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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998.
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For
the transition period from ___________ to ___________.
Commission File Number: 33-18600-D
QCS.NET CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0132465
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
650 CASTRO STREET, SUITE 210, MOUNTAIN VIEW, CA 94041
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(650) 966-1214
- --------------------------------------------------------------------------------
(Issuer's telephone number)
QCS CORPORATION
- --------------------------------------------------------------------------------
(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.
X
--- YES --- NO
Shares of Common Stock outstanding as of November 11, 1998: 19,279,294 shares
X
Transitional Small Business Disclosure Format --- YES --- NO
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QCS.NET CORPORATION
CONTENTS PAGE
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PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and June 30, 1998 3
Consolidated Statements of Operations
for the three months ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows
for the three months ended September 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 7
PART II OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds 10
ITEM 5 Other Information 10
ITEM 6 Exhibits and Reports on Form 8-K 10
SIGNATURES 10
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
QCS.NET CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
ASSETS 1998 1998
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(Unaudited)
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Current assets:
Cash and cash equivalents $ 385,022 $ 473,170
Accounts receivable (net of allowance for doubtful accounts of
$18,931 at September 30, 1998 and $29,657 at June 30, 1998) 225,073 203,921
Other current assets 10,365 5,345
---------------- ----------------
Total current assets 620,460 682,436
Property and equipment, net 229,106 248,871
Security deposits 14,608 27,942
---------------- ----------------
Total assets $ 864,174 $ 959,249
---------------- ----------------
---------------- ----------------
LIABILITIES
Current liabilities:
Accounts payable $ 349,784 $ 344,436
Accrued liabilities 574,994 590,526
Capital lease obligations, current portion 8,009 8,423
Preference dividends payable 9,247 65,051
---------------- ----------------
Total current liabilities 942,034 1,008,436
Capital lease obligations, net of current portion 4,403 6,468
---------------- ----------------
Total liabilities 946,437 1,014,904
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock, par value $.001 per share:
Authorized: 5,000,000 shares; issued and outstanding 4,641,267
and 4,680,102 shares at September 30, 1998 and June 30, 1998,
respectively (aggregate liquidation preference: $4,770,505) 4,641 4,680
Common stock, par value $.001 per share:
Authorized: 40,000,000 shares; issued and outstanding 19,230,750 and
18,831,552 at September 30, 1998 and June 30, 1998, respectively 19,231 18,832
Additional paid in capital 13,373,233 12,898,284
Subscriptions receivable from stockholders (200,100) (200,100)
Common stock note receivable (40,000)
Accumulated deficit (13,300,217) (12,928,630)
Cumulative foreign currency translation adjustments 60,949 151,279
---------------- ----------------
Total stockholders' deficit (82,263) (55,655)
---------------- ----------------
Total liabilities and stockholders' deficit $ 864,174 $ 959,249
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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QCS.NET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1998 1997
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Revenue:
Network $ 149,146 $ 209,971
Consulting 98,144
-------------------- --------------------
247,290 209,971
Cost of revenue:
Network 61,172 149,000
Consulting 98,144
-------------------- --------------------
159,316 149,000
Gross profit 87,974 60,971
Operating expenses:
Selling, general and administrative 400,728 490,915
Research and development 144,619 77,983
-------------------- --------------------
Total operating expenses 545,347 568,898
Operating loss (457,373) (507,927)
Other income (expense), net 82,678 (3,317)
Interest income 3,108 11,458
-------------------- --------------------
Net loss (371,587) (499,786)
Preferred dividend (62,262)
-------------------- --------------------
Net loss attributed to common stockholders $ (371,587) $ (562,048)
-------------------- --------------------
-------------------- --------------------
Net loss per share (basic and diluted) $ (0.02) $ (0.03)
-------------------- --------------------
-------------------- --------------------
Weighted average number of shares used
in per share calculation (basic and diluted) 19,011,358 17,136,531
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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QCS.NET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
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Cash flows from operating activities:
Net loss $ (371,587) $ (499,786)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense 26,763 16,654
Unrealized exchange loss (82,754) 117
Write-off of fixed assets 13,736
Changes in operating assets and liabilities:
Changes in accounts receivable (21,152) 22,980
Changes in other current assets and security deposits 8,314 (13,939)
Changes in accounts payable 5,348 3,029
Changes in accrued and other liabilities (15,532) (1,958)
------------------ -----------------
Net cash used in operating activities (450,600) (459,167)
Cash flows from investing activities:
Purchases of fixed assets (6,998) (1,505)
------------------ -----------------
Net cash used in investing activities (6,998) (1,505)
Cash flows from financing activities:
Proceeds from issuance of common stock 379,505
Payments on capital leases (2,479) (2,157)
------------------ -----------------
Net cash provided by (used in) financing activities 377,026 (2,157)
Effect of exchange rate changes on cash (7,576) 5,233
------------------ -----------------
Net decrease in cash and cash equivalents (88,148) (457,596)
Cash and cash equivalents, beginning of the period 473,170 1,274,157
------------------ -----------------
Cash and cash equivalents, end of the period $ 385,022 $ 816,561
------------------ -----------------
------------------ -----------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 576 $ 945
Conversion of preference dividend payable to common stock 55,804
Issuance of note receivable for exercise of employee stock option 40,000
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
The consolidated financial statements of QCS.net Corporation ("QCS" or the
"Company") are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments), which are, in the opinion of management,
necessary for a fair presentation, in all material respects, of the financial
position and operating results of the Company for the interim periods. The
results of operations for the three months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal
year ending June 30, 1999. The year-end balance sheet data at June 30, 1998
was derived from the audited financial statements.
