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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 June 30, 1999.
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________.
Commission File Number: 33-18600-D
SOURCINGLINK.NET, INC.
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(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
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(Address of principal executive offices)
(650) 966-1214
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(Issuer's telephone number)
QCS.NET 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 August 6, 1999: 23,010,874 shares
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SOURCINGLINK.NET, INC.
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CONTENTS
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PAGE
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PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 1999 (unaudited) and March 31, 1999 3
Consolidated Condensed Statements of Operations
for the three months ended June 30, 1999 and 1998 (unaudited) 4
Consolidated Condensed Statements of Cash Flows
for the three months ended June 30, 1999 and 1998 (unaudited) 5
Notes to Consolidated Unaudited Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
PART II OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds 15
ITEM 5 Other Information 15
ITEM 6 Exhibits and Reports on Form 8-K 15
SIGNATURE 16
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
SOURCINGLINK.NET, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
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JUNE 30, MARCH 31,
ASSETS 1999 1999
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Current assets: (Unaudited)
Cash and cash equivalents $ 810,331 $ 1,266,880
Accounts receivable, net 180,985 222,769
Other current assets 21,620 7,111
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Total current assets 1,012,936 1,496,760
Property and equipment, net 177,515 185,286
Other non-current assets 176,578 12,839
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Total assets $ 1,367,029 $ 1,694,885
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LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 989,814 $ 707,121
Deferred revenue and other 108,654 42,437
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Total current liabilities 1,098,468 749,558
STOCKHOLDERS' EQUITY
Series A convertible preferred stock 3,331 3,816
Common stock 23,011 22,525
Additional paid-in capital 15,298,501 15,298,501
Common stock note receivable (40,000) (40,000)
Accumulated deficit (15,103,240) (14,420,409)
Cumulative foreign currency translation adjustments 86,958 80,894
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Total stockholders' equity 268,561 945,327
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Total liabilities and stockholders' equity $ 1,367,029 $ 1,694,885
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</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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SOURCINGLINK.NET, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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<CAPTION>
THREE MONTHS ENDED JUNE 30,
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1999 1998
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Revenue:
Network $ 204,626 $ 142,221
Consulting 64,749 105,000
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269,375 247,221
Cost of revenue:
Network 83,350 58,458
Consulting 64,749 105,000
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148,099 163,458
Gross profit 121,276 83,763
Operating expenses:
Selling, general and administrative 612,690 864,868
Product development 197,924 125,569
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Total operating expenses 810,614 990,437
Operating loss (689,338) (906,674)
Other income (expense), net (4,327) 20,713
Interest income 10,834 1,134
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Net loss $ (682,831) $ (884,827)
Preferred dividend - (68,463)
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Net loss attributed to common stockholders $ (682,831) $ (953,290)
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------------------ ------------------
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Net loss per share (basic and diluted) $ (0.03) $ (0.05)
------------------ ------------------
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Weighted average number of shares
used in per share calculation (basic and diluted) 22,898,850 18,367,556
------------------ ------------------
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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SOURCINGLINK.NET, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
THREE MONTHS ENDED
----------------------------------------
JUNE 30, JUNE 30,
1999 1998
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Cash flows from operating activities:
Net loss $ (682,831) $ (884,827)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense 27,716 12,733
Unrealized exchange (gain) loss 4,246 (24,984)
Loss on disposal of fixed assets - 71,243
Expense related to stock options and warrants - 370,693
Changes in operating assets and liabilities-net 214,426 129,913
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Net cash used in operating activities (436,443) (328,229)
Cash flows from investing activities:
Purchases of fixed assets (19,945) (136,372)
Proceeds from disposal of fixed assets - 4,413
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Net cash used in investing activities (19,945) (131,959)
Cash flows from financing activities:
Proceeds from issuance of common stock - 466,654
Payments on capital leases (1,980) (2,395)
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Net cash provided by (used in) financing activities (1,980) 464,259
Effect of exchange rate changes on cash 1,819 (6,046)
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Net decrease in cash and cash equivalents (456,549) (1,975)
Cash and cash equivalents, beginning of the period 1,266,880 475,145
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Cash and cash equivalents, end of the period $ 810,331 $ 473,170
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</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
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SOURCINGLINK.NET, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
On July 20, 1999, the stockholders of the Company approved a proposal to
change the Company's name from QCS.net Corporation to SourcingLink.net, Inc.
