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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, 2000.
(_) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________.
Commission File Number: 000-28391
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SourcingLink.net, Inc.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0132465
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
16855 WEST BERNARDO DRIVE, SUITE 260, SAN DIEGO, CA 92127
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(Address of principal executive offices)
(858) 385-8900
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(Issuer's telephone number)
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(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
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Shares of Common Stock outstanding as of August 1, 2000: 8,066,154 shares
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SourcingLink.net, Inc.
CONTENTS
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<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 2000 (unaudited) and March 31, 2000 3
Consolidated Condensed Statements of Operations
for the three months ended June 30, 2000
and 1999 (unaudited) 4
Consolidated Condensed Statements of Cash Flows
for the three months ended June 30, 2000 and
1999 (unaudited) 5
Notes to Consolidated Unaudited Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
SourcingLink.net, Inc.
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 2000 2000
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(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,867,385 $ 3,870,362
Short-term investments - 1,955,040
Accounts receivable, net 159,785 354,767
Other current assets 76,882 81,662
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Total current assets 5,104,052 6,261,831
Property and equipment, net 493,711 375,463
Other non-current assets 62,776 64,873
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Total assets $ 5,660,539 $ 6,702,167
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LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 1,080,250 $ 1,388,538
Deferred revenue and other 319,506 288,741
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Total current liabilities 1,399,756 1,677,279
STOCKHOLDERS' EQUITY
Series A convertible preferred stock 246 246
Common stock 8,062 8,056
Additional paid-in capital 24,104,432 24,086,938
Unearned stock-based compensation (34,012) (219,255)
Accumulated deficit (19,904,912) (18,938,586)
Cumulative foreign currency translation adjustments 86,967 87,489
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Total stockholders' equity 4,260,783 5,024,888
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Total liabilities and stockholders' equity $ 5,660,539 $ 6,702,167
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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)
<TABLE>
<CAPTION>
Three months ended June 30,
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2000 1999
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<S> <C> <C>
Revenue:
eCommerce applications $ 200,094 $ 204,626
Professional services 565,091 64,749
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765,185 269,375
Cost of revenue:
eCommerce applications 255,047 83,350
Professional services 102,760 64,749
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357,807 148,099
Gross profit 407,378 121,276
Operating expenses:
Selling, general and administrative 888,926 612,690
Product development 371,062 197,924
Amortization of warrants issued
to strategic partners 185,243 -
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Total operating expenses 1,445,231 810,614
Operating loss (1,037,853) (689,338)
Other expense, net (668) (4,327)
Interest income 72,195 10,834
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Net loss $ (966,326) $ (682,831)
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Net loss per share (basic and diluted) $ (0.12) $ (0.12)
=========== ===========
Weighted average number of shares
used in per share calculation
(basic and diluted) 8,058,733 5,724,713
=========== ============
</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)
<TABLE>
<CAPTION>
Three months ended June 30,
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2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (966,326) $ (682,831)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense 50,460 27,716
Unrealized foreign exchange loss 668 4,246
Amortization of warrants issued to strategic partners 185,243 -
Changes in operating assets and liabilities-net (75,664) 214,426
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Net cash used in operating activities (805,619) (436,443)
Cash flows from investing activities:
Purchases of fixed assets (168,708) (19,945)
Maturities of short-term investments 1,955,040 -
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Net cash provided by (used in) investing activities 1,786,332 (19,945)
Cash flows from financing activities:
Proceeds from exercise of stock options 17,500 -
Payments on capital lease - (1,980)
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Net cash provided by (used in) financing activities 17,500 (1,980)
Effect of exchange rate changes on cash (1,190) 1,819
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Net increase (decrease) in cash and cash equivalents 997,023 (456,549)
Cash and cash equivalents, beginning of the period 3,870,362 1,266,880
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Cash and cash equivalents, end of the period $4,867,385 $ 810,331
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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.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Basis of presentation:
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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, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending March 31, 2001. The year-end balance sheet data at March 31, 2000 was
derived from the audited financial statements. All prior period share and per
share amounts have been restated to reflect the 1 for 4 reverse stock split,
which was effective August 25, 1999.
