UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 000-29113
SYCONET.COM, INC.
(Name of Small Business Issuer in its charter)
Delaware 54-1838089
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9105C Owens Drive, Manassas, Virginia 20111
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (703) 366-3900
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 [_] No [X]
The aggregate number of shares outstanding of the Issuer's Common Stock, its
sole class of common equity, was 12,888,958 as of May 9, 2000.
Transitional Small Business Issuer Disclosure Format: Yes [_] No [X]
Page 1 of 27; Exhibit Index is on Page 26
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SYCONET.COM, INC.
Balance Sheets
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
Unaudited
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 410,377 $ 587,559
Accounts receivable, net of allowance for
doubtful accounts of $15,000 at March 31, 2000 and
December 31, 1999, respectively 51,373 63,233
Due from officers -- 65,000
Prepaid expenses 21,924 4,324
Inventories 578,318 352,176
Other current assets -- 1,930
----------- -----------
Total current assets $ 1,061, 992 $ 1,074,222
----------- -----------
Property and Equipment, at cost $ 258,257 $ 84,869
Less accumulated depreciation (25,951) (12,679)
----------- -----------
Total property and equipment $ 232,306 $ 72,190
----------- -----------
Other Assets $ 38,775 $ 5,000
----------- -----------
Total assets $ 1,333,073 $ 1,151,412
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 529,153 $ 31,974
Accounts payable and accrued expenses $ 1,097,882 1,020,428
Stock subscriptions refund payable $ 22,500 22,500
----------- -----------
Total current liabilities $ 1,649,535 $ 1,074,902
----------- -----------
Long-Term Debt, less current maturities $ -- $ --
----------- -----------
Total liabilities $ 1,649,535 $ 1,074,902
----------- -----------
Stockholders' Equity (Deficit)
Preferred stock, authorized, 500,000 shares; no shares
outstanding $ -- $ --
Common stock, $0.0001 par value, authorized 14,500,000
shares in 2000 and 1999; issued and outstanding 12,834,958
and 11,795,429 shares in 2000 and 1999, respectively 1,271 1,180
Additional paid-in capital 7,977,576 7,245,967
Deferred compensation (594,400) (721,900)
Retained earnings (deficit) (7,700,909) (6,448,737)
----------- -----------
Total stockholders' equity (deficit) $ (316,462) $ 76,510
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,333,073 $ 1,151,412
=========== ===========
</TABLE>
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SYCONET.COM, INC.
Statements of Operations
For the Quarters Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
March 31 March 31
2000 1999
<S> <C> <C>
Net sales $ 236,806 $ 190,565
Cost of goods sold 143,648 142,351
------------ ------------
Gross profit 93,158 48,214
Operating expenses:
Selling, general and
administrative expenses 1,337,880 204,193
------------ ------------
Operating (loss) (1,244,722) (155,979)
Nonoperating expense, net 7,449 706
------------ ------------
Net (loss) $ (1,252,171) (156,685)
============ ============
Loss per common share, basic and diluted (0.10) (0.02)
Weighted average shares outstanding, basic and diluted 12,517,087 7,791,798
</TABLE>
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SYCONET.COM, INC
Statements of Cash Flows
For the Three Months Ended
<TABLE>
<CAPTION>
March 31 March 31
2000 1999
<S> <C> <C>
Cash Flows From Operating Activities
Net loss (1,252,171) (156,685)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation 13,272 1,419
Amortization of deferred compensation
related to stock options 127,500 --
Change in assets and liabilities
(Increase) decrease in accounts receivable 11,860 (14,055)
(Increase) in prepaid expenses (17,600) --
(Increase) in inventory (226,142) (142,842)
(Increase) in other assets (31,845) --
Increase (decrease) in accounts payable and accrued expenses 77,454 (16,406)
---------- ---------
Net cash (used in) operating activities (1,297,672) (328,569)
---------- ---------
Cash Flows From Investing Activities
purchase of property and equipment (173,388) --
---------- ---------
Cash Flows From Financing Activities
Proceeds form issuance of stock 731,700 380,000
Short-term loans from officers -- (10,000)
Short-term loans to employees 65,000 600
Proceeds from Other Financing 500,000 --
Principal payments on long-term debt (2,822) (2,008)
---------- ---------
Net cash provided by financing activities 1,293,878 368,592
---------- ---------
Increase (decrease) in cash and cash
equivalence (177,182) 40,023
Cash and Cash Equivalents
Beginning 587,559 20,676
---------- ---------
Ending 410,377 60,669
========== =========
Supplement Disclosures of Cash Flow Information,
cash payments for interest
See Notes to Financial Statements.
</TABLE>
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NOTE 1 - ACCOUNTING POLICIES
Unaudited Interim Financial Information
Syconet.com, Inc. ("the Company") has prepared its consolidated financial
statements as of March 31, 2000 in accordance with the rules and regulations of
the Securities and Exchange Commission ("SEC"). These statements are unaudited
and, in the opinion of management, include all adjustments (consisting of normal
recurring adjustments and accruals) necessary to present fairly the financial
condition and results of operations for the periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such SEC rules and regulations. Operating results for the
quarter ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2000. These consolidated
financial statements should be read in conjunction with the audited financial
statements and the accompanying notes included in the Company's Form 10SB
Registration Statement declared effective March 25, 2000.
CASH AND CASH EQUIVALENTS
All highly liquid investments with maturities of three months or less at
the date of purchase are considered to be cash equivalents and are carried at
cost plus accrued interest, which approximates fair value.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of related allowance for doubtful
accounts. The allowance for doubtful accounts remained at $15,000 as of March
31, 2000 and December 31, 1999.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consisted of goods,
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primarily anime videos, purchased for redistribution.
