<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2000
---------------------------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission file number 33-1933 3-D
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SMARTSOURCES.COM, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Colorado 84-1073083
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2030 Marine Drive, Suite 100 North Vancouver, British Columbia V7P 1V7, CANADA
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(Address of Principal Executive Offices)
(604) 986-0889
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 12,312,963 shares of Common
Stock
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the Company,
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
The June 30, 2000 condensed consolidated financial statements included in this
filing on Form 10-QSB have been reviewed by Moss Adams LLP, independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report of Moss Adams LLP
commenting upon their review accompanies the condensed financial statements
included in Item 1 of Part I.
<PAGE> 3
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
SmartSources.com, Inc.
We have reviewed the consolidated condensed financial statements of
SmartSources.com, Inc. and Subsidiaries as of June 30, 2000 and for the three
and nine months then ended. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of September 30, 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein), and in our report dated
March 14, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of September 30, 1999 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/S/ MOSS ADAMS LLP
-----------------------
Bellingham, Washington
August 2, 2000
<PAGE> 4
SMARTSOURCES.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JUNE 30, 2000 -
UNAUDITED
------------------ ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 164,200 $ 3,829,600
Trade accounts receivable, net 184,800 285,300
Prepaid expenses 12,300 27,000
----------- -----------
Total current assets 361,300 4,141,900
CAPITALIZED SOFTWARE COSTS and PURCHASED SOFTWARE
RIGHTS, net 1,550,500 1,273,600
PROPERTY and EQUIPMENT, net 764,300 835,500
OTHER ASSETS 33,300 70,200
----------- -----------
TOTAL ASSETS $ 2,709,400 $ 6,321,200
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 140,000 $ 291,700
Unearned revenue 3,300
Income tax payable 78,300 77,500
Current portion of long-term debt 58,700 298,700
----------- -----------
Total current liabilities 277,000 671,200
LONG-TERM LIABILITIES
Due to stockholder 24,700 -
Interest payable - 120,500
Long-term debt, net of current portion 414,800 3,626,100
Deferred tax liability 64,200 60,800
----------- -----------
Total liabilities 780,700 3,807,400
COMMITMENTS and CONTINGENCIES
MINORITY INTEREST 3,441,100 3,407,000
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, 50 million shares authorized, 11,563,200 1,821,300 6,693,800
and 11,855,600 shares outstanding at September 30, 1999
and June 30, 2000 respectively.
Accumulated other comprehensive income 124,500 91,300
Accumulated deficit (3,210,700) (7,506,500)
Deferred compensation (247,500) (843,000)
----------- -----------
Total stockholders' equity (1,512,400) (1,564,400)
----------- -----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 2,709,400 $ 6,321,200
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
2
<PAGE> 5
SMARTSOURCES.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
QUARTER AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES EARNED $145,500 $499,000 $495,700 $1,137,600
COST OF SALES 26,300 145,000 75,700 244,400
------------------ ------------------- ------------------ ------------------
GROSS PROFIT 119,200 354,000 420,000 893,200
OTHER EXPENSES, exclusive of
depreciation and amortization
Research & Development 72,800 262,600 158,000 759,500
Sales and Marketing 110,200 239,000 266,600 611,500
General and Administrative 279,300 625,500 639,300 1,753,300
------------------ ------------------- ------------------ ------------------
462,300 1,127,100 1,063,900 3,124,300
------------------ ------------------- ------------------ ------------------
OPERATING EARNINGS (LOSS) BEFORE (343,100) (773,100) (643,900) (2,231,100)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization 56,000 136,600 128,800 420,300
------------------ ------------------- ------------------ ------------------
OPERATING EARNINGS (LOSS) (399,100) (909,700) (772,700) (2,651,400)
------------------ ------------------- ------------------ ------------------
OTHER INCOME (EXPENSE)
Realized gain (loss) on investments 2,700 - (38,800) -
Interest income 59,700 - 95,200
Interest expense (12,700) (173,800) (36,500) (1,831,400)
------------------ ------------------- ------------------ ------------------
(10,000) (114,100) (75,300) (1,736,200)
------------------ ------------------- ------------------ ------------------
INCOME (LOSS) BEFORE PROVISION FOR (409,100) (1,023,800) (848,000) (4,387,600)
INCOME TAXES
PROVISION FOR (BENEFIT FROM) INCOME 8,900 (6,100) 29,100 (91,800)
TAXES
------------------ ------------------- ------------------ ------------------
NET INCOME (LOSS) $(418,000) $(1,017,700) $(877,100) $(4,295,800)
================== =================== ================== ==================
Basic earnings (loss) per share ($0.05) ($0.09) ($0.11) ($0.36)
Diluted earnings (loss) per share ($0.05) ($0.09) ($0.11) ($0.36)
Weighted average common shares 9,176,300 11,855,600 7,636,400 11,782,600
outstanding (basic and diluted)
</TABLE>
See accompanying notes to these consolidated financial statements.
