<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 June 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) 566-6000
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 August 1, 2000, registrant had 11,084,616 shares of common stock,
$.001 par value per share outstanding and 113 shares of preferred stock, $.001
par value per share outstanding.
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INCHORUS.COM
CONTENTS
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Balance Sheets 1
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
EXHIBIT 27.1
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PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 445,700 $ 1,995,900
Due from related party 789,300 700,000
Accounts receivable, net of allowance for
doubtful accounts of $550,900 and $672,200 140,300 1,400
Inventories 82,300 98,100
Prepaid expenses and other current assets 196,000 154,600
--------------------------------------------------------------------------------
Total Current Assets 1,653,600 2,950,000
Property and Equipment, net 163,800 157,000
Investments 149,200 --
Deposits and Other Assets 162,400 181,600
--------------------------------------------------------------------------------
$ 2,129,000 $ 3,288,600
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficiency
Current Liabilities:
Accounts payable $ 349,700 $ 524,300
Accrued liabilities 333,400 207,000
Deferred revenue 772,300 734,700
Obligations under capital lease,
current portion 6,100 6,800
-------------------------------------------------------------------------------
Total Current Liabilities 1,461,500 1,472,800
Convertible notes payable 1,899,000 1,878,800
Obligations under capital lease,
net of current portion 32,000 25,900
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Total Liabilities 3,392,500 3,377,500
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Commitments, Contingencies and Subsequent
Events
Stockholders' Deficiency:
Preferred stock, $0.001 par value;
1,000,000 shares authorized;
118 and 159 shares issued and
outstanding 936,800 1,264,400
Common stock, $0.001 par value;
59,000,000 shares authorized;
10,955,997 and 10,261,714 shares
issued and outstanding 11,000 10,300
Additional paid-in capital 7,983,900 7,542,100
Accumulated deficit (10,177,400) (8,887,900)
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(1,245,700) (71,100)
Less: Notes receivable (17,800) (17,800)
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Total Stockholders' Deficiency (1,263,500) (88,900)
-------------------------------------------------------------------------------
$ 2,129,000 $ 3,288,600
===============================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
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Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------
2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
License Fee Revenue, including $250,000
from related party for quarter ended
June 30, 2000 $ 262,500 $ 153,100
Product and Service Revenue, including
$56,300 from related party for quarter
ended June 30, 2000 140,800 171,500
--------------------------------------------------------------------------------
Total Revenue $ 403,300 $ 324,600
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Cost of Sales 88,300 57,000
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Gross Profit 315,000 267,600
--------------------------------------------------------------------------------
Operating Expenses:
Research and development 321,900 187,500
Sales and marketing 620,800 232,600
General and administrative 563,300 403,100
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Total Operating Expenses 1,506,000 823,200
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Loss From Operations (1,191,000) (555,600)
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Other Income (Expense):
Interest income 14,300 900
Interest expense (62,700) --
Other -- (7,200)
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Total Other Expense (48,400) (6,300)
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Loss Before Provision for Income Taxes (1,239,400) (561,900)
Provision for Income Taxes 25,800 800
--------------------------------------------------------------------------------
Net Loss $ (1,265,200) $ (562,700)
Preferred Stock Dividends (24,200) --
--------------------------------------------------------------------------------
Net Loss Available to Common Shareholders (1,289,400) (562,700)
================================================================================
Basic and diluted loss per share $ (0.12) $ (0.07)
================================================================================
Basic and diluted weighted-average common
shares outstanding 10,533,300 7,803,700
================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
===============================================================================================
Three Months Ended
June 30,
-------------------------------
2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss $(1,265,200) $ (562,700)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 24,300 5,100
Allowance for doubtful accounts (121,300) 2,200
Amortization of notes payable discount 27,400 --
Compensation relating to stock options issued -- 205,000
Compensation relating to stock issued for services 17,500 --
Changes in current operating assets and liabilities:
Accounts receivable (17,600) (318,700)
Due from related party (89,300) --
Inventories 15,800 (33,500)
Prepaid expenses and other current assets (41,400) (50,300)
Accounts payable (174,600) 56,200
Accrued liabilities 126,400 20,900
Deferred revenue 37,600 12,700
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Net Cash Used In Operating Activities (1,460,400) (663,100)
-----------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Payments to acquire property and equipment (31,100) (53,000)
Deposits and other assets (130,000) (15,200)
-----------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (161,100) (68,200)
-----------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Principal payments on capital lease obligations (1,900) --
Proceeds from note payable to shareholder -- 100,000
Proceeds from issuance of treasury stock -- 380,000
Proceeds from exercise of stock options 73,200 --
-----------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 71,300 480,000
-----------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents (1,550,200) (251,300)
Cash and Cash Equivalents, beginning of period 1,995,900 307,500
-----------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 445,700 $ 56,200
===============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
4
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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 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. Operating results for the three month period
ended June 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.
