<PAGE> 1
UNITED STATES
SECURITIES & 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 SEPTEMBER 30, 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 NO.
33-17229-D
UMEMBER.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 84-00978689
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENT. NUMBER)
10350 SANTA MONICA BOULEVARD SOUTH, SUITE 130
WEST LOS ANGELES, CALIFORNIA 90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER: (310) 552-3444
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934 DURING THE PAST 12 MONTHS (OR
SUCH SHORTER PERIOD THAT THE RESPONDENT IS REQUIRED TO FILE SUCH REPORTS),AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [ ] NO [X]
AS OF NOVEMBER 13, 2000, THE REGISTRANT HAD 20,005,323 SHARES OF ITS NO PAR
VALUE COMMON STOCK OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES [X] NO [ ]
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Several of the matters discussed in this document contain forward-looking
statements and uncertainties. uMember.com, Inc., a Colorado corporation and its
subsidiary (collectively, the Company) wish to caution readers that
forward-looking statements are based on assumptions, which may or may not prove
accurate and accordingly are necessarily speculative. Readers should not place
undue reliance on any such forward-looking statements, which speak only as of
the date made. Actual results could vary materially from those anticipated for a
variety of reasons. The Company undertakes no obligation to publicly release the
results of any revisions to those forward-looking statements, which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
UMEMBER.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FORM 10-QSB QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL STATEMENTS
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations (unaudited) for
the three months ended September 30, 2000 and 1999, for the nine
months ended September 30, 2000, from February 1, 1999 (date of
inception to) to September 30, 1999, and from inception to
September 30, 2000 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2000, from inception to
September 30, 1999, and from inception to September 30, 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis and Results Operations 9
PART II - OTHER INFORMATION 13
</TABLE>
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UMEMBER.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash $ 34,499 $ --
Accounts Receivable 138,944 --
Due from Employees 27,500 19,533
Inventory 66,872 --
Prepaids and Other Current Assets 34,460 41,978
Assets Held for Sale 237,581 --
----------- -----------
Total Current Assets 539,856 61,511
Property, Plant & Equipment, Net 465,929 437,901
Other Assets 48,202 --
----------- -----------
Total Assets $ 1,053,987 $ 499,412
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts Payable and Accrued Expenses $ 976,309 $ 219,092
Current Portion - Capital Lease 384,089 --
Due to Affiliate 181,089 1,234,880
Other Current Liabilities 121,595 --
----------- -----------
Total Current Liabilities 1,663,082 1,453,972
Long Term Capital Lease 407,003 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock, no par value; 100,000,000 shares
authorized, 20,005,323 and 5,000,000 issued
and outstanding at September 30, 2000 and
December 31, 1999 respectively 3,898,817 --
Deficit Accumulated During the Development Stage (4,914,915) (954,560)
----------- -----------
Total Stockholders' Equity (Deficit) (1,016,098) (954,560)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,053,987 $ 499,412
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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UMEMBER.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 1, 1999 (DATE OF
SEPTEMBER 30, SEPTEMBER 30 INCEPTION) TO SEPTEMBER 30,
2000 1999 2000 1999 2000
<S> <C> <C> <C> <C> <C>
Revenue $ 492,310 $ -- $ 596,372 $ -- $ 596,372
Cost of Sales:
Product Costs 452,413 -- 559,152 -- 559,152
Shipping and Handling 45,084 -- 46,993 -- 46,993
Fulfillment Center Costs 11,482 -- 13,028 -- 13,028
Inventory Reserves and Adjustments -- -- 57,550 -- 57,550
------------ ------------ ------------ ------------ ------------
Total Cost of Sales 508,979 -- 676,723 -- 676,723
------------ ------------ ------------ ------------ ------------
Gross Loss (16,669) -- (80,351) -- (80,351)
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Selling, General and Administrative 777,535 293,868 2,561,085 414,392 3,456,655
Loss on Assets Disposed of and
to be Disposed of 1,086,884 -- 1,086,884 -- 1,086,884
Depreciation and Amortization 73,577 7,471 256,869 10,471 284,515