PROPERTY AND EQUIPMENT
Property and equipment, principally computer hardware and software, are
stated at historical cost less accumulated depreciation. The costs of additions
and improvements are capitalized, while maintenance and repairs are charged to
expense. Depreciation is provided using the straight-line method over a three to
five-year estimated life. Depreciation expense totaled $ 13,272 and $ 1,419 for
the quarters ended March 31, 2000 and 1999, respectively.
LOSS PER SHARE
Loss per share is computed on the weighted average number of shares
outstanding and excludes any dilutive effects of options, warrants and
convertible securities. Common equivalent shares are excluded from the
computation if their effect is antidilutive.
REVENUE RECOGNITION
Sales are recorded net of discounts, which range from 28% to 50% versus
manufacturer's suggested retail price (MSRP). Generally, web-based consumer
purchases are non-returnable, except for damaged products. For retailers, the
right of return is granted in exchange for a cash refund or merchandise exchange
contingent upon receipt of the returned inventory on a case-by-base basis.
Retailer returns are subject to a 15% restocking fee.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of asset and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some
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portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company may be subject to legal proceedings and
claims in the ordinary course of business, including contract terminations,
employment related claims and claims of alleged infringement of trademarks,
copyrights and other intellectual property rights. The Company currently is not
aware of any such legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect on its business,
prospects, financial condition and operating results.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING STATEMENTS
This Item contains forward looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995). Such statements involve
significant risks and uncertainties and are subject to change based on various
important factors. The following factors, among others, could affect our
performance and could cause actual results for fiscal 2000 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: inability to obtain, or delay in obtaining, the substantial
additional capital we need; changes in consumer spending patterns and debt
levels; market acceptance of Anime and e-commerce; technological obsolescence;
and the impact of competitive market factors.
BUSINESS OVERVIEW
SyCoNet.Com, Inc. has been capitalized since its inception from private
placements of its Common Stock. We currently need substantial additional
capital, and we can give no assurance that we will be able to obtain it in the
near future or at all, or on commercially reasonable terms.
A. Anime Business
We are engaged principally in the distribution and direct marketing of
Anime -- animated cartoons produced in Japan and shipped to the United States
where the licensee or master distributor inserts English subtitles or dialogue
prior to distribution on videocassettes. We sell directly to individuals over
the Internet at www.Animedepot.com and at Anime trade shows and other retail
events.
In addition to our main product line of video tapes and DVDs, we have
started expanding our product line to games, trading cards, apparel, and toys.
In order to be able to fully exploit the upsell opportunity that is available to
us, SyCoNet.Com is actively pursuing licensing arrangements that would allow us
to control distribution for a wide variety of products (toys, games, apparel,
etc.) that are directly related to Anime themes. Depending on the product, we
could take advantage of these licenses in various ways - from sublicensing to
warehousing to manufacturing to direct sales. We are not focused on Anime as a
niche market, but as an all- encompassing mainstream phenomenon that can be
easily monetized through aggressive and creative marketing applications.
We began as a wholesaler of Anime products to small retail outlets, such as
Anime specialty stores, comic book specialty stores and video stores, that are
focused almost exclusively on being the resident experts on Anime in their
geographic area. We plan to continue providing wholesale services to retail
stores that would like us to provide their Anime product line. In fact, we
believe this line of business will continue to grow at 50% or more per year as
the genre grows, and as we develop our licensing and product creation
businesses. The consummation of our Letter of Intent to acquire Zocchi
Distributing Inc. ("Zocchi"), which is not probable at this time, would greatly
enhance our wholesale position, as it has a substantial number of wholesale
accounts, virtually all of which specialize in the retail games industry.* These
stores tend to purchase some of the more popular Anime titles, while Anime
dealers tend
- -------------------------
*We entered into a Letter of Intent to acquire Zocchi Distributing Inc., a
distributor of games and science fiction/fantasy products. The Letter of Intent
expressly provides that as a condition to the Zocchi acquisition we must cause
to be removed the personal guarantee by the sole Zocchi shareholder of Zocchi's
repayment of its bank debt. Given our financial condition as reflected in our
December 31, 1999 and March 31, 2000, financial statements, we think it unlikely
that such condition can be satisfied absent our receipt of substantial
additional financing or dramatic improvement in our results of operations, and
we can give no assurance that either will occur in the near future or at all.
Accordingly, it is premature to conclude the Zocchi acquisition is probable.
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to purchase some games and enable each company to cross-sell its products to the
other company's customer base while creating vertical supply chain efficiencies.
B. Technology Development and Business to Business Services
In the latter half of 1999, we began to develop plans to create a full
service e-commerce and distribution platform to better serve its wholesale and
retail Anime customers. In completing these plans it became apparent that a real
need existed for Internet companies to have a cost-effective and flexible
alternative to the current set of third party distribution outsourcing
companies, many of which provide poor service and little flexibility or
attention to specific customer needs, and that the cost of building a platform
with the flexibility and scalability to allow us to service other businesses
would not be significantly greater than the cost of building a platform for our
own customers. The principal difference would be in ensuring that the database
design and equipment architecture would allow flexibility in as many ways as
possible. As a result we decided to build a technical team dedicated to creating
a business to business distribution and e-commerce platform that we could sell
to third parties. If successful, the effect would be to create a source of
ongoing revenue and profit in its own right. In addition, the cost per sale for
distribution of our own products would decrease dramatically due to better
overall utilization of infrastructure and back office systems.
