<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2000
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 000-28391
SOURCINGLINK.net, INC.
(Name of small business Issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
98-0132465
(IRS Employer Identification Number)
16855 WEST BERNARDO DRIVE, SUITE 260, SAN DIEGO, CALIFORNIA 92127
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(858) 385-8900
--------------------------------------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock,
$0.001 Par Value per share
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. (X) YES (_) NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (_)
The Issuer's revenues for the fiscal year ended March 31, 2000 were $993,400.
The aggregate market value of the Common Stock of the Issuer held by non-
affiliates of the Issuer on May 31, 2000, based on the closing price at which
the Common Stock was sold on Nasdaq as of May 31, 2000, was $26,643,684.
The number of shares of the Issuer's Common Stock, par value $0.001 per share,
outstanding as of May 31, 2000 was 8,061,824.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's definitive Proxy Statement for the 2000 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A (including the Appendix thereto) are incorporated by reference
in Part III of this Report.
Transitional Small Business Disclosure Format: (_) YES (X) NO
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
Part I
<S> <C>
Item 1 Business.......................................................................................... 3
Item 2. Properties........................................................................................ 17
Item 3. Legal Proceedings................................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............................................... 17
Part II
Item 5. Market For Common Equity and Related Stockholders Matters......................................... 18
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 19
Item 7. Financial Statements.............................................................................. 26
Item 8. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.............. 26
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act of the Registrant............................................... 27
Item 10. Executive Compensation............................................................................ 27
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................... 27
Item 12. Certain Relationships and Related Transactions.................................................... 27
Part IV
Item 13. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K...................... 28
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
Certain statements contained in this Report, 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
SourcingLink.net 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
"Risks Related to Our Business" elsewhere in Item 1 of this Report. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. SourcingLink.net 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.
Our Company
We have 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. As opposed to
traditional Electronic Data Interchange, or EDI, providers who largely address
the post-order process, our solution is primarily focused on the preorder
merchandise sourcing process. To date, communications between retailers and
merchandise suppliers for preorder merchandise sourcing have largely been
carried out through paper-based systems, telephone calls, faxes, courier
services or travel and personal visits. This traditional process is time
consuming, labor intensive and results in low productivity for both the retailer
and merchandise supplier. Our solution, which uses proprietary software to link
and manage the data and oral communications between the retailer and merchandise
supplier, organizes and automates the preorder merchandise sourcing function
over the Internet. For merchandise suppliers, our solution provides a sales tool
and forms for the electronic exchange of company and product information.
The current pricing structure for our application solution in a private extranet
rollout offers merchandise suppliers, as well as retailers, the benefits of a
low-cost monthly subscription, rather than the variable transaction-based fees
typical of EDI. The up-front cost to implement our solution is limited to
connectivity to the Internet, mapping and forms specifications, creation of
electronic catalogs and training. Thereafter, each merchandise supplier pays a
fixed monthly fee of $95.00 per seat or a fixed annual fee of $1,025.00 per seat
regardless of the number of retailers they are connected to or the number of
transactions they process.
Overview
SourcingLink.net was founded in 1993 in France by Marcel van Heesewijk, our
Chairman, to develop desktop software that would enable retailers to manage
their preorder merchandise sourcing activities over a private network.
Concurrent with our formation, we established a relationship with Paris, France-
based Carrefour S.A. (the second largest retailer in the world) that enabled us
to develop a thorough knowledge of the systems, processes and forms required by
retailers and their merchandise suppliers to effectively source merchandise on a
global basis. In 1994, we merged with a publicly-held Colorado corporation as a
means of raising capital to further develop our business, and moved our
headquarters from France to California. By the end of 1994, we had successfully
developed a proprietary desktop software solution that enabled retailers to
transact sourcing activities over a private network.
In 1997, we began to web-enable our proprietary software to substantially reduce
the connectivity cost and enable broader distribution of our solution. During
1998, we pilot tested our Internet solution with PETsMART and Paris, France-
based Promodes. Based upon the successful completion of these pilots, we
completed our transition from a
3
<PAGE>
proprietary desktop software solution to a secure Internet-based communications
system. PETsMART and Promodes began the initial stages of rolling out our
Internet solution to certain of their buyers and merchandise suppliers in March
1999. In January 2000, we began moving our solutions to a Microsoft relational
data base platform specifically designed for use on the web, including use of
XML technology. To further our objectives, during the period February 1999 to
April 2000 we also strengthened our management team by hiring our President and
Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Vice
President of Sales & Services, and Vice President of Business Development &
Product Strategy.
To date, our eCommerce solution has been adopted on a limited basis by PETsMART
(the largest specialty retailer of pet food and supplies in the United States),
Mars Music Company (a rapidly growing U.S.-based specialty retailer of musical
instruments and supplies), and Promodes (a European operator of hypermarkets
that was acquired by Carrefour late in calendar 1999). We are also in
discussions with various additional retailers regarding evaluations of our
preorder merchandise sourcing solution. Customers who are using our solution
have experienced reduction in costs and improvement in productivity relating to
their sourcing activity.
Of our retail customers, Promodes has the largest rollout of our sourcing
solution to its buyers and merchandise suppliers. Promodes was implementing our
solution throughout its central buying organization when the company was
acquired by Carrefour, also of Paris, France, at the end of calendar 1999.
Carrefour is the second largest retailer in the world, and a long-standing
customer of SourcingLink's application solutions related to inspections and
shipping tracking. As a result of both the on-going and successful
implementation of our Internet sourcing solution at Promodes, and separate
discussions we were holding with Carrefour, Carrefour entered into an agreement
with us in December 1999 under which they were to rollout our Internet solution
to their more than 20,000 merchandise suppliers worldwide. In February 2000,
Carrefour shifted its intentions and announced that it, along with Sears,
Roebuck & Co. and Oracle Corporation, were going to form a new company,
GlobalNetXchange, or GNX, for the purpose of conducting auctions and other
merchandise buying electronically with suppliers worldwide. After negotiations
between the companies, we signed a new contract with Carrefour, the "Carrefour
contract," in March 2000. This new contract terminated the previous December
1999 agreement. Under the new contract we will receive a minimum of $9 million
for services to be performed over a three-year period beginning April 1, 2000.
The services called for in the contract are related to the use of Internet-based
merchandise procurement processes and procedures, and includes the use of
SourcingLink's proprietary sourcing tools and training materials.
Shortly after the end of fiscal 2000, we began providing services to Carrefour.
In addition to pursuing our application solution business, we will also explore
opportunities to expand these consulting services with Carrefour or other
members of retail exchanges that may need similar training and assistance.
SourcingLink's Products and Services
SourcingLink.net has developed Internet-based application services that provide
retailers and merchandise suppliers with reliable and secure systems for
managing their preorder merchandise sourcing transactions. We provide immediate
connectivity between retail merchandise buyers and their merchandise suppliers
worldwide. Our hosted solutions lie outside our customers' firewalls and are
accessed with standard web browsers. Our proprietary software organizes and
automates a broad range of sourcing activities, significantly improving
productivity and reducing costs and inventory lead-times. The application
services are provided on a turnkey basis, including project management for buyer
rollout, and both on-line and global help desk support for buyers and suppliers.
Our application set includes functionality for various aspects of the
merchandise sourcing workflow. These solutions include MySourcingCenter(TM),
SourceLink(TM), ShipLink(TM), InspectLink(TM) and AuctionLink(TM).
MySourcingCenter(TM) and SourceLink(TM)
---------------------------------------
MySourcingCenter(TM) and SourceLink(TM) form a comprehensive Internet-based
solution for all pre-order sourcing activities. MySourcingCenter is the starting
point, and features a database of members, company and product
4
<PAGE>
information, industry news, on-line chat capability, and more. SourceLink
includes standardized electronic forms for streamlined document exchange, easy-
to-use catalogs and an export function to integrate with existing back office
systems. It is designed to replace current paper based one-to-one communications
between buyers and suppliers, while also providing one-to-many searches and data
exchange for all members. Because MySourcingCenter and SourceLink are accessed
by a standard web-browser, they require no customer-installed software.
Membership is based on a low-cost subscription fee, so there are no escalating
transaction-based charges.
InspectLink(TM)
InspectLink(TM) is a desktop application for organizing, integrating and
managing the factory inspection and pre-shipment regulatory testing information
for all goods shipped to a retailer. With InspectLink, the retailer's quality
group has all of the inspection-related information for all goods being produced
worldwide summarized in one database for review and action. The data includes
all phases of the inspection process, and the application can also be used for
inspection certificates.
ShipLink(TM)
ShipLink(TM) is a desktop application that maps and translates into a single
Lotus Notes-based format all of the data sent in a wide variety of EDI
configurations to a retailer by various forwarders. With ShipLink, all of the
one-to-one EDI and paper-based interfaces with individual forwarders are
replaced with a single database containing all forwarder information. The
integrated data can be accessed, processed, acted upon and delivered as needed
among the retailers' logistics personnel.
AuctionLink(TM)
Via AuctionLink(TM), members have immediate access and connection to
TradeOut.com, one of the leading online marketplaces for businesses buying and
selling excess inventory and idle assets. TradeOut.com brings companies together
to buy and sell surplus assets in over 100 product categories using flexible,
online transaction capabilities. Our AuctionLink access to this service provides
added value to SourcingLink's supplier members.
Application Services
We provide our customers with a complete turnkey application service. All of the
application software resides outside of customer firewalls in a secure, third
party server farm. This centrally managed clearinghouse approach enables
retailers and merchandise suppliers to meet each other's specific information
requirements without customizing the information being transmitted. It also
ensures compatibility with a large number of proprietary systems.
Our project management staff assists the retailer with all phases of the
implementation process. This includes planning, buyer training, rollout to
suppliers and access to the help desk. For suppliers, there is both on-line help
and global help desk support.
Reporting and forms are standardized for suppliers, and standard forms are also
available for retailers. The data is automatically tailored to the type of
product being negotiated. In addition, we will map standard supplier data to any
forms specification the retailer may have, providing a customized display to
meet the requirements of any retailer.
Consulting Services
SourcingLink provides consulting services to Carrefour, the second largest
retailer in the world, under a three-year, $9 million contract. The services
called for in the Carrefour contract are related to the use of Internet-based
merchandise procurement processes and procedures, and includes the use of
SourcingLink's proprietary sourcing tools and training materials. We will also
explore opportunities to expand these consulting services with Carrefour
5
<PAGE>
or other members of retail exchanges that may need similar training and
assistance.
Customers
Retailers
We have historically targeted our solution at industry-leading retailers. To
date, our Internet solution has been adopted on a limited basis by PETsMART (the
largest specialty retailer of pet food and supplies in the United States), Mars
Music Company (a rapidly growing U.S.-based specialty retailer of musical
instruments and supplies), and Promodes (a European operator of hypermarkets
that was acquired by Carrefour late in calendar 1999). These companies are in
the early stage of rolling out our solution to their merchandise suppliers. We
are also in discussions with other retailers regarding evaluations of our
merchandise sourcing solution. In addition, Carrefour is a long-standing
customer of SourcingLink for Internet-based applications involving inspections
and shipping tracking.
Our sourcing solution was adopted and was in the process of being rolled-out by
Promodes until Carrefour acquired Promodes late in calendar 1999. Several buyers
for, and several hundred suppliers to, the former Promodes central buying office
(now part of Carrefour) are actively using our Internet solution to conduct
merchandise sourcing. Carrefour, however, has contracted with its newly formed
affiliated company, GlobalNetXchange, for performing electronic auctions and
other buying with its merchandise suppliers. The potential exists for these
former Promodes subscribers to move to GlobalNetXchange in the future.
Under a three-year, $9 million contract with Carrefour, we are providing
services to assist Carrefour with various aspects of sourcing merchandise over
the Internet. We will explore opportunities to expand these consulting services
with Carrefour or other members of retail exchanges that may need similar
training and assistance.
Suppliers
Our supplier customers of SourceLink(TM) are primarily merchandise suppliers to
Promodes, PETsMART and Mars Music Company. Carrefour utilizes ShipLink(TM) and
InspectLink(TM) to receive information from various forwarders and inspection
companies around the world.
Sales, Marketing and our IBM and Microsoft Strategic Alliances
Our initial strategic alliance agreement with IBM provided that we would rely
primarily upon IBM for our sales effort. As part of our new strategy, we
renegotiated our strategic relationship with IBM in an effort to reduce our
reliance on them for the sales and marketing of our solution. We established an
internal sales and marketing force in order to build direct relationships with
our retailer customers, and better facilitate customer feedback. Under our new
arrangement, IBM is providing certain worldwide marketing services for our
solution and we are currently purchasing our global infrastructure support from
IBM. Our solution is a part of IBM's global supply chain solutions products and
services portfolio and is marketed under IBM's e-business marketing initiatives
for the retail industry.