3
<PAGE> 6
SMARTSOURCES.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
9 MONTHS ENDED JUNE 30, 9 MONTHS ENDED JUNE 30,
1999 2000
----------------------- -----------------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net Income (Loss) $(877,100) $(4,295,800)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 128,800 420,300
Loss on disposal of assets 49,200 -
Stock-based compensation - 232,000
Realized gains(losses) on sale of investments. (7,300) -
Accrued interest expense on long-term debt - 120,500
Accrued interest expense from intrinsic value of
conversion feature of long-term debt and accretion of debt discount - 1,676,000
Changes in operating assets and liabilities
Trade accounts receivable 269,200 (102,900)
Other assets (38,400) (29,300)
Accounts payable and other current liabilities 111,800 162,900
Administrative fees payable (118,000) -
Income taxes payable and refundable (4,900) -
Sale deposit (99,500) -
----------- ------------
Net cash flows from operating activities (586,200) (1,816,300)
----------- ------------
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment (123,600) (81,300)
Purchase of capitalized software - (80,200)
Refund of deposit on property and equipment - 16,100
Proceeds from sale of Familyware 165,800 -
Proceeds from sale of investments 17,600 -
----------- ------------
Net cash flows from investing activities 59,800 (145,400)
----------- ------------
CASH FROM FINANCING ACTIVITIES
Repayment of note payable, net (53,700) -
Principal repayments of long-term debt (48,600) (50,400)
Principal repayments of capital lease obligations - (14,600)
Repayment of advances from stockholder (102,200) (24,600)
Proceeds from long-term debt and stock warrants - 4,552,000
Proceeds from issuance of common stock 1,000,000 1,184,200
Dividends (142,700)
----------- ------------
Net cash flows from financing activities 652,800 5,646,600
----------- ------------
EFFECT OF CHANGES IN EXCHANGE RATES 1,300 (19,500)
----------- ------------
NET CHANGES IN CASH 127,700 3,665,400
CASH and CASH EQUIVALENTS, beginning of period 1,700 164,200
----------- ------------
CASH and CAS EQUIVALENTS, end of period $129,400 $3,829,600
=========== ============
Supplemental disclosure of Cash Flow information:
Interest paid 36,300 35,000
Income taxes paid (received) 34,000 (91,800)
</TABLE>
See accompanying notes to these consolidated financial statements.
4
<PAGE> 7
Note 1 - Summary of Significant Accounting Policies
BASIS OF PRESENTATION -The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and in
accordance with the instructions for Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and disclosures normally required by generally accepted accounting
principles for complete financial statements or those normally reflected
in the Company's Annual Report on Form 10-KSB. The financial information
included herein reflects all adjustments (consisting of normal recurring
adjustments) that are, in the opinion of management, necessary for a
fair presentation of results for interim periods. Results of interim
periods are not necessarily indicative of the results to be expected for
a full year.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of
SmartSources.com, Inc. and Subsidiaries include the accounts of its
direct and indirect wholly-owned subsidiaries: Nifco Investments, Inc.;
SmartSources.com, Technologies, Inc.; Intelli Trade, Inc.; Infer
Technologies, Inc.; and Origin Software Corporation. All material
intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION - The Company recognizes revenue in accordance with
American Institute of Certified Public Accountants Statement of Position
(SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of
SOP 97-2 with Respect to Certain Transactions. Revenue from packaged
software products is recognized when shipped. Maintenance and
subscription revenue is recognized ratably over the contract period.
Revenue attributable to significant support is based on the price
charged for the undelivered elements and is recognized ratably over the
related product's life cycle. Revenue from fixed-price service contracts
and software development contracts requiring significant production,
modification, or customization are recognized using the
percentage-of-completion method. Revenue from service contracts that are
based on time incurred is recognized as work is performed.