The consolidated condensed 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, 2000.
2. Computation of net loss per share:
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Net loss per share is presented on a basic and diluted basis. Basic earnings
(loss) per share is computed by dividing the income (loss) 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 (loss) per share are calculated as follows for the
three months ended June 30, 2000 and 1999 (unaudited):
<TABLE>
<CAPTION>
Three months ended June 30,
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<S> <C> <C>
Basic and diluted: 2000 1999
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Net loss $ (966,326) $ (682,831)
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Weighted average shares
outstanding for the 8,058,733 5,724,713
period
Net loss per share $ (0.12) $ (0.12)
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</TABLE>
All prior period share and per share amounts have been restated to reflect the 1
for 4 reverse stock split, which was effective August 25, 1999.
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At June 30, 2000, the Company had 947,175 options and 768,824 warrants
outstanding to purchase shares of Common Stock compared to 847,125 options and
768,824 warrants outstanding at March 31, 2000. These options and warrants were
not included in the computation of diluted earnings per share because their
inclusion would be anti-dilutive.
3. Comprehensive loss:
-----------------------
Comprehensive loss for the three months ended June 30, 2000 and 1999 was
$966,848 and $676,767, respectively. The principal difference between
comprehensive loss and net loss is the treatment of cumulative foreign currency
translation adjustments.
4. Recent pronouncements:
-------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
This statement was to become effective for all quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments -
Deferral of the Effective Date of Statement No. 133." Statement No. 137 defers
the effective date of Statement No. 133 until fiscal quarters beginning after
June 15, 2000. The Company will adopt Statement No. 133 in the second quarter of
fiscal year 2001, and does not expect such adoption to affect our results of
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), providing the staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. The Company is applying SAB
101 to its financial statements as of the first quarter of fiscal year 2001. The
adoption of SAB 101 did not have a material impact on our results of operations,
financial position or cash flows.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25." This interpretation has provisions that
were effective after staggered dates, including provisions that were effective
after December 15, 1998 and others that became effective after June 30, 2000.
The adoption of this interpretation has not and will not have a material impact
on our results of operations, financial position or cash flows.
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 SourcingLink 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 "Risks Related to Our Business" section of SourcingLink's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 2000. Given
these uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. SourcingLink disclaims any obligation to update any
such factors or to announce publicly the results of any
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revisions of the forward-looking statements contained or incorporated by
reference herein to reflect future events or developments.
Overview
SourcingLink 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.
For merchandise suppliers, the solution provides a sales tool and electronic
forms for the exchange of company and product information.
Through fiscal 2000, SourcingLink's revenues were generated principally from
eCommerce Applications consisting of fees for access to and use of
SourcingLink's solutions. A portion of this revenue is derived from desktop
solutions, primarily from use of the InspectLink(TM) inspection data application
with one long-standing customer. Our focus for eCommerce applications, however,
is our core Internet sourcing solution, MySourcingCenter(TM), which was released
on a Microsoft platform in the first quarter of fiscal year 2001.
In March 2000, SourcingLink entered into a services contract with Paris, France-
based Carrefour S.A. (the "Carrefour contract"), under which SourcingLink will
receive a minimum of $9 million for services to be performed over a three-year
period which began April 1, 2000. The Carrefour contract followed an
announcement by Carrefour, the world's second largest retailer, that it, Sears,
Roebuck & Co. and Oracle Corporation were forming a new company named
GlobalNetXchange ("GNX"), for the purpose of conducting auctions and other
merchandise buying electronically with suppliers worldwide. Under our contract,
we will assist Carrefour with its implementation of GNX functionality and
processes.