The name change became effective as of that date upon the Company's filing of
its Amended and Restated Certificate of Incorporation with the Delaware
Secretary of State.
The interim consolidated condensed financial statements of SourcingLink.net,
Inc. ("SourcingLink" 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
June 30, 1999 are not necessarily indicative of the results to be expected
for the entire fiscal year ending March 31, 2000. The year-end balance sheet
data at March 31, 1999 was derived from the audited financial statements.
The consolidated financial statements include the accounts of
SourcingLink.net, Inc. and its wholly owned subsidiary. All significant
intercompany transactions and account balances have been eliminated in
consolidation.
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 March 31, 1999.
2. COMPUTATION OF NET LOSS PER SHARE:
Net loss per share is presented on a basic and diluted basis. 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 and conversion of preferred stock for all periods.
Basic and diluted earnings per share are calculated as follows for the three
months ended June 30, 1999 and 1998:
<TABLE>
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THREE MONTHS ENDED JUNE 30,
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BASIC AND DILUTED: 1999 1998
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Weighted average shares
outstanding for the period 22,898,850 18,367,556
Net loss attributed to
Common shareholders $ (682,831) $ (953,290)
-------------------- -------------------
Net loss per share $ (0.03) $ (0.05)
-------------------- -------------------
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</TABLE>
At June 30, 1999, the Company had 2,662,000 options and 3,382,132 warrants
outstanding to purchase shares of Common Stock compared to 3,585,077 options
and 3,378,641 warrants outstanding at March 31, 1999. These were not included
in the computation of diluted earnings per share because inclusion of the
options and warrants would be anti-dilutive.
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3. RECLASSIFICATION:
Certain prior period balances have been reclassified to conform to the
current period's presentation.
4. COMPREHENSIVE LOSS:
Comprehensive loss for the three months ended June 30, 1999 and 1998 was
$676,767 and $914,518, respectively. The principal difference between
comprehensive loss and net loss is the treatment of cumulative foreign
currency translation adjustments.
5. SUBSEQUENT EVENT:
In August 1999, the Company completed a private placement of Common Stock,
primarily to institutional investors. The investment banking firm of Needham
and Co. acted as placement agent for the offering which totaled 5,031,875
Common shares at a price of $1.60 per share. Gross proceeds were $8.1
million, and net proceeds, after placement agent fees and other offering
costs, were approximately $7.3 million. The net proceeds of the offering are
expected to be used primarily for general working capital and corporate
purposes, including product development and sales and marketing of the
Company's Internet solutions.
A pro forma balance sheet showing the impact of the offering as if the
proceeds had been received and the estimated offering costs had been paid as
of June 30, 1999, is presented below.
PRO FORMA BALANCE SHEETS
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<CAPTION>
(Unaudited)
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JUNE 30, 1999
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AS PRO FORMA PRO
REPORTED ADJUSTMENTS FORMA
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<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 810,331 $7,318,000 $ 8,128,331
Accounts receivable and other current assets 202,605 202,605
---------------- -------------- --------------
Total current assets 1,012,936 7,318,000 8,330,936
Property and equipment, net 177,515 177,515
Other non-current assets 176,578 (164,000) 12,578
---------------- -------------- --------------
Total assets $ 1,367,029 $7,154,000 $8,521,029
---------------- -------------- --------------
---------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities $ 1,098,468 $ (164,000) $ 934,468
Common stock 23,011 5,032 28,043
Additional paid-in capital 15,298,501 7,312,968 22,611,469
Other stockholders' equity-net (15,052,951) (15,052,951)
---------------- -------------- --------------
Total stockholders' equity 268,561 7,318,000 7,586,561
---------------- -------------- --------------
Total liabilities and stockholders' equity $ 1,367,029 $7,154,000 $8,521,029
---------------- -------------- --------------
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</TABLE>
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6. RECENT PRONOUNCEMENTS:
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company has
adopted SOP No. 98-1 as of the first quarter of fiscal year 2000. The
adoption of SOP No. 98-1 did not have a material impact on the Company's
financial statements.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Report, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and the
like, 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 factors discussed under the caption
"Risk Factors" below, and are discussed in more detail in the Risk Factors
section of the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1999. 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
The Company has developed an Internet-based turnkey solution for
business-to-business eCommerce that enables retailers to organize, automate
and significantly reduce the cost of their preorder merchandise sourcing
activities by connecting directly with their retail merchandise suppliers
around the globe. The Company's revenues are generated principally from
network revenues consisting of fees for access to and use of the Company's
solutions. These fees include initial registration fees, fixed monthly or
annual subscription fees or "pay-as-you-go" transactional fees. Effective
April 1, 1999, the Company discontinued offering the pay-as-you-go
transaction based subscription fee option for new subscribers.