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 1,937,996 301,339 3,904,838 424,863 4,828,054
------------ ------------ ------------ ------------ ------------
Loss From Operations (1,954,665) (301,339) (3,985,189) (424,863) (4,908,405)
Interest Expense, Net 9,128 9,154 45,097 14,052 75,641
------------ ------------ ------------ ------------ ------------
Loss Before Taxes (1,963,793) (310,493) (4,030,286) (438,915) (4,984,046)
Provision for Income Taxes -- -- 800 800 1,600
------------ ------------ ------------ ------------ ------------
Loss Before Extraordinary Item (1,963,793) (310,493) $ (4,031,086) $ (439,715) $ (4,985,646)
Extraordinary Gain on Debt
Restructuring 70,731 -- 70,731 -- 70,731
------------ ------------ ------------ ------------ ------------
Net Loss $(1 ,893,062) $ (310,493) $ (3,960,355) $ (439,715) $ (4,914,915)
============ ============ ============ ============ ============
Basic Loss Per Share $ (0.122) $ (0.062) $ (0.265) $ (0.088) $ (0.351)
============ ============ ============ ============ ============
Average Common Shares
Outstanding 15,481,751 5,000,000 14,953,416 5,000,000 13,986,311
============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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UMEMBER.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS FEBRUARY 1, 1999 (DATE OF
ENDED SEPTEMBER 30, INCEPTION) TO SEPTEMBER 30,
2000 1999 2000
<S> <C> <C> <C>
Operating Activities:
Net Loss $(3,960,355) $ (439,715) $(4,914,915)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 282,882 10,471 310,528
Consulting services exchanged
for Common Stock 102,500 -- 102,500
Loss on assets disposed of and to be
disposed of 1,086,884 -- 1,086,884
Gain from debt restructuring (70,731) -- (70,731)
Change in operating assets and liabilities:
Accounts receivable (138,944) -- (138,944)
Due from employees (7,967) 676 (27,500)
Inventory (66,872) -- (66,872)
Prepaids and other assets (40,683) (15,733) (82,661)
Assets held for sale (238,581) -- (238,581)
Accounts payable and accrued expenses 827,949 57,608 1,047,040
Other current liabilities 121,595 -- 121,595
----------- ----------- -----------
Net Cash Used in Operating Activities (2,101,323) (386,693) (2,870,657)
Investing Activities:
Purchase of property and equipment (175,903) (237,935) (641,449)
----------- ----------- -----------
Net Cash Used in Investing Activities (175,903) (237,935) (641,449)
Financing Activities:
Net proceeds from issuance of
common stock 3,796,317 -- 3,796,317
Due to/from affiliate (1,053,791) 653,298 181,089
Capital lease payments (430,801) -- (430,801)
----------- ----------- -----------
Net Cash Provided by Financing Activities 2,311,725 653,298 3,546,605
----------- ----------- -----------
Net Increase in Cash 34,499 28,670 34,499
Cash Beginning of Period -- -- --
----------- ----------- -----------
Cash End of Period $ 34,499 $ 28,670 $ 34,499
=========== =========== ===========
Supplemental Disclosure of Cash Flows Information:
Cash paid during the period for
Income Taxes $ -- $ 800 $ 800
Interest $ 47,689 $ 11,603 $ 75,641
Non-Cash Financing Activities:
Purchase of Computer Equipment
Under Capital Lease $ 1,214,835 $ -- $ 1,214,835
Issuance of Common Stock for Past Service $ 102,500 $ -- $ 102,500
Issuance of Common Stock in Exchange
For Cancellation of Warrants $ 68,750 $ -- $ 68,750
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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UMEMBER.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND GENERAL INFORMATION
In management's opinion, the unaudited condensed consolidated financial
statements of uMember.com, Inc. (uMember or the Company) at September 30, 2000
and at December 31, 1999, and for the periods ended September 30, 2000 and 1999
include all adjustments (consisting only of normal recurring adjustments)
necessary to fairly present these financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. Operating results for the three and nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. These condensed statements should be read in
conjunction with uMember's most recent 10-KSB and 8-K filings with the SEC.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
SIGNIFICANT RISK
During 1999 and the first half of 2000, uMember concentrated on developing
its technology, and its administrative and sales infrastructure. As a result,
for the three and nine months ended September 30, 2000, uMember had net losses
of $1,893,062 and $3,960,355, respectively, and a working capital deficit of
$1,123,226 at September 30, 2000. For the year ended December 31, 1999, the
Company had a working capital deficit of $1,392,461 with a net loss of $954,560.
