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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
COMMISSION FILE NUMBER: 1-13611
------------------------
SOFTLOCK.COM, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1130229
(State or other jurisdiction (IRS Employer Identification No.)
of Incorporation or
organization)
</TABLE>
5 CLOCK TOWER PLACE, SUITE 440, MAYNARD, MA 01754
(Address of principal executive offices)
(978) 461-5940
(Issuer's telephone number)
------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Company was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
As of November 13, 2000, 13,196,736 shares of common stock, par value $0.01 per
share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes /X/ No / /
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<PAGE>
INDEX
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<CAPTION>
PAGE
NUMBER
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet (Unaudited), September 30,
2000...................................................... 3
Consolidated Statements of Operations (Unaudited) for the
three months and nine months ended September 30, 2000 and
1999...................................................... 4
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2000 and 1999............. 5
Supplemental Disclosure of Cash Flow Information............ 6
Notes to consolidated financial statements.................. 7-10
Item 2. Management's Discussion and Analysis of Financial Position
and Results of Operations................................. 11-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 2. Changes in Securities....................................... 16
Item 3. Defaults upon Senior Securities............................. 16
Item 4. Submissions of Matters to a Vote of Security Holders........ 16
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures.................................................. 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SOFTLOCK.COM, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER
30, 2000
-----------
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 3,713,647
Accounts receivable, net.................................. 177,998
Prepaid expenses and other current assets................. 603,405
-----------
Total current assets.................................. 4,495,050
Property and equipment, net................................. 1,365,805
Website and product development costs, net.................. 1,287,927
Security deposits........................................... 55,777
Prepaid royalties........................................... 65,579
Goodwill, net............................................... 1,683,756
-----------
Total assets.......................................... $ 8,953,894
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 428,964
Accrued expenses.......................................... 1,501,985
Current portion of obligations under capital leases....... 321,339
-----------
Total current liabilities................................. 2,252,288
Obligations under capital leases, less current portion...... 636,383
Other long-term liabilities................................. 150,897
Commitments and contingencies (Note 1)
Redeemable convertible Series A Preferred Stock
(Aggregate liquidation preference of $5,643,769 at September
30, 2000)................................................... 5,178,571
Stockholders' Equity:
Common stock, $0.01 par value; 50,000,000 shares
authorized; 13,071,736 shares issued and outstanding at
September 30, 2000...................................... 130,717
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; 46,876 shares issued and outstanding at
September 30, 2000...................................... 469
Deferred compensation..................................... (62,805)
Deferred royalties........................................ (539,274)
Additional paid-in capital................................ 20,386,282
Accumulated deficit....................................... (18,910,754)
Notes receivable from officer and directors............... (268,880)
-----------
Total stockholders' equity............................ 735,755
-----------
Total liabilities and stockholders' equity.................. $ 8,953,894
===========
</TABLE>
See notes to Consolidated Financial Statements
3
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SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- -------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C>
Net Revenues............................. $ 339,926 $ 11,373 $ 443,472 $ 77,484
Cost of Revenues......................... 95,267 5,095 121,800 18,071
----------- ----------- ------------ -----------
Gross Profit............................. 244,659 6,278 321,672 59,413
Research and Development Expense(1)...... 1,069,371 540,346 2,740,546 1,268,383
Selling and Marketing Expense(2)......... 962,518 380,727 3,291,359 683,474
General and Administrative Expense(3).... 1,785,366 1,006,429 4,745,432 2,494,415
----------- ----------- ------------ -----------
Total Operating expenses................. 3,817,255 1,927,502 10,777,337 4,446,272
----------- ----------- ------------ -----------
Operating loss........................... (3,572,596) (1,921,224) (10,455,665) (4,386,859)
Other income (expense):
Interest expense....................... (28,059) (6,472) (58,826) (6,939)
Interest income........................ 86,744 18,346 325,381 51,134
----------- ----------- ------------ -----------
Loss before income tax (benefit)....... (3,513,911) (1,909,350) (10,189,110) (4,342,664)
Income tax expense (benefit)........... -- -- -- --
----------- ----------- ------------ -----------
Net loss................................. (3,513,911) (1,909,350) (10,189,110) (4,342,664)
Beneficial conversion feature on
convertible preferred stock, including
accretion of dividends on Series A
Preferred Stock of $393,753 at
September 30, 2000..................... (135,605) -- (9,779,301) --
----------- ----------- ------------ -----------
Net loss attributable to common
stockholders........................... $(3,649,516) $(1,909,350) $(19,968,411) $(4,342,664)
=========== =========== ============ ===========
Basic and diluted net loss per common
share.................................. $ (0.28) $ (0.18) $ (1.54) $ (0.45)
=========== =========== ============ ===========
Basic and diluted weighted average shares
outstanding............................ 13,071,736 10,664,193 12,931,686 9,671,299
=========== =========== ============ ===========
</TABLE>
------------------------
(1) including noncash compensation and consulting expense of $4,212 and $87,842
for the three months ended September 30, 2000 and 1999, respectively, and
$12,636 and $179,896 for the nine months ended September 30, 2000 and 1999,
respectively.