Historically, network revenues have been primarily from customer use of the
Company's private network desktop solution. In February 1999, the Company
began a rollout of its new Internet solution to selected merchandise
suppliers of the Company's retailer subscribers. While there continues to be
revenue from the desktop solution, the Company's focus is now centered on the
broad Internet solution, and current retailer customers are either adopting
or have committed to convert to the Internet solution.
The Company entered into a multi-faceted eCommerce agreement with IBM in the
third quarter of fiscal 1998, as an amendment to an earlier 1996 agreement
under which the Company became an active participant in IBM's e-commerce
group. Under the 1998 contract, referred to as the IBM Agreement or the
Agreement in the discussion below, IBM has been providing most of the sales
and marketing effort, worldwide help desk support and project management for
the Company, as well as the network and server infrastructure supporting the
Company's solution. Payments to IBM for these services have been based on a
percentage of sales under a revenue sharing provision of the Agreement. These
payments to IBM comprise the majority of cost of sales for network revenue.
8
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The Company has assisted IBM with sales and marketing of the Company's
solution, and has billed IBM at cost for such services. These billings to IBM
have been recorded as consulting revenue. The Company's new strategy and
intent is to bring sales and project management in-house; therefore, the
Company does not expect to continue providing or billing these consulting
services to IBM after the third quarter of fiscal year 2000.
ACCOUNTING FOR NEW IBM AGREEMENT
The Company is currently in the process of negotiating new agreements to
define its continuing relationship with IBM. The Company anticipates that the
alliance with IBM will continue to include both co-marketing and
infrastructure support to the Company. As mentioned above, the cost of these
services was historically based primarily on revenue sharing, and was all
included in cost of revenue. If the Agreement is modified effective October
1, 1999, as expected, payments to IBM will be accounted for as described
below.
For the infrastructure portion of the agreement, which includes the housing
of servers in IBM's secure data management center, the Company will pay IBM
under a combined fixed and variable price structure, based upon the level of
service. Payments for these services will be accounted for as cost of revenue.
For the co-marketing portion of the agreement, which includes services for
the active promotion of the Company's preorder merchandise sourcing solution,
use of the IBM logo and e-business mark on Company marketing material and our
website, and participation with IBM at its e-commerce trade show booths,
payments will be made on a revenue sharing basis and will be accounted for as
sales and marketing expense.
ACCUMULATED LOSSES
From its inception in 1993 through June 30, 1999, the Company has generated
an accumulated deficit of $15.1 million. Since inception, the Company has
incurred substantial costs to develop its technology, to create, introduce
and enhance its sourcing solution, 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 its operating history, and 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 grow or that it will be able to achieve or
sustain profitability. The Company's success depends to a significant degree
upon the Company's ability to raise additional capital, and 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 or the inability to attract or
retain qualified management and other 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, the
Company's success is highly dependent on its ability to execute in a timely
manner its new sales and marketing plan, of which no assurance can be made.
The previous strategy, which included outsourcing the sales and marketing
function to IBM, thus far has produced insignificant revenues.
CHANGE IN FISCAL YEAR
In May 1999, the Company's Board of Directors approved a change in the
Company's fiscal year end from June 30 to March 31, commencing April 1, 1999.