This financial information should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Form 10-KSB
for the fiscal year ended June 30, 1998 as filed with the Securities and
Exchange Commission on September 28, 1998.
COMPUTATION OF NET LOSS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 128 "Earnings per Share" effective December 31, 1997.
SFAS 128 requires the presentation of basic and diluted earning per share.
Basic earnings per share is computed by dividing the income available to
holders of Common Stock by the weighted average number of shares of Common
Stock outstanding for the period. Diluted earnings per share are computed by
giving effect to all dilutive potential shares of Common Stock that were
outstanding during the period. For the Company, dilutive potential shares of
Common Stock consist of incremental shares of Common Stock issuable upon the
exercise of stock options and warrants for all periods. In accordance with
SFAS 128, all prior period earnings per share amounts have been restated to
reflect this method of calculation.
Basic and diluted earnings per share are calculated as follows during the
three months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
BASIC: SEPT 30, 1998 SEPT 30, 1997
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<S> <C> <C>
Weighted average shares outstanding for the period 19,011,358 17,136,531
-------------------- ---------------------
Shares used in per share calculation 19,011,358 17,136,531
Net loss available to common shareholders $ (371,587) $ (562,048)
-------------------- ---------------------
Net loss per share $ (0.02) $ (0.03)
-------------------- ---------------------
-------------------- ---------------------
DILUTED:
Weighted average shares outstanding for the period 19,011,358 17,136,531
Common stock equivalents from stock options and warrants -- --
Convertible preferred stock -- --
-------------------- ---------------------
Shares used in per share calculation 19,011,358 17,136,531
Net loss available to common shareholders $ (371,587) $ (562,048)
-------------------- ---------------------
Net loss per share $ (0.02) $ (0.03)
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
Options and warrants to purchase 4,381,988 and 3,175,548 shares of Common
Stock were outstanding, respectively, at September 30, 1998 and 1997, but
were not included in the computation of diluted earnings per share because
inclusion of the options and warrants was anti-dilutive.
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RECLASSIFICATION
Certain prior period balances have been reclassified to conform to the
current period's presentation.
RECENT PRONOUNCEMENTS:
The Company adopted SFAS 130, "Reporting Comprehensive Income" in the first
quarter of fiscal 1999. SFAS 130 establishes new rules for the reporting and
displaying of comprehensive income and its components. Comprehensive loss for
the three months ended September 30, 1998 and 1997 were $461,917 and
$493,621, respectively. The principal difference between comprehensive loss
and net loss is the treatment of cumulative translation adjustments.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS 131 requires publicly held companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operation decision
maker. Specific information to be reported for individual segments includes
profit or loss, certain revenue and expense items and total assets. A
reconciliation of segment information to amounts reported in the financial
statements is required. SFAS 131 is effective in fiscal 1999 and does not
need to be applied to interim financial statements in the year of application.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes "special
accounting" for the following three different types of hedges: hedges of
changes in the fair value of assets, liabilities or firm commitments
(referred to as fair value hedges); hedges of variable cash flows of
forecasted transactions (cash flow hedges); and hedges of foreign currency
exposures of net investments in foreign operations. All three types of hedges
result in offsetting changes in fair values or cash flows of both the hedge
and the hedged item being recognized in operations in the same period.
Changes in fair value of derivatives that do not meet the criteria of one of
these three categories of hedges are included in income. SFAS 133 is
effective for years beginning after June 15, 1999, but earlier adoption is
allowed. The Company has not determined the impact of adopting SFAS 133 on
its financial position or results of operations.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this report and other reports of the Company,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects" and other words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, but are
not limited to, the effect of (i) risks related to the Company's recent
marketing and technology alliance with IBM, (ii) future capital needs and
uncertainty of additional financing, (iii) possible competitive entries, and
(iv) other risks detailed in this report. These factors are discussed in more
detail in the Risk Factors section of the Company's report on Form 10-KSB for
the fiscal year ended June 30, 1998. Given these uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to announce
publicly the results of any revisions of the forward-looking statements
contained or incorporated by reference herein to reflect future events or
developments.