Note 2 - Long-Term Debt and Private Placement
LONG-TERM DEBT -
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
-------------- ---------------
<S> <C> <C>
Convertible debentures, interest at 7% payable at maturity or upon
conversion or redemption, due February 2005, see further description
below. $ -- $ 3,401,200
Capital lease obligations payable in aggregate monthly installments of
$3,882, including imputed interest at rates ranging from 9.7% to 11.94%,
due at dates from October 2002 to March 2003 collateralized by the
leased equipment. -- 104,600
Note payable to a Canadian bank in monthly installments of $4,400 plus
interest at prime plus 1.25%, collateralized by general assets of
Technologies, due August 2000. 44,400 4,500
Mortgage payable to a Canadian bank in monthly installments of $1,700
including interest at 8.75%, collateralized by real estate of
Technologies and assignment of rents, guaranteed by the majority
stockholder, due February 2011. 155,500 148,500
Mortgages payable to two Canadian finance companies in aggregate monthly
installments of $2,200, including interest at rates of 7% and 9%,
collateralized by real estate of Technologies and guaranteed by the
majority stockholder, due January 2001 and June 2002. 273,600 266,000
---------- --------------
Total debt 473,500 3,924,800
Less current portion (58,700) (298,700)
---------- --------------
Long-term portion $ 414,800 $ (3,626,100)
---------- --------------
</TABLE>
5
<PAGE> 8
Long-term debt matures as follows:
<TABLE>
<CAPTION>
12 months ending
June 30,
<S> <C>
2001 $ 298,700
2002 199,100
2003 25,800
2004 0
2005 0
Thereafter 3,401,200
----------------
$ 3,924,800
</TABLE>
PRIVATE PLACEMENT OF CONVERTIBLE DEBENTURES AND WARRANTS -
On February 24, 2000, the Company issued $5 million of convertible
debentures and detachable stock purchase warrants. The debentures mature
in February 2005 and bear interest at 7%, which is payable upon
maturity, or upon conversion or redemption. The detachable warrants
entitle holders to purchase 330,000 shares of the Company's common stock
over a five-year term at an exercise price of $11.10 per share.
In connection with issuing the debentures and warrants, the Company paid
$325,000 of placement fees, $93,000 of legal costs, and $30,000 to the
holders of the debentures for reimbursement of a portion of their legal
costs. The Company also issued 25,000 warrants in lieu of placement
fees. The warrants entitle the holders to purchase an equal number of
shares of common stock at a price of $11.10 per share. The term of the
25,000 warrants is two years.
Concurrent with placing the debentures and warrants, the Company entered
into a Registration Rights Agreement (the Registration Agreement) with
the holders of the debentures. Pursuing to the Registration Agreement,
the Company filed a registration statement with the Securities and
Exchange Commission to register the shares of common stock that may be
acquired upon conversion of the debentures.
The debentures are convertible in whole or in part into common stock any
time before maturity at a conversion price that floats with the market
price of the stock, not to exceed a fixed conversion price of $9.71.
After August 24, 2000, if the debentures are submitted for conversion
and the conversion price is below $9.71, the Company has the right to
redeem the debentures for cash at an amount equal to the value of the
converted shares. For each share of common stock issued upon conversion,
the holders of the debentures have the option to purchase one additional
share at the fixed conversion price of $9.71. The number of shares
issued upon conversion of the debentures and exercise of the additional
purchase option is limited in that the total number of shares
beneficially owned by the holders of the debentures and their affiliates
may not exceed 4.9% of outstanding common shares. Any issuance of shares
in excess in of this limitation must be approved by a majority of the
Company's common stockholders.
In the event that certain circumstances pertain, including without
limitation the following, the conversion price will be adjusted
downward:
1. The Company's common stock is not listed on the American Stock
Exchange or the Nasdaq Small Cap Market by October 24, 2000 or on the
Nasdaq National Market by February 24, 2001.
2. The Company is in default of the requirements of the Registration
Agreement.
In the event the Company fails to comply with certain terms of the
debentures, holders may elect for the debentures to be redeemed for cash
at an amount equal to 120% of the conversion price that would otherwise
apply, plus interest and default payments. If the rules of the National
Association of Securities Dealers (NASD) apply, in the event the number
of shares to be issued upon conversion exceeds 20% of shares outstanding
at the time the debentures were issued, the Company must obtain
stockholder approval to issue shares in excess of this limit. If
stockholder approval is not obtained, the debentures underlying the
shares in excess of the 20% limit would become redeemable for cash.