(2) including noncash compensation and consulting expense of $0 and $60,395 for
the three months ended September 30, 2000 and 1999, respectively, and
$79,849 and $103,694 for the nine months ended September 30, 2000 and 1999,
respectively.
(3) including noncash compensation and consulting expense of $153,253 and
$349,242 for the three months ended September 30, 2000 and 1999,
respectively, and $494,268 and $1,153,664 for the nine months ended
September 30, 2000 and 1999, respectively.
See notes to Consolidated Financial Statements
4
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SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
(AS RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(10,189,110) $(4,342,664)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization............................. 765,070 22,247
Noncash compensation and consulting expense............... 586,753 1,437,254
Bad debt expense.......................................... 10,700 --
Deferred rent expense..................................... 94,604 25,000
Services paid in common stock of the Company.............. 7,400 229,475
Loss on disposal of property and equipment................ -- 2,044
Increase (decrease) in cash from:
Accounts receivable..................................... (185,342) 4,619
Prepaid expenses and other current assets............... (148,952) (76,778)
Accounts payable........................................ (214,155) 336,964
Accrued compensation and benefits....................... 571,815 92,431
Other accrued expenses.................................. 132,949 908,828
------------ -----------
Net cash used for operating activities.................. (8,568,268) (1,360,580)
Cash flows from investing activities:
Payment of security deposits.............................. (24,493) (20,000)
Website development costs................................. -- (992,759)
Cash paid in acquisition of Chili Pepper, net............. (329,139) --
Purchases of property and equipment....................... (254,725) (291,263)
------------ -----------
Net cash used for investing activities.................. (608,357) (1,304,022)
Cash flow from financing activities:
Principal payments on long-term debt...................... (144,055) (14,212)
Proceeds from bridge loan................................. -- 501,096
Proceeds from issuance of Series A preferred, net of
issuance costs.......................................... 1,969,781 --
Proceeds from issuance of Series B preferred, net of
issuance costs.......................................... 7,355,160 --
Proceeds from issuance of common stock, net of issuance
costs................................................... -- 3,037,478
Proceeds from exercise of stock options................... 13,977 --
------------ -----------
Net cash provided by financing activities............... 9,194,863 3,524,362
------------ -----------
Net increase in cash........................................ 18,238 859,760
Cash, beginning of period................................... 3,695,409 160,841
------------ -----------
Cash, end of period......................................... $ 3,713,647 $ 1,020,601
============ ===========
</TABLE>
See notes to Consolidated Financial Statements
5
<PAGE>
SOFTLOCK.COM, INC.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 58,826 $ 6,939
======== ========
Cash paid during the period for taxes..................... $ 10,368 $ 1,078
======== ========
Summary of noncash financing and investing activities:
Payable and accrued website development costs............. $116,426 $ --
======== ========
Issuance of common stock for web development costs........ $272,876 $ --
======== ========
Issuance of common stock for prepaid royalties............ $179,622 $ --
======== ========
Capital lease obligation--property and equipment.......... $761,412 $177,596
======== ========
</TABLE>
See notes to Consolidated Financial Statements
6
<PAGE>
SOFTLOCK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. MANAGEMENT'S REPRESENTATION OF INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements have been prepared by
SoftLock.com, Inc. (the "Company") without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements, prepared in accordance
with generally accepted accounting principles, have been condensed or omitted as
allowed by such rules and regulations, and management believes that the
disclosures are adequate to make the information presented not misleading.
These consolidated financial statements include all adjustments, which in
the opinion of management, are necessary to reflect a fair presentation of the
Company's financial position and results of operations. All such adjustments are
of a normal and recurring nature. The results for the nine-month period ended
September 30, 2000 are not necessarily indicative of the results for the entire
year 2000.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements for the year ended December 31,
1999 filed as part of the Company's Annual Report on Form 10-KSB/A.