3. Reclassifications
Certain 2000 and 1999 amounts in the consolidated financial statements and
notes thereto have been reclassified to conform to the present period
presentation.
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. 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
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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 $150,000 in the licensee in June 2000. The
investment is carried at its original cost in the balance sheet as of June 30,
2000. No revenue from this agreement had been recognized as of March 31, 2000.
Revenue of $250,000 has been recognized and collected as of June 30, 2000.
Amounts receivable on the contract of $789,300 and $700,000 at June 30, and
March 31, 2000, respectively, are included in Due from Related Party and are
offset by $772,300 and $734,700 in Deferred Revenue at June 30 and March 31,
2000.
5. Stockholders' Deficiency
During the three months ended June 30, 2000, a shareholder converted an
aggregate of 41 shares of preferred stock and accrued preferred stock dividends
of $24,200 into 564,283 shares of common stock.
6. Subsequent Events
In July 2000, a shareholder converted five shares of preferred stock and
accrued dividends into 141,299 shares of common stock.
In July 2000, the holder of the convertible note payable made a claim for the
issuance of common stock with a value of $40,000 as damages for the late filing
of a registration statement.
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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, we entered into a reorganization with Draco Technologies,
Inc., a Nevada corporation. Under the reorganization, our stockholders 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 the name of both
corporations 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.
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Beginning in 1998, we also focused on recruiting personnel and raising capital.
To date, a significant portion of our revenues have been derived 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 will 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 have devoted significant
engineering, marketing, sales and customer support resources to enhance the
competitiveness and cost-effectiveness of these services. 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.
As 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. As such 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 June 30, 2000, Compared With Three Months Ended June 30, 1999
Net sales for the three months ended June 30, 2000, were $403,300, compared
to net sales of $324,600 for the three months ended June 30, 1999. The increase
reflects expanded licensing fees for our inChorus product and related services
offset by a decrease in our product sales. In the three months ended June 30,
2000, $262,500 of our revenue consisted of licensing revenue and $140,800 was
derived from sales of products and services, as compared to licensing revenue of
$153,100 and product revenue of $171,500 for the three months ended June 30,
1999. Cost of sales increased to $88,300 for the three months ended June 30,
2000, from $57,000 for the comparable period in 1999, due to increased
production of our products.
Operating expenses increased to $1,506,000 for the three months ended June
30, 2000, compared to $823,200 for the three months ended June 30, 1999. The
increase was comprised of growth in all components of our operating expenses,
including research and
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development expenses, sales and marketing and general and administrative
expenses. Research and development expenditures increased to $321,900 for the
three months ended June 30, 2000, compared to $187,500 for the three months
ended June 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 $620,800 in the three months
ended June 30, 2000, compared to $232,600 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 the hiring
of 3 additional sales personnel and participation in trade shows. General and
administrative expenses increased to $563,300 for the three months ended June
30, 2000, compared to $403,100 for the three months ended June 30, 1999, 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 increased to $14,300 for the three months ended June
30, 2000, compared to $900 for the three months ended June 30, 1999. The
increase was due to interest earned on increased cash deposits. Interest expense
equaled $62,700 for the three months ended June 30, 2000, due to interest
accrued on our 8% convertible debentures. No interest expense was incurred
during the three months ended June 30, 1999.
As a result of these factors, we incurred a net loss of $1,265,200 for the
three months ended June 30, 2000, compared to a net loss of $562,700 for the
three months ended June 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 three months
ended June 30, 2000, financing activities generated $73,000 (all from the
exercise of stock options), as compared to $480,000 in cash generated by our
financing activities in the three months ended June 30, 1999. As of June 30,
2000, we had approximately $445,700 in cash and cash equivalents, an increase
from $56,200 of cash and cash equivalents at June 30, 1999, but a decrease from
the $1,995,900 of cash and cash equivalents at March 31, 2000. Cash and cash
equivalents at June 30, 2000, reflected the amount remaining from the proceeds
from our sale of 8% convertible debentures in March 2000. Our accounts
receivable (net allowance for doubtful accounts of $550,900) equaled $929,600 at
June 30, 2000, as compared to $701,400 at March 31, 2000, (net of an allowance
of $672,200 for doubtful accounts). Included in the doubtful account allowance
for the three months ended June 30, 2000, is a reserve of $550,000 for NIC.