A total of $1,330,000 of the $5,000,000 gross proceeds from the private
placement was allocated to the detachable stock warrants, based upon the
relative fair value of the warrants and the debentures. The value
ascribed to the warrants was recorded as a debt discount and an increase
in common stock. The debt discount is recognized as interest expense
over the five-year term of the debentures using the effective interest
method.
Total issue costs, including the fair value of stock warrants issue in
lieu of finder's fees, were $502,300, of which $368,700 was allocated to
the debentures and $133,600 was allocated to the detachable warrants.
The portion of the issue costs attributable to the debentures was
recorded as an offset against the gross proceeds allocated to the
debentures and is being amortized over the five-year term of the debt
using the effective interest method.
6
<PAGE> 9
The portion of the costs attributable to the warrants was recorded as an
offset against the gross proceeds allocated to the warrants.
At the date of issue, the conversion price of the debentures was less
than the fair value of the Company's common stock. The intrinsic value
of this conversion feature was $1,575,800, which was recorded as a
charge to interest expense and an increase to common stock.
Note 3 - Capital Stock
COMMON STOCK -
The Company has a single class of common stock. Authorized shares total
50 million. During the three months ended June 30, 2000, the Company
issued no shares of common stock. During the remainder of the nine
months ended June 30, 2000, the Company issued 292,400 shares for total
proceeds of $1,184,200.
At June 30, 2000, a total of 3,732,700 common shares are reserved to
honor the conversion rights, investments options, and stock purchase
warrants issued in connection with the private placement described in
Note 2. Another 5,675,000 common shares are reserved to honor other
outstanding stock options and warrants and grants made under the
Company's stock incentive compensation plan.
EXCHANGE OF CLASS B REDEEMABLE, EXCHANGEABLE PREFERRED STOCK OF ORIGIN
SOFTWARE CORPORATION-
In connection with the repurchase of certain software rights from
Columbia Diversified Software Fund Limited Partnership (Columbia), the
Company's subsidiary, Origin Software, issued 5 million shares of Class
B preferred stock. Concurrent with the issuance of the preferred shares,
Origin Software and the Company entered into a Share Exchange Agreement
(the Agreement) with Columbia. Under the Agreement, subsequent to
October 1, 1999, Columbia has the right to exchange all or part of the
Class B preferred shares for an amount of common shares of the Company
with market value of Cdn $5 million (not to exceed 5 million common
shares reserved for the exchange), based on average trading price during
the fourteen-day period immediately prior to exercise. Common shares
issued are to be "freely tradable" but 80%of the shares will be held in
trust and released ratably to Columbia over the following four years.
Effective January 26, 2000, Columbia notified the Company that it wished
to exercise its exchange rights, and on January 27, 2000 the Company
accepted the notice. The exchange ratio was based on a $7.60 share price
of the Company's common stock, and on February 15, 2000, the Company
issued 457,400 shares of common stock in the name of Columbia to be
exchanged for the 5 million Class B preferred shares of Origin Software
Corporation. Columbia has not yet tendered the Class B shares to the
Company, and the Company has not yet delivered the 457,400 shares of
common stock. Pursuant to the Agreement only 20% or 91,480 shares of
common stock would be delivered directly to Columbia. The remaining 80%
or 365,920 shares would be held in trust and released ratably to
Columbia over the following four years. The Company and Columbia have
not yet entered into a definitive escrow agreement for the shares that
would be held in trust.
Columbia has subsequently contended that the Company has not performed
in accordance with the Agreement because the shares of common stock
issued in Columbia's name are currently restricted from resale pursuant
to applicable securities laws. Based on its contention, Columbia has
indicated that it is withdrawing its notice of exchange and has
requested that the Company amend the Agreement. Management believes the
possibility exists that the Company may negotiate an amendment to the
Agreement and ultimately issue additional shares to Columbia, though at
present, management is unable to determine what the terms of such an
amendment might entail or estimate how many additional shares may be
issued.
Management has assessed the status of the pending exchange and
Columbia's contentions and believes that uncertainty exists about the
ultimate outcome of this matter. Accordingly, the $3,407,000 value of
the Class B preferred stock of Origin software continues to be presented
as minority interest.