As of today our platform's accounting system is fully operational to
real-time inventory levels are tracked and purchasing/ ordering/ shipping/
receiving transactions plus customer information have been simplified and
integrated into a single transaction and customer database. This has greatly
increased the level of service we provide to our customers.
We are currently in the process of implementing an architecture that will
allow us to sell a platform of the same caliber as those offered by the best of
breed Internet consulting and b-to-b e-commerce companies, such as Vertical Net
and Microstrategies. This would allow us to develop multiple web sites that
function with a single underlying business operations database that includes
site-specific catalog information, pricing, customer data, and content (for
example, a list of the Top 5 most requested videos for a particular site). We
expect to have this system fully operational by mid-summer 2000, at which point
we would be extremely well positioned to rollout genre-specific sites (such as a
site for children, another for teenage girls, and another focused on live action
videos).
In addition to e-commerce and distribution services, we also are developing
a virtual ISP (Internet Service Provider) service-in-a-box that would be
integrated into the e-commerce platform. This would allow e-commerce customers
to provide ISP services to their end-users without having to purchase
infrastructure. A tightly integrated package of content, commerce, and access
capabilities would create an extremely powerful set of products for which we
expect there to be high demand.
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Business Strategy - Anime
A. Licenses & Proprietary Product
We believe that licensing proprietary product from Japanese Anime content
providers is critical for our future success. We seek to acquire distribution
rights which would enable us to offer Anime titles and associated products that
are only available from us. Acquiring proprietary product rights would require
us to translate Japanese language Anime tapes into English for release and
distribution as sub-titled and voice dubbed VHS tapes and DVDs, but should also
enable us to achieve greater revenues with higher, more stable profit margins
that could withstand the entry of larger wholesale players (service and cost
advantages are not effective barriers to entry) and significantly increase our
competitive advantage.
B. Acquisitions
The Company's merger and acquisition strategy is directed toward obtaining
a critical mass through the acquisition of customers, infrastructure, property
licenses, and key employees, which would allow us to compete more effectively
for the right to distribute the most popular Anime series, as represented today
by Pokemon, Dragonball Z, and Princess Mononoke.
We have several competitors in the wholesale distribution market consisting
of small privately held companies that serve the Anime niche market of small
specialty retailers. The most important of these companies are: Animeigo,
Central Park Media, Media Blasters, AD Vision. In addition, we compete with
several privately held companies that are focused primarily on Anime but also
sell a wider variety of products including games, toys, wallscrolls, cards, etc.
These are Action Ace, Fandom, and Next Planet Over. Our strategy is to acquire
Anime distributors to leverage their assets (customers, licenses, people,
infrastructure) to create true critical mass for that industry segment and
enable rapid expansion into contiguous markets. As the only publicly traded
company among the group, we believe we have the means of accomplishing this
goal. However, we have not entered into any agreements to make any acquisitions
and we can give no assurance that we will make any acquisitions in the near
future or at all.
C. Marketing
We are in the process of developing and executing a complete marketing
program that is focused on customer acquisition, both wholesale and direct,
incorporating the following principal components:
Direct Sales to Customers. We believe that disintermediation, the process
by which the Internet provides companies with the ability to sell directly
to markets of all sizes, is a positive force that can be exploited by
companies like us. Consumers benefit greatly when companies with product
and their end users can rapidly locate each other. We intend to be the
premier player in the US Anime market and we intend to accomplish this in
large part via direct sales to consumers via the Internet. We are in the
process of designing several separate web sites for the different audiences
that enjoy various subgenera of Anime and action oriented films (such as
martial arts), expected to be launched in Summer 2000. Although marketed
separately, together they should be synergistic in terms of the types of
promotions that will drive people to the sites and the
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licensing and distribution deals that must take place to ensure supply. We
expect to experience economies of scale by targeting all of the subgroups
with different websites that operate under a single network operations and
financial infrastructure thereby reducing our cost per sale. We will
continue to focus on providing a full line of Anime product that appeals to
the core Anime customer - Anime fans who buy 24 tapes or more per year.
This includes both consumers who buy from us directly and retailers who
operate retail Anime shops. We will continue to target these customers via
Anime conventions and through the sponsorship of events where Anime fans
are expected to appear.
Television. We expect to be advertising on television networks and shows
that are focused on Anime. These venues would offer us an outstanding
opportunity to create mindshare and increase the value of our brand(s).
Web Based Advertising. Anime is a very popular entertainment topic on the
Internet, coming up consistently in the list of top words used in search
engines. Because the target audience is easily identified, web based banner
ads should prove to be cost-effective when properly targeted and when they
utilize dynamic artwork. We intend to use an extensive program of web based
advertising and sponsorships of Anime content sites and sites that
represent significant cross-over markets that provide similar demographics
to our core client base (age 16-33, educated, computer savvy, etc.).
Title Sponsorship of Dragon*Con. We have a three-year agreement to be the
title sponsor of Dragon*Con. Dragon*Con is North America's largest Science
Fiction and Popular Arts convention and one of Atlanta's largest annual
events. Dragon*Con 2000 will be held from June 29-July 2, 2000. Attendance
at 1999's event was over 38,000 people (unique visitors). Title Sponsorship
provides us with premier space and ubiquitous promotional and branding
coverage within the Dragon*Con event, including premier banner placement,
program books, registration bags, brochures, television and cable
advertising, and inclusion in all convention press releases. We will also
host several events and contests that will feature our products and
partnerships.
V-ISP Free ISP Service. In 2000 we expect to offer a free but complete ISP
service to our customers that includes nationwide dial-up access, hosted
e-mail, personal web pages, and 24/7/365 customer service. We plan to use
the ISP service to acquire customers, then aggressively sell both our own
products and our partners' products through our Internet sales and
fulfillment engines. Customers who purchase at least one Anime DVD or VHS
tape (or equivalent) in a given month will receive the service for free.