IBM Agreements
Original IBM Agreements. SourcingLink entered into a multi-faceted eCommerce
agreement with IBM in the third quarter of fiscal year 1998, as an amendment to
an earlier 1996 agreement under which SourcingLink became an active participant
in IBM's e-commerce group. Under the 1998 contract, referred to in the
discussion below as the "IBM agreement" or the "Agreement," IBM had been
providing most of the sales and marketing effort, worldwide help desk support
and project management for SourcingLink through the expiration of the contract
on September 30, 1999. Under the same Agreement, IBM also provided the network
and server infrastructure supporting SourcingLink's solutions. Payments to IBM
for these services were based on a percentage of sales under a revenue sharing
provision of the Agreement, and were accounted for as cost of sales. Through
September 30, 1999, SourcingLink assisted IBM with certain sales and marketing
efforts for the Company's solution, and billed IBM at cost for such services.
These billings to IBM have been recorded as Professional Services revenue. As
these services were on a cost-reimbursement basis, there was an equal and
offsetting cost of revenue, and thus no gross profit margin associated with this
Professional Services revenue. Effective October 1, 1999, SourcingLink began
performing its sales and project management in-house; therefore, there is no
further revenue from professional services to IBM after September 30, 1999. New
agreements have been entered into with IBM as of October 1, 1999, as discussed
below.
New IBM Agreements. Effective October 1, 1999, SourcingLink entered into a new
network services and infrastructure agreement with IBM. In addition, the
Company entered into a separate agreement to define its on-going co-marketing
relationship with IBM. As mentioned above, the cost of these services was
historically based on revenue sharing, and was all included in cost of revenue.
Beginning October 1, 1999, the accounting for these new agreements is as
follows:
. For the infrastructure agreement, which includes the housing of servers in
IBM's secure data management center, the Company pays IBM under a combined
fixed and
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variable price structure, based upon the level of service. Payments for
these services are accounted for as cost of revenue.
. For the co-marketing agreement, which includes 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, there are no
payments required under SourcingLink's present status as a premier IBM e-
business partner.
Accumulated Losses
From its inception in 1993 through June 30, 2000, SourcingLink has incurred net
losses of approximately $19.9 million, primarily as a result of costs to develop
its technology, to develop and introduce its sourcing solutions, 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, unproven 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.
Results of operations for the three months ended June 30, 2000 and 1999
Revenue. Total revenue for the three months ended June 30, 2000 increased
$496,000, or 184%, to $765,000, from $269,000 in the three months ended June 30,
1999. This includes an increase in Professional Services revenue of $500,000 to
$565,000 this year from $65,000 in the same period one year ago. Such increase
is attributable to the Carrefour contract, a three-year, $9 million services
agreement that began April 1, 2000. Professional Services revenue in the prior
year were primarily for sales and marketing services paid for by IBM under an
agreement that was concluded by SourcingLink effective September 30, 1999, as
described above. Revenues from eCommerce Applications were $200,000, nearly
unchanged from the $205,000 of the prior year's first quarter. A portion of the
eCommerce revenue in both the current and prior year quarters is from
subscriptions of suppliers that have been made available to SourcingLink by
Paris, France-based Promodes, which was acquired by Carrefour late in calendar
1999. As previously mentioned, Carrefour has contracted with GNX for performing
electronic auctions and other buying with its merchandise suppliers. Therefore,
the potential exists for these subscribers to transfer to GNX in the future.
The Company is pursuing new retail customers with suppliers that could adopt our
solution, is releasing a version of its solution targeted at the Home
Improvement segment of the retail market, and has entered into a multi-year
consulting contract with Carrefour that will provide revenue over a three-year
period, as previously described.
Due to the Carrefour contract, the Company expects that Professional Services
revenue will continue to comprise a significant portion of the Company's overall
revenue in its fiscal year ending March 31, 2001. In the eCommerce Application
area, the Company's solution for the Home Improvement industry may involve
marketing directly to merchandise suppliers, a group that will include small and
highly dispersed target customers.