In January 2000, SourcingLink entered into an eBusiness agreement with Microsoft
Corp. The agreement provides for the integration of SourcingLink's proprietary
Internet sourcing applications with the Microsoft Windows Distributed Internet
Applications (Windows DNA) architecture. In addition, the companies will jointly
collaborate on certain future marketing efforts.
We have been and will continue to direct a portion of our sales and marketing
efforts to developing reference accounts in selected retail sectors. Upon
selection of our solution by the retailer, the retailer will notify its
6
<PAGE>
merchandise suppliers and will provide us with a contact list for our follow-up.
We then provide each merchandise supplier with information regarding our
solution, together with the necessary documentation for subscription to our
solution. Through our online help menu and global help-desk, we assist the
merchandise supplier in initializing our solution, training its personnel,
developing its electronic catalog and electronically communicating with its
retailers. In addition, our solution enables the merchandise supplier to connect
to all of its retailer customers for the same fixed monthly or annual
subscription fee.
Going forward, we expect to market our Internet solutions directly to buyers
within retail companies, and directly to merchandise suppliers. Our solutions
may provide a valuable sales tool for merchandise suppliers, and a means for
suppliers to exchange company and product information with multiple retailers on
a widespread basis. We also expect to market our consulting services to
retailers involved in merchandise sourcing exchanges, and to market specific
proprietary application functionality to exchanges to broaden their service
offerings.
Technology and Infrastructure
We originally introduced our web-enabled solution in 1998 and have released a
significant number of product enhancements in several subsequent major releases.
Our solution enables worldwide, electronic commerce for our customers by
providing automated exchange of information and e-forms over the low-cost
connectivity of the Internet. Any supplier/manufacturer or retail buying
organization can access our solution with a standard Internet connection and a
standard web browser (such as Microsoft Internet Explorer).
The software architecture of our solution is a document exchange model which
includes on-line member profiles, policies and procedures, user authentication
and controlled access (via secure login and password procedures), messaging,
workflow management, and the ability to selectively share databases of product
information such as forms and catalogs. It is based on and built with IBM's
Lotus Notes/Domino Server technology. It supports industry standard protocols
such as HTTP, HTTPS, and SMTP. Our latest release, named MySourcingCenter(TM),
is built with Windows DNA architecture and Microsoft relational database
technology. This application was designed specifically for the web, and we
expect to migrate our other applications to a similar foundation.
Our solution contains the highest level of security permitted by U.S. export
laws to ensure the secure transmission of information among multiple trading
partners. We use SSL (Secure Socket Layer), an Internet security technology, to
ensure secure transmission of all electronic forms (Requests, Offer,
Negotiation) and catalogs. User information is encrypted to provide a high
degree of security. Our employees do not have access to user information, except
as necessary to perform customer service and accounting functions.
We maintain our server farm in a secure IBM data center in Rochester, NY. We
have a facility management and network services agreement with IBM that runs
from October 1, 1999 to October 1, 2000 and is renewable on an annual basis.
However, we are in the process of relocating our server farm to a hardened,
tier-one data center at Verio in the Southern California region at the present
time, and do not expect to renew our network infrastructure agreement with IBM
in October 2000.
The volume of traffic on our web site and the number of transactions being
conducted by users will be increasing and will require us to expand and upgrade
our technology, transaction processing systems and network infrastructure and
add new engineering personnel. We may be unable to accurately project the rate
or timing of increases in the use of our services or timely expand and upgrade
our systems and infrastructure to accommodate such increases. Any failure to
expand or upgrade our systems to keep pace with the growth in demand for
capacity could cause our web site to become unstable and possibly cease to
operate for a period of time. Unscheduled downtime could harm our business.
Product Development
Our development organization is focused on developing and enhancing our current
sourcing solutions, including the transition to Microsoft technology as
discussed below, and developing web-based versions of our shipping
7
<PAGE>
(ShipLink(TM)) and inspection (InspectLink(TM)) desktop solutions. The
development group is supported by our QA group which implements a process
designed to identify defects throughout the entire development cycle.
We entered into an agreement with Microsoft Corp. in January 2000 and are moving
our solutions to a Microsoft technology platform and foundation. We will
maintain the current functionality of our solution while making it significantly
faster with a better user interface including improved ease of use, navigation,
consistency and look & feel. We are migrating our current database to
Microsoft SQL 7.0 which will provide faster access and better searching
capability. We also intend to make extensive use of XML to facilitate
integration with our customers in-house, back-office systems. The first release
based on the Microsoft foundation, named MySourcingCenter(TM), occurred in May
2000. We expect additional releases to follow.
We believe that many of our enhancements to existing and future products will be
developed internally. However, we may license certain externally developed,
third party technologies and will continue to evaluate such technologies to
integrate with our solution as appropriate. In cases requiring specialized
expertise, we have augmented the resources of our development organization with
independent contractors. We are currently using Microsoft Consultants and
independent contractors, on a work-for-hire basis, to assist with our
development efforts.
There are a number of risks and challenges involved in the development of new
features and technologies. We cannot be sure that existing and future
development efforts will be completed within our anticipated schedules or that,
if completed, they will have the features or quality necessary to make them
successful in the marketplace. Further, despite testing by us and by current and
potential customers, errors could be found in our products. We may not be able
to correct these errors in a timely and cost-effective manner. If we are not
able to develop new products or enhancements to existing products or corrections
on a timely and cost-effective basis, or if these new products or enhancements
do not have the features or quality necessary to make them successful in the
marketplace, our business will be seriously harmed.
Competition
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.
Our competitors include traditional solution providers that have extended their
connections over the Internet and new Internet companies that are focused on
trading exchanges that allow merchandise buyers and sellers to access each other
on channels within new or existing portals. Companies that offer EDI include
General Electric Information Services, Sterling Commerce, Harbinger Corporation,
QRS Inc. and IBM. Companies that offer exchange solutions include Oracle
Corporation, VerticalNet, Wiznet (E.C. Portal), Commerce One, Netscape,
Ariba.com, Cyber Merchants Exchange, Inc. and Global Sources. In addition, newly
formed companies that are owned primarily by retailers, such as
GlobalNetXchange, and are designed to provide auction and other electronic
connectivity for the retailer owners and their merchandise suppliers may provide
substantial competition in the retail marketplace. Some of these companies have
longer operating histories, significantly greater financial, technical,
marketing and other resources than us, significantly greater name recognition
and a larger installed base of customers. In addition, many of our competitors
have well-established relationships with our current and potential customers and
have extensive knowledge of our industry. One or more of these companies may
develop and add preorder merchandise sourcing capabilities to their existing
product offerings, giving them 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 believe that the primary competitive factors that will influence the success
of companies seeking to provide large-scale exchange capability include history
of operating exchanges, technical competence and capability, software content,
and business partners. For supply chain management solutions, the primary
competitive factors will be industry knowledge, value-added content, product
features, quality and performance, attractive pricing,
8
<PAGE>
global reach and information management capabilities. Although we believe that
our solution effectively addresses these factors for supply chain management
solutions, our market is relatively new and rapidly evolving. We may not be able
to compete successfully against future competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other resources.
Intellectual Property and Other Proprietary Rights
We depend on our ability to develop and maintain the proprietary aspects of our
technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, and trade
secrets. Copyrights and trademarks are currently looked to for the protection of
brand names for marketing purposes, and would be used to protect software and
documentation and other written materials if deemed appropriate by management
and legal counsel. These legal measures typically afford only limited
protection.
We require our customers to enter into agreements that impose restrictions on
their ability to utilize our service and prohibit unauthorized use or copying of
the software incorporated in our service. In addition, we seek to avoid
disclosure of our trade secrets, including but not limited to, requiring those
persons with access to our proprietary information to execute confidentiality
agreements with us and restricting access to our source code. We cannot assure
you that any of our proprietary rights with respect to our solution will be
viable or have value in the future since the validity, enforceability and type
of protection of proprietary rights in Internet-related industries are uncertain
and still evolving.
We may not develop proprietary products or technologies that are patentable and
it is possible that any patent issued to us may not provide us with any
competitive advantages, or that the patents of others will seriously harm our
ability to do business.
We rely on technology that we license from third parties, including software
that is integrated with internally developed software and used in our service to
perform key functions. If we are unable to continue to license any of this
software on commercially reasonable terms, we will face delays in releases of
new versions of our service until equivalent technology can be identified,
licensed or developed and integrated into our service. These delays, if they
occur, could seriously harm our business.
We are in the process of applying for registration of certain of our trademarks
in the United States and certain other foreign countries. The trademark
applications will be subject to review by the applicable governmental authority,
may be opposed by private parties and the trademarks may not issue.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our service is difficult,
and while we are unable to determine the extent to which such unauthorized use
or piracy of our software exists, these can be expected to be persistent
problems. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our service
or design around patents issued to us or around our other intellectual property
rights.
There has been a substantial amount of litigation in the software and Internet
industries regarding intellectual property rights. It is possible that in the
future third parties may claim that SourcingLink.net or our current or future
products infringe their intellectual property. We expect that providers of
eCommerce solutions will increasingly be subject to infringement claims as the
number of competitors in our industry segment grows and the functionality of
products and services in different industry segments overlaps. Any claims, with
or without merit, could be time-consuming, result in costly litigation, cause
delays in the introduction of new technology or require us to enter into royalty
or licensing agreements. Royalty or licensing agreements, if required, may not
be available on terms
9
<PAGE>
acceptable to us or at all, which could seriously harm our business.
Legal Proceedings
There are no legal proceedings pending to which we are a party and our
management is unaware of any contemplated legal actions against us.
Employees
As of May 31, 2000, we had 31 full time employees, including seven in sales and
marketing, 15 in engineering and development, two in field operations, and seven
in management and administrative support functions. As of May 31, 2000, one of
these employees was located in Paris, France and the remaining employees were
located in the United States. Our employees are not represented by a labor union
and we believe that our relations with our employees are good.
Risks Related to Our Business
We are an early-stage company and our limited history makes it difficult to
evaluate our future prospects.
We were founded in 1993 and have a limited operating history due to a
significant amount of time spent developing our product. This limited operating
history makes it difficult or impossible to evaluate our future prospects. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new, unproven and rapidly evolving markets. To address
these risks, we must, among other things, continue to upgrade our technology,
commercialize products incorporating such technology, continue to attract,
retain and motivate qualified persons and respond to competitive developments.
Since competition for experienced information technology personnel is intense,
we cannot be certain that we will be able to attract such required personnel.
There can be no assurance that we will be successful in addressing such risks.
If we do not successfully address these risks, our business will be seriously
harmed.
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 $1.5 million in the
nine months of fiscal 1999. As of March 31, 2000, we had an accumulated deficit
of approximately $18.9 million. While the Carrefour contract will provide a
total of $9 million of revenue over a three-year period, 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. Although these
Internet revenues have grown in recent quarters, we may not be able to sustain
this growth in the future. In fact, with Carrefour's acquisition of Promodes and
subsequent formation, along with Sears, Roebuck & Co. and Oracle Corporation, of
GlobalNetXchange, we may lose subscribing suppliers of the former Promodes
central buying 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
10
<PAGE>
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 18 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.
Our quarterly operating results are volatile and difficult to predict. If we
fail to meet the expectations of public market analysts or investors, the market
price of our common stock may decrease significantly.
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;
. Demand for our consulting services by Carrefour or others;
. Actions taken by our competitors, including new product introductions
and enhancements;
. 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, or of the capabilities and
success of other exchanges in the retail marketplace;
. Customer budget cycles and changes in these budget cycles; and
. General economic factors.
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.
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, substantial non-performance by SourcingLink on the Carrefour contract
would seriously harm our ability to collect the minimum payments due to us under
the contract, which amount to a total of $9 million over a three-year period.
Implementation of our solutions by large retailers is complex, time consuming
and expensive. We frequently
11
<PAGE>
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 for a particular quarter.
We are currently considering marketing our solutions to buyers within a retail
company, and directly to suppliers, in addition to targeting enterprise-wide
rollouts for large retailers. There is no assurance that such a strategy, if
employed, 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. Specifically, due to Carrefour's
participation in GlobalNetXchange, we may lose a significant number of its
suppliers. We may be unable to adequately perform the required services under
our contract with Carrefour. Any 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 currently depend on IBM for the management and security of our network
infrastructure. We are in the process of relocating our server farm to a tier-
one data center in Southern California.
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. We are currently in the process of relocating our server
farm to a hardened, tier-one data center in the Southern California region.
While we will not move our applications without evaluating and testing the
network and infrastructure in the new data center, there can be no assurance
that we will be successful in this relocation or that the new network and
infrastructure will prove capable or satisfactory. If we were required and 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 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.
12
<PAGE>
Indirect competitors are traditional Value Added Network, or VAN, solution
providers that have extended their VAN 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 the introduction of new versions of our proprietary solution and on
enhancing the functionality and services offered by our solution.