OVERVIEW
QCS.net Corporation ("QCS" or the "Company") is an electronic commerce
service provider serving the worldwide retail industry. The Company's
revenues are derived from consulting fees, installation services and user
training, network registration fees, and network usage fees for which the
Company charges a fixed
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monthly fee and/or volume-based recurring usage fees or pay-as-you-go
transaction fees for electronic forms. Based on a marketing agreement signed
in December 1996, IBM has assumed responsibility for much of the sales and
marketing efforts for the Company. Additionally, IBM provides end-user
support via three international "solution centers" and houses the network
servers in an IBM facilities management environment. The Company believes
this alliance with IBM to be an essential component of its business plan, but
the involvement with IBM is still in its early stages and the Company can
give no assurance of when or if the alliance will ultimately be successful.
As of September 30, 1998, sales generated from this alliance were still very
limited.
From inception in 1993 through September 30, 1998, the Company has generated
an accumulated deficit of $13,300,217. Since inception, the Company has
incurred substantial costs to develop and enhance its technology, to create,
introduce and enhance its product offerings, to establish marketing and
distribution relationships, to recruit and train a sales and marketing group
and to build an administrative organization. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new, unproved and rapidly evolving markets. The limited
operating history of the Company makes the prediction of future results of
operations difficult or impossible; and, therefore, there can be no assurance
that the Company will sustain growth or achieve profitability. The Company's
success depends to a significant degree upon the continued contributions of
key management, engineering, sales and marketing, and finance personnel,
certain of whom would be difficult to replace. The loss of the services of
any of the key personnel, the inability to attract or retain qualified
personnel in the future or delays in hiring required personnel could have a
material adverse effect on the Company's business, operating results or
financial condition. Also, as indicated above, the Company's success is
highly dependent on its and IBM's ability to execute in a timely manner the
joint sales and marketing plan, of which no assurance can be made. If this
fails to occur, the Company would be materially and adversely affected.
Additionally, the Company is in immediate need of equity capital if it is to
sustain current operations. See "Liquidity and Capital Resources."
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
The Company's network revenues decreased by 29% to $149,146 for the first
quarter of fiscal year 1999 ("Q1 99") as compared to $209,971 for the first
quarter of fiscal year 1998 ("Q1 98"). This decrease is primarily attributed
to the Company's lower sales of its full Lotus Notes-based supplier stations
and the related installation and monthly subscription fees. The loss of these
revenues has not been compensated by revenues of Internet-based services. The
revenue associated with the Company's service agreement with IBM Corporation
in Q1 99 was $98,144. In this agreement with IBM, the Company provides sales,
marketing and end-user support services to assist in marketing QCS products.
The combined network and consulting revenues of $247,290 for Q1 99 represent
an 18% increase from total revenues of $209,971 for Q1 98.
Cost of network revenues decreased by 59% to $61,172 for Q1 99 from $149,000
in Q1 98. Cost of network revenues is calculated primarily as a percentage of
network revenues in accordance to the IBM revenue sharing arrangement. In Q1
98 cost of revenues included cost of purchasing network services, the cost of
internal and external labor to install and support customer sites, and third
party software and hardware for the existing Lotus Notes based product. Cost
of consulting revenue in Q1 99 was $98,144, which represents the value of
services sold to IBM at cost.
Selling, general and administrative expenses ("SG&A") consist primarily of
personnel-related costs in the Company's sales, marketing and general
management organizations and other administrative support costs such as
external legal and financial services. SG&A expenses decreased 18% to
$400,728 in Q1 99 from $490,915 in Q1 98. The decrease was due in part to the
aforementioned cost of sales, marketing and end-user support services, which
are now invoiced to IBM or covered by IBM directly. In Q1 99 the Company
realized savings of approximately $35,000 in rents and facility expenses
compared to Q1 98, following the closure of two overseas offices. Research
and development expenses increased by $66,636 to $144,619 in Q1 99 compared
to Q1 98. The increased expenditures were for internal labor and consulting
services for enhancements to the Company's Internet product.
As a result of the foregoing, the net loss decreased 26% to $371,587 for Q1
99 from $499,786 in Q1 98.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at September 30, 1998 was $385,022,
representing a $88,148 decrease from June 30, 1998. Cash used in operating
activities for the three months ended September 30, 1998 was $450,600,
compared to $459,167 for the three months ended September 30, 1997. The cash
usage is primarily attributed to the net losses that occurred in each of the
periods. During the first quarter of fiscal 1999, the Company raised $379,505
in net proceeds from the sale of 276,091 shares of Common Stock in a private
placement.