Cost of Revenue. In the three months ended June 30, 2000, the cost of revenue
increased $210,000, or 142%, to $358,000 from $148,000 in the prior three-month
period. Total gross
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profit increased $286,000 to $407,000, or 53% of revenues, from $121,000, or 45%
of revenues, in the three months ended June 30, 1999. The increase in gross
profit is attributable to the increase in Professional Services revenue, and
associated profit, under the Carrefour contract. The dollar amount of the cost
of revenue increased due to the labor and other expenses related to the new
services work, as well as to an increase in the cost of providing our eCommerce
applications. For both the current and prior year periods, SourcingLink's cost
of revenue for eCommerce Applications consists primarily of fees paid to IBM for
infrastructure support and hosting of the Company's application services within
the IBM Global Network. During the three months ended June 30, 1999, these fees
paid to IBM were under the original Agreement and were based on revenue sharing.
In the current year's first quarter, the fees paid for the IBM hosting services
are based on the new IBM contract that provides for a combination of fixed and
variable costs based on the level of service. The cost of revenue incurred this
year is near the minimum cost provided for in the contract, but such amount is
substantially greater than the revenue sharing-based payment for the same three-
month period in the prior year. The Company believes that lower costs can be
obtained for its network infrastructure, and does not plan on maintaining the
current arrangement with IBM after the contract expires in September 2000.
Operating Expenses
Selling, General and Administrative Expenses. In the three months ended June
30, 2000, SourcingLink's selling, general and administrative expenses increased
by $276,000, or 45%, to $889,000 from $613,000 in the three months ended June
30, 1999. SourcingLink has expanded its management team, and began hiring an
administrative, sales and project management staff during the last half of
fiscal year 2000. The associated labor and support costs comprise the majority
of the increase in selling, general and administrative expenses compared to the
prior year's first quarter.
The Company expects that its sales and marketing expenses will increase as it
begins to market its new solution to buyers and suppliers in the Home
Improvement retail industry, and incurs additional labor and other costs related
to the marketing of its solutions.
Product Development Expenses. Product development expenses during the first
quarter of fiscal year 2001 increased by $173,000, or 87%, to $371,000 from
$198,000 in the three months ended June 30, 1999. The increase in product
development expenses is primarily due to increased labor and support costs
associated with continued enhancement of the Company's Internet solution,
including new management and development personnel.
Stock-based Compensation. The cost of warrants for the purchase of SourcingLink
common stock issued to two strategic partner companies during fiscal year 2000
is being amortized over the periods associated with the business agreements
underlying the warrants. The amount of expense was determined under the Black-
Scholes valuation method, and the related amortization amounted to $185,000 in
the first quarter of fiscal year 2001. There was no such amortization of
warrant expense in last year's first quarter.
Other Expense, net and Interest Income. Other expense, net was $1,000 and
$4,000 in the three months ended June 30, 2000 and 1999, respectively, and is
principally comprised of the exchange gain or loss on foreign currency
transactions with SourcingLink's subsidiary in France. Interest income was
$72,000 and $11,000 for the three months ended June 30, 2000 and 1999,
respectively. In August 1999, SourcingLink completed a private placement of
1,258,000 shares of its common stock and received net proceeds of $7.3 million
after offering costs. While a portion of these proceeds have been consumed in
operations since the offering, the increase in interest income is primarily
attributable to the increase in cash available for investment as a result of
this private placement.
Income Taxes. SourcingLink recorded a net loss of $966,000 during the three
months ended June 30, 2000, and had net losses of $4.5 and $1.5 million in
fiscal 2000 and 1999, respectively. Accordingly, no provision for income taxes
was recorded in any of these
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periods. As of June 30, 2000, SourcingLink had net operating loss carryforwards
for United States income tax purposes of approximately $12.5 million. These
losses expire at various dates between 2011 and 2020. The Internal Revenue Code
of 1986, as amended, contains provisions that limit the use in any future period
of net operating loss and credit carryforwards upon the occurrence of certain
events, including a significant change in ownership interests. A valuation
allowance has been recorded for the tax benefit of the net operating loss
carryforwards and the deferred tax assets of SourcingLink 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 solutions 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 customers and potential customers as companies review eCommerce
applications; ability to scale our network and operations infrastructure;
ability to develop, introduce and market our solutions 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 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 developments or
features of our solution; customer budget cycles and changes in these budget
cycles; and general economic factors.
