<PAGE>
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 March 31, 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
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)
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
X YES NO
--- ---
Shares of Common Stock outstanding as of May 13, 1999: 22,525,437 shares
Transitional Small Business Disclosure Format YES X NO
--- ---
<PAGE>
QCS.net CORPORATION
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and June 30, 1998 3
Consolidated Statements of Operations
for the three and nine month periods ended March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows
for the nine months ended March 31, 1999 and 1998 (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 12
ITEM 5 Other Information 13
ITEM 6 Exhibits and Reports on Form 8-K 13
SIGNATURE 13
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
QCS.net CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
ASSETS 1999 1998
-------------------- -------------------
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents $ 1,266,880 $ 473,170
Accounts receivable (net of allowance for doubtful accounts of
$35,121 at March 31, 1999 and $29,657 at June 30, 1998) 222,769 203,921
Other current assets 7,111 5,345
-------------------- -------------------
Total current assets 1,496,760 682,436
Property and equipment, net 185,286 248,871
Security deposits 12,839 27,942
-------------------- -------------------
Total assets $ 1,694,885 $ 959,249
==================== ===================
LIABILITIES
Current liabilities:
Accounts payable $ 207,303 $ 344,436
Accrued liabilities 524,807 590,526
Capital lease obligations, current portion 8,201 8,423
Preference dividends payable 9,247 65,051
-------------------- -------------------
Total current liabilities 749,558 1,008,436
Capital lease obligations, net of current portion
- 6,468
-------------------- -------------------
Total liabilities 749,558 1,014,904
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, par value $.001 per share:
Authorized: 5,000,000 shares; issued and outstanding 3,816,023 and 3,816 4,680
4,680,102 shares at March 31, 1999 and June 30, 1998, respectively
(aggregate liquidation preference: $3,930,504)
Common stock, par value $.001 per share: Authorized: 40,000,000 shares;
issued and outstanding 22,525,437 and 18,831,552 at March 31, 1999 and 22,501 18,832
June 30, 1998, respectively
Additional paid in capital 15,298,525 12,898,284
Subscriptions receivable from stockholders - (200,100)
Common stock note receivable (40,000)
Accumulated deficit (14,420,409) (12,928,630)
Cumulative foreign currency translation adjustments 80,894 151,279
-------------------- -------------------
Total stockholders' equity (deficit) 945,327 (55,655)
-------------------- -------------------
Total liabilities and stockholders' equity (deficit) $ 1,694,885 $ 959,249
==================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
QCS.net CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Network $ 175,851 $ 144,805 $ 480,082 $ 539,971
Consulting 64,749 105,000 260,915 105,000
------------------ ----------------- --------------- ------------------
240,600 249,805 740,997 644,971
Cost of revenue:
Network 72,466 73,624 201,032 356,357
Consulting 64,749 105,000 260,915 105,000
------------------ ----------------- --------------- ------------------
137,215 178,624 461,947 461,357
Gross profit 103,385 71,181 279,050 183,614
Operating expenses:
Selling, general and
administrative 554,434 521,496 1,371,269 1,636,805
Research and development 182,564 118,347 479,416 281,910
Adjustment to long-term
contract (156,702) (156,702)
------------------ ----------------- --------------- ------------------
Total operating expenses 736,998 483,141 1,850,685 1,762,013
Operating loss (633,613) (411,960) (1,571,635) (1,578,399)
Other income (expense), net (18,569) (28,982) 62,056 (65,146)
Interest income 11,752 1,320 17,800 17,570
------------------ ----------------- --------------- ------------------
Net loss $ (640,430) $ (439,622) $(1,491,779) $ (1,625,975)
Preferred dividend (64,537) (188,503)
------------------ ----------------- --------------- ------------------
Net loss attributed to common
stockholders $ (640,430) $ (504,159) $(1,491,779) $ (1,814,478)
================== ================= =============== ==================
------------------ ----------------- --------------- ------------------
Net loss per share (basic and diluted) $ (0.03) $ (0.03) $ (0.07) $ ( 0.11)
================== ================= =============== ==================
Weighted average number of shares
used in per share calculation (basic
and diluted) 21,994,373 17,474,312 20,193,250 17,264,914
================== ================= =============== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
QCS.net CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------
MARCH 31, MARCH 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,491,779) $ (1,625,975)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense 81,549 50,803
Unrealized exchange (gain) loss (64,329) 64,516
Write-off of fixed assets 4,809 15,181
Compensation related to stock options & warrants 107,250
Changes in operating assets and liabilities:
Changes in accounts receivable (18,848) (97,961)
Changes in other current assets and security deposits 13,337 24,904
Changes in accounts payable (137,133) 86,931
Changes in accrued and other liabilities (65,719) (3,601)
----------------- -----------------
Net cash used in operating activities (1,678,113) (1,377,952)
Cash flows from investing activities:
Purchases of fixed assets (22,773) (44,034)
Proceeds from sale of fixed assets 19,405
----------------- -----------------
Net cash used in investing activities (22,773) (24,629)
Cash flows from financing activities:
Proceeds from issuance of common stock 2,507,342 611,585
Exercise of stock options - 750
Payments on capital leases (6,690) (6,703)
----------------- -----------------
Net cash provided by financing activities 2,500,652 605,632
Effect of exchange rate changes on cash (6,056) (2,063)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 793,710 (799,012)
Cash and cash equivalents, beginning of the period 473,170 1,274,157
----------------- -----------------
Cash and cash equivalents, end of the period $ 1,266,880 $ 475,145
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,573 $ 3,225
Cash paid during the period for taxes 800 -
Non-cash financing transactions:
Conversion of preference dividend payable to common stock 55,804 -
Issuance of note receivable for exercise of employee stock options 40,000 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
QCS.net CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
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 and nine month periods ended March 31,
1999 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.