These financial statements have been prepared on a going concern basis. uMember
has accumulated a deficit of $4,914,915 as of September 30, 2000. Its ability to
continue as a going concern is dependent upon the ability of the Company to
generate profitable operations in the future and/or to obtain the necessary
financing to meet its obligations and repay its liabilities arising from normal
business operations when they come due. The Company is currently in the process
of raising additional funds sufficient to fund its operations through at least
September 30, 2001, however, no assurance can be given that these efforts will
be successful or, if successful, that such funds will be raised on favorable
terms.
NOTE 2 - NEGOTIATED SETTLEMENT WITH VENDOR
In September 2000, the Company negotiated a settlement with its prior web
hosting vendor to reduce the amount of payments otherwise due under its contract
with this vendor. This settlement required Wareforce.com, Inc. (which is the
largest shareholder of the Company) to pay $25,000 and execute a promissory note
payable to the web hosting vendor in the amount of $75,000, due in three
installments of $25,000. In exchange for this promissory note, all amounts due
under the contract were forgiven, resulting in a reduction in Accounts Payable
of $70,731, an increase in the amount due to Wareforce in the amount of
$100,000 and an extraordinary gain on debt restructuring of $70,731. To date,
Wareforce has made the initial payment of $25,000, and the first monthly
installment of $25,000 under this note.
NOTE 3 - BASIC LOSS PER SHARE
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Basic loss per share in the accompanying condensed consolidated financial
statements is calculated in accordance with SFAS No. 128. SFAS No. 128 requires
that basic earnings per share be calculated on weighted average number of common
shares outstanding for the period without giving effect to outstanding common
share equivalents on weighted average number of common shares outstanding.
During a loss period the assumed exercise of "in the money" stock options
has an anti dilutive effect. "In the money" options to purchase approximately
185,021 and 237,100 shares of common stock were outstanding at September 30,
2000 and 1999, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
(UNAUDITED) (UNAUDITED)
NET LOSS SHARES EPS NET LOSS SHARES EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS Before
Extraordinary Item $(1,963,793) 15,481,751 $(0.127) $ (310,493) 5,000,000 $(0.062)
Basic EPS From
Extraordinary Item 70,731 15,481,751 0.005 -- 5,000,000 --
----------- ------- ----------- ------
Basic EPS $(1,893,062) 15,481,751 $(0.122) $ (310,493) 5,000,000 $(0.062)
=========== ======= =========== =======
<CAPTION>
NINE MONTHS ENDED FEBRUARY 1, 1999 (DATE OF
SEPTEMBER 30, 2000 INCEPTION) TO SEPTEMBER 30, 1999
(UNAUDITED) (UNAUDITED)
NET LOSS SHARES EPS NET LOSS SHARES EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS Before
Extraordinary Item $(4,031,086) 14,953,416 $(0.270) $ (439,715) 5,000,000 $(0.088)
Basic EPS From
Extraordinary Item 70,731 14,953,416 0.005 -- 5,000,000 --
----------- ------- ----------- ------
Basic EPS $(3,960,355) 14,953,416 $(0.265) $ (439,715) 5,000,000 $(0.088)
=========== ======= =========== =======
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 1, 1999 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000
(UNAUDITED)
NET LOSS SHARES EPS
<S> <C> <C> <C>
Basic EPS Before
Extraordinary Item $(4,985,646) 13,986,311 $(0.356)
Basic EPS From
Extraordinary Item 70,731 13,986,311 0.005
----------- -------
Basic EPS $(4,914,915) 13,986,311 $(0.351)
=========== =======
</TABLE>
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NOTE 4 - SEGMENT REPORTING
The Company operates in two industry segments; off-line
business-to-business sales, and Internet- based online sales to members.