Customers who decide to not purchase our products in a given month will be
charged a nominal fee for the ISP service.
In addition, we strongly believe that our ISP service will be attractive to
our wholesale customers and partners as an inexpensive private label
service for the development of customer growth and loyalty. We intend to
private-label the free ISP service for our
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wholesale customers and partners, managing the service and back office
functions in exchange for a fee for each account or for other reasonable
consideration.
In addition to the profits we expect from direct use of the service by
consumers, partners, and retailers, we also expect to generate advertising
revenue. We will be able to place Anime or related advertising in several
visible areas of the service including the CD ROM, the home page, the
e-mail service, and the personal web pages.
Business Strategy - E-Commerce Technology Platform
Our e-commerce platform is expected to significantly increase the size of
our customer base, provide value added services, and efficiently support our
growth. We have decided to build this platform using a complete end-to-end
solution from Great Plains that seamlessly combines accounting, inventory
management, and e-commerce into a single integrated package. In addition to
supporting new products, promotions, and websites, the platform would allow
tracking our Internet traffic and sales in great detail in real time so we can
ensure our Internet advertising and promotional dollars are being spent as
efficiently as possible. We also would be able to understand the activity of
each customer that touches our site, and track his or her movements on our site
in relation to browsing and purchase behavior. We also believe this platform can
be sold through commercial ISPs and systems integrators to large corporate
clients and we intend to develop and execute a marketing plan around these
areas.
As of today our platform's accounting system is fully operational and is
used to process and track all sales, purchasing, inventory, and other
transactions completed by SyCoNet. Real- time inventory levels are tracked and
purchasing/ ordering/ shipping/ receiving transactions plus customer information
have been simplified and integrated into a single transaction and customer
database. This has greatly increased the level of service we provide to our
customers.
We are currently in the process of implementing an architecture that will
allow us to sell a platform of the same caliber as those offered by the best of
breed Internet consulting and b-to-b e-commerce companies, such as Vertical Net
and Microstrategies. This would allow us to develop multiple web sites that
function with a single underlying business operations database that includes
site-specific catalog information, pricing, customer data, and content (for
example, a list of the Top 5 most requested videos for a particular site). We
expect to have this system fully operational by mid-summer 2000, at which point
we would be extremely well positioned to rollout genre-specific sites (such as a
site for children, another for teenage girls, and another focused on live action
videos).
V-ISP Services for Business
Our V-ISP product is being built to be the most feature-rich and
cost-effective ISP-in-a-box product that is available in the US. In addition to
its package of features, the access service will be integrated with the
e-commerce service to allow pricing and features of the access service to be
tied to the end-user's purchasing activity.
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Business-to-Business E-Commerce
In addition to helping to improve our consumer services, our e-commerce
system would allow us to offer business-to-business e-commerce services to
companies that are unable to fund and/or develop their own systems. We intend to
provide a complete end-to-end solution that seamlessly combines the operation of
on-line stores, with related accounting and inventory management, into a single
integrated package would allow tracking Internet traffic and sales in great
detail in real time. Our business customers would be able to offer their catalog
of product and effect on line sales transactions, as well as to purchase and
track inventory, track shipping, conduct account inquires, consult customer
service, and access product information via the Internet. We plan to use this
technology platform as a means to creating advanced e-commerce services for the
business market, especially our wholesale customers and partners. We will be
operational by May 15 for basic services. Additional development should be
completed by mid to late 2000 with rollout of functionality in stages.
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FINANCIAL OVERVIEW
The following is a discussion of certain factors affecting our results for
the quarters ended March 31, 2000 and 1999, and our liquidity and capital
resources. This discussion and analysis should be read along with our financial
statements and their notes, contained elsewhere in this Form 10QSB. The SEC is
currently reviewing the financial classification of distribution and fulfillment
costs as reported by e-commerce companies. Concurrent with industry practice, we
present these costs on the financial statements as a component of selling,
general and administrative expenses. The SEC may later decide to require the
classification of certain distribution costs as cost of sales. If this occurs,
we will reclassify these costs pursuant to the new SEC requirements, and our
gross profit will be negatively impacted accordingly. However, such
reclassification will not have any impact on our sales, operating profit or
loss, or net profit or loss.
As a reminder, our fiscal year ends on December 31. The years mentioned
throughout are fiscal years.
Since inception, we have incurred losses, and as of March 31, 2000, we had
an accumulated deficit of $ 7.7 million. A substantial portion of this deficit
arose during 1999, during which time we reported a loss of $ 5.3 million, of
which $ 3.8 million consisted of stock-based compensation costs. We expect
losses to continue, pending our achievement of growth in e-commerce based sales
or the acquisition of targeted product licenses, which would allow us to realize
higher profit margins. We believe that Internet sales growth will be contingent
on our ability to (a) establish name recognition among fans of Anime and
capitalize on up-selling and cross-selling opportunities; (b) select and market
product lines that will gain popularity among Anime fans and will have
cross-over potential to mainstream animation fans; (c) provide our customers
good value, in terms of competitive pricing and order fulfillment; (d) identify
and capitalize on advertising media and search engine tools that will allow us
to best reach our target customers; and (e) acquire and successfully market
product licenses. In January, 2000, we entered into an alliance with USA Network
Interactive, which will enable us to launch an integrated advertising and
branding campaign for our Anime product line through an e-commerce area jointly
developed by USA Networks' Interactive science fiction web site, Scifi.com, and
animedepot.com, our premier Anime
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website. In addition to directly targeting Anime fans, the partnership provides
a venue for us to cross-sell to science fiction enthusiasts, build brand
awareness, and drive traffic to our web site, thereby potentially increasing
sales. In addition, the agreement also calls for the joint development of web
content, print media advertising, promotional events, and direct targeting
through millions of banner impressions. In addition we have entered into
short-term on-line advertising agreements with several targeted web sites, such
as with the World Wrestling Federation's www.wwf.com, renewable at the option of
either party.