STOCK OPTION INCENTIVE COMPENSATION PLAN -
Effective June 21, 1999, the Company adopted the 1999 Stock Incentive
Compensation Plan (the Plan). Under the Plan, the Company may make
grants of incentive stock options, nonqualified stock options, and stock
awards to employees, officers, directors and consultants of the Company
and its subsidiaries for an amount of common shares equal to 10% of
issued and outstanding shares, not to exceed 4,000,000 shares. The
exercise price of incentive stock options and nonqualified stock options
can be no less than the fair value of the Company's common stock on the
date of grant. The maximum term of options is ten years; and, unless
otherwise modified by the Plan administrator, they vest over four years.
Options granted to senior management during 1999 vest over two years.
7
<PAGE> 10
A summary of the status of the Plan at June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted-
Number Average
Of Shares Exercise Price
--------- --------------
<S> <C> <C>
Options outstanding at September 30, 1999 919,000 $5.50
Granted 1,155,000 $6.38
Exercised - -
Forfeited (289,000) $5.63
Options outstanding at June 30, 2000 1,785,000 $5.88
Options exercisable at June 30, 2000 160,000 $5.50
</TABLE>
A summary of stock options outstanding at June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ------------ --------- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.65 to $10.25 1,785,000 4.4 years $5.88 440,000 $5.50
</TABLE>
The Company applies the provision of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations to account for
its stock-based awards. Accordingly, costs for employee stock options or
issuance of shares is measured as the excess, if any, of the fair value
of the Company's common stock at the measurement date over the amount
the employee must pay to acquire the stock. No compensation expense was
recognized for grants of awards under the Plan in the quarter and nine
months ended June 30, 2000.
OTHER STOCK-BASED COMPENSATION
1.
During the nine months ended June 30, 2000 the Company issued 200,000
options to purchase the same number of the Company's common shares as
follows: 50,000 shares at an exercise price of $5.25, 50,000 shares at
an exercise price of $6.00, 50,000 shares at an exercise price of $7.50
and 50,000 shares at an exercise price of $8.00. The options expire on
December 14, 2002. The options were issued at no cost in connection with
the Company entering into a consulting agreement with Continental
Capital & Equity Corporation (Continental). Under the agreement,
Continental will assist and advise the Company with respect to investor
relations professional services.
As required by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has applied the fair value method to account for issuance of
the options. The Company used the Black-Scholes option pricing model to
compute estimated fair value of the warrants, based on the following
assumptions:
Risk-free interest rate 6.0%
Price volatility 52.5%
Average expected life of options 1.5 years
Total compensation cost computed for the options issued to Continental
is $188,000. The cost is being recognized ratably over the three-year
term of the options.
2.
In January 2000 the Company issued 100,000 options to purchase the same
number of the Company's common shares at an exercise price of $5.50. The
options expire on January 2002 and were issued at no cost in connection
with the Company entering into a consulting agreement with Peter Sanders
under which Mr. Sanders will assist and advise the Company in respect to
investor relations professional services.
8
<PAGE> 11
As required by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has applied the fair value method to account for issuance of
the options. The Company used the Black-Scholes option pricing model to
compute estimated fair value of the warrants, based on the following
assumptions:
Risk-free interest rate 6.0%
Price volatility 33.7%
Average expected life of options 1.5 years
Total compensation cost computed for the options issued to Peter Sanders
is $105,000. The cost is being recognized ratably over the two-year term
of the options.
3.
In April, 2000, the Company issued 200,000 warrants that entitle holders
to purchase an equal number of common shares at $6.00 per share. The
warrants expire in April 2005. The warrants were issued at no cost in
connection with the Company entering into a consulting agreement with
Murdock Capital Partners Corp. (Murdock). Under the agreement, Murdock
will provide investor relations services to the Company.
As required by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has applied the fair value method to account for issuance of
the warrants. The Company used the Black-Scholes option pricing model to
compute the estimated fair value of the warrants, based on the following
assumptions:
Risk-free interest rate 6%
Price volatility 62.3%
Average expected life of the warrants 2 years
Total compensation cost computed for the warrants is $455,600. The cost
is being recognized ratably over a two-year period.
Note 4 - Non-Cash Transactions
During the nine months ended June 30, 2000, $1,196,400 of the net
proceeds from the convertible debentures described in Note 2 was
allocated to detachable stock warrants and credited to additional paid
in capital.
