amortization of notes payble discount 40,400 --
Compensation relating to stock options issued -- 421,300
Compensation relating to stock issued for services 57,300 --
Accrued interest on notes receivable -- (5,000)
Changes in current operating assets and liabilities:
Accounts receivable 521,700 (536,600)
Due from related party 606,600 --
Inventories 63,900 (45,500)
Prepaid expenses and other current assets (42,400) (93,600)
Accounts payable 259,400 (7,300)
Accrued expenses 179,100 200,200
Deferred revenue (724,600) 72,900
------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (1,977,500) (1,496,800)
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Payments to acquire property and equipment (32,300) (71,800)
Deposits and other assets (107,800) (22,800)
Payments for notes receivable -- (130,000)
Proceeds from repayment of notes receivable -- 30,000
------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (140,100) (194,600)
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from note payable to shareholder -- 218,300
Principal payments on notes payable to shareholder -- (218,300)
Proceeds from borrowing on notes payable 68,500 120,000
Principal payment on notes payable -- (120,000)
Principal payments on capital lease obligations (3,800) (500)
Proceeds from issuance of common stock 73,200 1,200
Proceeds from issuance of preferred stock -- 2,788,700
Proceeds from issuance of treasury stock -- 380,000
------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 137,900 3,169,400
------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,979,700) 1,478,000
Cash and Cash Equivalents, beginning of period 1,995,900 307,500
------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 16,200 $ 1,785,500
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
Notes to Financial Statements:
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. In February 2000, the Company changed its name to inChorus.com.
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.
6
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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. Operating results for the six month period
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending March 31, 2001. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended March 31, 2000.
Adoption of New Accounting Pronouncements
-----------------------------------------
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition. SAB 101 provides the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. SAB No. 101 is effective for the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company believes
that its current revenue recognition policies comply with the provisions of SAB
No. 101.
3. Reclassifications
Certain prior period amounts in the consolidated financial statements and
notes thereto have been reclassified to conform to the present period
presentation.
7
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4. License Agreement
In March 2000, the Company entered into a license agreement with a Japanese
company, which gives the licensee an exclusive right in Japan to develop and
market the Company's inChorus Pro technology through March 31, 2003 (Note 6).
Under the license agreement, the licensee is to pay an aggregate of $1,000,000,
provided that the Company has delivered both the English and Japanese versions
of inChorus Pro. The English version was delivered upon inception of the
agreement and the Japanese version was delivered in May 2000. Additionally, the
Company invested $149,200 in the licensee in June 2000. The investment is
carried at its original cost in the balance sheet as of September 30, 2000.
Revenue of $1,000,000 was recognized and collected during the six months ended
September 30, 2000. Amounts receivable on the contract of $700,000 as of March
31, 2000, are included in due from related party and are offset by $700,000 in
deferred revenue as of March 31, 2000.
5. Stockholders' Deficiency
During the six months ended September 30, 2000, shareholders converted an
aggregate of 54 shares of preferred stock and accrued dividends into 1,041,146
shares of common stock.
In July 2000, the Company issued 100,000 shares of common stock with a
value of $40,000 to the holder of the convertible note payable as damages for
the late filing of a registration statement.
6. Subsequent Events
In October 2000, the Company obtained a loan in the amount of $250,000 from
the related party described in Note 4. The loan is due October 2003, and is
convertible into common stock at $0.34 per share after June 30, 2001. Interest
of 6% per annum is due every March 31, and September 30. In connection with this
agreement, the Company extended the license agreement through March 31, 2010.
8
<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 solutions and software that
bring life to online communications 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. In February 2000, we
changed our name to "inChorus.com"
We began the marketing and promotion of our products when we introduced our
second product, PowerLink, a precursor of eMail inChorus.com, in November 1997.
Beginning in 1998, we also focused on recruiting personnel and raising capital.
9
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To date, our revenues have been derived primarily from the licensing of our
products. We are attempting to increase sales of our software and related
services 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 have also broadened 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 compete 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
Three Months Ended September 30, 2000, Compared With Three Months Ended
September 30, 1999
Net sales for the three months ended September 30, 2000, were $875,000,
compared to net sales of $336,300 for the three months ended September 30, 1999.
The increase reflects increased revenue from licensing fees offset by a decrease
in revenue from product sales. In the three months ended September 30, 2000,
$762,100 of our revenue consisted of licensing revenue and $112,900 was derived
from sales of products and services, as compared to licensing revenue of $60,900
and product and service revenue of $275,400 for the three months ended September
30, 1999. Cost of sales increased to $121,700 for the three months ended
September 30, 2000, from $119,000 for the comparable period in 1999, due to an
increase in our reserve for inventory obsolescence.