If we are unable to develop new software or enhancements to our existing
solution on a timely and cost-effective basis, or if such new software or
enhancements do not achieve market acceptance, our business would be seriously
harmed. The life cycle of our solution is difficult to predict because the
market for our solution is new and emerging, and is characterized by rapid
technological change, changing customer needs and evolving industry standards.
The introduction of services employing new technologies and emerging industry
standards could render our existing solution obsolete and unmarketable.
To be successful, our solution must keep pace with technological developments
and emerging industry standards, address the ever-changing and increasingly
sophisticated needs of our customers and achieve market acceptance. We intend
to add additional features to extend the order and post-order capabilities of
our solution.
In developing new features of our solution, we may:
. Fail to develop and market features that respond to technological
changes or evolving industry standards in a timely or cost-effective
manner;
. Encounter products, capabilities or technologies developed by others
that render our solution obsolete or noncompetitive or that shorten the
life cycles of our existing solution;
. Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new features; or
. Fail to develop new features that adequately meet the requirements of
the marketplace or achieve market acceptance.
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, in
particular Marcel van Heesewijk, our Chairman, and Sean Maloy, our President and
Chief Executive Officer. 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.
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
13
<PAGE>
limitations, in new versions after release.
Protection of our intellectual property may not be adequate.
We depend on our ability to develop and maintain the proprietary aspects of our
solution. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures and trade
secrets.
We do not sell our software and we require our customers to enter into user
agreements, which impose restrictions on their ability to utilize the software.
In addition, we seek to avoid disclosure of our trade secrets, including but not
limited to, requiring those persons with access to our proprietary information
to execute confidentiality agreements with us and restricting access to our
source code. We may seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. We cannot assure you that any of our proprietary rights with
respect to our solution will be viable or of value in the future because the
validity, enforceability and type of protection of proprietary rights in
Internet-related industries are uncertain and still evolving.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our solution or obtain and use information that we
regard as proprietary. Policing unauthorized use of our solution is difficult,
and while we are unable to determine the extent to which unauthorized use
exists, it can be expected to be a persistent problem. In addition, the laws of
some foreign countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. Our means of protecting our
proprietary rights may not be adequate and our competitors may independently
develop similar technology, duplicate our solution or our other intellectual
property.
There has been a substantial amount of litigation in the Internet industry
regarding intellectual property rights. It is possible that in the future, third
parties may claim that we or our current or potential future solutions infringe
their intellectual property. Any claims, with or without merit, could be time-
consuming, result in costly litigation, cause delays in the introduction of new
versions or features or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements, if required, may not be available
on terms acceptable to us or at all, which could seriously harm our business.
We must now, and may in the future have to, license or otherwise obtain access
to intellectual property of third parties. For example, we are currently
dependent on licenses of IBM's Lotus Domino software for certain of our
solutions, and various Microsoft licenses for our new solutions. We may in the
future be dependent on developers' licenses from enterprise resource planning,
database and other system software merchandise suppliers in order to ensure
compliance of our solution with their systems. We may not be able to obtain any
required third party intellectual property in the future.
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 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.
Our business is susceptible to numerous risks associated with international
operations.
We market our solution and services to retailers worldwide, and historically
have derived a significant portion of
14
<PAGE>
our revenues from international sales. As such, we are subject to a number of
risks associated with international business activities. These risks generally
include:
. Seasonal fluctuations in purchasing patterns;
. Unexpected changes in regulatory requirements;
. Tariffs, export controls and other trade barriers;
. Longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. Difficulties in managing and staffing international operations;
. Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. The burdens of complying with a wide variety of foreign laws;
. The risks related to global economic turbulence and adverse economic
circumstances;
. Political instability; and
. Currency exchange rate fluctuations, which could increase the cost of
our solutions and services.
Our business could be affected as a result of any future acquisitions.
In order to remain competitive, we may find it necessary to acquire additional
businesses, products or technologies. If we identify an appropriate acquisition
candidate, we may not be able to negotiate the terms of the acquisition
successfully, finance the acquisition, or integrate the acquired business,
products or technologies into our existing business and operations. Further,
completing a potential acquisition and integrating an acquired business will
cause significant diversions of management time and resources. If we consummate
one or more significant acquisitions in which the consideration consists of
stock or other securities, your equity could be significantly diluted. If we
were to proceed with one or more significant acquisitions in which the
consideration included cash, we could be required to use a substantial portion
of our available cash to consummate any acquisition. Acquisition financing may
not be available on favorable terms, or at all. In addition, we may be required
to amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions, which would seriously harm our business.
If we are not able to apply our net operating losses against taxable income in
future periods, our financial results will be harmed.
Our future net income and cash flow will be affected by our ability to apply our
net operating losses, which totaled approximately $11.5 million for United
States federal tax reporting purposes as of March 31, 2000, against taxable
income in future periods. Changes in tax laws in the United States may further
limit our ability to utilize our net operating losses, harming our financial
condition.
Risks Related to the Internet Industry
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
15
<PAGE>
the development of eCommerce and reducing the need for our solution.
Capacity constraints may restrict the use of the Internet as a commercial
marketplace.
The Internet may not be accepted as a viable long-term commercial marketplace
for a number of reasons. These include:
. Potentially inadequate development of the necessary communication and
network infrastructure;
. Delayed development of enabling technologies and performance
improvements;
. Delays in the development or adoption of new standards and protocols;
and
. Increased governmental regulation.
Security risks and concerns may deter the use of the Internet for conducting
eCommerce.
A significant barrier to eCommerce and communications is the secure transmission
of confidential information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments could result in compromises or breaches of our security systems or
those of other web sites to protect proprietary information. If any well-
publicized compromises of security were to occur, it could have the effect of
substantially reducing the use of the web for commerce and communications.
Anyone who circumvents our security measures could misappropriate proprietary
information or cause interruptions in our services or operations. The Internet
is a public network, and data is sent over this network from many sources. In
the past, computer viruses, software programs that disable or impair computers,
have been distributed and have rapidly spread over the Internet. Computer
viruses could be introduced into our systems or those of our customers or
merchandise suppliers, which could disrupt our network or make it inaccessible
to customers or merchandise suppliers. We may be required to expend significant
capital and other resources to protect against the threat of security breaches
or to alleviate problems caused by breaches. To the extent that our activities
may involve the storage and transmission of proprietary information, such as
credit card numbers, security breaches could expose us to a risk of loss or
litigation and possible liability. Our security measures may be inadequate to
prevent security breaches, and our business would be harmed if we do not prevent
them.
Our software solution may experience delays as a result of high volumes of
traffic.
Our solution is currently operating on a limited basis. Our software may not be
fully scalable, and if the volume of traffic on the website for our solution
significantly increases, our solution may experience slower response times or
other problems. In addition, users will depend on Internet Service Providers,
telecommunications companies and the efficient operation of their computer
networks and other computer equipment for access to our solution. Each of these
has experienced significant outages in the past and could experience outages,
delays and other difficulties due to system failures unrelated to our systems.
Any delays in response time or performance problems could cause users of our
solution to perceive this service as not functioning properly and therefore
cause them to use other methods to manage their sourcing and procurement
activities.
Even if the Internet infrastructure is adequately developed and maintained, we
may incur substantial expenditures in order to adapt our solution to changing
Internet technologies. Such additional expenses could severely harm our
financial results.
Increasing government regulation could limit the market for, or impose sales and
other taxes on the sale of our solution and services.
As eCommerce evolves, we expect that federal, state or foreign agencies will
adopt regulations covering issues such as user privacy, pricing, content and
quality of products and services. It is possible that legislation could expose
companies involved in eCommerce to liability, which could limit the growth of
eCommerce generally. Legislation could dampen the growth in Internet usage and
decrease its acceptance as a communications and commercial
16
<PAGE>
medium. If enacted, these laws, rules or regulations could limit the market for
our solution and services.
We do not collect sales or other similar taxes in respect of registration and
subscription fees for the use of our solution. However, one or more states or
countries may seek to impose use tax on companies like us. Legislation limiting
the ability of the states to impose taxes on Internet-based transactions has
been adopted by the U.S. Congress. This legislation could contain a limited time
period in which this tax moratorium will apply. In the event that the tax
moratorium is imposed for a limited time period, legislation could be renewed at
the end of this period. Failure to enact or renew this legislation could allow
various states to impose taxes on eCommerce, and the imposition of these taxes
could seriously harm our business.
ITEM 2. PROPERTIES
We maintain one office in San Diego, California occupying approximately 8,000
square feet of space. Our operating lease on this facility expires in October
2002. The employee in Paris, France works in the offices of our customer,
Carrefour.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings were commenced by or against the Company during Fiscal
2000.
The Company is subject to certain routine legal actions arising in the ordinary
course of business. The Company believes that the results of any such actions
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF ITEMS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
March 31, 2000.
17
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our common stock traded on the OTC Bulletin Board through December 10, 1999, at
which time it began trading on the Nasdaq SmallCap Market. Through July 1999,
our stock symbol was "QCSC." Concurrent with a July 1999 change in our name
from QCS.net Corporation to SourcingLink.net, Inc., the trading symbol was
changed to "SNET." The following table lists the high and low closing bid
quotations for our common stock as quoted on the Nasdaq SmallCap Market or the
OTC Bulletin Board, as applicable, for the periods indicated. These market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions. All
quotations have been restated to reflect the 1 for 4 reverse stock split of
SourcingLink's common stock in August 1999.
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C>
Fiscal Year Ended June 30, 1998
First Quarter................................ $ 4.75 $ 2.00
Second Quarter............................... 6.25 1.75
Third Quarter................................ 6.50 2.00
Fourth Quarter............................... 15.50 6.00
Fiscal Year Ended March 31, 1999 (nine month year)
First Quarter................................ $ 10.00 $ 3.50
Second Quarter............................... 26.00 3.50
Third Quarter................................ 22.50 6.50
Fiscal Year Ended March 31, 2000
First Quarter................................ $11.248 $6.748
Second Quarter............................... 15.00 7.12
Third Quarter................................ 26.75 5.75
Fourth Quarter............................... 49.00 9.75
</TABLE>
As of March 31, 2000, there were 156 holders of record and approximately 1,250
beneficial holders of SourcingLink's common stock, and three holders of the
Company's Series A Convertible Preferred Stock for which no market is
maintained.
The Company has never declared nor paid dividends on its common stock and does
not anticipate paying dividends on its common stock for the foreseeable future.
Quarterly dividends of $0.012875 per share began accruing on the Company's
Series A Convertible Preferred Stock on November 22, 1994 and began compounding
annually on January 1, 1996 (the "Series A dividend"). Effective June 30, 1998,
the Company completed an agreement with the then current Series A preferred
stockholders to restructure the Series A dividend. SourcingLink and the Series
A preferred stockholders agreed to eliminate future dividends on the Series A
preferred stock and to issue additional shares of preferred stock in
satisfaction of the accrued dividend payable at that date. These additional
shares have the same voting and other rights as the Series A preferred stock.
At the June 30, 1998 conversion date, the accrued dividend for the Series A
preferred stockholders was $797,377. The Company issued 660,681 shares of
preferred stock in payment of that accrued preferred dividend under an agreed
upon formula. In September 1998, the Company issued 11,068 shares of common
stock to a Series A preferred shareholder whose shares had been converted to
common stock as payment of the dividend accrued prior to such conversion. The
remaining dividend accrued but unpaid is $9,247.
18
<PAGE>
Recent Sales of Unregistered Securities
The following is a summary of transactions by us during the fiscal year ended
March 31, 2000 involving sales of our securities that were not registered under
the Securities Act. All share and per share amounts have been restated to
reflect the 1 for 4 reverse stock split of SourcingLink's common stock in August
1999.
. Warrants for 175,000 shares of common stock were issued to three
strategic partner companies during fiscal year 2000, of which a warrant
to purchase 10,000 shares of common stock at $6.19 per share is
exercisable until October 2004, and a warrant to purchase 15,000 shares
of common stock at $27.06 per share is exercisable until January 2005.
The remaining warrant, for the purchase of 150,000 shares of common
stock, was cancelled shortly after its issuance.
. During fiscal year 2000 we granted incentive stock options and
nonqualified stock options to purchase an aggregate of 503,750 shares of
common stock to eligible employees and directors pursuant to our stock
option plans. The exercise price for such options ranged from $6.125 to
$34.00 per share. Such options were issued but not sold, in the view of
SourcingLink.net, and therefore, registration thereof was not required.
During the same period, SourcingLink.net issued an aggregate of 125,401
shares of common stock to employees and former employees upon the
exercise of options under SourcingLink.net's stock option plans.
. In August 1999, SourcingLink.net completed a private placement of its
common stock through a placement agent to a limited number of
institutional investors. The offering included 1,257,970 shares of
common stock at $6.40 per share, and gross proceeds were $8.1 million.
Net proceeds, after placement agent fees and other offering costs, were
$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. As part of
this private placement, a warrant for 50,319 shares of common stock was
issued in August 1999 at a price of $6.40 per share.
We used the proceeds of the stock sales for working capital and other general
corporate purposes.