2. COMPUTATION OF NET LOSS PER SHARE:
The Company adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") 128 "Earnings per Share" effective December 31, 1997. SFAS
128 requires the presentation of basic and diluted earnings 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 and conversion of preferred stock 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 and nine month periods ended March 31, 1999 and 1998 (unaudited):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------------------- -------------------------------------------
BASIC AND DILUTED: 1999 1998 1999 1998
-------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding for the period 21,994,373 17,474,312 20,193,250 17,264,914
Net loss available to
common shareholders $ (640,430) $ (504,159) $ (1,491,779) $ (1,814,478)
-------------------- ------------------- ------------------- --------------------
Net loss per share $ (0.03) $ (0.03) $ (0.07) $ (0.11)
==================== =================== =================== ====================
</TABLE>
At March 31, 1999 the Company had 3,790,077 options and 3,378,651 warrants
outstanding to purchase shares of Common Stock compared to 2,986,077 options
and 1,267,894 warrants outstanding at March 31, 1998 (unaudited). These were
not included in the computation of diluted earnings per share because
inclusion of the options and warrants was anti-dilutive.
3. RECLASSIFICATION:
Certain prior period balances have been reclassified to conform to the
current period's presentation.
4. RECENT PRONOUNCEMENTS:
The Company adopted SFAS 130, "Reporting Comprehensive Income" in the first
quarter of fiscal year 1999. SFAS 130 establishes new rules for the reporting
and displaying of comprehensive income and its components.
6
<PAGE>
Comprehensive loss for the three months ended March 31, 1999 and 1998 were
$620,485 and $409,473, respectively. For the nine months ended March 31, 1999
and 1998, the comprehensive loss was $1,562,164 and $1,564,861, 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 year 1999 and does
not need to be applied to interim financial statements in the year of
application.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations of
the Company should be read in conjunctions with the Financial Statements and
related Notes thereto included elsewhere in this Form 10-QSB. This discussion
contains, in addition to historical information, forward-looking statements
that involve risks and uncertainties. The Company's actual results could
differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited those discussed below, as well as those
discussed in the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1998. The Company disclaims any obligation to update
information contained in any forward-looking statements.
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 factors discussed in the Risk Factors section of the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30,
1998, and in the Risk Factor Section below. 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 a provider of a
business-to-business electronic preorder sourcing solution used by the retail
industry to manage their global merchandise suppliers. QCS.net provides an
Internet, browser-based workflow tool which integrates electronic catalogs,
requests for proposals, product offers, negotiations, ordering and order
status/fulfillment tracking. In conjunction with IBM, the Company can offer
full Internet EDI functionality. The Company's revenues are derived from
consulting fees, deployment services and user training, solution, access,
subscription and registration fees. The Company charges a fixed monthly fee
or pay-as-you-go transaction fees for electronic forms. In April 1999, the
Company suspended the transaction based (pay-as-you-go) payment plan for new
subscribers. 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
7
<PAGE>
in its early stages and the Company can give no assurance of when or if the
alliance will ultimately be successful. To date, sales generated from this
alliance were still very limited.
From inception in 1993 through March 31, 1999, the Company has generated an
accumulated deficit of $14,420,409. Since inception, the Company has incurred
substantial costs to develop and enhance 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
the light of its operating history, 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 achieve profitability. The
Company's success depends to a significant degree upon the Company's ability
to raise additional capital, 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
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 and thus
far has produced insignificant revenues. If this fails to occur, the Company
would be materially and adversely affected.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
The total network and consulting revenues of $240,600 for the third quarter
of fiscal year 1999 ("Q3 99") represent a 4% decrease from total revenues of
$249,805 for the third quarter of fiscal year 1998 ("Q3 98"). The Company's
network revenues increased by 21% to $175,851 for Q3 99 as compared to
$144,805 for Q3 98. This increase is primarily attributed to the higher level
of megabyte traffic on the Company's Lotus Notes-based product and a modest
increase in Internet-based subscription sales. The Company's Internet
revenues historically have been slow in developing due to the lengthy sales
and implementation cycles required for our initial retail clients to strongly
encourage their merchandise suppliers to connect to the QCS Solution and to
provide the required level of training to buyers and suppliers.