Operating expenses increased to $1,774,700 for the three months ended
September 30, 2000, compared to $1,166,000 for the three months ended September
30, 1999. The increase was comprised of growth in both research and development
expenses and sales and marketing costs.
10
<PAGE>
Research and development expenditures increased to $279,000 for the three months
ended September 30, 2000, compared to $172,000 for the three months ended
September 30, 1999, 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 $983,800 in the three months
ended September 30, 2000, compared to $403,500 for the comparable period in
1999, 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 decreased to $511,900 for the three months ended
September 30, 2000, compared to $590,500 for the three months ended September
30, 1999. The decrease reflects audit and legal fees incurred in 1999 for the
first time audit of our financial statements as well as compensation relation to
common stock options during the three months ended September 30, 1999.
No interest income was accrued during the three months ended September 30,
2000, compared to $17,500 for the three months ended September 30, 1999.
Interest expense equaled $61,600 for the three months ended September 30, 2000,
due to interest accrued on our 8% convertible debentures and amortization of the
related discount. Interest expense equaled $10,400 for the three months ended
September 30, 1999.
As a result of these factors, we incurred a net loss of $1,152,200 for the
three months ended September 30, 2000, compared to a net loss of $971,700 for
the three months ended September 30, 1999.
Six Months Ended September 30, 2000, Compared With Six Months Ended
September 30, 1999
Net sales for the six months ended September 30, 2000, were $1,278,300,
compared to net sales of $660,900 for the six months ended September 30, 1999.
The increase reflects increased revenue from licensing fees offset by a decrease
in revenue from product sales. In the six months ended September 30, 2000,
$1,024,600 of our revenue consisted of licensing revenue and $253,700 was
derived from sales of products and services, as compared to licensing revenue of
$214,000 and product and sales revenue of $446,900 for the six months ended
September 30, 1999. Cost of sales increased to $210,000 for the six months ended
September 30, 2000, from $176,000 for the comparable period in 1999, due to an
increase in our reserve for inventory obsolescence.
Operating expenses increased to $3,280,700 for the six months ended
September 30, 2000, compared to $1,989,200 for the six months ended September
30, 1999. The increase was comprised of growth in all components of our
operating expenses. Research and development expenditures increased to $600,900
for the six months ended September 30, 2000, compared to $359,500 for the six
months ended September 30, 1999, 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
$1,604,600 in the six months ended September 30,
11
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2000, compared to $636,100 for the comparable period in 1999, 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 $1,075,200 for the six months ended September 30, 2000, compared to
$993,600 for the six months ended September 30, 1999, due primarily to the
expansion of our infrastructure through the hiring of additional personnel and
management and the lease of additional facilities.
Interest income equaled $14,300 for the six months ended September 30,
2000, due to interest earned on cash deposits, compared to $18,400 for the six
months ended September 30, 1999. Interest expense equaled $124,300 for the six
months ended September 30, 2000, due to interest accrued on our 8% convertible
debentures and amortization of the related discount. Interest expense equaled
$10,400 for the six months ended September 30, 1999.
As a result of these factors, we incurred a net loss of $2,417,400 for the
six months ended September 30, 2000, compared to a net loss of $1,534,400 for
the six months ended September 30, 1999.
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 years ended March
31, 2000 and 1999, financing activities, principally private placements,
generated $5,191,700 and $1,363,000, respectively, of cash. In the six months
ended September 30, 2000, financing activities generated $137,900, as compared
to $3,169,400 in cash generated by our financing activities in the six months
ended September 30, 1999. This decline in financing activity, combined with the
increased utilization of cash for our operating activities, has resulted in a
severe capital shortfall. As of September 30, 2000, we had approximately $16,200
in cash and cash equivalents, a decrease from $1,785,500 of cash and cash
equivalents at September 30, 1999, and a decrease from the $1,995,900 of cash
and cash equivalents at March 31, 2000. Our accounts receivable (net allowance
for doubtful accounts of $112,900) equaled $132,400 at September 30, 2000, as
compared to $701,400 at March 31, 2000, (net of an allowance of $672,200 for
doubtful accounts). Included in the allowance for the doubtful accounts at March
31, 2000 is a reserve of $479,900 for NIC Ltd. During the six months ended
September 30, 2000, we wrote off the entire amount due from NIC Ltd. and the
related allowance for doubtful accounts.