Revenues and cost of sales for the three months and nine months ended September
30, 2000, and from February 1, 1999 (date of inception) to September 30, 2000
for these two industry segments are displayed in the table below. All of the
business-to-business revenues in the third quarter of 2000 and approximately
$230,000 for the nine months ended September 2000, and from February 1, 1999
(date of inception) to September 30, 2000 were derived from sales to a company
that is owned by three of the Company's founders. This company was acquired by
uMember in October 2000 (see Note 5 - Subsequent Events). There were no revenues
or cost of sales in 1999. The Company does not track other expenses or assets or
liabilities by segment.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS FEBRUARY 1, 1999 (DATE
ENDED ENDED OF INCEPTION TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
NET REVENUE
Business-to-business $247,325 $347,368 $347,368
Internet 244,985 249,004 249,004
-------- -------- --------
Total Net Revenue $492,310 $596,372 $596,372
======== ======== ========
COST OF SALES
Business-to-business $234,514 $335,671 $335,671
Internet 274,465 341,052 341,052
-------- -------- --------
Total Cost of Sales $508,979 $676,723 $676,723
======== ======== ========
</TABLE>
NOTE 5 - SUBSEQUENT EVENTS - ACQUISITION AND REORGANIZATION
In October 2000 the Company acquired 100% of the outstanding capital stock
of Continental Computer Exchange, Inc. ("Continental Computer"), a computer
retailer located in Los Angeles, California. Continental Computer was formerly
owned by three of the Company's founders, who remain shareholders in the
Company. The Company currently derives a large portion of its revenue from
Continental Computer (See Note 4 - Segment Reporting). Total revenue from
Continental Computer was $221,519 and $233,917, respectively for the three and
nine month periods ended September 30, 2000. The Company had trade receivables
due from Continental Computers of $119,239 at September 30, 2000, of which
$96,242 remained outstanding at the date of the acquisition. Wareforce has also
sold products to Continental Computer from time to time and in 1996 sold the
assets of its Personal Support Computers division to Continental Computer.
The consideration for the acquisition was the issuance by the Company of an
aggregate of 950,000 shares of the Company's Common Stock to the former
shareholders of Continental Computer. The Company has agreed to register 350,000
shares of the Common Stock in its next registration statement. (See Note 7 -
Line of Credit Agreement with Wareforce). Two of the former shareholders of
Continental Computer entered into one-year employment agreements with the
Company at annual salaries of $180,000 each. The spouse of the other former
shareholder of Continental Computer entered into a one year consulting agreement
with the Company at a monthly rate of $6,000.
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The terms of the acquisition were not negotiated as an arms-length
transaction and there can be no assurance that an unaffiliated company would not
have paid less consideration for Continental Computer than paid by the Company.
The acquisition will be accounted for under the purchase method of accounting.
In conjunction with the acquisition, the Company has reorganized its
operations to leverage the workforce and expertise of Continental Computer,
focusing its marketing efforts on the computer and consumer electronics product
lines, and eliminating 8 positions, or approximately one-fourth of the positions
of the combined companies. The Company has relocated most of its operating
activities to the Continental Computer location, maintaining only executive
offices at its headquarters location.
As a result of the acquisition and subsequent reorganization, the Company
is focusing primarily on the computer and consumer electronics market. This
change in focus and the relocation of the Company's operating activities has
resulted in the abandonment of some furniture and equipment and several web
development efforts, and the decision to sell some of uMember's fixed assets
with a net book value of $43,151 to Wareforce at the estimated fair market value
of the assets. The losses associated with the abandonment of the furniture and
equipment and the capital projects and the pending sale of assets of $88,268 and
$8,190, respectively, were recorded as losses on assets disposed of and to be
disposed of in the Company's Statement of Operations for the three and nine
months ended September 30, 2000, and the period February 1, 1999 (date of
inception) to September 30, 2000. The estimated sales value of the assets
subject to sale have been included in Assets Held for Sale at September 30,
2000.
NOTE 6 - SUBSEQUENT EVENTS - REFINANCING OF EQUIPMENT LEASE AND SALE OF
EQUIPMENT
In November 2000 the Company entered into an agreement with its equipment
lease vendor, Wareforce and a third party asset leasing and brokerage company to
sell the assets underlying its capital lease and enter into an unsecured note
payable to repay the difference between the balance due under the capital lease
and the sale price of the assets. The note is payable over 23 months commencing
in November 2000 at $20,000 with a balloon payment in the amount of $382,249 due
in December 2002. The sale price of the equipment was $200,000. A total of
$968,946 was due under the lease as of September 30, 2000, exclusive of interest
on future lease payments. The equipment underlying the lease was written down to
the sale price of $200,000 and reclassified to Assets Held for Sale at September
30, 2000. The resulting loss was recorded as a loss on assets disposed of and to
be disposed of and included in the Company's Statement of Operations in the
amount of $855,492 for the three and nine months ended September 30, 2000, and
the period February 1, 1999 (date of inception) to September 30, 2000. The
Company was in technical default under the terms of the lease at the time this
agreement was entered into.