The consulting revenue associated with the Company's service agreement with
IBM Corporation in Q3 99 was $64,749 compared to $105,000 in Q3 98. The
revenues and costs associated with these services have been declining as some
of employees performing these functions have been transferred to IBM
employment. Under a purchase order with IBM, the Company provides sales,
marketing and end-user support services to assist in marketing of the QCS
solution and services. It is anticipated that this order will be completed
within the next six months, resulting in the further reduction of consulting
revenues.
Cost of network revenues decreased by 2% to $72,466 for Q3 99 from $73,624 in
Q3 98. Cost of network revenues in Q3 99 is primarily calculated as a
percentage of network revenues in accordance with the IBM revenue sharing
arrangement. The higher cost of network revenues in Q3 98 were due to the
cost of third party services preformed in Asia. Cost of consulting revenue in
Q3 99 was $64,749 versus $105,000 in Q3 98 is declining in line with the
lower levels of consulting services performed. Cost of network revenues
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 increased 6% to $554,434
in Q3 99 from $521,496 in Q3 98. The increase was due in part to costs
associated with the expansion of the Company's management team in February
1999 and increased consulting expenses. Research and development expenses
increased by $64,217 to $182,564 in Q3 99 compared to $118,347 in Q3 98. The
increased expenditures were for internal labor for the continued enhancements
to the Company's products and the release of the latest version of the
Company's Internet solution.
8
<PAGE>
During Q3 98 the Company recorded an adjustment to the 1996 IBM contract of
$156,702 to reverse cost accrued to cost of sales during the first six months
of fiscal 1998 in conjunction with mutual agreement to amend the 1996 IBM
contract.
As a result of the foregoing and primarily the adjustment referred to in the
previous paragraph, the net loss increased 46% to $640,430 for Q3 99 from
$439,622 in Q2 98.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999
The total network and consulting revenues of $740,997 for the first nine
months of fiscal year 1999 represent a 15% increase from total revenues of
$644,971 for the first nine months of fiscal year 1998. This increase is due
primarily to an increase in the IBM consulting service revenues, which were
$260,915 for the nine months of fiscal year 1999 compared to $105,000 the
comparable period in fiscal year 1998. The increase from last year was
because the contract did not take effect until the third quarter of fiscal
1998.
The Company's network revenues decreased by 11% to $480,082 for the first
nine months of fiscal year 1999 as compared to $539,971 for the first nine
months of fiscal year 1998. This decrease is primarily attributed to the
Company's lower sales of its full Lotus Notes-based product and the related
installation and monthly subscription fees. The loss of these revenues has
not been offset by Internet-based registration and subscription revenues.
Cost of network revenues decreased by 44% to $201,032 for the first nine
months of fiscal year 1999 from $356,357 in the first nine months of fiscal
year 1998. In fiscal year 1999, cost of network revenues is calculated
primarily as a percentage of network revenues in accordance to the IBM
revenue sharing arrangement. In the first half of fiscal year 1998, 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 the first nine months fiscal year 1999 was $260,915
compared to $105,000 in the first nine months of fiscal year 1998, which
represents the value of services sold to IBM at cost.
SG&A expenses decreased by 16% to $1,371,269 in the first nine months of
fiscal year 1999 from $1,636,805 in the same period in fiscal year 1998. The
decrease was due in part to the aforementioned cost of sales, marketing and
end-user support services, which are now invoiced to IBM, and the savings
from the closure of the France and Hong Kong offices in December 1997.
Research and development expenses increased by 70% from $281,910 to $479,416
in the nine months of fiscal year 1999 compared to the same period in fiscal
year 1998. The increased expenditures were for internal labor for continued
enhancements to the Company's Internet product and release of the latest
version of the Company's Internet solution.
As a result of the foregoing, the net loss decreased by 8% to $1,491,779 for
the first nine months of fiscal year 1999 from $1,625,975 in the first nine
months of fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at March 31, 1999 was $1,266,880,
representing a $793,710 increase from June 30, 1998. Cash used in operating
activities for the nine months ended March 31, 1999 was $1,678,113, compared
to $1,377,952 for the nine months ended March 31, 1998. The cash usage is
primarily attributed to the net losses that occurred in each of the periods
and to pay down accounts payable and other current liabilities in 1999 which
had accumulated prior to the receipt of the latest funding from the sale of
Common Stock as described below.