In the comparison of the periods ended June 30, 1999 and 1998, this year's
three months are the first quarter of the fiscal year, whereas last year's
three months were the fourth quarter of fiscal year 1998.
9
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Total revenues for the three months ended June 30, 1999 increased $22,000, or
9%, to $269,000 from $247,000, in the three months ended June 30, 1998. This
includes an increase in Network revenues of $62,000, or 44%, to $205,000 from
$142,000, which was primarily attributable to revenue from the Company's new
Internet sourcing solution. The Company began rolling-out its Internet
solution in February 1999, and therefore was not receiving revenue from this
solution in the three-month period ended June 30, 1998. Consulting revenues
decreased $40,000, or 38%, to $65,000 for the three months ended June 30,
1999 from $105,000 for the same period one year ago. Consulting revenues are
derived from the IBM Agreement, primarily for sales, marketing and project
management assistance provided to IBM by the Company. This assistance to IBM
has been reduced in scope as compared to the prior year's three month period,
and, as mentioned above, the Company intends to continue reducing both its
reliance on, and its assistance to, IBM's sales and project management
efforts, particularly after the anticipated modifications to the IBM
Agreement which are expected to be effective October 1, 1999.
Sales of the Company's Internet solution generally require adoption by
retailers and then a roll-out to the retailer's merchandise suppliers which
the Company expects will result in lengthy sales and implementation cycles.
Revenues from the Internet solution in the current quarter are from
subscriptions among the groups of suppliers that have been made available for
roll-out by two of the Company's current retailer customers.
COST OF REVENUES
In the three months ended June 30, 1999, the cost of network revenues
increased $25,000, or 43%, to $83,000 from $58,000 in the three months ended
June 30, 1998. The cost of network revenues consists primarily of revenue
sharing payments under the IBM Agreement, and the increase in these costs is
largely due to the increase in revenue. The cost of consulting revenue, which
equals the revenues received, was $65,000 in the first quarter of this year,
and $105,000 in the three months ended June 30, 1998. Overall, gross profit
increased $38,000 to $121,000, or 45% of revenues, from $84,000, or 34% of
revenues, in the three months ended June 30, 1998. The increase in gross
profit as a percent of sales is largely attributable to the reduction in
consulting revenue, as such revenue is billed at cost and there is no
associated gross profit margin.
Under the infrastructure portion of the new agreement with IBM that is
expected to become effective October 1, 1999, network and other
infrastructure support costs will not be as closely tied to revenue sharing,
and will be relatively fixed over varying levels of activity; accordingly,
future fluctuations in revenue may have a greater impact on gross profit
margins than in prior periods.
OPERATING EXPENSES
In the three months ended June 30, 1999, the Company's selling, general and
administrative expenses decreased by $252,000, or 29%, to $613,000 from
$865,000 in the three months ended June 30, 1998. The Company has expanded
its management team, but the related increase in costs was more than offset
by charges taken last year with no similar charges this year. Such charges in
the 1998 quarter related to the issuance of warrants, and to legal and
accounting fees associated with the closure of offices in France and Hong
Kong. Product development expenses during the first quarter of fiscal year
2000 increased by $72,000, or 58%, to $198,000 from $126,000 in the three
months ended June 30, 1998. The increase in product development is primarily
labor and support costs associated with continued enhancement of the
Company's Internet solution, including new management personnel.
10
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The Company expects that product development and selling, general and
administrative expenses will increase as it expands its operations, brings
its sales and project management function in-house, and incurs additional
labor and other costs related to the enhancement and sales of its solution.
OTHER INCOME (EXPENSE), NET AND INTEREST INCOME
The principal component of other income (expense), net, an expense of $4,000
and a gain of $21,000 in the three months ended June 30, 1999 and 1998,
respectively, is the exchange gain or loss on foreign currency translations
with the Company's subsidiary in France. Interest income increased to $11,000
in the current year's first quarter from $1,000 in the same three months one
year ago. The increase in interest income is attributable to the increased
cash available for investment. During the period September to December 1998,
the Company raised approximately $2.5 million through various private
placements of equity securities, thereby providing the additional invested
funds.