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In the three months ended June 30, 2000, our operating activities utilized
$1,476,000 in cash, as compared to the utilization of $663,100 in cash for
operating activities for the comparable period in 1999. The increase in our
operating activities expenditure for the three month period ended June 30,
2000, as compared to the three month period ending June 30, 1999, was due to the
expansion of our operations as a component of our business growth. Investing
activities utilized $145,500 of cash during the three month period ended June
30, 2000, compared to the $68,200 utilized for investing activities during the
same 1999 period. The increase in investing activities was due to the
availability of funds from the sale of our 8% convertible debentures in March
2000. For more information, please see the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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. 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., for a total of 100,000 shares of our common stock,
in connection with this transaction.
Our independent certified public accountants have issued a report on our
audited financial statement 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.
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;
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- 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 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 into fourth quarter 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. The
sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders. The incurrence of additional
indebtedness would result in an increase in our fixed obligations and could
result in operating covenants that would restrict our 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
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.
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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 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 $1,265,200 for the three months ended June 30, 2000, and
approximately $6,148,600 for the year ended March 31, 2000. As of June 30, 2000,
we had an accumulated deficit of $10,177,400.
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 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."
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Our revenues are also dependent on licensing revenue from one major licensing
customer.
For the years ended March 31, 2000 and 1999, approximately $153,100 and
$640,000, respectively, or 22.5% and 87.5%, respectively, of our net sales were
derived from licensing revenue from one customer, NIC Ltd. In addition, we had
net accounts receivable from NIC Ltd. of $479,900 and $421,900 at March 31, 2000
and March 31, 1999, respectively. As of March 31, 2000, we increased the
allowance for doubtful accounts to $672,200, fully reserving the unpaid balance
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 have recently experienced greater than estimated retail software returns.
In the quarter ended March 31, 2000, we experienced greater than estimated
returns of our software from retailers. These returns exceeded the amount of
revenues from retail software sales during the same quarter. We are currently
investigating the reasons for these returns, and believe that they may be due in
part to the traditionally higher return rate in the first calendar quarter in
the shrinkwrap software industry as distributors and retailers balance their
inventory. Returns in the quarter ended June 30, 2000, were significantly lower
than those recorded by us in the previous quarter ended March 31, 2000, with
$44,000 in returned products, as compared to $455,000, respectively.
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.
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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 demand and uncertain market acceptance for products
and services. Businesses and consumers have the option of using other methods
of online communication, including video 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 our
products, services and infrastructure. 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, Edmund Leung, our Chief
Technical Officer, and Patrick Coan, our Chief Financial 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, nor have we experienced any significant
failures due to the year 2000 date changes. 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
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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
of 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.
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 the equity line agreement.
The sale of stock pursuant to the 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 effect 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 offer and sale of shares of common stock under the private equity line
arrangement 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 the 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
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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 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.
Some of the information in this prospectus contains forward-looking statements.
Some of the information in this prospectus 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 prospectus, 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. Before you invest in our common stock, you should be aware that the
occurrence of any of the events described in these risk factors and elsewhere in
this prospectus could have a material and adverse effect on our business,
results of operations and financial condition and that upon the occurrence of
any of these events, the trading price of our common stock could decline and you
could lose all or part of your investment.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant.
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Although as of June 30, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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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 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In March 2000, we issued 8% convertible debentures in the original
principal amount of $2,000,000 to an investor. The debentures are convertible,
at the option of the holder, into shares of our common stock at a price per
share of $1.75. We also issued to the investor warrants to purchase 100,000
shares of common stock at an exercise price of $3.187 per share. The issuance
was made in reliance on Section 4(2) of 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
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investment, and who represented to us that the securities were being acquired
for investment purposes.
In April 2000, we issued warrants to purchase 100,000 shares of common
stock in connection with an equity line agreement. The warrants are immediately
exercisable at a price of $1.50 per share. The issuance was made in reliance on
Section 4(2) of 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 securities were being acquired for investment
purposes.
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 June
30, 2000.
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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: August 14, 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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