During the nine months ended June 30, 2000, the Company acquired 1,600
shares of Class A preferred stock of its subsidiary, Infer Technologies,
Inc., in connection with an employee compensation arrangement. As a
result of this transaction, a total of $113,000 of minority interests
was reclassified as common stock.
During the nine months ended June 30, 2000, the Company acquired $98,000
of equipment under capital lease agreements.
During the nine months ended June 30, 1999, the Company's subsidiary,
Origin Software Corporation, issued preferred shares valued at
$3,407,000 in exchange for certain software rights. During the same
period, it offset $1,792,400 of deferred gain, net of tax, against the
value of the software rights acquired.
Note 5 - Segment Information
SEGMENT INFORMATION -
The Company's primary operations consist of the development and sale of
trade compliance software products to entities subject to the North
American Free Trade Agreement and the development and implementation of
internet-based content management software. Other services include
international trade consulting. Management assesses the operations of
its software sales and development activities and its consulting
activities as separate segments. The following tables and schedules
summarize certain information about these segments.
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<TABLE>
<CAPTION>
SOFTWARE SALES AND DEVELOPMENT
------------------------------
INTERNATIONAL TRADE K-SERVER INTERNATIONAL TOTAL
TRADE CONSULTING
------------------- -------- ---------------- -----
<S> <C> <C> <C> <C>
Three months ended June
30, 1999
External revenues 52,000 5,000 82,300 139,300
Inter-segment revenues - - 6,200 6,200
Segment income (loss) (335,000) (27,000) 22,000 (340,000)
before tax
Segment assets 1,984,000 554,500 119,000 2,657,500
Three months ended June
30, 2000
External revenues 91,000 240,000 168,000 499,000
Inter-segment revenues - - - -
Segment income (loss) (90,700) (198,000) 81,200 (207,500)
before tax
Segment assets 1,633,500 659,000 195,000 2,487,500
Nine months ended June
30, 1999
External revenues 114,400 76,800 266,800 458,000
Inter-segment revenues 31,500 0 6,200 37,700
Segment income (loss) (758,500) (27,000) 73,000 (712,500)
before tax
Segment assets 1,984,000 554,500 119,000 2,657,500
Nine months ended June
30, 2000
External revenues 182,000 531,500 424,100 1,137,600
Inter-segment revenues - - - -
Segment income (loss) (413,500) (503,000) 150,000 (766,500)
before tax
Segment assets 1,633,500 659,000 195,000 2,487,500
Three months ended June 30,
1999 2000
Total income (loss) before tax for (340,000) (207,500)
reportable segments
Corporate headquarters expenses (69,100) (816,300)
Consolidated totals (409,100) (1,023,800)
Nine months ended June 30,
1999 2000
Total income (loss) before tax for (712,500) (766,500)
reportable segments
Corporate headquarters expenses (135,500) (3,621,100)
Consolidated totals (848,000) (4,387,600)
</TABLE>
Note 6 - Contingencies
CANADIAN TAX IMPLICATIONS OF SALE AND PURCHASE OF SOFTWARE RIGHTS -
During 1995 and 1996, the Company's subsidiary, Technologies, sold the
rights to its primary software product to Columbia Diversified Software
Fund Limited Partnership (Columbia). During 1999, another of the
Company's subsidiaries, Origin Software, repurchased these rights.
During the same time frame, Technologies purchased and sold an interest
in certain other software rights. These transactions all included a
significant noncash component that employed the issuance, receipt, and
settlement of long-term promissory notes. Although these notes were not
recognized for financial reporting purposes, they did increase
significantly the value assigned to the software rights in question for
tax reporting purposes in Canada.
Revenue Canada has been reviewing various software transactions,
including those to which Technologies was a party. In October 1999, the
Company submitted a proposed settlement to Revenue Canada that would
limit the amount of tax it must pay on the net gain from these
transactions to the net amount of cash received. Effective January 7,
2000, Revenue Canada agreed to the terms of the settlement.