In the six months ended September 30, 2000, our operating activities
utilized $1,977,500 in cash, as compared to the utilization of $1,496,800 in
cash for operating activities for the comparable period in 1999. The increase in
our operating activities expenditures for the six month period ended September
30, 2000, as compared to the six month period ending September 30, 1999, was
due to the expansion of our operations as a component of our business growth.
Investing activities utilized $140,100 of cash during the six month period ended
September 30, 2000, compared to the $194,600 utilized for investing activities
during the same 1999 period. The decrease in investing activities was due to our
limited availability of funds.
12
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In March 2000, we entered into a loan agreement with AMRO International,
S.A. for a $2,000,000 bridge loan. The loan is evidenced by convertible
debentures bearing interest at the rate of eight percent per annum, which are
convertible into shares of our common stock at $1.75 per share. If not
converted, the debentures are due and payable on September 30, 2001. In
connection with this loan, we issued to AMRO International, S.A. warrants to
purchase 100,000 shares of our common stock at an exercise price of $3.187 per
share.
Effective April 24, 2000, we entered into an equity line agreement with
Plumrose Holdings, Ltd. and WEC Global Telecom Ltd. This agreement allows us to
sell, from time to time, through April 24, 2001, up to $5,000,000 of our common
stock. Because of the trading price of our common stock and its trading volume
and because of specific restrictions on the amount of money that can be drawn
down, we have been unable to draw capital from this equity line and may not be
able to for the foreseeable future. We also issued warrants to purchase 50,000
shares of our common stock, with an exercise price of $1.50 per share, to each
of Plumrose Holdings, Ltd. and WEC Global Telecom Ltd. in connection with this
transaction. To date, no shares of common stock have been sold under this
agreement.
Our independent certified public accountants have issued a report on our
audited financial statements for the year ended March 31, 2000 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.
As indicated above, we are currently experiencing a severe capital
shortfall. We believe that our current cash and cash equivalents plus existing
financing commitments and anticipated cash generated from operations will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures only through the remainder of November 2000. We are presently
discussing certain strategic alternatives, such as private placements, licensing
transactions, debt arrangements and business combinations, with various parties.
There can be no assurance that any of these alternatives will succeed in
generating the capital required to sustain our operations.
13
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Impact of the Year 2000
In our previous filings with the Securities and Exchange Commission, we
have discussed the nature and progress of our plans to deal with potential Year
2000 problems. These problems arise from the fact that many currently installed
computer systems and software products were 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 needed
to be upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities. Prior to
December 31, 1999, we completed our assessment of all material information
technology and non-information technology systems at our headquarters, as well
as our review of Year 2000 compliance by our key vendors, distributors and
suppliers. To date, we have experienced no significant disruptions in mission
critical information technology and non-information technology systems and we
believe those systems successfully responded to the Year 2000 date changes. We
Are not aware of any material problems resulting from Year 2000 issues, either
with our own internal systems or the products and services of third parties. We
will continue to monitor our mission critical computer applications and those of
our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
Forward-Looking Statements
The forward-looking statements contained in this Quarterly Report on Form
10-QSB are subject to various risks, uncertainties and other factors that could
cause actual results to differ materially from the results anticipated in such
forward-looking statements. Included among the important risks, uncertainties
and other factors are those discussed below.
Risks Related to Our Operations
We need significant capital to continue our operations.
As indicated above, we are currently experiencing a severe capital
shortfall. We currently anticipate that our available funds will be sufficient
to meet our anticipated needs for working capital, capital expenditures and
business operation through the end of November 2000. We need to raise additional
funds. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced, stockholders may experience additional dilution and such securities
may have rights, preferences and privileges senior to those of our common stock.
We are currently attempting to identify prospective investors with respect to
financing; however, we have not entered into agreements with any such investors.
There can be no assurance that additional financing will be available on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to fund our operations. Such
inability could have a material adverse effect on our business, results of
operations and financial condition. See "Management's Discussion and Analysis Of
Financial Condition And Results Of Operations."
We have a history of losses, and we expect losses for the foreseeable future.
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Since our inception in November 1995, we have incurred substantial losses.
Our net loss equaled approximately $2,417,400 for the six months ended September
30, 2000, and approximately $6,148,600 for the year ended March 31, 2000. As of
September 30, 2000, we had an accumulated deficit of approximately $11,348,900.