The Company has reviewed the status of its legal contingencies and believes
that there are no material changes from that disclosed in Form 10-KSB/A for the
year ended December 31, 1999.
The Company's interim consolidated statements of operations and cash flows
for 1999 have been restated from amounts previously reported to reflect the
effects of the matters discussed in Note 9 of the Company's 1999 annual report
on Form 10-KSB/A.
2. PRIVATE PLACEMENT OF EQUITY SECURITIES
On January 7, 2000, the Company received gross proceeds $500,004 ($492,445,
net of issuance costs) in exchange for 4,902 shares of the Company's Series A
Preferred Stock (the "Series A Preferred").
In connection with the Series A Preferred transaction, the Company entered
into a Series A Preferred Stock Purchase Agreement dated as of December 30, 1999
as supplemented on January 7, 2000 (the "Purchase Agreement") with SI Venture
Fund II, L.P. ("SI"), Apex Investment Fund IV, L.P., Apex Strategic Partners IV,
LLC, (collectively, "Apex") and RSA Security Inc. ("RSA") (collectively, the
"Purchasers") and a Shareholders and Rights Agreement (the "Shareholders
Agreement") with the Purchasers and the then President and Chief Executive
Officer and the Chief Scientist of the Company. The Company also filed a
Certificate of Designation with the Delaware Secretary of State that states the
powers, preferences and rights of the Series A Preferred.
On February 10, 2000, the Company issued 46,876 shares of Series B Preferred
Stock (the "Series B Preferred") to a group of investors, including affiliates
of Tudor Investment Corp. and Ritchie Capital, as well as investors in an
earlier round of financing, SI and Apex (collectively, the "Investors") for a
purchase price of $160 per share for an aggregate purchase price of $7,500,160
($7,355,160, net of issuance costs). Investors were also issued two warrants,
one of which would become exercisable for an aggregate of 312,500 shares of
common stock if, as of August 15, 2000, the Company's registration statement for
the shares of common stock issuable upon conversion of the Series B Preferred
was not declared effective and the NASDAQ listing application for the common
7
<PAGE>
SOFTLOCK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
2. PRIVATE PLACEMENT OF EQUITY SECURITIES (CONTINUED)
stock was not accepted, and the second of which would become exercisable for an
aggregate of an additional 312,500 shares of common stock if, as of
November 15, 2000, these two conditions were not met. On August 15, 2000, the
Holders of the Series B Preferred Stock agreed to extend the date for vesting of
the warrants from August 15, 2000 to September 14, 2000. The condition for
registration was met on August 10, 2000 and the condition for NASDAQ listing was
met on September 14, 2000. As a result, these warrants are no longer
outstanding. In addition, as a result of being listed on NASDAQ, the Series B
Preferred stock was no longer redeemable at the option of the holder. At
September 14, 2000, the Company reclassified the amount of Series B Preferred
Stock into equity.
Ascent Venture Partners III, L.P. ("Ascent") also purchased 14,706 shares of
the Company's Series A Preferred for $102 per share for an aggregate purchase
price of $1,500,012 ($1,477,336, net of issuance costs) in February 2000. In
connection with the investment by Ascent, the Company agreed to appoint an
Ascent representative to its Board of Directors.
In connection with the Series B Preferred transaction, the Company entered
into a Series B Preferred Stock and Warrant Purchase Agreement dated as of
February 10, 2000 (the "Purchase Agreement") with the investors and an Amended
and Restated Shareholders and Rights Agreement (the "Amended Shareholders
Agreement") with the Investors, the holders of the Series A Preferred and the
Company's then President and Chief Scientist. The rights and preferences of the
Series B Preferred are similar to those of the Series A Preferred.
The Company recorded, immediately upon issuance, a preferred stock dividend
representing the value of the beneficial conversion feature on the issuance of
Series A and B preferred stocks. Such amount was limited to the proceeds
received from issuing the beneficial conversion securities or approximately
$9,324,941.
3. EARNINGS PER SHARE
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding during the periods presented. Earnings per
share exclude the effects of 4,559,422 and 2,786,299 stock options, zero and
196,400 warrants and 100,311 and zero convertible preferred as of September 30,
2000 and 1999, respectively, because the inclusion of such securities would be
anti-dilutive.
4. PREPAID ROYALTIES
In December 1999, the Company entered into an agreement with Intel for the
use of certain of Intel's technology. In connection with such agreement, the
Company paid $75,000 and issued 224,514 shares of its common stock to Intel.