We have increased our operating expenses substantially to expand our management
team and 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 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
SourcingLink's cash and cash equivalents at June 30, 2000 were $4.9 million, an
increase of $997,000 from March 31, 2000. However, this increase includes $2
million from the maturity during the quarter of funds that were in short-term
investments at March 31, 2000. Cash used in operating activities for the three
months ended June 30, 2000 was $806,000, compared to $436,000 for the three
months ended June 30, 1999. The cash usage in each period was primarily due to
the net losses.
We believe that our current working capital, including cash to be received in
the fiscal year ending March 31, 2001 under our services contract with
Carrefour, will be sufficient to meet our working capital requirements for the
next 12 months. We plan to actively seek additional equity investment to fund
operations beyond that period. If such efforts are unsuccessful, we will need
to reduce operating spending significantly, which would materially and adversely
affect SourcingLink's business.
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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 Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
This statement was to become effective for all quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments -
Deferral of the Effective Date of Statement No. 133." Statement No. 137 defers
the effective date of Statement No. 133 until fiscal quarters beginning after
June 15, 2000. The Company will adopt Statement No. 133 in the second quarter of
fiscal year 2001, and does not expect such adoption to affect our results of
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), providing the staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. The Company is applying SAB
101 to its financial statements as of the first quarter of fiscal year 2001. The
adoption of SAB 101 did not have a material impact on our results of operations,
financial position or cash flows.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25." This interpretation has provisions that
were effective after staggered dates, including provisions that were effective
after December 15, 1998 and others that became effective after June 30, 2000.
The adoption of this interpretation has not and will not have a material impact
on our results of operations, financial position or cash flows.
RISK FACTORS
The market for our solution is at an early stage. We need a critical mass of
retailers and their merchandise suppliers to implement and use our solution.
The market for Internet-based supply chain management solutions and services is
at an early stage of development. Our success depends on a significant number
of retailers and their merchandise suppliers implementing our solution. The
implementation of our solution by major retailers and their merchandise
suppliers is controlled by multiple parties in the retail organization. In many
cases, these organizations must change established business practices and
conduct business in new ways. Our ability to attract additional customers for
our solution may depend on leveraging existing customers as reference accounts.
Our solution may not achieve significant market acceptance. Unless a critical
mass of retailers and their merchandise suppliers implement our solution, our
solution may not achieve widespread market acceptance and our business would be
seriously harmed.
We have a history of losses and expect to incur losses in the future.
We incurred net losses of $4.5 million in fiscal 2000 and $1.0 million in the
first three months of fiscal 2001. As of June 30, 1999, we had an accumulated
deficit of approximately $19.9 million. While the Carrefour contract will
provide a total of $9 million of revenue over the three-year period that began
April 1, 2000, we still expect to derive a portion of our future revenues from
subscription fees of our Internet sourcing solution, which is based on an
unproven business model. With Carrefour's acquisition of Promodes and
subsequent formation, along with Sears, Roebuck & Co. and Oracle Corporation, of
GlobalNetXchange, we may lose current subscribing suppliers of the former
Promodes central buying
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organization. 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.
SourcingLink.net believes that its current working capital, including amounts to
be received under the Carrefour contract, will be sufficient to meet its working
capital requirements for the next 12 months. SourcingLink.net plans to actively
seek additional equity investment to fund operations beyond that period. If such
efforts are unsuccessful, SourcingLink.net will need to reduce operating
spending significantly, which would materially and adversely affect
SourcingLink.net's business.
We expect to depend on our solution to augment revenue from our consulting
contract with Carrefour in the future.
Our solution and related services have accounted for substantially all of our
prior revenues. We anticipate that revenues from our solution will constitute
substantially all of our non-service 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.
Likewise, if we fail to perform under the Carrefour contract, our ability to
collect the minimum payments due to us under the contract, which amount to a
total of $9 million over the three-year period that began April 1, 2000, would
be seriously harmed.