INCOME TAXES
The Company recorded a net loss of $683,000 during the three months ended
June 30, 1999, and had net losses of $1.5 and $2.8 million in fiscal 1999 and
1998, respectively. Accordingly, no provision for income taxes was recorded
in any of these periods. As of June 30, 1999, the Company had net operating
loss carryforwards for United States income tax purposes of approximately
$8.4 million. These losses expire at various dates between 2002 and 2020. As
of June 30, 1999, the Company also had net operating loss carryforwards for
income tax purposes in France of approximately $3.7 million, which expire at
various dates between 1999 and 2003. A valuation allowance has been recorded
for the tax benefit of the net operating loss carryforwards and the deferred
tax assets of the Company due to the fact that, as of the present time, it is
more likely than not that such assets will not be realized.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. We believe that
period-to-period comparisons of our results of operations are not meaningful
and should not be relied upon as indicators of future performance. Our
operating results could fall below the expectations of securities analysts or
investors in some future quarter or quarters. Our failure to meet these
expectations would likely adversely affect the market price of our Common
Stock.
Our quarterly operating results may vary depending on a number of factors,
including: demand for our solution and services; actions taken by our
competitors, including new product introductions and enhancements; delays or
reductions in spending for, or the implementation of, supply chain management
solutions by our potential customers as companies attempt to stabilize their
computer systems prior to January 1, 2000 in order to reduce the risk of
computer system problems associated with the year 2000; ability to scale our
network and operations infrastructure; ability to develop, introduce and
market new solutions and enhancements to our existing solution on a timely
basis; changes in our pricing policies or those of our competitors; ability
to expand our sales and marketing operations, including hiring additional
sales personnel; size and timing of sales of our solution and services;
success in maintaining and enhancing existing relationships and developing
new relationships with strategic partners; ability to control costs;
technological changes in our markets; deferrals of customer subscriptions in
anticipation of new enhancements or features of our solution; customer budget
cycles and changes in these budget cycles; and general economic factors.
We plan to increase our operating expenses substantially to expand our sales
and marketing operations, fund greater levels of product development,
increase general and administrative support, develop new partnerships,
increase our professional services and support capabilities
11
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and improve our operational and financial systems. If our revenues do not
increase along with these expenses, our business, operating results and
financial condition could be seriously harmed and net losses in a given
quarter could be even larger than expected. In addition, because our expense
levels are relatively fixed in the near term and are based in part on
expectations of our future revenues, any decline in our revenues to a level
that is below our expectations would have a disproportionately adverse impact
on our operating results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at June 30, 1999 were $810,000, a
decrease of $457,000 from March 31, 1999. Cash used in operating activities
for the three months ended June 30, 1999 was $436,000, compared to $328,000
for the three months ended June 30, 1998. The cash usage in each period was
primarily due to the net losses. Approximately $370,000 of the loss in the
three-month period ended June 30, 1998 related to non-cash stock options and
warrants expense. Therefore, less cash was used in operations in the
three-month period one year ago even though the net operating loss was
greater in that period. The Company plans to continue investing in product
development and sales and marketing of its Internet sourcing solution, and
use of cash to fund such activities is expected to continue to increase for
the foreseeable future.
Subsequent to the end of the quarter, the Company completed a private
placement of its Common Stock through a placement agent to a limited number
of institutional investors. The offering included 5,031,875 Common shares and
gross proceeds were $8.1 million. Net proceeds, after placement agent fees
and other offering costs, were approximately $7.3 million, and are expected
to be used primarily for general working capital and corporate purposes,
including product development and the expansion of the sales, marketing and
management functions. Including the equity capital received subsequent to the
end of the quarter, the Company believes that its current working capital
will be sufficient to meet its working capital requirements for the next 12
months. The Company plans to actively seek additional equity investment to
fund operations beyond that period. If such efforts are unsuccessful, the
Company will need to reduce operating spending significantly, which would
materially and adversely affect the Company's business.