Under the agreement, the Company has the right to recoup a portion of the shares
issued if Intel fails to meet its performance obligations. The fair value of the
forfeitable shares has been recorded as a reduction of stockholders' equity. The
value of such forfeitable shares is remeasured at each reporting period until
such shares become nonforfeitable. Per the agreement, on September 30, 2000, an
additional twenty percent (20%) of the shares became nonforfeitable for a total
of 40% nonforfeitable shares as of September 30, 2000. As such, the
8
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SOFTLOCK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
4. PREPAID ROYALTIES (CONTINUED)
Company recorded an additional prepaid relating to the royalty of $179,622 and
reduced deferred royalty costs by the same amount.
5. ACQUISITION
On May 12, 2000, the Company completed its acquisition of certain net assets
of Chili Pepper, Inc. ("Chili Pepper"), a Boston-based strategic marketing
consulting firm. Under the terms of the agreement, the Company issued 193,289
shares of the Company's common stock, $.01 par value, with an aggregate value of
$1,404,365, paid $351,090 in cash and incurred $50,000 in transaction costs
(collectively, the "Purchase Price"). The acquisition has been accounted for as
a purchase, and accordingly, the results of operations of the Chili Pepper
business have been included in the Company's consolidated financial statements
from the date of acquisition. The Purchase Price has been allocated to the net
assets acquired based upon their fair values. The Purchase Price exceeded the
fair value of the assets acquired and liabilities assumed resulting in goodwill
being recorded. Such goodwill is being amortized over its estimated useful life
of five years. The following is a summary of the Purchase Price allocation.
<TABLE>
<S> <C>
Cash paid................................................... $ 351,090
Aggregate value of Common Stock............................. 1,404,365
Transaction costs........................................... 50,000
----------
Total purchase price.................................. $1,805,455
==========
Allocated to tangible assets acquired....................... $ 67,543
Allocated to liabilities assumed............................ 39,488
Goodwill acquired........................................... 1,777,400
----------
Total................................................. $1,805,455
==========
</TABLE>
The following supplemental pro forma financial information is provided to
reflect revenues, net loss and net loss per share, had the consummation of the
asset acquisition taken place at the beginning of each period presented below.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 SOFTLOCK.COM CHILIPEPPER ADJUSTMENTS TOTAL
-------------------------------------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue................................... $ 77,484 $ 780,818 0 $ 858,302
Net Loss.................................. $ (4,342,664) $ 18,137 (177,740) $ (3,065,013)
Number of shares.......................... 9,671,299 193,289 9,864,588
EPS....................................... $ (0.30) $ (0.31)
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 SOFTLOCK.COM CHILIPEPPER ADJUSTMENTS TOTAL
-------------------------------------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue................................... $ 443,472 $ 870,631 (354,450) $ 959,653
Net Loss.................................. $(10,189,111) $(193,933) (118,493.3333) $(10,501,537)
Number of shares.......................... 12,738,397 193,289 12,931,686
EPS....................................... $ (0.80) $ (0.81)
</TABLE>
9
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SOFTLOCK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
5. ACQUISITION (CONTINUED)
Under the terms of the agreement, 30% of the shares issued shall be entitled
to non-priority piggyback registration rights, under certain restrictions. Such
rights are subordinated to the registration rights of the holders of Series A
Preferred Stock and Series B Preferred Stock and to the registration rights of
Intel Corporation. In addition, the Company entered into an employment agreement
with one of the shareholders of Chili Pepper.
6. OFFICERS AND DIRECTORS
Effective April 17, 2000, Scott W. Griffith was appointed as Chief Executive
Officer of the Company. In connection with that appointment, Mr. Griffith
entered into an employment agreement with the Company, as part of which, he was
granted a stock option to purchase 1,164,670 shares of common stock at an
exercise price of $8.50 per share, the fair market value of the Company's common
stock on the date of the grant.
On May 5, 2000, the Company and Keith Loris, the former Chief Executive
Officer and President entered into a Separation Agreement. Pursuant to that
agreement, Mr. Loris shall engage in Transition Period Employment with the
Company until November 6, 2000. In connection with the Separation Agreement,
approximately 673,000 options to purchase shares of the Company's stock were
cancelled.
On June 16, 2000 Mr. Loris resigned as a Director of the Company. Also on
that date, Ronald Dunn was elected to the board to replace Mr. Loris.