NOTE 7 - SUBSEQUENT EVENTS - LINE OF CREDIT AGREEMENT WITH WAREFORCE
In October 2000 the Company entered into a line of credit agreement with
Wareforce. Under the terms of the agreement, Wareforce will provide the Company
with a maximum of $1,200,000 in additional funds over a one year period ending
October 2001. Under the terms of the agreement, the funding will occur in
$200,000 payments for the first three months, and as agreed upon thereafter. The
Company had trade payables of $333,317 and other amounts due to Wareforce of
$181,089 at September 30, 2000. The Company's management believes that a portion
or all of these amounts will be offset against the line of credit, reducing the
availability under the line after the initial three payments. At the end of the
term of this agreement, $600,000 will be converted into a term loan, and the
remainder will become due and payable. The line of credit bears interest at the
Prime Rate plus 1% (with the Prime Rate based on the prime rate published in
Investor's Business Daily).
One half of the funds under the line of credit agreement are being provided
by a significant investor in the Company through a separate equity transaction
with Wareforce. In order to induce this investor to enter into the transaction
and provide the funding, the Company has entered into an agreement dated October
10,
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2000, to file a registration statement with the Securities and Exchange
Commission no later than 90 days subsequent to the date of the agreement,
registering all of the unregistered common stock held in the Company as of
October 10, 2000 by this investor. Certain other investors have agreements with
uMember whereby their unregistered shares will be included in any registration
statement filed by the Company. The Company cannot determine the total number of
shares of common stock to be registered at this time.
ITEM 2
MANAGEMENT'S DISCUSSION & ANALYSIS OR PLAN OF OPERATION
The forward-looking statements included in Management's Discussion and
Analysis or Plan of Operation, which reflect management's best judgment based on
factors currently known, involve risks and uncertainties. Our actual results may
differ significantly from the results discussed in the forward-looking
statements. You should not regard their inclusion as a representation by us that
the objectives or plans will be achieved. Factors that might cause such a
difference include, but are not limited to, competitive, technological,
financial and business challenges making it more difficult than expected to
continue to sell products and services over the Internet. We may be unable to
retain existing key sales, technical and management personnel; there may be
other material adverse changes in the Internet industry or in our operations or
business, and any or all of these factors may affect our ability to achieve our
projected sales growth. Forward-looking information provided by uMember pursuant
to the safe harbor established by recent securities legislation should be
evaluated in the context of these factors.
Certain important factors affecting the forward-looking statements made
herein include, but are not limited to (a) a low number of current members and
limited current sales; (b) dependence by us on certain distributors; (c)
continued downward pricing pressures in sales made over the Internet; (d)
seasonal patterns of sales over the Internet; (e) changing economic influences
in the industry; (f) the development by competitors of new or superior delivery
technologies or entry in the market by new competitors; (g) our dependence on
key personnel, and potential influence by executive officers and principal
stockholders; (h) volatility in price and limited trading of the company's
stock; (i) delays in the shipment of products; (j) any delay in execution and
implementation of our system development plans; (k) changes in the quantity
and/or quality of the suppliers available for the Company's products; (l)
changes in the costs or availability of products; (m) general business
conditions in the economy; and (n) the Company's inability to raise additional
private or public capital necessary for development of our business to that of a
profitable enterprise.
Assumptions relating to budgeting, marketing, and other management
decisions are subjective in many respects. They are therefore susceptible to
interpretations and periodic revisions. These interpretations and revisions may
be based on actual experience and business developments and their impact may
cause us to alter our marketing, capital expenditure or other budgets. This may
in turn affect our business, financial position, results of operations and cash
flows. Therefore, you should not place undue reliance on forward-looking
statements contained in this 10-QSB.