We are currently completing the development of a purchase-driven virtual
ISP ("Internet Service Provider") service to our customers and to affiliate
groups associated with our strategic partners. The ISP program would be launched
sometime in June. In addition, we are marketing the ISP program and e-commerce
business services to leverage our existing e-commerce infrastructure and related
competencies in front-office and back-office business solutions.
We plan to expand our consumer oriented e-commerce business, and we expect
that additional spending will occur in this area. We believe that achieving
profitability will be highly dependent on our ability to grow this segment of
the business, in addition to increasing our licensing and advertising revenues.
Overall, our sales may fluctuate as a result of promotional
discounts,convention marketing, current trends, which influence the popularity
of certain of our product lines, inventory levels, and seasonal demand. Although
we continue to experience sales growth relative to the same periods in prior
years, our quarterly sales during a given year reflect seasonality, with the
lowest and highest volumes reported during the first quarter and fourth quarter,
respectively. Other factors that may impact sales in the future include
unforeseen technological problems associated with web traffic and server
availability, government regulations on web transactions, and the general state
of the economy.
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Subsequent to March 31, 2000, we have experienced an increase in
international sales orders due to the strong growth in demand overseas for anime
products that are dubbed or subtitled in English. We intend to leverage this
increase in demand by actively advertising our anime web outlets,
www.animedepot.com, and www.sycodistribution.com, on popular Latin American and
European web portals, plus selected venues in Asia. We expect international
sales to continue to grow during the remaining quarters of this year. In order
to carve a significant niche in the largely untapped Anime market, which has
grown significantly based on the success of Anime entertainment like Pokemon and
Princess Mononoke, we will incur additional expenditures in marketing costs, web
technology, business-to-consumer and business-to-business e-commerce solutions,
enhancing our web presence, establishing a highly automated order fulfillment
system, and upgrading back-office and infrastructure support. Although we expect
to have sufficient capital to make these expenditures and that our sales will
grow as a result of these expenditures, we cannot assure you that we will have
the necessary funds or that the anticipated level of growth will occur or will
offset the planned expenditures.
Operating margins will be significantly impacted by (a) our ability to
maintain and satisfy our existing repeat customers, as well as attract new
customers with the same level of loyalty; (b) competitive pricing pressures; (c)
the effectiveness of advertising and marketing expenditures and management's
ability to measure and evaluate results; (d) the effectiveness of our web design
and content in attracting and leading consumers to consummate on-line sales; (e)
shipping efficiencies; (f) proportion of distributor sales in relation to
consumer sales; (g) general economies of scale; and (h) overall efficiencies
achieved from the full implementation of our e-commerce platform.
Results of Operations
Comparison of the quarters ended March 31, 2000 and 1999
Net sales, consisting of the selling price of VHS and DVD products, trading
cards, toys and apparel, net of discounts and customer returns, were $236,800
for the quarter ended March 31, 2000, a 24% growth over net sales of $190,600
during the comparable quarter in 1999. The growth in our first quarter sales for
2000 was driven primarily by consumer purchases through the Internet and
fan-based convention sales. Higher gross margin consumer sales increased in
relation to total sales. Despite the year-over-year
15
<PAGE>
growth in sales, our results were impacted by the temporary loss of a major
retail customer that was subject to an acquisition during the first quarter.
This situation was remedied and sales from this customer are expected to return
to normal levels in the second quarter of this year. Based on historical trends,
the first quarter generally reflects the lowest sales volume for the entire
year, due to most retailers' decision to deplete inventories built up during the
holidays prior to restocking more product. We had no significant international
sales during the first quarter of 2000.
The following table sets forth certain financial data for us as a
percentage of net sales for the indicated periods:
(Unaudited)
Quarter ended March 31
2000 1999
--------- ------
Net Sales 100.00% 100.00%
Cost of Goods Sold 60.66 74.70
Gross Margin 39.34 25.30
Selling, General and Administrative
Expenses 564.97 107.15
-------------------------
Operating Loss (525.63) (81.85)
Other Expense (3.15) (.37)
-------------------------
Net Loss (528.78) (82.22)
=========================
Gross profit is defined as sales less cost of sales, which consists of the
cost of product sold to the customers and related shipping costs. Our gross
margin during the first quarter of 2000 was more favorable than the previous
year as a result of a higher percentage of consumer sales which generally yield
higher margins than sales from our distribution business. Our gross profit was $
93,200 for the quarter ended March 31, 2000, a 93% increase over the gross
profit during 1999. We expect gross margins to fluctuate from period to period
based on any shift in the customer base (wholesaler/retailer versus consumer),
mix of products sold, or change in shipping and handling costs.
16
<PAGE>
Selling, general and administrative (SG&A) expenses include the costs of
personnel involved in product distribution, customer service, financial
administrative and executive functions, in addition to travel, advertising,
investor relations, legal and professional services, stock compensation, and
other operating costs.