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, 2000, contains an explanatory paragraph indicating that
our accumulated deficit and net losses raise substantial doubt about our ability
to continue as a going concern. This going concern qualification may adversely
affect the perception of inChorus by our 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
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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 licensing revenue from one major licensing
customer.
For the six months ended September 30, 2000, approximately $1,143,600 or
97.9% of our net sales were derived from licensing revenue from one customer,
eNews. In addition, we had net accounts receivable from eNews of $93,400 and
$700,000 at September 30, 2000 and March 31, 1999, respectively. 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.
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
multimedia 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.
We have broadened our business 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. These
actions may divert resources from our other products and services and may thus
harm our core eMail VOICELink and eMail inChorus business.
Multimedia email is a new and evolving business, competes with other methods of
online communication, and may not receive widespread acceptance.
Multimedia 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
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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 intend to grow rapidly, and effectively managing our growth may be difficult.
In order to execute our business plan, we must 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.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant.
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,
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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.
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 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.
There are dilutive effects of our equity line agreement with Plumrose Holdings,
Ltd. and WEC Global Telecom Ltd.
The sale of stock pursuant to our equity line agreement with Plumrose
Holdings, Ltd. and WEC Global Telecom Ltd. will have a dilutive impact on our
stockholders. As a result, our net income or loss per share could be materially
affected in future periods and the market price of our common stock could be
materially and adversely affected. The shares of common stock to be issued under
the equity line agreement will be issued at a discount to the then-prevailing
market price of the common stock. These discounted sales could have an immediate
adverse affect on the market price of the common stock. We have also issued to
AMRO International, S. A., Plumrose Holdings, Ltd. and WEC Global Telecom Ltd.
warrants to purchase an aggregate of 200,000 shares of our common stock at
exercise prices from $1.50 to $3.187 per share. The issuance of shares of common
stock under the equity line agreement or upon exercise of these warrants, and
the subsequent resale of the common stock would have a further dilutive effect
on our common stock and could adversely affect its market price. The shares of
common stock under the equity line agreement and underlying the warrants have
been registered pursuant to our registration statement on Form SB-2 (File No.
333-39534), which was declared effective by the Securities and Exchange
Commission on August 11, 2000.
The offer and sale of shares of common stock under our private equity line
arrangement with Plumrose Holdings, Ltd. and WEC Global Telecom Ltd. might
violate federal securities laws.
In a transaction like our sale of common stock to Plumrose Holdings, Ltd.
and WEC Global Telecom Ltd. pursuant to our equity line agreement, the issuer of
such securities generally may register the resale of securities prior to their
issuance if the issuer has completed a valid exempt sale of the securities to
the investor, and the investor is at market risk at the time of filing of the
registration statement. Because Plumrose Holdings, Ltd. and WEC Global Telecom
Ltd. might not be deemed to have been at market risk prior to filing of the
registration statement, the transaction might not qualify for an exemption from
the registration requirements of the Securities Act of 1933. If this
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transaction is deemed to have violated the Securities Act of 1933, Plumrose
Holdings, Ltd. and WEC Global Telecom Ltd. would have the right, for a period of
up to one year from the date of its purchase of common stock, to recover the
cash it paid or, if it had already sold the stock, sue for damages resulting
from its purchase. These damages could equal up to the full $5,000,000 plus
interest that Plumrose Holdings, Ltd. and WEC Global Telecom Ltd. might purchase
under the equity line. If this occurs, our business, results of operations and
financial condition would be harmed. In particular, such an occurrence would
have a material adverse effect on our liquidity position and our ability to meet
short-term obligations and we might not be able to secure alternative financing
on favorable terms or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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.
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 complied
with the subpoenas and are cooperating with the SEC in connection with this
matter. Additional testimony of Mr.
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Johnson Lee and Mr. William Yuan had been scheduled to be taken the week of
September 18, 2000, but have been adjourned by the SEC staff without an
adjourned date at this time.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
To date, we have not paid the interest due on our 8% convertible debentures
and thus, are technically in default under the debentures.
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
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(b) Reports on Form 8-K.
We filed a current Report on Form 8-K on October 25, 2000 to disclose that,
on October 13, 2000, we terminated nine of our employees in order to reduce
operating expenses to bring them more in line with revenues.
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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.
INCHORUS.COM
Date: November 20, 2000 By: /s/ Ralph G. Coan, Jr.
----------------------
Ralph G. Coan, Jr.
Vice President, Finance and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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