We did not employ any underwriters in connection with any of the transactions
set forth above.
The sales of securities listed above were exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation
D promulgated thereunder, or, with respect to issuances to employees, Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under Rule 701.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the instruments representing such securities issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes included elsewhere in this Report.
Overview
SourcingLink has developed an Internet-based turnkey solution for business-to-
business eCommerce that enables
19
<PAGE>
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 have been generated principally
from Network revenues consisting of fees for access to and use of SourcingLink'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, we discontinued offering the pay-as-you-go transactional fee option for
new subscribers to SourceLink(TM), our core Internet sourcing solution, and
effective January 1, 2000 the pay-as-you-go option was eliminated for all
SourceLink subscribers.
In prior years, Network revenues were primarily from customer use of
SourcingLink's private network desktop solution. In February 1999, we began a
rollout of our new Internet solution to selected merchandise suppliers of
SourcingLink's retailer subscribers. While there continues to be revenue from
the desktop solution, primarily from use of the InspectLink(TM) inspection data
application with one long-standing customer, our focus is now centered on the
Internet solutions.
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 intend to form a new company named
GlobalNetXchange ("GNX"), for the purpose of conducting auctions and other
merchandise buying electronically with suppliers worldwide. Our services
contract with Carrefour supersedes a previously announced agreement under which
Carrefour committed to rollout SourceLink to its more than 20,000 merchandise
suppliers worldwide over a period of approximately 24 months.
Sales of SourcingLink's Internet solution generally require adoption by
retailers and then a rollout to the retailer's merchandise suppliers which
SourcingLink expects will result in lengthy sales and implementation cycles.
Sales directly to merchandise suppliers for lead generation and electronic
connectivity to retailer buyers may involve small and highly dispersed target
customers and marketing to communities of suppliers within a retail market
segment.
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, the Company 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 Consulting revenue. As this
consulting was on a cost-reimbursement basis, there was an equal and offsetting
cost of revenue, and thus no gross profit margin associated with this Consulting
revenue. Effective October 1, 1999, the Company began performing its sales and
project management in-house; therefore, there is no further revenue from
consulting 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, the Company 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:
20
<PAGE>
. 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 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 the Company's present status as a premier IBM e-
business partner.
Description of Costs and Expenses
The cost of Network revenue consists primarily of fees paid to IBM, and to a
lesser degree the costs of third party software and the internal costs of
maintaining the Company's solutions. Fees paid under the original IBM Agreement
were for customer support provided by three IBM international solution centers
and IBM-provided sales, marketing and project management services, as well as
hosting of the Company's applications on network servers in an IBM facilities
management environment. Under the new agreement with IBM, fees paid are for the
hosting and network infrastructure only.
For fiscal 1998 and 1999 and the majority of fiscal 2000, the cost of Consulting
revenue equaled the revenue received based on the cost reimbursement provision
of the IBM Agreement. The reimbursed costs consisted primarily of payroll
related costs of our employees providing the services to IBM. In the fiscal
year ending March 31, 2001, Consulting revenue is expected to be received
primarily under the Carrefour contract on a time and expense basis.
Selling, general and administrative expenses consist primarily of personnel-
related costs for the Company's sales, marketing and general management
functions and other administrative support costs such as external legal and
financial services. Product development expenses consist primarily of
personnel-related costs for software developers, product managers and quality
assurance personnel and payments to outside contractors incurred to develop and
enhance the Company's technology.
Accumulated Losses
From its inception in 1993 through March 31, 2000, SourcingLink has incurred net
losses of approximately $18.9 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.
As a result of the accumulated losses, the Company has not recorded any
provision for income taxes since inception. As of March 31, 2000, net operating
loss carryforwards for United States federal income tax purposes were
approximately $11.5 million. In addition, the Company had net operating loss
carryforwards for tax purposes in France of approximately $3.5 million. Under
the tax laws, the amounts of and benefits from these net operating losses may be
impaired or limited in certain circumstances, for example, in the case of the
U.S. net operating losses, a cumulative ownership change of more than 50% as
defined, over a three-year period.
21
<PAGE>
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. Accordingly, fiscal 1999 is a nine-
month period beginning July 1, 1998 and ending March 31, 1999. Fiscal 2000 and
fiscal 1998 are the twelve-month periods ended March 31, 2000 and June 30, 1998,
respectively. For purposes of this discussion and analysis, the results of
operations for fiscal 2000 are compared to pro forma results for the twelve
months ended March 31, 1999, and results of operations for the nine months of
fiscal 1999 are compared to pro forma results for the nine months ended March
31, 1998. The twelve-month March 1999 and the nine-month March 1998 pro forma
results are contained in Note 11 to the consolidated financial statements.
Results of Operations
Results of operations for the twelve months ended March 31, 2000 and 1999
Revenue. Total revenue for fiscal 2000 increased $5,000, or less than 1%, to
$993,000 from $988,000 in the twelve months ended March 31, 1999. Network
revenues in fiscal 2000 increased $173,000, or 28%, to $795,000 from $622,000 in
the prior twelve-month period. This increase in Network revenue is 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
received almost no revenue from this application service in the twelve-month
period ended March 31, 1999. The increase in Internet-based Network revenue has
more than offset a decrease in Network revenue from the Company's desktop
solution, which is being de-emphasized because of the broader market potential
of the Internet solutions.
Revenues from the Internet solution for fiscal 2000 are primarily from
subscriptions among the groups of suppliers that have been made available for
rollout 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, and has entered into a consulting contract with Carrefour
that will provide revenue over a three-year period, as further described below.
Offsetting the increase in Network revenue was a decrease in Consulting revenue
of $167,000, or 46%, to $199,000 from $366,000 in the prior twelve-month period.
Consulting revenue declined because the IBM Agreement was discontinued by
SourcingLink as of September 30, 1999. Under that Agreement, SourcingLink paid
fees based on revenue sharing for both hosting services and sales and marketing
support. SourcingLink was reimbursed by IBM for certain of SourcingLink's sales
and marketing expenses, with such reimbursements included as revenue for
financial statement purposes. Thus, fiscal 2000 includes six months of such
revenue, whereas the comparable period last year included a full twelve months
of these reimbursements from IBM. As discussed above, the IBM Agreement was
replaced by two new arrangements with IBM, one fee-bearing contract for the
network infrastructure for hosting the Company's applications services, and a
second contract under which the Company receives certain co-marketing privileges
with IBM, but has no payments or revenue sharing costs for such privileges. The
Company moved its sales and marketing function in-house as of October 1, 1999.
SourcingLink earned some Consulting revenue from its retailer customers in the
fourth quarter of fiscal 2000, and will be performing similar services on a
monthly basis under the new contract with Carrefour, as described above. Due to
the Carrefour contract, the Company expects that services revenue will be a
significant portion of the Company's revenue in its fiscal year ending March 31,
2001.
Cost of Revenue. In fiscal 2000, the cost of revenue increased $99,000, or 16%,
to $724,000 from $625,000 in the prior twelve-month period. This increase is
attributable to the cost of Network revenues, which increased $316,000, or 122%,
to $575,000 from $259,000 during the comparable prior year period. The
Company's cost of Network revenue 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 first six months of fiscal 2000, these fees
paid to IBM were under the original Agreement and were based on revenue sharing.
Costs were higher during these six months than
22
<PAGE>
during the comparable six months last year due to the increased Network revenue
in fiscal 2000. Beginning October 1, 1999, 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 sales
incurred over the last six months of fiscal 2000 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 period in the prior year.
All of the Consulting revenue in the twelve months ended March 31, 1999, as well
as the majority of such revenue in fiscal 2000 was from IBM. The IBM Consulting
revenue has a cost of revenue equal to the revenues received. The reduction in
these costs in fiscal 2000 is due to a decrease in the consulting activities
with IBM through September 30, 1999, with no further consulting after that date,
as previously described.
Total gross profit decreased to $269,000, or 27% of overall revenue in the
current fiscal year, from $363,000, or 37% of revenue in the twelve months ended
March 31, 1999. The decrease in gross profit as a percent of sales is largely
attributable to increased costs under the new contract with IBM. The Company
believes that significantly 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. Under the new IBM contract or
such other arrangement that the Company may obtain for its network
infrastructure, such support costs will not be 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 in which such costs were tied to a percentage of revenue.
Operating Expenses
Selling, General and Administrative Expenses. In fiscal 2000, the Company's
selling, general and administrative expenses increased $1.7 million, or 89%, to
$3.6 million from $1.9 million in the twelve months ended March 31, 1999.
SourcingLink has expanded its management team, and began hiring an internal
sales and project management staff during the last six months of fiscal 2000.
The associated labor and travel costs, as well as costs related to a larger
facility for the increased staff, outsourced help desk support, various legal
and filing fees, and directors' and officers' insurance, comprise the majority
of the increase in selling, general and administrative expenses compared to the
same prior twelve months. These increases more than offset certain one-time
charges taken in the prior twelve months, primarily in the quarter ended June
30, 1998, relating to the legal and accounting fees associated with the closure
of offices in France and Hong Kong.
Product Development Expenses. Fiscal 2000 product development expenses
increased $576,000, or 95%, to $1.2 million from $605,000 for the prior twelve
months. The increase in product development expenses is primarily labor and
support costs associated with continued enhancement of SourcingLink's Internet
solution, including new management and development personnel.
SourcingLink will continue to invest in its product development and sales,
marketing and project management capabilities as we pursue our business
strategies. We currently anticipate that such investments in the fiscal year
ending March 31, 2001 will be at or near an annualized level similar to that of
the last half of fiscal 2000.
Stock-based Compensation. Warrants for 175,000 shares of common stock were
issued to three strategic partner companies during fiscal 2000. The amount of
expense for the warrants was determined under the Black-Scholes valuation method
and is being amortized over the periods associated with each of the business
agreements underlying the warrants. This amortization amounted to $277,000 in
fiscal 2000. Of the 175,000 warrants, 150,000 were issued to Carrefour in
December 1999. The Carrefour warrants were subsequently cancelled in March 2000
in conjunction with a new business agreement signed by the parties at that time.
Stock-based compensation of $371,000 was incurred in the 12-months ended March
31, 1999 primarily for warrants issued to consultants and associates of the
Company in the quarter ended June 30, 1998.
Other Income (Expense), net and Interest Income. The principal component of
other income (expense), net is the exchange gain or loss on foreign currency
transactions with SourcingLink's subsidiary in France. Primarily as a result of
these foreign currency translations, other income (expense), net resulted in an
expense of $16,000 in fiscal
23
<PAGE>
2000 compared to income of $83,000 in the prior twelve-month period. Interest
income was $243,000 and $19,000 for the twelve months ended March 31, 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. The increase in interest income is primarily
attributable to the increased cash available for investment as a result of this
private placement.
Income Taxes. SourcingLink recorded net losses of $4.5 million and $2.4 million
during the twelve months ended March 31, 2000 and 1999, respectively.
Accordingly, no provision for income taxes was recorded in these periods. As of
March 31, 2000, SourcingLink had net operating loss carryforwards for United
States income tax purposes of approximately $11.5 million. These losses expire
at various dates between 2011 and 2020. As of March 31, 2000, SourcingLink also
had net operating loss carryforwards for income tax purposes in France of
approximately $3.5 million which expire at various dates between 2000 and 2003.
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.
Results of operations for the nine months ended March 31, 1999 and 1998
Revenues. Total revenues for fiscal 1999 increased $96,000, or 15%, to $741,000
from $645,000, in the first nine months of fiscal 1998. This increase was
primarily due to an increase in Consulting revenues under the IBM Agreement,
primarily for sales, marketing and project management assistance provided to IBM
by the Company, which amounted to $261,000 in fiscal 1999, as compared with
$105,000 in the same period in fiscal 1998. The Agreement with IBM that
provided for such services became effective in the third quarter of fiscal 1998,
and therefore was present for all of fiscal 1999 but only a portion of the
comparable prior period.
Network revenues in fiscal 1999 decreased by $60,000, or 11%, to $480,000 from
$540,000 for the first nine months of fiscal 1998. This decrease was primarily
due to the Company's transition from its desktop solution to its Internet
solution. As part of the transition, the Company de-emphasized sales of its
desktop solution, and the reduction in these sales had not yet been offset by
revenues from the Internet solution which had only recently begun to be rolled-
out.
Cost of Revenues. In fiscal 1999, the cost of Network revenues decreased
$155,000, or 44%, to $201,000 from $356,000 in the first nine months of fiscal
1998. In fiscal 1999, the cost of Network revenues consisted primarily of
revenue sharing payments under the IBM Agreement. Network and other
infrastructure support was provided by IBM under this Agreement. In the first
half of fiscal 1998, prior to entering into the Agreement with IBM, the cost of
network revenues was greater as additional costs were incurred internally for
network support, including internal and external labor to install and support
customer sites, and the cost of third party software and hardware for our
solution. The cost of Consulting revenue, which equals the revenues received,
was $261,000 in fiscal 1999 and $105,000 in the first nine months of fiscal
1998. Overall, gross profit in fiscal 1999 increased $95,000 to $279,000, or
38% of revenues, from $184,000, or 29% of revenues, in fiscal 1998.