7. DEFERRED COMPENSATION
During the three months ended September 30, 2000, several employees, for
whom there had been deferred compensation recorded, left the Company. As a
result, the Company has reversed approximately $1,514,600 of previously deferred
compensation expense.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issues
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended in June 1999,
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The new standard requires that all companies record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivatives and whether it qualifies for hedge
accounting. Management is currently assessing the impact of SFAS No. 133 on the
consolidated financial statements of the Company. The Company will adopt this
accounting standard on January 1, 2001, as required.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements. The
Company adopted SAB No. 101 on October 1, 2000 and management believes that the
adoption of this standard will not have an effect on previously recorded
financial statements.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements (as this term is defined in
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) and information relating to the Company that is based on
the beliefs of the management of the Company as well as assumptions made by and
information currently available to the management of the Company, including, but
not limited to, statements related to the Company's future cash and financing
requirements. Forward-looking statements involve known and unknown risks and
uncertainties which may cause the actual results in future periods to differ
materially from what is anticipated. Factors that could cause or contribute to
these differences include, but are not limited to, those discussed in this
section and elsewhere in this Report and the risks discussed under the heading
"Risk Factors" in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999. The Company does not assume responsibility for the accuracy
and completeness of these forward-looking statements and undertakes no
obligation to update forward-looking statements. The following discussion and
analysis should be read in conjunction with our consolidated financial
statements and notes included herein and our annual report on Form 10-KSB/A for
the year ended December 31, 1999.
BACKGROUND
The Company provides a system that combines content management and context
marketing to allow commercial web sites to securely market and sell digital
content. Publishers of digital content, including research reports, newsletters
and electronic books, use the Company's system to package and securely
distribute their products while protecting their intellectual property. The
Company markets digital content through strategic relationships with many
affiliates who offer the digital content on their web sites. When a prospective
consumer accesses the content, the consumer can preview selected portions of the
final product. The consumer can then instantly purchase access to the complete
product twenty-four hours a day, seven days a week via the World Wide Web. The
consumer then has permanent access to the product for the consumer's own use.
Consumers are encouraged to pass along the digital content they have purchased,
but recipients can only preview the selected portions of the final product
chosen by the content provider until they complete the purchase process
themselves.
The Company's patented persistent security technology (US #5,509,070) for
information commerce prevents electronic shoplifting (piracy) not just during
the initial download, but also when the digital content is passed from one
consumer to another. This allows commercial web sites to sell their electronic
information simply and securely. Because content offered by the Company can be
instantly purchased and re-distributed, but not pirated, the technology is
useful in many markets, especially information "publishing" web sites (news,
media, finance, research, etc.).
CORPORATE STRUCTURE
Prior to July 1998, the Company was a public shell company organized to
locate and acquire an operating company. In July 1998, pursuant to a Plan and
Agreement of Reorganization, the Company exchanged 7,097,266 shares of its
restricted common stock for all of the issued and outstanding shares of SoftLock
Services, Inc. ("SSI"), and the owners of SSI became the majority owners of the
Company. The Company's only asset consists of shares of capital stock of SSI,
its wholly owned, operating subsidiary.
CHILI PEPPER ASSET ACQUISITION
On May 12, 2000, the Company completed its acquisition of certain net assets
of Chili Pepper, Inc. ("Chili Pepper"), a Boston-based strategic marketing
consulting firm. Under the terms of the
11
<PAGE>
agreement, the Company issued 193,289 shares of the Company's common stock, $.01
par value, with an aggregate value of $1,404,365, paid $329,139 in net cash and
incurred $50,000 of transaction costs (collectively, the "Purchase Price"). The
acquisition has been accounted for as a purchase, and accordingly, the results
of operations of the Chili Pepper business have been included in the Company's
consolidated financial statements from the date of acquisition. The Company has
allocated the Purchase Price to the net assets acquired based upon their fair
values; therefore, the Company has recorded $1,777,400 of goodwill. The Company
is amortizing this goodwill over its estimated useful life of five years.
Under the terms of the agreement, 30% of the shares issued are entitled to
restricted non-priority piggyback registration right. These rights are
subordinated to the registration rights of the holders of Series A Preferred
Stock and Series B Preferred Stock and to the registration rights of Intel
Corporation. In addition, the Company entered into an employment with one of the
shareholders of Chili Pepper.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Total revenues increased to $339,926 for the three months ended
September 30, 2000, as compared to $11,373 for the three months ended
September 30, 1999. The increase is a result of increased revenue from password
vending (the process by which documents are "unlocked" in the Company's system)
to $27,875 from $11,373 in 1999, a 145% increase, and the addition in 2000 of
outside advertising revenue from Chili Pepper and other eMerchandising services
of $312,051 for the three months ended September 30, 2000.