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<PAGE> 13
EXCHANGE OF CLASS B PREFERRED SHARES OF ORIGIN SOFTWARE -
As described in Note 3, effective January 26, 2000, Columbia Diversified
Software Fund Limited Partnership (Columbia) notified the Company that
it wished to exercise the exchange rights associates with the 5 million
outstanding shares of Class B preferred stock of Origin Software
Corporation. On February 15, 2000, the Company issued 457,400 shares of
common stock in the name of Columbia to be exchanged for the Class B
shares stock. Columbia has not yet tendered the Class B shares to the
Company, and the Company has not yet delivered the 457,400 shares of
common stock. Only 20% or 91,480 shares of the shares of common stock
would be delivered directly to Columbia. The remaining 80% or 365,920
shares would be held in trust pursuant to the terms of the Share
Exchange Agreement (the "Agreement") and be released ratably to Columbia
over the following four years. The Company and Columbia have not yet
entered into a definitive escrow agreement for the shares that would be
held in trust.
Columbia has subsequently contended that the Company has not performed
in accordance with the Agreement because the shares of common stock
issued in Columbia's name are currently restricted from resale pursuant
to applicable securities laws. Based on its contention, Columbia has
indicated that it is withdrawing its notice of exchange and has
requested that the Company amend the Agreement. Management believes the
possibility exists that the Company may negotiate an amendment to the
Agreement and ultimately issue additional shares to Columbia, though at
present, management is unable to determine what the terms of such an
amendment might entail or estimate how many additional shares may be
issued.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATIONS ANALYSIS
During the quarter ended June 30, 2000 we had consolidated revenues of $499,000
operating expenses of $1,127,100 and a net loss before interest and depreciation
of $773,100. For the nine months ending June 30,2000, revenues were $1,137,600,
operating expenses were $3,124,300 and the net loss before depreciation,
amortization and interest was $2,231,100.
Revenues for the three months ended June 30, 2000 increased 243% as compared to
1999 revenues for the same period, which totaled $145,500. The increase is a
result of new revenues generated by kServer(TM), launched during the current
fiscal year and an increased client base for the International Trade products
and services. A kServer(TM) contract entered into with the Government of Canada
was the main contributor to the increase in revenues. Furthermore, the
deployment of Ktravel to the Uniglobe Western Canada region commenced during the
quarter, resulting in initial deployment and customer support revenues.
Operating expenses include research and development, sales and marketing, and
general and administrative expenses. The aggregate of these costs increased
considerably as compared to the previous period. The increase was due to a
significant increase in staffing and activity levels across all our departments.
Research and development costs for the three months ended June 30, 2000 totaled
$262,600 as compared to $72,800 for the same period in the previous fiscal year.
This was a direct result of continued costs incurred in the development of the
kServer(TM) line of products, including higher payroll costs due to the
increased number of engineers and other technical personnel working on
kServer(TM) .
Sales and marketing costs increased 117% during the quarter, from $110,200 to
$239,000 as a result of higher payroll expense and costs associated with more
sales, marketing and support personnel, and increased travel expenses incurred
in the promotion of our lines of products.
General and administrative expenses increased 124%, from $279,300 to $625,500.
The increase was the result of higher payroll costs, travel expense, shareholder
relations costs and professional fees as compared to the previous year.
Amortization and depreciation costs increased from $56,000 to $136,600, mainly
as a result of the amortization costs for the ORIGIN(TM) software acquired in
May 1999.
Interest expense for the three months ending June 30, 2000 was $173,800, a
significant increase as compared to the same period in fiscal year 1999. The
increase is a direct result of the company issuing $5 million of convertible
debentures in February 2000, which bear interest at a rate of 7.0% per annum.
Net loss during the quarter was $1,017,700. In the quarter ended June 30,1999,
we reported a net loss of $418,000. The increase in the net loss was primarily
due to higher interest expense and an increase in operating costs.
In the nine months ended June 30, 2000 revenues increased 130% compared to
revenues for the period ended June 30, 1999. In the same periods of analysis,
the gross profit margin decreased from 85% to 79% as a result of the company
incurring new direct sales costs.
Research and Development expenditures increased 381% as compared to expenditures
for the nine months ended June 30, 1999. The company has increased its
engineering staff and incurs significant additional costs since the deployment
of the kServer(TM) line of products. To support its sales effort, the company
has increased its Sales and Marketing expenditures by 130%, an increase
consistent with the sales growth disclosed in the previous paragraph.
General and Administrative expenses for the nine months ended June 30, 2000
total $1,753,300, a 175% increase compared to administrative expenditures for
the nine months of the previous fiscal year. Costs associated with compliance as
a public company, such as legal, accounting and regulatory costs are grouped in
this category. All of these costs have increased in the current fiscal year.