Operating Expenses. In fiscal 1999, the Company's selling, general and
administrative expenses decreased by $109,000, or 7%, to $1.4 million from $1.5
million in the first nine months of fiscal 1998. The decrease in these expenses
was primarily due to the impact of the IBM Agreement, under which certain sales,
marketing and customer support services were charged to IBM beginning in the
third quarter of fiscal 1998, and the reduction in costs from the closure of the
France and Hong Kong offices in December 1997. Fiscal 1999 product development
expenses increased by $197,000, or 70%, to $479,000 from $282,000 in the first
nine months of fiscal 1998. The increase in product development was primarily
labor costs associated with continued enhancement of the Company's Internet
solution, including release of a new version of this Internet solution.
Other income (expense), net. The principal component of other income (expense),
net, a gain of $62,000 and an expense of $65,000 in fiscal 1999 and the nine
months ended March 31, 1998, respectively, consists of exchange
24
<PAGE>
gains and losses arising on foreign currency transactions with the Company's
foreign subsidiaries in France and Hong Kong.
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 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 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 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, cash equivalents and short-term investments at March 31,
2000 were $5.8 million, an increase of $4.6 million from March 31, 1999. During
August 1999, SourcingLink completed a private placement of 1,258,000 shares of
common stock through a placement agent to a limited number of institutional
investors resulting in gross proceeds of $8.1 million. Net proceeds, after
placement agent fees and other offering costs, were $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. Cash used in operating activities for the
twelve months ended March 31, 2000 was $3.4 million, compared to $2.0 million
for the twelve months ended March 31, 1999. Such cash usage in each period is
primarily related to the losses incurred, with increasing investments in sales
and marketing, administration and product development in the current year
resulting in more cash used in operations this year than in the prior year's
comparable twelve months. SourcingLink plans to continue investing in product
development and sales and marketing of its Internet sourcing solution, and
project management for its consulting services, and use of cash to fund such
activities is expected to continue at or above current levels for the
foreseeable future.
The Company's cash and cash equivalents at March 31, 1999 were $1.3 million,
representing an increase of $794,000 from June 30, 1998. Cash used in operating
activities for the nine months ended March 31, 1999 was $1.7 million, compared
to $1.4 million for the nine months ended March 31, 1998. The cash usage was
primarily due to the net losses that occurred in each of the periods and the
payment of certain accounts payable and other current liabilities during the
nine months of fiscal 1999.
We believe that our current working capital, including cash to be received in
the fiscal year ending March 31, 2001
25
<PAGE>
under our services contract with Carrefour, will be sufficient to meet our
working capital requirements for the next 18 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.
During this year's third quarter, the Company moved its headquarters and
operations from Mountain View, California to San Diego, California. The
majority of the employees located in Mountain View also relocated to San Diego.
There was no significant impact on operations or cash flow from the relocation.
SourcingLink currently does not have a bank credit line. SourcingLink does not
intend to pay cash dividends with respect to capital stock in the foreseeable
future.
Recent Accounting Pronouncements
In April 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which provides guidance for
determining whether computer software is internal-use software and for
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold. SOP 98-1, which is
effective for the year ended March 31, 2000, also provides guidance on
capitalization of the costs incurred for computer software developed or obtained
for internal use. The adoption of SOP 98-1 did not have a material effect on
the consolidated financial statements.
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 effective date of SAB
101 for the Company is the first quarter of fiscal 2001. The Company believes
that the adoption of SAB 101 will not have a material effect on the consolidated
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. Without corrective
measures, computer programs that have date sensitive software might recognize a
date using "00" as the year 1900 rather than the year 2000, possibly resulting
in program failure, miscalculation or disruptions of operations. During
calendar year 1999, the Company reviewed its internal computer systems, its
Internet solutions and its desktop software solutions that could be affected by
the "Year 2000" issue. The Company's Internet solutions were designed and
developed to be "Year 2000" compliant. Within its internal computer systems and
its desktop software solutions the Company identified some systems and software
applications that would be affected, and took steps to remedy those issues prior
to December 31, 1999. No "Year 2000" problems have been encountered in the
first four months following the beginning of 2000. However, if the designs,
modifications and conversions that have been made by the Company are not
adequate, "Year 2000" related problems could yet occur, and while the Company
would take corrective action in those circumstances, there can be no assurance
that such problems would not have a material adverse effect on the business,
financial condition and results of operations of the Company.
ITEM 7. FINANCIAL STATEMENTS
Financial statements and supplementary data are set forth on pages F-1 through
F-22.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT
The information required by this item is included under the captions entitled
"Election of Directors" and "Information Concerning Directors and Executive
Officers" in SourcingLink.net's Proxy Statement and is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included under the caption entitled
"Executive Compensation" in the SourcingLink.net's Proxy Statement and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
SourcingLink.net's Proxy Statement and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption entitled
"Certain Relationships and Related Transactions" in the SourcingLink.net's Proxy
Statement and is incorporated herein by reference.
27
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
<S> <C>
(a) The following documents are filed as a part of this form:
1. Financial Statements:
Report of Independent Accountants....................................................................... F-1
Consolidated Balance Sheets - As of March 31, 2000 and 1999............................................. F-2
Consolidated Statements of Operations - For the fiscal year ended March 31, 2000, the nine months of
the fiscal year ended March 31, 1999 and the fiscal year ended June 30, 1998............................ F-3
Consolidated Statements of Stockholders' Equity (Deficit) - For the fiscal year ended March 31, 2000,
the nine months of the fiscal year ended March 31, 1999 and the fiscal year ended June 30, 1998......... F-4
Consolidated Statements of Cash Flows - For the fiscal year ended March 31, 2000, the nine months of the
fiscal year ended March 31, 1999 and the fiscal year ended June 30, 1998................................ F-5
Notes to Consolidated Financial Statements ............................................................. F-6
2. Financial Statement Schedules - For the fiscal years ended March 31, 2000 and 1999:
Schedule II - Valuation and other Qualification Accounts ............................................... F-22
</TABLE>
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
3. Exhibits: The list of exhibits on the Form 10-KSB Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K: None.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized, this 16th day
of June 2000.
SOURCINGLINK.net, INC.
(Registrant)
/s/Sean Maloy
--------------------------------------------
Sean Maloy, President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of SourcingLink.net, Inc. do
hereby constitute and appoint Sean Maloy with full power of substitution and
resubstitution, our true and lawful attorney and agent, to do any and all acts
and things in our name and behalf in our capacities as directors and officers
and to execute any and all instruments for us and in our names in the capacities
indicated below, which said attorney and agent, may deem necessary or advisable
to enable said corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission in connection with this Annual Report on Form 10-KSB,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names and in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto; and we do hereby ratify
and confirm all that the said attorney and agent, or either of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-KSB has been signed below by the
following persons in the capacities and on the dates indicated this 16th day of
June, 2000.
SIGNATURE TITLE
/s/Sean Maloy President, Chief Executive
------------------------------------------- Officer and Director
Sean Maloy (Principal Executive Officer)
/s/Gary Davidson Vice President of Finance
------------------------------------------- and Chief Financial Officer
Gary Davidson (Principal Financial and
Accounting Officer)
/s/ Marcel van Heesewijk Chairman of the Board of
------------------------------------------- Directors
Marcel van Heesewijk
/s/ Johan Vunderink Director
-------------------------------------------
Johan Vunderink
/s/ Louis Delmonico Director
-------------------------------------------
Louis Delmonico
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of SourcingLink.net, Inc. (formerly QCS.net Corporation):
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
SourcingLink.net, Inc. (formerly QCS.net Corporation) and its subsidiary at
March 31, 2000 and 1999, and the results of their operations and their cash
flows for the fiscal periods ended March 31, 2000, 1999 and June 30, 1998 in
conformity with accounting principles generally accepted in the United States.
These consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits of these
consolidated financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
San Jose, California PricewaterhouseCoopers LLP
May 17, 2000
F-1
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
-----------------------------------
ASSETS 2000 1999
--------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,870,362 $ 1,266,880
Short-term investments 1,955,040 -
Accounts receivable (net of allowance for doubtful accounts of
$24,277 and $35,121 at March 31, 2000 and 1999, respectively) 354,767 222,769
Other current assets 81,662 7,111
--------------- ------------------
Total current assets 6,261,831 1,496,760
Property and equipment, net 375,463 185,286
Other non-current assets 64,873 12,839
--------------- ------------------
Total assets $ 6,702,167 $ 1,694,885
=============== ==================
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 1,388,538 $ 707,121
Deferred revenue and other 288,741 42,437
--------------- ------------------
Total current liabilities 1,677,279 749,558
Commitments and Contingencies (Notes 7 and 10)
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, par value $.001 per share
Authorized: 15,000,000 shares; issued and outstanding: 246,071 and 3,816,023 246 3,816
shares at March 31, 2000 and 1999, respectively (aggregate liquidation preference:
$253,453)
Common stock, par value $.001 per share
Authorized: 60,000,000 shares; issued and outstanding: 8,055,574 and 5,631,359 at 8,056 5,631
March 31, 2000 and 1999, respectively
Additional paid-in capital 24,086,938 15,315,395
Unearned stock-based compensation (219,255) -
Note receivable from stockholder - (40,000)
Accumulated deficit (18,938,586) (14,420,409)
Cumulative foreign currency translation adjustments 87,489 80,894
--------------- ------------------
Total stockholders' equity 5,024,888 945,327
--------------- ------------------
Total liabilities and stockholders' equity $ 6,702,167 $ 1,694,885
=============== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Twelve Nine Twelve
Months Ended Months Ended Months Ended
March 31, March 31, June 30,
2000 1999 1998
------------------- ------------------- ---------------------
<S> <C> <C> <C>
Revenue:
Network $ 794,777 $ 480,082 $ 682,192
Consulting 198,623 260,915 210,000
---------------- ---------------- ---------------
993,400 740,997 892,192
Cost of revenue:
Network 575,541 201,032 414,815
Consulting 148,873 260,915 210,000
---------------- ---------------- ---------------
724,414 461,947 624,815
Gross profit 268,986 279,050 267,377
Operating expenses:
Selling, general and administrative 3,556,195 1,371,269 1,867,028
(excludes stock-based compensation of
$276,870, $0 and $477,943)
Product development 1,181,271 479,416 407,479
Stock-based compensation 276,870 - 477,943
---------------- ---------------- ---------------
Total operating expenses 5,014,336 1,850,685 2,752,450
Operating loss (4,745,350) (1,571,635) (2,485,073)
Other income (expense), net (15,632) 62,056 (44,433)
Interest income 242,805 17,800 18,704
---------------- ---------------- ---------------
Net loss (4,518,177) (1,491,779) (2,510,802)
Preferred dividend - - (256,966)
---------------- ---------------- ---------------
Net loss attributed to common stockholders $ (4,518,177) $ (1,491,779) $ (2,767,768)
================ ================ ===============
Net loss per common share (basic and diluted) $ (0.67) $ (0.30) $ (0.63)
================ ================ ===============
Weighted average number of shares used
in per share calculation (basic and diluted) 6,766,008 5,048,313 4,384,955
================ ================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
SOURCINGLINK.net, INC
(formerly QCS.net Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWELVE MONTHS ENDED MARCH 31, 2000, NINE MONTHS ENDED MARCH 31, 1999 AND TWELVE MONTHS ENDED JUNE 30, 1998
CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
--------------------- ---------------------
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1997 4,368,937 $4,369 4,284,133 $4,284 $10,666,084
Proceeds from private placement 317,626 318 1,077,921
Conversion of preferred stock to (349,516) (350) 87,379 87 263
common stock
Exercise of warrants 18,750 19 731
Payment of dividend in preferred stock 660,681 661 796,716
Compensation related to stock options 370,693
and warrants
Preferred dividend payable
Translation adjustment
Net loss for the year
--------------------- --------------------- -----------
Balances at June 30, 1998 4,680,102 4,680 4,707,888 4,708 12,912,408
Preference dividend payable in 11,068 11 55,793
common stock
Proceeds from private placements 628,443 628 2,506,714
Conversion of preferred stock to (864,079) (864) 216,019 216 648
common stock
Exercise of options and warrants 84,616 85 39,915
Cancellation of stock note (16,675) (17) (200,083)
Translation adjustment
Net loss for the nine month period
------------------------------------------------------------
Balance at March 31, 1999 3,816,023 3,816 5,631,359 5,631 15,315,395
Proceeds from private placement 1,257,970 1,258 7,281,073
Conversion of preferred stock to (3,569,952) (3,570) 892,524 893 2,677
common stock
Exercise of options and warrants 273,721 274 991,668
Warrants issued to strategic partners 496,125
Amortization of stock-based
compensation
Payment of stock note
Translation adjustment
Net loss for the year
------------------------------------------------------------