The following table sets forth certain financial data for the periods indicated:
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<TABLE>
<CAPTION>
February 1, 1999
Three Months Ended (Date of
September 30, Nine Months Ended Inception to
2000 1999 September, 2000 September 30, 1999
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Revenue $ 492,310 $ -- $ 596,372 $ --
Cost of Sales 508,979 -- 676,723 --
Gross Loss (16,669) -- (80,351) --
SG&A 777,535 293,868 2,561,085 414,392
Loss on Disposal 1,086,884 -- 1,086,884 --
Depr & Amort 73,577 7,471 256,869 10,471
Total Operating Exp 1,937,996 301,339 3,904,838 424,863
Interest Expense, Net 9,128 9,154 45,097 14,052
Loss Before
Extraordinary Item (1,963,793) (310,493) (4,031,086) (438,915)
Extraordinary Gain
On Debt
Restructuring 70,731 -- 70,731 --
Net Loss (1,893,062) (310,493) (3,960,355) (439,715)
</TABLE>
Results of Operations:
Net Revenue. As we are in start-up operations, net revenues during the
three and nine months ended September 30, 2000 were not substantial and there
was no revenue during the comparable periods of 1999. Of the $492,310 and
$596,372 in net revenue for the three and nine month periods ended September 30,
2000, 47% and 49%, respectively, related to non-Internet based sales to
Continental Computer (see Note 5 - Subsequent Events - Acquisition and
Reorganization to the Condensed Consolidated Financial Statements).
Additionally, 18% of the net revenue for the nine months ended September 30,
2000 related to non-Internet sales to a single unaffiliated commercial customer.
While sales to this company are expected to continue, they should become a much
smaller percentage of our sales as our online sales ramp up. The Company's
Internet sales activity increased substantially in the three months ended
September 30, 2000, with approximately $245,000 in net revenue generated during
the period as compared to approximately $4,000 for the previous six months.
Cost of Sales. Cost of sales includes the cost of products sold, as well as
shipping and handling costs, fulfillment center costs and costs associated with
inventory adjustments and reserves. Cost of sales were 103%, 113% and 113% of
revenue for the three months and nine months ended September 30, 2000 and from
February 1, 1999 (date of inception) to September 30, 2000, respectively. Cost
of sales exceeded net revenue in all periods primarily as a result of (a) free
shipping offered to customers in June and early July 2000, to promote sales,
reducing revenue by approximately 2% in each of the three and nine months ended
September 30, 2000 and from February 1, 1999 (date of inception) to September
30, 2000; (b) fulfillment center costs higher than anticipated increasing cost
of sales by 2% in each of the three and nine months ended September 30, 2000 and
from February 1, 1999 (date of inception) to September 30, 2000, and resulting
in our decision to bring all fulfillment of owned inventory in house effective
September 29, 2000; (c) commissions on sales to certain Internet based
affiliates at higher rates than anticipated in establishment of sales prices to
allow us to partner with high membership Internet sites, reducing net sales by
approximately 3%, 1% and 1% in the three months and nine months ended September
30, 2000 and from February 1, 1999 (date of inception) to September 30, 2000,
respectively; (d) an adjustment to inventory related to lost or damaged
inventory of $12,412 for the nine months ended September 30, 2000, and (e) a
reserve established for inventory obsolescence of $45,000 for the nine months
ended September 30, 2000 related to consumer electronics inventory that has been
replaced in the market by new products, and which we anticipate selling at below
cost to liquidate this inventory.
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Selling, General, & Administrative Expenses. During the three and nine
months ended September 30, 2000 selling, general and administrative expenses
were $777,535 and $2,561,085, respectively, compared to $293,868 and $414,392
for the comparable periods in 1999. These increases of $483,667 and $2,146,693,
respectively are primarily due to the first quarter of 1999 being our first
quarter of operations. The largest component of selling, general and
administrative expenses was employee related expenses, which increased to
$325,431 and $1,487,831, respectively, for the three and nine months ended
September 30, 2000 compared to $212,595 and $303,745, respectively for the three
months ended September 30, 1999 and the eight months from inception to September
30, 1999. These increases resulted from increases to our staff to support our
start-up sales, marketing and technology efforts. Average monthly employee
related expenses decreased from $164,838 for the nine months ended September 30,
2000 to $107,048 for the three months ended September 30, 2000 due to our
reorganization and staff reduction in June 2000. Costs associated with the
technical support and maintenance of our web site were $263,976 and $434,440 for
the three and nine months ended September 30, 2000, respectively. These
requirements increased as a result of the increase in revenue from the site.