Factors accounting for the increased costs during the first quarter of 2000
include: hiring of key personnel in management, information technology, customer
service, and warehousing/distribution to establish our infrastructure and
facilitate order fulfillment; travel related to financing efforts and trade
conventions; grass roots marketing and on-line advertising; and professional
services required in connection with regulatory compliance and letters of
intent. SG&A expenses for 2000 also included stock compensation costs associated
with the compensatory effect of non-qualified stock option grants awarded last
year, which vested in part during the first quarter. Most of the stock options
that were awarded during the first quarter were granted at the fair market value
of the stock at the date of award and hence had no impact on the financial
statements. During the remainder of the year 2000, we expect our operating costs
to continue to increase as a result of our targeted marketing, branding and
advertising campaign to facilitate the ramp-up of sales; warehouse and office
expansion as well as co-location facility for our ecommerce equipment;
additional customer service, order fulfillment, and warehouse personnel to
process an anticipated increase in on-line sales; amortization of software
costs, capitalized labor, and capitalized leases associated with e-commerce
solutions; depreciation of newly purchased PCs and computer peripherals;
recurring network engineering and telecommunications to maintain and
continuously secure our various web sites; and the build-out of more web sites
to increase Anime market penetration and to cater to cross-over market segments.
Our advertising agreements are short-term and generally cancelable. In the event
that we are not satisfied with click-through and estimated sell-through rates,
we terminate the agreements as soon as practicable. Despite our tight focus on
our operations, we cannot assure you that we will achieve a level of sales
commensurate with our efforts.
17
<PAGE>
DEFERRED COMPENSATION
We recorded total deferred stock compensation of $ 127,500 during the first
quarter of 2000, in connection with the amortization of compensatory stock
options granted late last year. We had no recognizable deferred compensation
costs during the first quarter of 1999. Deferred stock compensation is amortized
to expense over the vesting periods of the applicable options. The amortization
cost represents the vested portion of the difference between the exercise price
of stock option grants and the deemed fair value of our common stock at the time
of such grants.
INCOME TAXES
We made no provision for any current or deferred U.S. federal, state income
tax or benefit for any of the periods presented. Since inception, we have
experienced operating losses, which have recently been declining in relation to
sales. Although management expects the improved trend to continue, we cannot
provide any assurance as to when profits will materialize. Therefore, we cannot
predict when we can use the net operating loss carry-forwards , which begin to
expire in 2017, and which may be subject to certain limitations imposed under
Section 382 of the Internal Revenue Code of 1986. Due to the uncertainty
concerning our ability to realize the related tax benefit, we have provided a
full valuation allowance on the deferred tax asset, which consists primarily of
net operating loss carry- forwards.
Year 2000
As of the end of 1999, we substantially replaced disparate financial,
purchasing, and customer order databases with a fully integrated Y2K-compliant
enterprise-wide platform of front office, back office, financial and e-business
solutions. We have made an assessment of our internal systems, software,
computer technology and other services internally developed by third party
vendors and have not detected any malfunctions or any system failures at or
beyond the year 2000. These systems include the software to run our financial
accounting system, search engines, sales order fulfillment, inventory control,
transaction-processing, as well as monitoring and back-up capabilities. Failure
of these systems to be Year 2000 compliant could adversely impact the accounting
operations, order fulfillment and other operations of our web site. Based upon
our assessment to date, we believe that our
18
<PAGE>
systems are year 2000 compliant, although there can be no unconditional
assurance in this regard. In connection with our assessment, we have partially
relied on assurances from our vendors, including financial institutions to
process credit card payments for Internet sales, telecommunications and Internet
Service Providers. Currently, we do not believe that it will be necessary to
implement a remediation plan for our third-party software, third-party vendors
and computer technology and services with respect to year 2000 compliance. The
costs of the year 2000 readiness internal review incurred prior to and during
the year 2000 were not material and were charged to operations in the respective
periods that they occurred. Although we do not expect to experience, nor have we
experienced, business disruptions associated with Year 2000-related problems, we
cannot assure you that all potential Year 2000 defects have been uncovered or
corrected in our internal systems, including third party software and related
products.
Impact of Recently Issued Accounting Standards
As of January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130") entitled "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Currently, there are no
reportable items of comprehensive income (loss).
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1 ("SOP 98-1"), entitled "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which requires all
costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 will be effective for our fiscal year ending December 31, 1999. Projected
expenditures for our e-commerce infrastructure will be capitalized in compliance
with this pronouncement.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98- 5, entitled "Reporting on the Costs of Start-Up Activities." SOP
98-5 is effective for our fiscal year ending December 31, 1999. SOP 98-5
requires
19
<PAGE>
costs of start-up activities and organization costs to be expensed as incurred.
We do not expect adoption of the subject pronouncement to have a material effect
on the financial statements.
Recent Developments
We entered into a Letter of Intent to acquire Zocchi Distributing Inc., a
distributor of games and science fiction/fantasy products. The letter of intent
expressly provides that a condition to the Zocchi acquisition is Syconet causing
the sole Zocchi shareholder to be relieved its personal guarantee of Zocchi's
bank debt. Given our current financial condition, we think it unlikely that such
condition can be satisfied absent our receipt of substantial additional
financing or improvement in our results of operations. Accordingly, it is
premature to conclude the Zocchi acquisition is probable.
Liquidity and capital resources
As of March 31, 2000, our cash position consisted of $ 410,400 in cash
compared to $ 587,600 in cash as of December 31, 1999.
We have funded our operations primarily through private equity financing
from accredited investors pursuant to Regulation D, which is a limited offer and
sale of securities without registration under the Securities Act of 1933. During
the first quarter of 2000, net cash provided by financing included $ 731,700 in
private placement funds compared to $ 380,000 for the same period in 1999.
Subsequent to the date of the financial statements, in April, 2000, the Company
raised an additional $675,000 in a recent private placement offering.