The Company currently does not have a bank credit line. The Company does not
intend to pay cash dividends with respect to capital stock in the foreseeable
future.
RECENT PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company has
adopted SOP No. 98-1 as of the first quarter of fiscal year 2000. The
adoption of SOP No. 98-1 did not have a material impact on the Company's
financial statements.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As such, computer
programs that have date sensitive software might recognize a date using "00"
as the year 1900 rather than the year 2000. This 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, its Internet solution
and its desktop software solution that could be affected by the "Year 2000"
issue. The Company has tested its Internet solution and believes it is "Year
2000" compliant. Within its internal computer systems and its desktop
software solution, however, the Company has identified some systems
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and software applications that will be affected. The Company presently
believes, with modification to existing software and converting to new
software, the "Year 2000" issues relating to internal computer systems and
the desktop software solution will not cause significant operational or
customer problems. Furthermore, the Company does not anticipate that the cost
of implementing these solutions will be material to its financial position or
results of operations. Such costs will primarily consist of the labor of
in-house personnel; no significant outside costs are currently planned or
anticipated. However, if the needed modifications and conversions are not
made, or are not completed on a timely basis, "Year 2000" related problems
could have a material adverse effect on the business, financial condition and
results of operations of the Company. Furthermore, the costs of such
conversions and updates are based on management's best estimates, which are
derived utilizing numerous assumptions of future events including such things
as, but not limited to, the availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes and
similar uncertainties. The Company began initiating formal communications
with its significant suppliers and large customers in fiscal 1999 to
determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their own "Year 2000" issues. However, there
can be no guarantee that the systems of other companies on which the Company
directly or indirectly relies will be timely converted, or that a failure to
convert by another company or a conversion that is incompatible with the
Company's systems will not have a material adverse impact on the Company.
RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of $1.5 million in fiscal 1999 and $0.7 million in the
first three months of fiscal 2000. As of June 30, 1999, we had an accumulated
deficit of approximately $15.1 million. We expect to derive substantially all
of our revenues for the foreseeable future from subscription fees of our
Internet sourcing solution, which is based on an unproven business model.
Although these revenues have grown in the most recent quarter, we may not be
able to sustain this growth in the future. In fact, we may not have any
revenue growth, and our revenues could decline. Moreover, we expect to incur
significant sales and marketing, product development, and general and
administrative expenses. As a result, we expect to incur significant losses
for the foreseeable future.
WE EXPECT TO DEPEND ON OUR INTERNET SOLUTION FOR SUBSTANTIALLY ALL OF OUR
REVENUES FOR THE FORESEEABLE FUTURE.
Our solution and related services accounted for substantially all of our
revenues. We anticipate that revenues from our solution and related services
will continue to constitute substantially all of our revenues for the
foreseeable future. Consequently, a decline in the price of, or demand for, our
solution, or its failure to achieve broad market acceptance, would seriously
harm our business.
IMPLEMENTATION OF OUR SOLUTIONS BY LARGE RETAILERS IS COMPLEX, TIME CONSUMING
AND EXPENSIVE. WE FREQUENTLY EXPERIENCE LONG SALES AND IMPLEMENTATION CYCLES.
Our supply chain management solution is an enterprise-wide solution that must
be deployed with many users within a large retailer's sourcing organization.
Its adoption by large retailers is characterized by long sales cycles
beginning with pilot studies and concluding with retailers strongly
encouraging their merchandise suppliers to subscribe to our solution. In many
cases, our customers must change established business practices and conduct
business in new ways. In addition, they must generally consider a wide range
of other issues before committing to purchase our product, including product
benefits, integration, interoperability with existing
13
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computer systems, scalability, functionality and reliability. As a result, we
must educate potential customers on the use and benefits of our solution. It
frequently takes several months to finalize a sale and the sale must often be
approved by a number of management levels within the customer organization.
The implementation of our solution requires a commitment of resources by our
customers and third-party and our professional services organizations. Delay
of these commitments may adversely affect our financial results of any
particular quarter.
WE CURRENTLY DEPEND ON IBM FOR MARKETING OF OUR SOLUTION AND FOR THE
MANAGEMENT AND SECURITY OF OUR NETWORK INFRASTRUCTURE.