There were no similar costs in 1999. The remainder of the selling, general and
administrative expenses in both periods of 2000 related primarily to sales and
marketing, rent and facilities related costs, and costs associated with hosting
our web site. The remainder of the selling, general and administrative expenses
in both periods of 1999 related primarily to rent and other facilities costs.
Loss on Assets to be Disposed of. The loss on assets disposed of in the
amount of $1,086,884 for the three and nine months ended September 30, 2000 and
from February 1, 1999 (date of inception) to September 30, 2000, relates
primarily to the write-down to net realizable value of the computer equipment
sold in November 2000 as discussed in Note 6 - Subsequent Events - Refinancing
of Equipment Lease and Sale of Equipment to Notes to Condensed Consolidated
Financial Statements, and the web development costs and other assets to be sold
or abandoned in connection with the acquisition of Continental as discussed in
Note 5 - Subsequent Events - Acquisition and Reorganization to Notes to
Condensed Consolidated Financial Statements.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased from $7,471 and $10,471 in the three months ended September
30, 1999 and eight months from inception to September 30, 1999, respectively, to
$73,577 and $256,869 in the comparable periods of 2000, as we purchased
depreciable office and technology assets in 2000, including computer equipment
purchased under a capital lease for hosting our web site.
Interest Expense. $11,720 and $37,776 of the interest expense in the three
and nine months ended September 30, 2000, respectively, related to interest paid
for equipment purchased under the terms of the capital lease. The remainder of
the interest expense in the three and nine months ended September 30, 2000, and
all of the interest expense in the comparable periods of 1999 related to
interest paid to Wareforce.com, Inc. under the terms of a loan agreement. The
balance outstanding under this loan agreement was repaid in March 2000. During
the three months ended September 30, 2000 the Company earned $2,592 through the
investment of idle cash under the terms of a sweep agreement with its bank.
Extraordinary Gain on Debt Restructuring. In September 2000 Wareforce
entered into an agreement with the Company's web hosting vendor to pay a total
of $100,000 to the vendor as payment in full of all amounts owed to the vendor
by the Company. As a result of this transaction, the Company wrote off accounts
payable in the amount of $70,731, increased the amount due to Wareforce by
$100,000 and recorded an extraordinary gain on debt restructuring of $70,731.
Liquidity and Capital Resources:
From inception through March 16, 2000, operations were financed primarily
through credit from vendors and loans from Wareforce. Wareforce had committed to
fund $1.0 million of our initial operations and development costs. In August
1999 we entered into a loan agreement with Wareforce guaranteeing
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repayment of the $1.0 million (or any amounts advanced under the agreement) no
later than the earlier of February 20, 2001 or the date of an Initial Public
Offering or private placement by us. Interest accrued on this loan agreement at
the bank prime rate. As of March 16, 2000 Wareforce had funded approximately
$1.0 million in excess of the $1.0 million commitment.
On March 16, 2000, we obtained outside financing through a private
placement of equity, in which we sold 2 million shares of our common stock for
net proceeds of $3.8 million. The amounts due to Wareforce as of March 16, 2000
were repaid with some of the proceeds from this private placement.
In October 2000 we entered into a line of credit agreement with Wareforce
under which we may draw up to a maximum of $1,200,000 through November 2001.
Draws for the first three months are limited to $200,000 each, with draws
thereafter based on amounts agreed to with Wareforce. At the termination of the
line of credit agreement in November 2001, $600,000 in borrowings under the line
of credit will be converted into a term note with the balance immediately
payable. (See Note 7 - Subsequent Events - Line of Credit Agreement with
Wareforce to the Condensed Consolidated Financial Statements.)
In November 2000 we entered into an agreement with our equipment lease
vendor, Wareforce and a third party asset leasing and brokerage company to sell
the assets underlying our capital lease and enter into an unsecured note payable
to repay the difference between the balance due under the capital lease and the
sale price of the assets. The note is payable over 23 months commencing in
November 2000 at $20,000 with a balloon payment in the amount of $382,249 due in
December 2002. The sale price of the equipment was $200,000. A total of $968,946
was due under the lease as of September 30, 2000 (including $70,112 included in
Accrued Expenses and $107,742 included in Accounts Payable), exclusive of
interest on future lease payments. We were in technical default under the terms
of the lease at the time this agreement was entered into. (See Note 6 -
Subsequent Events - Refinancing of Equipment Lease and Sale of Equipment to the
Condensed Consolidated Financial Statements.)