Balance at March 31, 2000 246,071 $ 246 8,055,574 $8,056 $24,086,938
===================== ===================== ===========
<CAPTION>
CUMULATIVE TOTAL
NOTES FOREIGN STOCK-
UNEARNED RECEIVABLE CURRENCY HOLDERS'
STOCK-BASED FROM ACCUMULATED TRANSLATION EQUITY /
COMPENSATION STOCKHOLDERS DEFICIT ADJUSTMENTS (DEFICIT)
------------ ------------ ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1997 $(107,250) $ (200,100) $(10,160,862) $119,856 $ 326,381
Proceeds from private placement 1,078,239
Conversion of preferred stock to -
common stock
Exercise of warrants 750
Payment of dividend in preferred stock 797,377
Compensation related to stock options 107,250 477,943
and warrants
Preferred dividend payable (256,966) (256,966)
Translation adjustment 31,423 31,423
Net loss for the year (2,510,802) (2,510,802)
----------------------------------------------------------------- -------------
Balances at June 30, 1998 - (200,100) (12,928,630) 151,279 (55,655)
Preference dividend payable in 55,804
common stock
Proceeds from private placements 2,507,342
Conversion of preferred stock to -
common stock
Exercise of options and warrants (40,000)
Cancellation of stock note 200,100 -
Translation adjustment (70,385) (70,385)
Net loss for the nine month period (1,491,779) (1,491,779)
----------------------------------------------------------------------------------
Balance at March 31, 1999 - (40,000) $(14,420,409) 80,894 945,327
Proceeds from private placement 7,282,331
Conversion of preferred stock to -
common stock
Exercise of options and warrants 991,942
Warrants issued to strategic partners (496,125) -
Amortization of stock-based 276,870 276,870
compensation
Payment of stock note 40,000 40,000
Translation adjustment 6,595 6,595
Net loss for the year (4,518,177) (4,518,177)
----------------------------------------------------------------------------------
Balance at March 31, 2000 $(219,255) $ - $(18,938,586) $ 87,489 $ 5,024,888
================================================================= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
2000 1999 1998
--------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,518,177) $(1,491,779) $(2,510,802)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense 125,945 81,549 63,536
Unrealized foreign exchange (gain) loss 6,278 (64,329) 39,532
Loss on retirement of fixed assets 9,177 4,809 86,424
Amortization of stock-based compensation 276,870 - 477,943
Changes in operating assets and liabilities:
Accounts receivable (131,998) (18,848) (51,132)
Other assets (126,585) 13,337 13,668
Accounts payable and accrued liabilities 681,417 (173,772) 131,643
Deferred revenue and other 254,806 (29,080) 43,007
----------- ----------- -----------
Net cash used in operating activities (3,422,267) (1,678,113) (1,706,181)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (325,299) (22,773) (180,406)
Proceeds from retirement of fixed assets - - 23,818
Purchases of short-term investments (3,926,726) - -
Maturities of short-term investments 1,971,686 - -
----------- ----------- -----------
Net cash used in investing activities (2,280,339) (22,773) (156,588)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 7,282,331 2,507,342 1,078,239
Proceeds from exercise of options and warrants 1,031,942 - 750
Payments on capital lease (8,502) (6,690) (9,098)
----------- ----------- -----------
Net cash provided by financing activities 8,305,771 2,500,652 1,069,891
----------- ----------- -----------
Effect of exchange rate changes on cash 317 (6,056) (8,109)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 2,603,482 793,710 (800,987)
Cash and cash equivalents, beginning of the period 1,266,880 473,170 1,274,157
----------- ----------- -----------
Cash and cash equivalents, end of the period $ 3,870,362 $ 1,266,880 $ 473,170
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,499 $ 1,573 $ 4,153
Cash paid during the period for taxes 6,222 800 800
Non-cash financing transactions:
Conversion of preference dividend payable to common stock - 55,804 797,377
Issuance of note receivable for exercise of employee stock - 40,000 -
option
Cancellation of common stock subscription receivable - 200,100 -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
SourcingLink.net, Inc. ("the Company") was incorporated in 1994 as a Delaware
corporation, and maintains its office in San Diego, California. The Company owns
all of the outstanding shares of its subsidiary, QCS Development Company S.A. in
France (the "French Subsidiary"). The Company has no other subsidiaries. The
Company changed its name from QCS.net Corporation in 1999.
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 merchandise sourcing activities with
their merchandise suppliers around the globe. For merchandise suppliers, the
solution provides a sales tool and forms for the electronic exchange of company
and product information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR:
The Company has changed its fiscal year end from June 30th, to March 31st
effective April 1, 1999. Amounts for the nine month period ended March 31, 1999
are defined as Fiscal 1999. Amounts for the twelve months ended March 31, 2000
and June 30, 1998 are defined as Fiscal 2000 and Fiscal 1998, respectively.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of SourcingLink.net,
Inc. and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
All prior period share and per share amounts have been restated to reflect the 1
for 4 reverse stock split of the Company's common stock in August 1999.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make use of estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of highly liquid instruments with an original
or remaining maturity of 90 days or less at the date of purchase.
SHORT-TERM INVESTMENTS:
Short-term investments consist of corporate debt securities. These debt
securities are classified as available for sale and are carried at fair value,
based upon quoted market prices. Unrealized gains and losses, if material, are
reported as a separate component in stockholders' equity (deficit). Realized
gains and losses on sales of such investments are reported in the consolidated
statements of operations using the specific identification cost method.
F-6
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
assets, ranging from one to five years, or over the term of the lease, if
shorter.
The cost of property retired or otherwise disposed of and the related
accumulated depreciation or amortization are removed from the accounts, and the
resulting gains or losses are included in the results of operations.
REVENUE RECOGNITION:
The Company's revenues are generated from fees for access to and use of the
Company's network application solutions, and for consulting services performed
that are related to the application solutions. These fees include initial
registration fees, fixed monthly or annual subscription fees or "pay-as-you-go"
transactional fees. In April 1999, the Company suspended the pay-as-you-go
payment option for new subscribers, and in December 1999 the pay-as-you-go
option was eliminated for all subscribers. Network revenues are recognized as
the application services are provided. Revenues from consulting services are
recognized at the time the service is performed and accepted by the customer.
PRODUCT DEVELOPMENT:
All application development expenditures are expensed as incurred. Software
development costs are accounted for in accordance with Financial Accounting
Standards Board ("FASB") Statement No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Under Statement No. 86,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. The
Company begins capitalization upon completion of a working model. In Fiscal 2000
and 1999, no software development costs were capitalized, as the costs incurred
between technological feasibility and general release were not significant. In
Fiscal 1998, the Company capitalized $141,132 of external costs associated with
the development of its Internet product. These capitalized costs are being
amortized on the straight-line basis over the estimated life of the products or
the ratio of current revenue to the total of current and anticipated future
revenue, whichever amortization expense is greater.
EMPLOYEE STOCK PLANS:
The Company complies with the disclosure provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for its stock-
based compensation in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25. Under APB No. 25 compensation cost is based on the
difference, if any, between the fair market value of the Company's stock and the
exercise price on the date of grant. The Company accounts for equity instruments
issued to non-employees in accordance with the provisions of FASB Statement No.
123 and Emerging Issues Task Force No. 96-18.
INCOME TAXES:
The Company accounts for income taxes in accordance with FASB Statement No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
F-7
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, short-term investments, accounts receivable, accounts
payable, accrued expenses and other liabilities approximate fair value due to
their short maturities.
CONCENTRATION OF CREDIT RISK:
The Company performs ongoing credit evaluations of its customers, does not
require collateral, and maintains reserves for potential credit losses on
customer accounts when deemed necessary. Financial instruments that are
potentially subject to a concentration of credit risk for the Company consist of
cash equivalents, short-term investments and accounts receivable. Cash and cash
equivalents are deposited with financial institutions in the United States.
Short-term investments are placed through an investment advisor in highly
liquid, high-credit-quality commercial paper. One customer represented 85% of
accounts receivable at March 31, 2000, and three customers represented 52%, 25%
and 14% of accounts receivable at March 31, 1999.
NET LOSS PER SHARE:
Basic earnings or loss per share is computed by dividing the income or loss
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share is computed by
giving effect to all dilutive potential common shares that were outstanding
during the period. For the Company, dilutive potential common shares consist of
incremental common shares issuable upon the exercise of stock options and
warrants for all periods.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of the foreign subsidiary were translated into U.S.
dollars at year-end exchange rates. Revenue and expenses have been translated at
average exchange rates during the year. The local currency is considered to be
the functional currency for the Company's foreign subsidiary. Accordingly,
currency translation adjustments are accumulated as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
in other income (expense) in the determination of net loss.
COMPREHENSIVE LOSS:
For the periods of Fiscal 2000, 1999 and 1998, the comprehensive loss was
$4,511,582, $1,562,164, and $2,479,379, respectively. The principal difference
between comprehensive loss and net loss is the inclusion of cumulative foreign
currency translation adjustments.
RECENT ACCOUNTING PRONOUNCEMENTS:
In April 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which provides guidance for
determining whether computer software is internal-use software and for
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold. SOP 98-1, which is
effective for the year ended March 31, 2000, also provides guidance on
capitalization of the costs incurred for computer software developed or obtained
for internal use. The adoption of SOP 98-1 did not have a material effect on the
consolidated financial statements.
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 effective date of SAB 101
for the Company is the first quarter of fiscal 2001. The Company believes that
the adoption of SAB 101 will not have a material effect on the consolidated
financial statements.
F-8
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
RECLASSIFICATIONS:
Certain reclassifications have been made to prior year accounts to conform to
current year presentation.
3. BALANCE SHEET DETAIL
PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
March 31,
----------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Furniture and equipment $ 371,428 $ 158,145
Computer software 186,219 159,727
Leasehold improvements 38,204 10,559
----------------- -----------------
595,851 328,431
Less accumulated depreciation and amortization (220,388) (143,145)
----------------- -----------------
$ 375,463 $ 185,286
================= =================
</TABLE>
Depreciation and amortization expense for property and equipment was $125,945
for Fiscal 2000, $81,549 for the nine months of Fiscal 1999, and $63,536 for
Fiscal 1998.
Assets acquired under capital lease arrangements included in property and
equipment above are as follows:
<TABLE>
<CAPTION>
March 31,
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Furniture and equipment $ 21,593 $ 21,593
Less accumulated amortization (21,593) (14,395)
----------------- -----------------
$ - $ 7,198
================= =================
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
March 31,
----------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Accounts payable $ 436,304 $ 207,303
Payroll and related taxes 479,909 98,594
Accrued legal and audit expenses 207,518 98,829
Other accrued expenses 264,807 302,395
----------------- -----------------
$ 1,388,538 $ 707,121
================= =================
</TABLE>
4. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS:
In August 1999, the Company issued 1,257,970 shares of common stock in a private
placement, primarily to institutional investors, at a price of $6.40 per share
for net proceeds of $7,282,331.
In December 1998, the Company issued 326,087 equity "Units" at $4.60 per unit.
Each such unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at an exercise price of $7.00. The
Company received net proceeds of $1,445,337. The warrants were exercisable
immediately and expire in December 2002.
F-9
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 1998, the Company issued 233,333 equity "Units" at $3.00 per unit.
Each such unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at an exercise price of $4.00. The
Company received net proceeds of $682,500. The warrants were exercisable
immediately and expire in November 2001.
In September 1998, the Company issued 69,023 shares of common stock in a private
placement at a price of $5.50 per share for net proceeds of $379,505.
In June 1998, the Company issued 317,626 shares of common stock in a private
placement at prices ranging from $3.00 to $5.50 per share for net proceeds of
$1,078,239.
PREFERRED STOCK:
The Company issued 4,368,937 shares of Series A convertible preferred stock
("Series A preferred stock") on November 11, 1994 for proceeds of approximately
$4.5 million. The holders of Series A preferred stock were initially entitled to
receive dividends at 5% per annum on the original issue price of $1.03 per
share. Effective June 30, 1998, the Company completed an agreement with the then
current Series A preferred stockholders to restructure the Series A dividend.
The Company and Series A preferred stockholders agreed to eliminate future
dividends on the Series A preferred stock and to issue additional shares of
preferred stock in satisfaction of the accrued dividend payable at that date.
These additional shares have the same voting and other rights as the Series A
preferred stock.
At the June 30, 1998 conversion date, the accrued dividend for the Series A
preferred stockholders was $797,377. The Company issued 660,681 shares of
preferred stock in payment of that accrued preferred dividend under an agreed
upon formula. In September 1998, the Company issued 11,068 shares of common
stock to a Series A preferred shareholder whose shares had been converted to
common stock as payment of the dividend accrued prior to such conversion. The
remaining dividend accrued but unpaid is $9,247.