We have an alliance with IBM for co-marketing and customer support. We are
currently dependent on IBM for most of our marketing and support activities.
Therefore, IBM's decisions and performance with respect to these matters have
a material impact on our ability to market our solution. While we are
currently negotiating new agreements to cover our relationship, and our
future plans call for us to take over a substantial portion of our sales and
marketing activities, we may not be able to do so effectively. IBM is under
no contractual obligation to continue to market our solution. A decision by
IBM to cease or reduce substantially its marketing efforts would have an
immediate and material adverse effect on our financial condition and results
of operations. There can be no assurance that, in such an event, we would
succeed in alternative sales methods.
In addition, we depend on IBM Global Network, or IGN, for certain services
relating to our infrastructure, including maintenance of communications lines
and management of network data centers. IGN may terminate its performance of
these services for us at any time. If IGN were to terminate these services,
we would have to obtain them from another service provider or perform them
ourselves. There can be no assurance that we would be able to obtain or
perform these services on a timely or cost-effective basis. If we were able
to obtain such services from a third party, we would be entirely dependent on
them to manage and maintain our network infrastructure and to provide
security for it.
WE DEPEND ON OUR KEY PERSONNEL.
Our future performance depends on the continued service of our senior
management, product development and sales personnel. The loss of the services
of one or more of our key personnel could seriously harm our business. Our
future success also depends on our continuing ability to attract, hire, train
and retain a substantial number of highly skilled managerial, technical,
sales, marketing and customer support personnel. We are particularly
dependent on hiring additional personnel to increase our direct sales and
product development organizations. In addition, new hires frequently require
extensive training before they achieve desired levels of productivity.
Competition for qualified personnel is intense, and we may fail to retain our
key employees or to attract or retain other highly qualified personnel.
WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ECOMMERCE.
IF THE USE OF THE INTERNET AND ECOMMERCE DO NOT GROW AS ANTICIPATED, OUR
BUSINESS WILL BE SERIOUSLY HARMED.
Our success depends on the increased acceptance and use of the Internet as a
medium of commerce on a global basis. Rapid growth in the use of the Internet
is a recent phenomenon. As a result, acceptance and use may not continue to
develop at historical rates and a sufficiently broad base of business
customers may not adopt or continue to use the Internet as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty, and
there exist few proven services and products.
14
<PAGE>
Our business would be seriously harmed if:
- Use of the Internet, the web and other online services does not
continue to increase or increases more slowly than expected;
- The infrastructure for the Internet, the web and other online
services does not effectively support expansion that may occur; or
- The Internet, the web and other online services do not create a
viable commercial marketplace, inhibiting the development of
eCommerce and reducing the need for our solution.
Additional risk factors are discussed in more detail in the risk factor
section of the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1999.
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 21, 1999, the Company issued 485,437 shares of Common Stock in
exchange for the same number of Series A preferred shares at the election of
the series A shareholder. These preferred shares were converted to Common
Stock under the terms and conditions of the November 22, 1994 Series A
Convertible Preferred Stock Purchase Agreement.
ITEM 5 OTHER INFORMATION
On July 20, 1999, the stockholders of the Company approved a proposal to
change the Company's name to SourcingLink.net, Inc. The name change became
effective as of that date upon the Company's filing of its Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State.
In conjunction with the name change, the Company changed its trading symbol
to SNET effective on July 30, 1999.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 27 - Financial Data Schedule
B. REPORTS ON FORM 8-K
On June 22, 1999, the Company filed a report on Form 8-K, announcing,
pursuant to Section 135c of the Securities Act of 1933, that it had engaged a
placement agent for the purpose of undertaking of a private placement of up
to approximately $10,000,000 of a new series of its Preferred Stock, to be
designated Series B Convertible Preferred Stock, to a limited number of
institutional investors.
15
<PAGE>
SIGNATURE
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: August 16, 1999 SOURCINGLINK.NET, INC.
By: /s/ Gary Davidson
---------------------
Gary Davidson,
Vice President Finance and
Administration, Chief Financial Officer
16
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