Net cash used in operations were $ 1.3 million during the first quarter of
2000 compared to $328,600 during the same period in 1999. The use of cash was
due primarily to a loss from operations which was $ 1.2 million and $ 156,700
for the subject periods in 2000 and 1999, respectively. The expansion of our
product offerings to ensure product availability has required us to increase our
inventory levels, thereby causing an additional strain on our cash flows. We
have been ramping up our inventory with new titles in anticipation of a joint
branding and marketing campaign with USA Network Interactive to be launched in
20
<PAGE>
late May, 2000.
During the first quarter of 2000, net cash used in investing activities
consisted primarily of purchases geared towards the enhancement of our
e-commerce platform. We have deployed our technical staff to develop a fully
integrated end-to-end order fulfillment and inventory management system, which
is initially for internal use but can be packaged and customized for resale as a
business-to-business or business-to-consumer solution. As an added incentive to
promote sales, we plan to provide virtual ISP ("Internet Service Provider")
service to our customers that maintain a minimum level of monthly sales. We are
also packaging and branding the service for sale to business customers who will
be able to offer the service to their clientele with customized content and at a
price that is tied to product sale. Towards this end, we expended $ 174,000
during the first quarter and expect our capital commitment for the year to reach
$ 1 million, which will be funded through capital leases and equity financing.
During 1999, there were no capital expenditures for the comparative period.
We received a $2,000,000 funding commitment from an investor firm that has
funded numerous emerging growth companies. The funds will be made available to
us in four $500,000 tranches. Pursuant to the funding agreement, we received an
initial loan of $500,000 upon our filing of our Form 10SB registration statement
with the SEC. The three other tranches will be provided to us as follows: (a)
the date on which the SEC declares effective our Form SB-2; (b) 60 days
following the effectiveness of our SB-2, and (c) 120 days following the
effectiveness of our SB-2. Following the registration process, the loans will be
paid off upon our delivery of stock equivalent to that number of shares at a
stated price, corresponding to the principal plus interest accrued to the stock
delivery date.
During the first quarter of 2000, we entered into a new lease for a larger
warehouse, pending identification of a permanent distribution facility. We also
executed a 5-year lease on a build-to-suit facility in Manassas, Virginia, with
an expected completion date in the third quarter of 2000. In late April, 2000,
we relocated our corporate headquarters to an interim location in Manassas,
Virginia, pending the completion of our new facility. We will require additional
financing to provide for our working capital and for bringing our technology and
marketing plans to fruition. Accordingly, we are seeking
21
<PAGE>
such capital through debt or private placements, equity offerings or other
sources. The sale of equity or equity-related securities could result in
additional dilution to shareholders. We expect to obtain shareholder consent to
increase the number of authorized common shares from 14,500,000 to 85,000,000
and the number of authorized preferred shares from 500,000 to 1,000,000, to
allow us greater flexibility to finance our working capital and growth. We plan
to issue shares to fund the costs of future acquisition of, or a strategic
partnership with, complementary businesses which might further impact our
liquidity position or require the issuance of equity or debt securities.
Although we have entered into letters of intent with certain companies, we have
not completed our due diligence review of their operations nor have we obtained
the required financing, and we may never do so.
We have been in discussions with a number of parties regarding obtaining
additional financing. Recently, we entered into a Letter of Intent ("LOI") to
provide a $ 3 million convertible debenture offering to a hedge fund group based
in Rhode Island. Pending this investor's completion of its due diligence and
closing on the financing, we are not able to disclose terms at this time.
Barring unforeseen circumstances, we expect to close the deal within 45 days of
this filing. We also have a current private placement offering in progress,
which provides us intermittent infusions of cash. However, we cannot assure you
that our financing requirements can be met by current, available or potential
facilities or that additional facilities will be available on terms and
conditions favorable to us, if at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS.
The "Overview" and the "Liquidity and Capital Resources" section of the
Management's Discussion and Analysis cover risk factors that may impact the
Company's operating results. We have identified additional risk factors as
listed below.
WE HAVE A LIMITED OPERATING HISTORY, WHICH CONSTRAINS OUR FORECASTING ABILITY.
Because of limited historical financial data, changes in the product line during
the last two years along with changes in consumer trends and preferences, and a
recent growth in web-based consumer
22
<PAGE>
sales, we are unable to identify an established trend on which to base planned
operating expenses. Consequently, we may not be able to contain our costs in a
timely manner to offset any unfavorable sales trend, or ramp up our
infrastructure to absorb unexpected sales growth. As a result, we may incur a
net loss during any quarter that may be greater than expected.
WE ANTICIPATE OPERATING LOSSES TO CONTINUE.
In order to expand our market share and enhance branding, we expect to incur
significant marketing and advertising expenses. Certain of these expenses
include web-based targeted advertising as well as partner/ affiliate marketing
programs to generate new customers. In connection with the recruitment and
retention of additional key personnel, we expect to utilize stock options, which
may result in increased stock compensation costs. Recent increases in capital
investments will result in depreciation or lease amortization costs over the
these capital assets' economic lives. Additionally, future acquisitions, if
undertaken, may result in the recognition of goodwill, the amortization of which
will not impact cash flows, but will adversely impact results of operations.
ANY INABILITY TO STREAMLINE AND/ OR CONSOLIDATE OUR DISTRIBUTION FACILITY WILL
MATERIALLY IMPACT OUR OPERATIONS.
We currently operate an 8,100 square foot distribution facility based in
Manassas, VA , which we are leasing over an 8- month period. If the current
facility during this time period is not able to accommodate increases in demand
and customer orders, our operating results will be materially impacted. In the
event that we move the distribution facility elsewhere, we may expect a
temporary disruption in our business as well as unexpected costs during the
transition period pending connection of the new location to our automated order
fulfillment system.