During the first nine months of fiscal year 1999, the Company raised
$2,507,342 in net proceeds in a private placement. This private placement
consisted of 19 investors purchasing 2,237,680 equity "Units" at prices
ranging from $0.75 to $1.15 per unit, each such unit consisting of one share
of Common Stock and one warrant to purchase an additional share of Common
Stock at an exercise price ranging from $1.00 to $1.75.
9
<PAGE>
The Company believes the capital currently on hand will be sufficient to meet
the working capital requirements through September 1999. The Company is
actively seeking additional capital investment to fund operations into the
future. 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.
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 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 uncertainties, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of $2.8 million in fiscal 1998 and $1.5 million in the
first nine months of fiscal 1999. As of March 31, 1999, we had an accumulated
deficit of approximately $14.2 million. We expect to derive substantially all
of our revenues for the foreseeable future subscription fees for the QCS.net
Network, which is based on an unproven business model. Although these
revenues have grown slightly 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, research and development, and general and
administrative expenses. As a result, we expect to incur significant losses
for the foreseeable future.
10
<PAGE>
WE EXPECT TO DEPEND ON OUR QCS.NET SOLUTION FOR SUBSTANTIALLY ALL OF OUR
REVENUES FOR THE FORESEEABLE FUTURE.
Our solution and related services accounted for substantially all of our
revenues in fiscal 1999. 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 enterprise rollouts. 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 computer systems,
scalability, functionality and reliability. As a result, we must educate
potential customers on the use and benefits of our products and services. 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 and deployment of our products requires a significant
commitment of resources by our customers and third-party and/or our
professional services organizations.
WE ARE DEPENDENT ON IBM FOR MARKETING OF OUR SOLUTIONS AND FOR THE MANAGEMENT
AND SECURITY OF OUR NETWORK INFRASTRUCTURE.
We have an alliance with IBM for co-marketing and customer support. IBM has
historically exercised substantial discretion and control over such marketing
and support including financial resources devoted to marketing and the
compensation of its sales and support personnel. While 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. Therefore, IBM's
decisions and performance with respect to these matters have a material
impact on our ability to market our products and services. IBM is under no
contractual obligation to continue to market our products and services. 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 for certain services relating to
the QCS.net Network, 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.
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
research and 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.
11
<PAGE>
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 QCS.net Network 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.
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 products and services.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
The Company is actively seeking additional capital investment to fund
operations into the future. We expect the net proceeds from this offering
will be sufficient to meet our working capital and capital expenditure needs
for at least the next 12 months. After that, we may need to raise additional
funds and we cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all. If we cannot raise funds on
acceptable terms, if and when needed, we may not be able to develop or
enhance our products and services, take advantage of future opportunities,
grow our business or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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 June 30, 1998.
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 4, 1999, the Company issued 776,700 shares of Common Stock in
exchange for the same number of Series A preferred shares at the election of
the series A shareholder converted under the term and conditions of the
November 22, 1994 Series A Convertible Preferred Stock Purchase Agreement.
Effective March 31, 1999 the Company cancelled 66,700 shares of Common Stock
which we held as collateral for a Common Stock Subscription Receivable for
$200,100 which the Company has deemed to be uncollectable.
12
<PAGE>
ITEM 5 OTHER INFORMATION
On February 3, 1999, the Company announced the appointment of Sean Maloy as
its new President and Chief Executive Officer. Mr. Maloy has held several
senior management positions, most recently at Maxwell Technologies, Inc., a
technology-based company, where Mr. Maloy has served as Chief Operating
Officer, Chief Financial Officer and, prior to joining QCS.net, as Vice
President of Mergers and Acquisitions.
On May 12, 1999, the Company determined to change its fiscal year end from
June 30, to March 31. The Company expects to file its transition report on
Form 10-KSB in June 1999, covering the transition period from its previous
fiscal year ended June 30, 1998 to its new fiscal year ended March 31, 1999.
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.
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: May 14, 1999 QCS.net CORPORATION
By: /s/ Sean Maloy
----------------
Sean Maloy,
President, Chief Executive Officer,
Acting Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 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> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,267
<SECURITIES> 0
<RECEIVABLES> 258
<ALLOWANCES> 35
<INVENTORY> 0
<CURRENT-ASSETS> 1,497
<PP&E> 328
<DEPRECIATION> 143
<TOTAL-ASSETS> 1,695
<CURRENT-LIABILITIES> 750
<BONDS> 0
0
4
<COMMON> 23
<OTHER-SE> 918
<TOTAL-LIABILITY-AND-EQUITY> 1,695
<SALES> 0
<TOTAL-REVENUES> 241
<CGS> 0
<TOTAL-COSTS> 137
<OTHER-EXPENSES> 749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (640)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