Cost of sales increased to $95,267 for the three months ended September 30,
2000, as compared to $5,095 for the three months ended September 30, 1999. The
increase in cost of sales is primarily related to an increase in costs
associated with outside advertising and other eMerchandising activities as well
as an increase in credit card transaction fees due to an increase in volume.
Gross profit increased to $244,659 for the three months ended September 30,
2000, as compared to $6,278 for the three months ended September 30, 1999. Gross
profit increased to 72% of revenue for the three months ended September 30,
2000, as compared to 55% of revenue for the three months ended September 30,
1999. The increase in gross margin is attributable to the addition of outside
advertising and eMerchandising services which have a higher gross margin than
the Company's current transactional activities, but is partially offset by an
increase in both the fixed and variable transaction costs associated with a
higher number of transactions, a majority of which had a lower average
commission per unit.
Operating expenses increased to $3,817,255 for the three months ended
September 30, 2000, as compared to $1,927,502 for the three months ended
September 30, 1999. This is an increase of $1,889,753. The increase is primarily
due to costs associated with significant staffing increases (from 24 employees
at September 30, 1999 to 62 employees as of September 30, 2000) to support the
SoftLock eMerchandising system, related operating and consulting costs, research
and development costs, and other miscellaneous administrative costs. Included in
operating expenses are costs related to noncash compensation and consulting
transactions in the amounts of $157,465 and $497,479 for the three months ended
September 30, 2000 and 1999, respectively.
Research and development costs increased to $1,069,371 for the three months
ended September 30, 2000, as compared to $540,346 for the three months ended
September 30, 1999. This is an increase of $529,025. This increase is related to
the additional staffing, as well as outside consulting, in connection with the
research and development of the eMerchandising system and related proprietary
software. Included in research and development expenses are costs related to
noncash compensation
12
<PAGE>
and consulting in the amounts of $4,212 and $87,842 for the three months ended
September 30, 2000 and 1999, respectively.
Selling and marketing costs increased to $962,518 for the three months ended
September 30, 2000, as compared to $380,727 for the three months ended
September 30, 1999. This is an increase of $581,791. This increase is primarily
attributable to additional staffing and outside consulting costs associated with
the enrollment of content providers and affiliates for the SoftLock Affiliate
Network. Included in selling and marketing expenses are costs related to noncash
compensation and consulting in the amounts of $0 and $60,395 for the three
months ended September 30, 2000 and 1999, respectively.
General and administrative costs increased to $1,785,366 for the three
months ended September 30, 2000, as compared to $1,006,429 for the three months
ended September 30, 1999. This is an increase of $778,937. This increase relates
primarily to additional staffing and outside consulting costs incurred in the
building of the management infrastructure and support team for the
eMerchandising system. Included in the above costs are salaries and wages,
consulting, and all other related operating expenses. Also included in general
and administrative expenses are costs related to noncash compensation and
consulting in the amounts of $153,253 and $349,242 for the three months ended
September 30, 2000 and 1999, respectively.
Other income, net increased to $58,685 for the three months ended
September 30, 2000, as compared to $11,874 for the three months ended
September 30, 1999. This change relates primarily to investment earnings on the
Company's cash reserves which increased as a result of the Company's private
placement offerings of preferred stock which occurred during the first quarter
of fiscal 1999 and the first quarter of fiscal 2000.
Net loss increased to $3,513,911 for the three months ended September 30,
2000, as compared to $1,909,350 for the three months ended September 30, 1999.
The increase resulted primarily from the increase in operating expenses. The
Company's business plan calls for higher losses in 2000 as the Company continues
to develop products, hire the personnel necessary to grow the business and
expand its marketing strategy. The Company anticipates that it will incur
significant operating losses for the remainder of 2000 and 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Total revenues increased to $443,472 for the nine months ended
September 30, 2000, as compared to $77,484 for the nine months ended
September 30, 1999. This 472% increase was due to both the addition of outside
advertising revenue from Chili Pepper and other eMerchandising of $383,062 as
well as an increase of $16,691, or 37% of password vending revenue. These
increases were partially offset by a decrease of $33,500 in licensing fees,
custom tools and programming and consulting and speaking fees.
Cost of sales increased to $121,800 for the nine months ended September 30,
2000 as compared to $18,071 for the nine months ended September 30, 1999. The
increase in costs of sales is primarily due to the costs associated with the
Company's outside advertising and eMerchandising services and credit card
transaction fees associated with the transactional services.