WE HAVE EXPOSURE TO INVENTORY RISK.
We have expanded our inventory to provide our customers variety and greater
access to popular as well as rare product titles. Certain of these titles are
stocked based on past demand and on our expectations of future demand. We may
not accurately predict changes in consumer tastes and may temporarily overstock
on certain items. Although we are able
23
<PAGE>
to return most of our stock, increased inventory levels would subject us to
additional inventory risks, including shrinkage. Although we have tight security
measures and systems in place at our distribution center, we may not
successfully prevent inventory shrinkage in future periods.
OUR SALES GROWTH IS PARTLY DEPENDENT ON OUR ABILITY TO DEVELOP OUR WEBSITE AND
EMPLOY THE MOST RECENT E-COMMERCE TECHNOLOGY.
Commencing in late 1999 through the present time, we have expended considerable
resources in enhancing our web site and leveraging unique e-commerce
capabilities. Significant effort has been expended towards the development of
web content, graphics, as well as web maintenance to include timely product
pricing and product availability information. Our inability to update our
website, facilitate on-line shopping, and cater to changing tastes and
preferences will result in lost customers and sales. In order to remain
competitive and improve our Internet sell-through rates, we must continue to
upgrade the functionality and features of our online stores.
INVESTORS' NEGATIVE PERCEPTIONS ON DOTCOM COMPANIES COULD RESULT IN SUBSTANTIAL
SALES OF OUR COMMON STOCK THAT COULD CAUSE OUR STOCK PRICE TO FALL AND TO REMAIN
LOW.
General market perceptions concerning comparative investment risk
associated with dotcom companies, as well as investors' reassessment of their
risk relative to investment in our Company, can influence their decision to hold
or sell shares of our stock. Additionally, shareholders, who have passed their
respective restriction periods, may sell their shares, if there is some modest
price appreciation relative to the cost basis of their shares, which might might
have been acquired at a discount. If enough stockholders at any one time sell
substantial amounts of our common stock, the market price of our stock could
fall, thereby making it more difficult for us to obtain equity-based financing
in the future at favorable terms. As of March 31, 2000, we had outstanding 12.8
million shares of common stock, of which 8 million are freely tradable in the
public market, and 4.8 million are restricted, in accordance with Rule 144 of
the Securities Act.
Under Rule 144, a person who has beneficially owned restricted securities
for at least one year would be entitled to sell within any three-month period
that number of shares which does not exceed the greater of (a) one percent of
the number of
24
<PAGE>
shares of common stock then outstanding or (b) the average weekly trading volume
of the common stock during the four calendar weeks preceding the sale. Sales
under Rule 144 are governed by certain requirements with respect to manner of
sale, notice, and the availability of current public information about us. Under
Rule 144(k), a person who is not deemed to have been our affiliate at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell such
shares, and does not have to comply with the manner of sale, public information,
volume limitation or notice provisions prescribed by Rule 144. Stock selling
based investor perceptions on market conditions and relative strength our stock
can result in a high enough daily volume of trading, setting a high volume
limitation for Rule 144 purposes. Sales by our stockholders of a substantial
amount of our common stock could adversely affect the market price of our common
stock.
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
In January 2000 we issued 10,000 shares to Jamie Graham in connection with
his 1998 appointment as a director in reliance on the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act").
25
<PAGE>
In January and February 2000, we sold to seven accredited investors 208,823
shares of common stock at a price of $.85 per share, for an aggregate price of
$177,500, in a private placement made pursuant to the exemption from
registration provided by Section 4(2) and 4(6) of the Securities Act and Rule
506 of Regulation D promulgated under the Securities Act.
In February 2000, we sold to one accredited investor 343,000 shares of
common stock at a price of $1.00 per share for an aggregate price of $343,000,
in a private placement made pursuant to the exemption from registration provided
by Section 3(b) and Rule 504 of the Securities Act and Section 203(t) of the
Pennsylvania Securities Act of 1972.
In February 2000, we issued 280,000 shares of common stock to a director,
J. Larry Hineline, who exercised certain stock options at a price of $.51 per
share for 250,000 shares, $1.02 per share for 15,000 shares and $.01 per share
for 15,000 shares, for an aggregate price of $142,950. This issuance was in
reliance on the exemption from registration under Section 4(2) and 4(6) of the
Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed with this report:
Page
27. Financial Data Schedule 28
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 12, 2000 SYCONET.COM, INC.
By: /s/ Sy R. Picon
--------------------------------
Name: Sy R. Picon
Title: President and Chief
Executive Officer
By /s/ Kathryn Jacobson
--------------------------------
Name: Kathryn Jacobson
Title: Chief Financial Officer
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SyCoNet.Com,
Inc. financial statements for the three months ended March 31, 2000 (unaudited)
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 410,378
<SECURITIES> 0
<RECEIVABLES> 66,373
<ALLOWANCES> 15,000
<INVENTORY> 578,318
<CURRENT-ASSETS> 1,061,992
<PP&E> 258,257
<DEPRECIATION> 25,951
<TOTAL-ASSETS> 1,333,073
<CURRENT-LIABILITIES> 1,649,535
<BONDS> 0
0
0
<COMMON> 1,271
<OTHER-SE> (317,733)
<TOTAL-LIABILITY-AND-EQUITY> 1,333,073
<SALES> 236,806
<TOTAL-REVENUES> 236,806
<CGS> 143,648
<TOTAL-COSTS> 1,481,528
<OTHER-EXPENSES> 6,685
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (14,134)
<INCOME-PRETAX> (1,252,171)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,252,171)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,252,171)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