During 1999 and the first half of 2000, we concentrated on developing our
technology, administrative and sales infrastructure. As a result, for the three
and nine months ended September 30, 2000, we had net losses of $1,893,062 and
$3,960,355, respectively, and a working capital deficit of $1,123,226 at
September 30, 2000. For the year ended December 31, 1999, we had a working
capital deficit of $1,392,461 with a net loss of $954,560. We have accumulated a
deficit of $4,914,915 since inception. Funds available through operating
activities and under the Wareforce line of credit agreement are not sufficient
to meet our current and ongoing obligations. Our ability to continue as a going
concern is dependent upon our ability to generate profitable operations in the
future, to obtain additional concessions from our vendors and/or to obtain the
necessary financing to meet our obligations and repay our liabilities arising
from normal business operations when they come due. We are currently in the
process of raising additional private placement funds sufficient to fund our
operations through at least September 30, 2001, however, no assurance can be
given that these efforts will be successful. The Company has been advised by its
independent public accountants that, if the Company is unable to obtain
sufficient funds to execute its business plan to generate positive operating
results prior to the filing of its annual report on Form 10-KSB for the year
ending December 31, 2000, it is likely to receive a qualified auditors' report
on the financial statements included in such report on Form 10-KSB.
The Company is considered a development stage enterprise devoting
substantially all of its efforts to establishing customer and vendor
relationships, establishing complete product lines, and building its operational
infrastructure. The Company is subject to the risks and challenges associated
with other companies at a similar stage of development including dependence on
key individuals, successful development and marketing of its products and
services, the continued acceptance of the Internet as a medium for electronic
commerce, competition from substitute products and services and larger companies
with greater financial, technical management and marketing resources. Further,
during the period required to develop commercially viable products, services and
sources of revenues, the Company may require additional funds that may not be
readily available.
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Net cash flows used in investing activities for the nine months ended
September 30, 2000 of $0.2 million was used primarily to fund development of our
Web Site, and to purchase computer equipment for our internal use.
Net cash flows provided by financing activities for the nine months ended
September 30, 2000 were $2.3 million. The sources of this financing activity
were the $3.8 million net proceeds from our private placement and from exercises
of stock options, net of the $1.1 million used to repay Wareforce, and $.4
million used to make payments under the terms of the capital lease used to
finance the computer system for our web site.
In November 2000 we completed the acquisition of Continental Computers, a
Los Angeles based retailer of computers and consumer electronics. In conjunction
with the acquisition, we have reorganized our operations to leverage the
workforce and expertise of Continental Computer, focusing our marketing efforts
on the computer and consumer electronics product lines, and eliminating
approximately one-fourth of the positions of the combined companies. We have
relocated most of our operating activities to the Continental Computer location,
maintaining only executive offices at our headquarters location. In addition to
reducing the costs of the combined companies, the addition of the Continental
Computer revenue base will assist us in achieving profitability more quickly.
(See Note 5 - Subsequent Events - Acquisition and Reorganization to the
Condensed Consolidated Financial Statements.)
Many factors relating to obtaining financing are beyond our control. Any
decrease or material limitation on the amount of borrowings available to us from
our vendors, will adversely affect our ability to fill sales orders and/or
increase our sales. It will also adversely affect our financial position and
operating results. We cannot guarantee that our creditors will continue to
extend credit to us in the amounts they currently do.
We anticipate that we will need additional equity investments in the future
to continue to fund our general working capital. There can be no assurance that
such investments will be obtained. If they are not, we will be materially,
negatively affected.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS ON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE EXCHANGE ACT OF 1934, THE REGISTRANT
HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED.
UMEMBER.COM, INC.
REGSITRANT
DATED: NOVEMBER 29, 2000 BY: /s/ SHARON A. VANZANT
------------------------------
NAME: SHARON A. VANZANT
TITLE: CHIEF FINANCIAL OFFICER
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