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 often viewed as an enterprise-wide
solution that must be deployed with many users within a large retailer's
sourcing organization. An enterprise-wide 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 computer
systems, scalability, functionality and reliability. As a result, we must
educate potential customers on the use and benefits of our solution. It takes
several months to finalize an enterprise-wide 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 professional services organizations. Entering into an
agreement with a customer for the adoption of our solution does not assure that
the customer will in fact make such adoption or assure the time frame in which
the adoption may occur. A delay or change of these commitments may adversely
affect our financial results of any particular quarter.
We are currently planning to market our solutions to buyers within a retail
company, and directly to suppliers, in addition to targeting enterprise-wide
rollouts for large retailers. There can be no assurance that such a strategy
will shorten sales cycles or result in significant new subscribing customers for
our solutions.
We derive most of our revenue from sales to a small number of retailers, and if
we are not able to retain these retailers as customers our revenues would be
reduced and our financial results would suffer.
Our largest customers account for a substantial majority of our revenues. In
the fiscal year ended March 31, 2000, sales to Carrefour and its suppliers
accounted for 61% of our total revenues. We may not be able to retain our key
retail customers or these customers may decrease their commitment to require
their suppliers to use our solution. We may be unable to adequately perform the
required services under our contract with Carrefour. Any
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substantial decrease or delay in sales to suppliers of one or more of our key
retail customers, or sales of services to a key customer, could harm our sales
or financial results.
Our customers are all in, or supplying goods to, the retail industry. A
significant change or downturn in this industry could adversely affect our
business.
We face intense competition. If we are unable to compete successfully, our
business will be seriously harmed.
The market for business-to-business eCommerce solutions in general, and supply
chain management solutions in particular, is extremely competitive, evolving and
characterized by continuous rapid development of technology. Competition to
capture business users is intense and is expected to increase dramatically in
the future, which will likely result in price reductions, reduced profit margins
and a decrease in our market share, which could have a serious adverse impact on
our business.
Indirect competitors are traditional Value Added Network solution providers that
have extended their network connections over the Internet and both new and
traditional companies that are focused on trading exchanges that allow
merchandise buyers and sellers to access each other on channels within new or
existing portals. One or more of these companies may develop and add preorder
merchandise sourcing capabilities to their existing product offerings, and new
exchanges such as GlobalNetXchange will focus on retail merchandise procurement,
giving these companies a broader or more comprehensive solution than our
solution, which could adversely affect our business. We expect that additional
established and emerging companies will seek to enter our market as it continues
to develop and expand. We may not be able to compete successfully against future
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.
We depend on our key personnel.
Our future performance depends on the continued service of our senior
management, product development and sales and product marketing 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, customer support and professional
services personnel. 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.
Our software may contain errors or defects.
Our software is complex and, accordingly, may contain undetected errors or
failures when first introduced. This may result in loss of, or delay in, market
acceptance of our solution. We have in the past discovered programming errors
in our new releases after their introduction. We have experienced delays in
release and customer frustration during the period required to correct these
errors. We may discover errors in the future, including scalability limitations,
in new versions after release.
In order to manage our growth and the expansion of our services business, we
will need to improve and implement new systems, procedures and controls.
We currently plan to hire new employees and to expand the geographic scope of
our customer base and operations. We plan to perform services for Carrefour in
France and elsewhere around the world. These activities will result in
substantial demands on our management resources. Our ability to compete
effectively and to manage future expansion of our services and operations, if
any, will require us to continue to improve our financial and management
controls, reporting systems, project management and procedures on a timely
basis, and expand, train and manage our employee work force. We may encounter
difficulties in
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transitioning a portion of our business to a services focus, and our personnel,
systems, procedures and controls may be inadequate to support our future
operations.
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.
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 "Risks Related to
Our Business" section of the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 2000.
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
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.
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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 14, 2000 SourcingLink.net, Inc.
By: /s/ Gary Davidson
------------------
Gary Davidson,
Vice President Finance and Administration, Chief
Financial Officer
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