Amortization and depreciation expenses as of June 30, 2000 increased 227%. The
main factor behind this increase is the amortization of the Origin Software
rights, as disclosed previously in this document. The company has also increased
its hardware and software asset base considerably to support the deployment of
kServer(TM).
For the nine months ended June 30, 2000, interest expense is $1,831,400. The
figure is dramatically higher than the $36,500 spent in the same nine months of
the previous year. As explained above, the increase results from the company
issuing convertible debentures for $5 million, bearing interest at 7% per annum.
The debentures included a beneficial conversion feature that was immediately
exercisable. This circumstance resulted in the Company immediately recognizing
over $1.5 million of interest expense related to this feature during the second
quarter of fiscal 2000.
As a result of the above, the company's net loss for the nine months ended June
30, 2000 is $4,295,800, a loss 390% higher than the $877,100 lost in the nine
months ended June 30, 1999.
INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY:
On June 30, 2000, our cash and cash equivalents totaled $3,829,600. This is a
significant increase in cash as compared to the September 30, 1999 cash position
of $164,200. The
12
<PAGE> 15
increase resulted from the issuance on February 24, 2000, of convertible
debentures in the aggregate principal amount of $5,000,000. The debentures bear
interest at a rate of 7% per annum commencing February 24, 2000 and mature on
February 24, 2005. The principal amount of the debentures (plus all accrued
interest and any additional amounts owed) is convertible, in whole or in part,
at the option of the holders, into shares of Common Stock. In connection with
this issuance, we incurred $448,000 of issue costs.
On June 30, 2000, the Company had working capital of $3,470,700 and a current
ratio of 6.2 to 1. The working capital position has increased significantly as
compared to the balance at September 30, 1999 when working capital was $84,300
with a current ratio of 1.3 to 1. The current working capital position was
achieved through the issuance of additional equity capital during the nine
months ended June 30, 2000 for gross proceeds of approximately $1,184,000 and
the issuance of convertible debentures in the aggregate principal amount of
$5,000,000.
Investing activities during the nine months ended June 30, 2000 have consisted
primarily of purchases of property and equipment, principally computer hardware
and software. Capital expenditures, including those under capital leases,
totaled $139,500 in fiscal 1999 and $280,500 in the nine months ended
June 30, 2000. We expect that capital expenditures will increase with our
anticipated growth in operations, infrastructure and personnel.
To date, we have not invested in derivative securities or any other financial
instruments that involve a high level of complexity or risk. We expect that in
the future, cash in excess of current requirements will continue to be invested
in high credit-quality, interest-bearing securities.
We believe that the net proceeds of the debentures, together with cash and cash
equivalents, will be sufficient to meet our working capital requirements for at
least the next 12 months. Thereafter, we may require additional funds to support
our working capital demand or for other purposes and may seek to raise
additional funds through public or private equity financings or from other
sources. There can be no assurance that additional financing will be available
on acceptable terms, if at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to develop or enhance our
products, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on our business, financial condition and operating results.
There are no legal or practical restrictions on the ability of the subsidiaries
to transfer funds to the parent company (Smartsources.com Inc.)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 is effective for all fiscal quarters
beginning with the quarter ending December 31, 2000. SFAS No.133 establishes
accounting and reporting standards for derivative instruments, including other
contracts, and for hedging activities. We will adopt SFAS No. 133 in the quarter
ending December 31, 2000 and do not expect its adoption to have an impact on our
results of operations, financial position or cash flows.
MATERIAL COMMITMENTS:
The Company has not undertaken any material commitments for expenditures as of
June 30, 2000.
TRENDS OR UNCERTAINTIES:
There are no known trends or uncertainties that will have a material impact on
revenues.
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<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS
10.1 Agreement for the Sale of Origin Professional between SmartSources.com
Technologies Inc. and The Eureka Company.
10.2 Licensing Agreement between SmartSources.com Technologies Inc. and
Everdream Corporation.
10.3 Value-Added Reseller Agreement between SmartSources.com Technologies Inc.
and Ultraseek Corporation.
10.4 Distribution Agreement between SmartSources.com Technologies Inc. and
kTravel Solutions Inc. (The entire document has been omitted and filed
separately with the commission, requesting confidential treatment).
11 Computation of per share earnings
27 Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMARTSOURCES.COM, INC.
Date: August 11, 2000 By: /s/ Nathan Nifco
--------------------- ---------------------------------------
President, Chairman and C.E.O.
14