Upon any liquidation, dissolution, or winding up of the Company, whether
voluntary or involuntary, the holders of Series A preferred stock shall be paid
$1.03 per share before any payment shall be made to holders of any other class
or series of stock. If upon liquidation, dissolution or winding up the Company,
the assets to be distributed to the holders of the Series A preferred stock are
insufficient to permit payment to such stockholders of the full preferential
amounts, then the assets of the Company shall be distributed to such holders of
the Series A preferred stock pro rata, so that each holder receives that portion
of assets available for distribution as the liquidation preference payment
amounts of the shares of Series A preferred stock held by such holders bear to
the aggregate liquidation preference payment amounts for all shares of Series A
preferred stock then outstanding.
Each holder of Series A preferred stock has the right to convert the Series A
preferred stock at any time into common shares of the Company at a ratio of four
shares of preferred stock for one common share. Unless earlier converted, the
Series A preferred stock will automatically convert into common stock upon the
earlier of (i) the effective date of a registration pertaining to, and subject
to the consummation of, an underwritten public offering of the Company's common
stock at a price of at least $5.00 per share and, (ii) the first business day
following the occurrence of the last of the three following events: (a) the
completion of a 36 month period commencing on the closing date, (b) the
completion of six consecutive quarters of sustained profitability of the
Company, and (c) the completion of a 30 consecutive day period during which the
low bid for the Company's common stock shall have been in excess of $5.00.
During Fiscal 2000, 1999, and 1998, 3,569,952, 864,079 and 349,516 shares of
preferred stock were converted to common stock, respectively.
WARRANTS:
Warrants to purchase 175,000 shares of common stock were issued to three
strategic partner companies during Fiscal 2000, of which a fully vested warrant
to purchase 10,000 shares of common stock at $6.19 per share is
F-10
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
exercisable until October 22, 2004, and a fully vested warrant to purchase
15,000 shares of common stock at $27.06 per share is exercisable until January
4, 2005. The remaining warrant, for the purchase of 150,000 shares of common
stock, was cancelled shortly after its issuance.
During August 1999, the Company issued a warrant for 50,319 shares of common
stock, at a price of $6.40 per share as a part of a private placement. The
warrant is exercisable at any time until August 10, 2004.
During December 1998, the Company issued warrants for 326,087 shares of common
stock, at a price of $7.00 per share as a part of a private placement. The
warrants are exercisable until December 1, 2002.
During November 1998, the Company issued warrants for 233,333 shares of common
stock, at a price of $4.00 per share as a part of a private placement. The
warrants are exercisable at any time until November 13, 2001.
Warrants for 41,085 shares of common stock were issued during Fiscal 1999, of
which a warrant to purchase 37,500 shares of common stock at $3.48 per share is
exercisable until February 3, 2002, and warrants to purchase 3,585 shares of
common stock at prices ranging from $4.56 to $26.60 per share are exercisable
until April 2002.
During March 1998, the Company issued a warrant for 5,250 shares of common
stock, at a price of $3.00 per share. The warrant is exercisable at any time
until February 23, 2001.
During March 1998, the Company issued warrants for 202,500 shares of common
stock, at a price of $4.00 per share. The warrants are exercisable until March
6, 2002.
The warrants issued in Fiscal 2000 were valued using the Black-Scholes model,
while warrants issued in prior years were valued using the Noreen-Woolfson
model. A portion of the warrants issued in Fiscal 2000 and substantially all of
the warrants issued in Fiscal 1999 were in connection with the Company's private
placements; accordingly, these warrants were treated as a cost of the
financings. Certain warrants issued in Fiscal 2000 and Fiscal 1998 related to
sales, marketing and administrative matters. Expense recognized for the
amortization of these warrant costs in Fiscal 2000 and Fiscal 1998 was $276,870
and $370,693, respectively. At March 31, 2000, warrants for 768,824 shares of
common stock were outstanding.
5. STOCK OPTION PLANS
In 1999, 1997 and 1995, respectively, the Board of Directors adopted the 1999
Stock Option Plan, the 1997 Stock Option Plan and the Stock Option Plan ("the
Plans") for employees, directors and others. A total of 250,000, 1,000,000 and
225,000 shares of common stock were authorized under the 1999 Stock Option Plan,
the 1997 Stock Option Plan and the Stock Option Plan, respectively. Options may
be granted at an exercise price of not less than 85% of the fair market value of
the common stock at the date of grant, and are exercisable at such times and
under such conditions as determined by the Board of Directors. Options granted
under the Plans generally become exercisable over a four-year period and
generally expire ten years from the date of grant. Unvested options are canceled
90 days after termination of employment and become available under the Plans.
F-11
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
Activity under the Plans for Fiscal 2000, 1999, and 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------
Shares Price Aggregate
Available Shares Per Share Exercise Price
--------- ------ --------- --------------
<S> <C> <C> <C> <C>
Balances at June 30, 1997 257,981 662,019 $0.60 - $12.52 $ 4,528,865
Options granted (91,500) 91,500 $2.80 256,200
Options canceled 7,000 (7,000) $3.00 - $12.00 (77,250)
--------- ---------- -------------
Balances at June 30, 1998 173,481 746,519 $0.60 - $12.52 4,707,815
Shares authorized 250,000
Options granted (304,750) 304,750 $3.876 - $16.00 3,600,171
Options exercised (10,000) $4.00 (40,000)
Options canceled 145,000 (145,000) $2.00 - $12.00 (690,600)
--------- ---------- -------------
Balances at March, 31, 1999 263,731 896,269 $0.60 - $16.00 7,577,386
Shares authorized 250,000
Options granted (503,750) 503,750 $6.125 - $34.00 3,401,817
Options exercised (125,401) $2.80 - $12.00 (631,490)
Options canceled 427,493 (427,493) $2.80 - $34.00 (3,644,740)
--------- ---------- -------------
Balances at March 31, 2000 437,474 847,125 $0.60 - $27.062 $ 6,702,973
========= ========== =============
</TABLE>
The following table summarizes information with respect to stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise at Exercise
Price March 31, 2000 Life (years) Price March 31, 2000 Price
---------------------- ----------------- ----------------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$0.60 75,000 3.76 $ 0.600 75,000 $0.600
$2.80 - $4.00 91,000 7.73 $ 3.785 68,157 $3.763
$6.125 - $8.25 482,875 9.33 $ 6.470 50,781 $6.400
$12.00 - $16.00 194,250 8.92 $ 15.871 53,625 $15.533
$25.00 - $27.062 4,000 9.94 $ 26.547 - -
----------------- ------------------
847,125 8.57 $ 7.912 247,563 $5.895
================= ==================
</TABLE>
At March 31, 1999, options to purchase 561,561 shares of common stock were
exercisable at a weighted average exercise price of $6.92.
For certain options granted, the Company recognized compensation expense of
$107,250 in Fiscal 1998 for the excess of the fair value of the common stock
issuable upon exercise of such options over the aggregate exercise price at the
date of grant. The compensation expense was charged to operations as the options
vested.
The Company has adopted the disclosure only provisions of Financial Accounting
Standards Board Statement No. 123. Had compensation cost for the Plans been
determined based on the fair market value at the grant date for the options
granted in Fiscal 2000, 1999 and 1998, consistent with the provisions of
Statement No. 123, the Company's net loss for such years would have been
increased to the pro forma amounts indicated below:
F-12
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
<TABLE>
<CAPTION>
Twelve Months Nine Months Ended Twelve Months
Ended March 31, Ended
March 31, June 30,
2000 1999 1998
------------- ----------------- -------------
<S> <C> <C> <C>
Net loss as attributed to common stockholders $ 4,518,177 $ 1,491,779 $ 2,767,768
- as reported
============= ================= =============
Net loss as attributed to common stockholders $ 5,886,678 $ 1,724,905 $ 2,868,733
- pro forma
============= ================= =============
Loss per share - as reported $ (0.67) $ (0.30) $ (0.63)
============= ================= =============
Loss per share - pro forma $ (0.87) $ (0.34) $ (0.65)
============= ================= =============
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years because additional
option grants in future years are anticipated.
The aggregate fair values of options granted ranged from $5.39 to $23.83 in
Fiscal 2000, from $3.08 to $12.76 in Fiscal 1999, and was $2.24 Fiscal 1998. The
fair value of option grants for the Plans are estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
2000 1999 1998
---------- --------- ----------
Risk-free interest rate 6.18% 4.74% 6.06%
Expected life 5 years 4 years 5 years
Expected volatility 132% 122% 84%
Expected dividend yield 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in estimating the
fair market value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in these subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a single measure of the fair value
of its employee stock options.
6. INCOME TAXES
The Company has paid no income tax to date other than Delaware and California
minimum franchise tax due to net operating losses incurred. Deferred tax assets
arise from both net operating loss carryforwards and differences between the
timing of deductions for tax purposes and expense for financial accounting
purposes. The components of deferred tax assets consist of the following at:
F-13
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
March 31, March 31, June 30,
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Miscellaneous accruals $ 108,500 $ 56,917 $ 138,559
Provision for doubtful accounts receivable 9,700 14,048 2,018
Set up costs and product development
expenditures 257,000 163,480 106,589
Compensation related to stock options
granted 190,500 190,507 190,508
Net operating loss carryforwards 5,900,000 4,216,102 3,532,888
------------ ------------ -----------
Total deferred tax asset 6,465,700 4,641,054 3,970,562
Valuation allowance (6,465,700) (4,641,054) (3,970,562)
------------ ------------ -----------
Net deferred tax asset $ - $ - $ -
============ ============ ===========
</TABLE>
A valuation allowance is provided due to the uncertainty surrounding the
realization of the deferred tax assets in view of the Company's not having
achieved profitable operations.
Net operating losses of the French Subsidiary which are available for offset
against future taxable income of the French Subsidiary amount to approximately
$3.5 million, and expire between 2000 and 2003.
U.S. net operating losses which are available for offset against future taxable
income in the U.S. amount to approximately $11.5 million, and expire between
2011 and 2020.
The difference between the statutory U.S. federal income tax rate on loss before
income taxes and the Company's effective tax rate is summarized as follows for
Fiscal 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
2000 % 1999 % 1998 %
-------------- -------- ------------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (4,518,177) $ (1,491,779) $(2,510,802)
============== ============= ============
Federal tax at statutory rate (1,581,362) 35.0% (522,123) 35.0% (853,673) 34.0%
State and foreign taxes (219,622) 4.9% (205,664) 13.8% (199,412) 7.9%
Other (23,662) 0.5% 57,295 (3.8%) (40,245) 1.6%
Increase in valuation
allowance 1,824,646 (40.4%) 670,492 (45.0%) 1,093,330 (43.5%)
-------------- ------ ------------- ---------- ------------ -------
Total provision $ - - $ - - $ - -
============== ====== ============= ========== ============ =======
</TABLE>
F-14
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. COMMITMENTS
OPERATING LEASE OBLIGATIONS:
The Company leases its offices and certain equipment under operating lease
agreements expiring in future years. These agreements require the Company to pay
taxes, insurance, and maintenance expenses. Rental expense was approximately
$162,000, $56,000, and $174,000 for the twelve months of Fiscal 2000, the nine
months of Fiscal 1999 and the twelve months of Fiscal 1998, respectively.
The annual minimum rental commitments under all non-cancelable operating lease
arrangements at March 31, 2000 are as follows:
Fiscal year ending March 31,
2001 $ 216,000
2002 215,000
2003 91,000
---------
$ 522,000
=========
8. EARNINGS PER SHARE
Reconciliation of the numerator and denominator of both basic and diluted loss
per share is as follows for Fiscal 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
2000 1999 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Basic and diluted:
Weighted average shares outstanding 6,766,008 5,048,313 4,384,955
-------------- ------------- -------------
Shares used in calculating per share amounts 6,766,008 5,048,313 4,384,955
-------------- ------------- -------------
Net loss attributed to common stockholders $ 4,518,177 $ 1,491,779 $ 2,767,768
============== ============= =============
Net loss per share attributed to common stockholders $ (0.67) $ (0.30) $ (0.63)
============== ============= =============
</TABLE>
At March 31, 2000 the Company had 847,125 options and 768,824 warrants
outstanding to purchase shares of common stock compared to 896,269 options and
844,663 warrants outstanding at March 31, 1999. At June 30, 1998 the Company had
746,519 options and 316,975 warrants outstanding. These were not included in the
computation of diluted earnings per share because inclusion of the options and
warrants was anti-dilutive.
9. BUSINESS SEGMENT, FOREIGN SALES AND OPERATIONS AND MAJOR CUSTOMERS
The Company operates in a single industry segment and sells its applications and
services primarily to the retail industry and its merchandise suppliers. The
Company markets its applications and services in the U.S. and foreign countries
(mainly in Europe and Asia) through its sales organization.