Gross profit increased to $321,672 for the nine months ended September 30,
2000, as compared to $59,413 for the nine months ended September 30, 1999.
However, gross profit decreased to 73% of revenue for the nine months ended
September 30, 2000, as compared to 77% of revenue for the nine months ended
September 30, 1999. The decrease is due to an increase in both the fixed and
variable transaction costs associated with a higher number of transactions a
majority of which had a lower average commission per unit partially offset by
higher gross margin in licensing fees, custom tools and programming.
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<PAGE>
Operating expenses increased to $10,777,337 for the nine months ended
September 30, 2000, as compared with $4,446,272 for the nine months ended
September 30, 1999. This is an increase of $6,331,065. The increase is primarily
due to costs associated with significant staffing increases (from 24 employees
at September 30, 1999 to 62 employees as of September 30, 2000) to support the
SoftLock eMerchandising system, related operating and consulting costs, research
and development costs, and other miscellaneous administrative costs. Included in
operating expenses are costs related to noncash compensation and consulting
transactions in the amounts of $586,753 and $1,437,254 for the nine months ended
September 30, 2000 and 1999, respectively.
Research and development costs increased to $2,740,546 for the nine months
ended September 30, 2000, as compared to $1,268,383 for the same period in 1999.
This is an increase of $1,472,163. This increase is related to the additional
staffing, as well as outside consulting, in connection with the research and
development of the eMerchandising system and related proprietary software.
Included in research and development expenses are costs related to noncash
compensation and consulting in the amounts of $12,636 and $179,896 for the nine
months ended September 30, 2000 and 1999, respectively.
Selling and marketing costs increased to $3,291,359 for the first nine
months of 2000, as compared to $683,474 for the first nine months of 1999. This
is an increase of $2,607,885. This increase is primarily attributable to
additional staffing and outside consulting costs associated with the enrollment
of content providers and affiliates for the SoftLock Affiliate Network. Included
in selling and marketing expenses are costs related to noncash compensation and
consulting in the amounts of $79,849 and $103,694 for the nine months ended
September 30, 2000 and 1999, respectively.
General and administrative costs increased to $4,745,432 for the nine months
ended September 30, 2000, as compared to $2,494,415 for the nine months ended
September 30, 1999. This is an increase of $2,251,017. This increase relates
primarily to additional staffing and outside consulting costs incurred in the
building of the management infrastructure and support team for the
eMerchandising system. Included in the above costs are salaries and wages,
consulting, and all other related operating expenses. Also included in general
and administrative expenses are costs related to noncash compensation and
consulting in the amounts of $494,268 and $1,153,664 for the nine months ended
September 30, 2000 and 1999, respectively.
Other income, net increased to $266,555 for the nine months ended
September 30, 2000, as compared to $44,195 for the nine months ended
September 30, 1999. This change relates primarily to investment earnings on the
Company's cash reserves, which increased as a result of the Company's private
placement offerings of preferred stock, which occurred during the fourth quarter
of fiscal 1999 and the first quarter of fiscal 2000.
Net loss increased to $10,189,110 for the nine months ended September 30,
2000, as compared to $4,342,664 for the nine months ended September 30, 1999.
The increase resulted primarily from the increase in operating expenses. The
Company's business plan calls for higher losses in 2000 as the Company continues
to develop products, hire the personnel necessary to grow the business and
expand its marketing strategy. The company anticipates that it will incur
significant operating losses for the remainder of 2000 and 2001.
Management anticipates that the trend toward increased quarterly operating
expenses will continue in order to support increased marketing and promotional
efforts, to develop and release new products, to continue to build a strong
management team, to raise necessary capital, and to otherwise create the
infrastructure that the Company will need to provide its services in the future.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations totaled $8,568,268 for the nine months ended
September 30, 2000, as compared to $1,360,580 for the nine months ended
September 30, 1999. Cash used for the nine months ended September 30, 2000,
related primarily to the net loss sustained during the period. In addition,
there was an increase in accounts receivable and prepaid expenses of $185,342
and $148,952 respectively as well as a decrease in accounts payable of $214,155,
which were offset by increases in depreciation and amortization of $765,070,
noncash compensation and consulting expense of $586,753, accrued compensation
and benefits of $571,816 and other accrued expenses of $132,949. At
September 30, 2000, working capital totaled $2,242,762.
Investing activities for the nine months ended September 30, 2000 included,
among other things, $329,139, net cash paid for the acquisition of the Chili
Pepper net assets, $254,725 paid for computer and software purchases and
leasehold improvements related to the building-out of the new main office, as
well as an increase in security deposits of $24,493.