As of November 11, 1998, the Company's cash on hand was approximately
$215,000. With the capital currently on hand, the Company has resources to
fund its operations through approximately the end of calendar year 1998. As
of November 13, 1998, the Company has received and accepted executed
subscription agreements whereby two investors have agreed pay to the Company
$300,000 for 400,000 shares of Common Stock and warrants to purchase an
additional 300,000 shares of Common Stock with an exercise price of $1.00 per
share. The Company expects to receive the proceeds from these subscriptions
during the current fiscal quarter (Q2 99). The Company believes that it will
likely need to raise additional equity capital during the remainder of fiscal
1999. Furthermore, if the Company continues to sustain significant losses, it
will be required to obtain additional debt or equity funds in subsequent
periods. If such capital raising efforts should prove unsuccessful, the
Company will need to reduce operating spending significantly, which would
materially and adversely affect the Company's business and raise substantial
doubts about its ability to continue as a going concern.
The Company currently does not have a bank credit line. The Company does not
intend to pay cash dividends with respect to Common Stock in the foreseeable
future.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year.
Accordingly, computer programs that have date sensitive software might
recognize a date using "00" as the year 1900 rather than the year 2000. This
circumstance could result in program failure or miscalculation causing
disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices, operate equipment or engage
in similar normal business activities. The Company has reviewed its internal
computer systems, as well as its products and services, that could be
affected by the Year 2000 issue and has identified certain systems, products
and services that could be affected. The Company presently believes that,
with modification to existing software and conversion to new software, the
Year 2000 issues relating to such systems, products and services will not
cause significant operational or customer problems. The Company is addressing
these issues and intends to complete these efforts, including testing phases,
throughout calendar year 1999. The Company does not anticipate that the cost
of implementing these solutions will be material to its business, financial
condition and results of operations. However, if such modifications and
conversions are not made or not completed in a timely manner, then resulting
Year 2000 issues could have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Company has initiated formal communications with its
significant suppliers and customers in order to (i) determine the extent to
which the Company is vulnerable to such third parties' failure to remedy
their own Year 2000 issues and (ii) assess whether the Company has adequate
resources for required supplies, components and complementary offerings. As
part of its contingency planning efforts, the Company is preparing to
identify alternate sources or strategies where necessary if significant Year
2000 exposure is identified. The Company is addressing these issues and
intends to complete these efforts throughout calendar year 1999. In addition,
the Year 2000 issues present a number of other risks and uncertainties that
could affect adversely the Company, including, without limitation, utilities
failures, competition for personnel skilled in the resolution of Year 2000
issues and the nature of government responses to these issues. Although the
Company believes that the Year 2000 matters discussed above will not have a
material adverse effect on its business, financial condition or results of
operations, the Company remains uncertain whether or to what extent that it
may be affected. Accordingly, the Company's expenses to identify and address
such risks and uncertainties, as well as the expenses and liabilities to
which the Company may become subject as a result of such risks and
9
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uncertainties, could have a material adverse effect on the Company's
business, financial condition and results of operations.
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
c. On September 1, 1998, the Company issued 276,091 shares of
Common Stock in a private placement to certain existing and
new stockholders of the Company, at a price of $1.375 per
share for net proceeds to the Company of $379,505. This
private placement transaction was effected in reliance upon
the exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), as
contained in Section 4(2) of the Securities Act on the basis
that such transaction did not involve a public offering.
ITEM 5 OTHER INFORMATION
On October 29, 1998, the stockholders of the Company approved a proposal to
change the Company's name to QCS.net Corporation. The name change became
effective as of November 13, 1998, the date on which the Company filed its
related Certificate of Amendment of Certificate of Incorporation with the
Delaware Secretary of State.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 27 - Financial Data Schedule
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter for which this report
is filed.
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: November 13, 1998 QCS.NET CORPORATION
By: /s/ Marcel van Heesewijk
-------------------------------------
Marcel van Heesewijk, President,
Chief Executive Officer, Acting Principal
Accounting and Financial Officer and
Chairman of the Board of Directors
10
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 385
<SECURITIES> 0
<RECEIVABLES> 244
<ALLOWANCES> 19
<INVENTORY> 0
<CURRENT-ASSETS> 620
<PP&E> 329
<DEPRECIATION> 100
<TOTAL-ASSETS> 864
<CURRENT-LIABILITIES> 942
<BONDS> 0
0
5
<COMMON> 19
<OTHER-SE> (106)
<TOTAL-LIABILITY-AND-EQUITY> 864
<SALES> 0
<TOTAL-REVENUES> 247
<CGS> 0
<TOTAL-COSTS> 159
<OTHER-EXPENSES> 462
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (372)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (372)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