The geographical distribution of the revenues and operating loss for Fiscal
2000, 1999 and 1998 is as follows:
F-15
<PAGE>
SOURCINGLINK.net, INC
(formely QCS. net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenues
-------------------------------------------------
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
2000 1999 1998
------------- ----------- -------------
North and South America $ 320,454 $ 172,418 $ 145,695
Europe / Africa 381,315 336,508 428,257
Asia / Pacific Rim 291,631 232,071 318,240
------------- ----------- -------------
$ 993,400 $ 740,997 $ 892,192
============= =========== =============
Operating Loss
-------------------------------------------------
Twelve Months Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, June 30,
2000 1999 1998
------------- ------------ -------------
North and South America $ (4,828,475) $(1,432,015) $(2,028,824)
Europe / Africa 64,443 (76,349) (277,198)
Asia / Pacific Rim 18,682 (63,271) (179,051)
------------- ----------- -----------
$ (4,745,350) $(1,571,635) $(2,485,073)
============= =========== ===========
There were two customers representing 61% and 13% of revenues in Fiscal 2000,
two customers representing 51% and 35% of revenues in Fiscal 1999, and two
customers representing 48% and 24% of revenues in Fiscal 1998.
10. CONTINGENCIES
The Company is subject to a number of claims arising out of the conduct of its
business. The Company believes that the results of the claims will not have a
materially adverse effect on the Company's financial condition.
11. TRANSITION PERIOD COMPARATIVE DATA
The accompanying statements of operations and cash flows for the twelve months
ended March 31, 1999 and the nine months ended March 31, 1998 are unaudited. In
the opinion of management, these statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair presentation of the
results of the period.
F-16
<PAGE>
SOURCINGLINK.net, INC
(formely QCS. net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents financial information for the twelve months ended
March 31, 2000 and 1999.
Twelve Months Ended March 31,
-----------------------------
2000 1999
------------ -----------
(unaudited)
Revenue:
Network $ 794,777 $ 622,303
Consulting 198,623 365,915
----------- -----------
993,400 988,218
Cost of revenue:
Network 575,541 259,491
Consulting 148,873 365,915
----------- -----------
724,414 625,406
Gross profit 268,986 362,812
Operating expenses:
Selling, general and administrative 3,556,195 1,865,444
Product development 1,181,271 604,985
Stock-based compensation 276,870 370,693
----------- -----------
Total operating expenses 5,014,336 2,841,122
Operating loss (4,745,350) (2,478,310)
Other income (expense), net (15,632) 82,770
Interest income 242,805 18,934
----------- -----------
Net loss (4,518,177) (2,376,606)
Preferred dividend - (68,463)
----------- -----------
Net loss attributed to common stockholders $(4,518,177) $(2,445,069)
=========== ===========
Net loss per common share (basic and diluted) $ (0.67) $ (0.50)
=========== ===========
Weighted average number of shares used
in per share calculation (basic and diluted) 6,766,008 4,934,207
=========== ===========
F-17
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents cash flow information for the twelve months ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
------------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net loss $ (4,518,177) $ (2,376,606)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization expense 125,945 94,282
Unrealized foreign exchange (gain) loss 6,278 (89,313)
Loss on retirement of fixed assets 9,177 76,052
Amortization of stock-based compensation 276,870 370,693
Changes in operating assets and liabilities:
Accounts receivable (131,998) 27,981
Other assets (126,585) 2,101
Accounts payable and accrued liabilities 681,417 (83,877)
Deferred revenue and other 254,806 (27,655)
------------------- -----------------
Net cash used in operating activities (3,422,267) (2,006,342)
------------------- -----------------
Cash flows from investing activities:
Purchases of fixed assets (325,299) (159,145)
Proceeds from retirement of fixed assets - 4,413
Purchases of short-term investments (3,926,726) -
Maturities of short-term investments 1,971,686 -
------------------- -----------------
Net cash used in investing activities (2,280,339) (154,732)
------------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 7,282,331 2,973,996
Proceeds from exercise of options and warrants 1,031,942 -
Payments on capital lease (8,502) (9,085)
------------------- -----------------
Net cash provided by financing activities 8,305,771 2,964,911
------------------- -----------------
Effect of exchange rate changes on cash 317 (12,102)
------------------- -----------------
Net increase (decrease) in cash and cash equivalents 2,603,482 791,735
Cash and cash equivalents, beginning of the period 1,266,880 475,145
------------------- -----------------
Cash and cash equivalents, end of the period $ 3,870,362 $ 1,266,880
=================== =================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,499 $ 2,417
Cash paid during the period for taxes 6,222 800
Non-cash financing transactions:
Conversion of preference dividend payable to common stock - 793,965
Issuance of note receivable for exercise of employee stock option - 40,000
Cancellation of common stock subscription receivable - 200,100
</TABLE>
F-18
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents financial information for the nine months ended
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------------------------
1999 1998
------------------ ----------------
<S> <C> <C>
(unaudited)
Revenue:
Network $ 480,082 $ 539,971
Consulting 260,915 105,000
------------------ ----------------
740,997 644,971
Cost of revenue:
Network 201,032 356,357
Consulting 260,915 105,000
------------------ ----------------
461,947 461,357
Gross profit 279,050 183,614
Operating expenses:
Selling, general and administrative 1,371,269 1,480,103
Product development 479,416 281,910
------------------ ----------------
Total operating expenses 1,850,685 1,762,013
Operating loss (1,571,635) (1,578,399)
Other income (expense), net 62,056 (65,146)
Interest income 17,800 17,570
------------------ ----------------
Net loss (1,491,779) (1,625,975)
Preferred dividend - (188,503)
------------------ ----------------
Net loss attributed to common stockholders $ (1,491,779) $ (1,814,478)
================== ================
Net loss per common share (basic and diluted) $ (0.30) $ (0.42)
================== ================
Weighted average number of shares used
in per share calculation (basic and diluted) 5,048,313 4,316,229
================== ================
</TABLE>
F-19
<PAGE>
SOURCINGLINK.net, INC.
(formerly QCS.net Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents cash flow information for the nine months ended
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Nine months ended March 31,
-----------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
(unaudited)
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 foreign exchange (gain) loss (64,329) 64,516
Loss on retirement of fixed assets 4,809 15,181
Compensation related to stock options - 107,250
Changes in operating assets and liabilities:
Accounts receivable (18,848) (97,961)
Other assets 13,337 24,904
Accounts payable (137,133) 86,931
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 retirement 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
Proceeds from exercise of stock options - 750
Payments on capital lease (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 option 40,000 -
Cancellation of common stock subscription receivable 200,100 -
</TABLE>
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of SourcingLink.net, Inc. (formerly QCS.net Corporation):
Our audits of the consolidated financial statements referred to in our report
dated May 17, 2000 appearing in the March 31, 2000 Annual Report to Shareholders
of SourcingLink.net, Inc. (formerly QCS.net Corporation) also included an audit
of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
San Jose, California PricewaterhouseCoopers LLP
May 17, 2000
F-21
<PAGE>
FINANCIAL STATEMENT SCHEDULE
REQUIRED RULE BY 5-04 OF REGULATION S-X
SCHEDULE II
VALUATION AND QUALIFICATION ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- -------- -------- ---------- ------
Fiscal year ended
March 31, 2000
<S> <C> <C> <C> <C> <C>
Provision for doubtful
accounts receivable $ 35,121 $ 10,002 - $ (20,846) $ 24,277
Deferred tax valuation
allowance 4,641,054 - $ 1,824,646 - 6,465,700
Fiscal year ended
March 31, 1999
(nine-month period)
Provision for doubtful
accounts receivable 29,657 15,000 - (9,536) 35,121
Deferred tax valuation
allowance 3,970,562 - 670,492 - 4,641,054
</TABLE>
F-22
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of SourcingLink, as
filed July 20, 1999 (incorporated by reference to Exhibit C to
SourcingLink's definitive proxy materials filed with the Commission on
June 17, 1999 - the "1999 Proxy Statement").
3.2 Bylaws (incorporated herein by reference to Exhibit 28(viii) to Form 8-K
filed November 22, 1994).
4.1 Series A Convertible Preferred Stock Purchase Agreement by and between
SourcingLink.net and the Series A Purchasers (incorporated herein by
reference to Exhibit 28(i) to Form 8-K filed on November 22, 1994).
4.2 Registration Rights Agreement by and between SourcingLink.net and the
Series A Purchasers (incorporated herein by reference to Exhibit 28(ii)
to Form 8-K filed on November 22, 1994).
4.3 Shareholders' Agreement by and between SourcingLink.net and the Series A
Purchasers (incorporated herein by reference to Exhibit 28(vi) to Form 8-
K filed on November 22, 1994).
4.4 Class U Warrant to Purchase common stock by and between SourcingLink.net
and the Series A Purchasers (incorporated herein by reference to Exhibit
28(iii) to Form 8-K filed on November 22, 1994).
4.5 Amendment No. 1 to Series A Convertible Preferred Stock Purchase
Agreement by and between SourcingLink.net and the Series A Purchasers
(incorporated herein by reference to Exhibit 4.7 to Form 10-KSB filed
June 22, 1999).
4.6 Amended and Restated Shareholders' Agreement by and between
Sourcinglink.Net and the Series A Purchasers (incorporated herein by
reference to Exhibit 4.8 to Form 10-KSB filed June 22, 1999).
4.7 Amended and Restated Class U Warrant to Purchase common stock by and
between SourcingLink.net and the Series A Purchasers (incorporated herein
by reference to Exhibit 4.9 to Form 10-KSB filed June 22, 1999).
10.1 Engagement Letter for consulting services from SourcingLink.net to Het
Goede Paard dated August 30, 1997 (incorporated herein by reference to
Exhibit 10.1 to Form 10-KSB filed June 22, 1999).*
10.2 Consulting Agreement by and between SourcingLink.net and L.A. Delmonico
Consulting, Inc. dated May 1, 1998 (incorporated herein by reference to
Exhibit 10.2 to Form 10-KSB filed June 22, 1999).*
10.3 Employment Agreement by and between SourcingLink.net and Sean Maloy dated
January 29, 1999 (incorporated herein by reference to Exhibit 10.3 to
Form 10-KSB filed June 22, 1999).*
10.4 Employment Agreement by and among SourcingLink.net and Gary Davidson
dated April 30, 1999 (incorporated herein by reference to Exhibit 10.5 to
Form 10-QSB filed November 16, 1999).*
10.5 Stock Option Plan. (the "Stock Option Plan") (incorporated herein by
reference to Exhibit 10.5 to Form 10-KSB filed June 22, 1999).*
10.6 Form of Stock Option Agreement pertaining to the Stock Option Plan
(incorporated herein by reference to Exhibit 10.6 to Form 10-KSB filed
June 22, 1999).*
10.7 1997 Stock Option Plan, as amended (the "1997 Option Plan") (incorporated
herein by reference to Exhibit 10.7 to Form 10-KSB filed June 22, 1999).*
10.8 Incentive Stock Option Agreement pertaining to the 1997 Option Plan
(incorporated herein by reference to Exhibit 10.8 to Form 10-KSB filed
June 22, 1999).*
10.9 Nonstatutory Stock Option Agreement pertaining to the 1997 Stock Option
Plan (incorporated herein by reference to Exhibit 10.9 to Form 10-KSB
filed June 22, 1999).*
10.10 Form of Indemnification Agreement for Officers and Directors of
SourcingLink.net (incorporated herein by reference to Exhibit 10.10 to
Form 10-KSB filed June 22, 1999).*
10.11 City Center Office Lease by and between SourcingLink.net and Eagle Square
Partners dated July 20, 1995 (incorporated herein by reference to Exhibit
10.11 to Form 10-KSB filed June 22, 1999).
10.12 Services Agreement between International Business Machines Corporation
and SourcingLink.net dated November 23, 1996 (incorporated herein by
reference to Exhibit 10.12 to Form 10-KSB filed June 22, 1999).
10.13 1999 Stock Option Plan (incorporated by reference to Exhibit A to the
1999 Proxy Statement).*
<PAGE>
10.14 Employee Stock Purchase Agreement (incorporated by reference to Exhibit B
to the 1999 Proxy Statement).*
10.15 Form of Common Stock Purchase Agreement (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-3, File
Number 333-87051) between the Company and each of the Investors in the
Company's 1999 Private Placement of Common Stock.
10.16 Bernardo Executive center Gross Office Lease dated August 25, 1999
between the Company and Bernardo Three Flags, Inc. (incorporated herein
by reference to Exhibit 10.4 to Form 10-QSB filed November 15, 1999).
10.17 Letter Agreement dated December 8, 1999 between the Company and
Carrefour, S.A. (incorporated herein by reference to Exhibit 10.1 to Form
10-QSB filed February 14, 2000) (portions omitted pursuant to a request
for confidential treatment).
10.18 Services Agreement dated March 29, 2000 between the Company and
Carrefour, S.A. (portions omitted pursuant to a request for confidential
treatment).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Pricewaterhouse Coopers LLP.
27 Financial Data Schedule.
--------
* Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 13(a) of Form 10-KSB.