The Company's primary source of liquidity continues to be proceeds from the
sale of securities in private placements. A total of $9,324,941 was raised in
the first three quarters of 2000, of which $1,969,781, net of commission and
expenses, was raised through the sale of 19,608 shares of Series A Preferred
Stock and of which $7,355,160, net of commissions and expenses, was raised
through the sale of 46,876 shares of Series B Preferred Stock. These funds will
be used to finance continued operations, product development and marketing.
During the nine months ended September 30, 2000, the Company financed the
purchase of certain computer hardware and office furniture totaling $761,412
through capital leases. Principal payments on long-term debt used cash of
$144,055 for the nine-months ended September 30, 2000.
The Company, based upon its current operating plan, anticipates that its
currently available funds will be sufficient to satisfy its anticipated needs
for working capital, capital expenditures and business expansion through the
rest of this fiscal year. The Company's cash requirements depend upon many
factors, including, but not limited to, the Company's net cash flows from
operations, the length of time it may take for the Company to develop a market
for its products or services, the market acceptance of these products or
services and the response of competitors who may develop competing products or
services at lower costs. The Company will require additional financing over the
next twelve months. To the extent that the Company is unable to raise additional
financing, the Company may be required to eliminate current and planned software
development programs and other operating expenses. We cannot assure you that the
Company would be able to secure additional financing sources, or that financing
would be made available on terms favorable to the Company. The failure to
acquire additional financing when required could have a material adverse effect
on the Company.
The Company plans to continue to develop, improve and enhance its product
offerings as part of its continuous plan for research and development.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as set forth below, the Company is not a party to any legal
proceedings which management believes to be material, and there are no such
proceedings which are known to be contemplated for which the Company anticipates
a material risk of loss.
The Company is one of approximately 18 defendants in an action in the United
States District Court for the Southern District of New York entitled INTERACTIVE
GIFT V. COMPUSERVE INC. ET AL, filed August 23, 1995. The action alleges that
the Company and 18 other defendants are infringed on the U.S. Patent
No. 4,528,643 held by E-Data Inc. The plaintiff seeks judgment declaring the
validity of its patent and further declaring that each of the defendants has
infringed the plaintiff's patent, enjoinment of further infringement and treble
damages plus attorneys' fees and costs and disbursements.
On March 12, 1999, judgment was entered in the Company's favor and the
patent owner's claims were dismissed on the merits. On November 3, 2000 the
Court of Appeals for the Federal Circuit reversed the judgment and remanded the
case to the District Court for further proceedings. This is not a finding that
the patent is valid or that the Company is infringing the patent, but is only a
reversal of certain claim construction decisions previously made by the District
Court. The Company is considering whether to allow the case to proceed in the
District Court or to seek rehearing EN BANC before the entire Court of Appeals.
Although the Company and its counsel are unable to predict the ultimate
outcome of the appeal with any reasonable degree of certainty, the Company will
continue to defend their positions vigorously.
Other patent-related suits are possible, including legal actions, which
might be pursued to litigate or defend the Company's patent, and the outcomes
and expenses cannot be predicted with confidence. Liability lawsuits are also a
risk to be considered. The Company has developed software technology to protect
intellectual property, but the Company cannot assure you that such technology
will not be breached, resulting in lost revenues for which the Company might be
held responsible. Similarly, the software that incorporates the Company's tools
can have adverse consequences, which might lead to claims of liability against
the Company.
The Company is subjected to this and other litigation from time to time in
the ordinary course of business. Although the amount of the liability, if any,
with respect to such litigation cannot be determined, in the opinion of
management, such liability, if any, will not have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K/A was filed with the SEC on July 6, 2000
(Item 5. Other Events. Reporting the signing of a new letter of intent
between Softlock.com, Inc. and Chili Pepper, Inc.
Current Report on Form 8-K/A was filed with the SEC on July 25, 2000
(Item 2. Acquisition of Assets. Reporting the acquisition of certain assets
of Chili Pepper, Inc. Includes the financial statements required under Item
7.)
Current Report on Form 8-K was filed with the SEC on August 16, 2000
(Item 5. Other Events. Reporting that holders of common stock purchase
warrants issued in connection with the issuance of the Company's Series B
preferred stock extended the vesting date of certain warrants.)
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 14, 2000
<TABLE>
<S> <C> <C>
SOFTLOCK.COM, INC.
By: /s/ MICHAEL J. DZICZKOWSKI
-----------------------------------------
Michael J. Dziczkowski
CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
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