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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From _____ to ______
Commission File Number 000-22172
recordLab CORPORATION
(Exact name of small business issuer as specified in its charter)
[formerly Midisoft Corporation]
Washington 91-1345532
(State of incorporation) (I.R.S. Employer Identification No.)
1605 NW Sammamish Rd., Suite 205
Issaquah, Washington 98027
(Address of principal executive offices)
(425) 391-3610
(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 registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock, no par value; shares outstanding;
7,291,749 as of November 12, 1999
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<PAGE>
recordLab CORPORATION
INDEX TO FORM 10-QSB
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements................................ 3
a) Balance Sheets - September 30, 1999 and December 31, 1998
b) Statements of Operations - For the Three and Nine
Months Ended September 30, 1999 and 1998
c) Statements of Cash Flows - For the Nine Months Ended
September 30, 1999 and 1998
d) Notes to Financial Statements - For the Three and Nine
Months Ended September 30, 1999 and 1998
Item 2. Management's Discussion and Analysis or
Plan of Operation ........................................ 8
PART II
OTHER INFORMATION
Item 1. Legal Proceedings......................................... 15
Item 2. Changes in Securities and Use of Proceeds................. 15
Item 3. Defaults Upon Senior Securities .......................... 16
Item 4. Submission of Matters to a Vote of Security Holders ...... 16
Item 5. Other Information......................................... 16
Item 6. Exhibits and Reports on Form 8-K ......................... 16
SIGNATURE.......................................................... 17
<PAGE>
ITEM 1. Financial Statements
<TABLE>
recordLab Corporation
BALANCE SHEETS
ASSETS
<S> <C> <C>
(Unaudited)
At September 30, At December 31,
1999 1998
----------------- ----------------
Current assets:
Cash and cash equivalents $ 242,000 $ 270,000
Accounts receivable - net of allowances of
$419,000 in 1999 and $245,000 in 1998 383,000 183,000
Inventories 126,000 115,000
Prepaid expenses and other receivable 49,000 42,000
----------------- ----------------
Total current assets 800,000 610,000
Long-term receivable 195,000 195,000
Property & equipment, net of depreciation 128,000 116,000
Debt issuance costs, net of accumulated amortization
of $44,000 in 1999 and $23,000 in 1998 56,000 56,000
----------------- ----------------
Total assets $ 1,179,000 $ 977,000
================= ================
LIABILITIES & SHAREHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable $ 1,098,000 $ 1,181,000
Line of credit 400,000 -
Current portion of long-term debt - 250,000
Accrued wages & payroll taxes 106,000 93,000
Other accrued expenses 173,000 273,000
Deferred revenue 12,000 6,000
----------------- ----------------
Total current liabilities 1,789,000 1,803,000
Long-term debt, net of discount 2,728,000 2,258,000
Warrant obligations - 81,000
Shareholders' deficit
Common stock, no par value; 25,000,000 shares authorized,
8,626,000 issued and outstanding in 1999 and
7,251,000 issued and outstanding in 1998 22,059,000 20,488,000
Additional paid-in capital 3,477,000 3,026,000
Notes receivable from shareholders (109,000) (191,000)
Accumulated deficit (28,765,000) (26,488,000)
----------------- ----------------
Total shareholders' deficit (3,338,000) (3,165,000)
----------------- ----------------
Total liabilities and shareholders' deficit $ 1,179,000 $ 977,000
================= ================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
recordLab Corporaton
STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
Revenues $ 493,000 $ 582,000 $ 783,000 $ 1,336,000
Cost of revenues 83,000 244,000 138,000 551,000
----------- ----------- ------------ ------------
Gross profit 410,000 338,000 645,000 785,000
Operating expenses:
Sales and marketing 348,000 322,000 708,000 996,000
General and administrative 673,000 400,000 1,422,000 1,188,000
Research and development 90,000 112,000 269,000 535,000
----------- ----------- ------------ ------------
Total operating expenses 1,111,000 834,000 2,399,000 2,719,000
----------- ----------- ------------ ------------
Operating loss (701,000) (496,000) (1,754,000) (1,934,000)
Interest and other (expense) (85,000) (489,000) (522,000) (1,325,000)
----------- ----------- ------------ ------------
Net loss $(786,000) $ (985,000) $ (2,276,000) $ (3,259,000)
=========== =========== ============ ============
Basic and diluted
net loss per share $ (0.10) $ (0.16) $ (0.30) $ (0.52)
=========== =========== ============ ============
Weighted average shares
outstanding 7,990,000 6,329,000 7,503,000 6,308,000
=========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
recordLab Corporation
STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C> <C>
Nine Months Ended
September 30,
---------------------------------
1999 1998
--------------- ---------------
Cash flows used in operating ctivities:
Net loss $(2,276,000) $(3,259,000)
--------------- ---------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation & amortization 47,000 123,000
Non-cash interest expense to APIC 721,500 1,500,000
(Increase) decrease in assets:
Accounts receivable, net (200,000) 216,000
Inventories (11,000) 73,000
Prepaid expenses & other assets (7,000) (48,000)
Increase (decrease) in liabilities:
Trade accounts payable (83,000) 119,000
Accrued wages & payroll taxes 13,000 4,000
Other accrued expenses (100,000) 10,000
Deferred revenue 6,000 (4,000)
--------------- ---------------
Total adjustments 386,500 1,993,000
--------------- ---------------
Net cash used for operations (1,889,500) (1,266,000)
--------------- ---------------
Cash flows used in investing activities:
Additions to property & equipment (59,000) (4,000)
--------------- ---------------
Net cash used in investing activities (59,000) (4,000)
--------------- ---------------
Cash flows from financing activities:
Borrowings under line of credit 400,000 -
Proceeds from issuance of long-term debt
and warrants, 427,000 1,265,000
Proceeds from issuance of common stock 1,094,000 2,000
---------------- ---------------
Net cash provided by financing activities 1,921,000 1,267,000
---------------- ---------------
Net change in cash and cash equivalents (27,500) (3,000)
Cash and cash equivalents, beginning of year 270,000 90,000
---------------- ---------------
Cash and cash equivalents, end of period $ 242,500 $ 87,000
================ ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
recordLab Corporation
(formerly Midisoft Corporation)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 1999 and 1998
Interim Financial Information
The inancial statements included herein have been prepared by recordLab
Corporation (the "Company"), according to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) considered necessary to present fairly the results for the interim
periods presented. The accompanying financial statements and related notes
should be read in conjunction with the Company's 1998 audited financial
statements included in its Annual Report on Form 10-KSB/A filed April 30, 1999.
The results of operations for the three and nine months ended September
30, 1999 are not necessarily indicative of the results to be expected for the
full calendar year.
<TABLE>
Accounts Receivable and Major Customer Information
Accounts receivable from Original Equipment Manufacturers (OEM) and
other resellers are summarized as follows:
<S> <C> <C>
(Unaudited)
September 30, December 31,
1999 1998
OEM $ 14,000 $ 17,000
Resellers and other 788,000 411,000
------------ ------------
Subtotal 802,000 428,000
Less: Allowance for doubtful accounts (39,000) (72,000)
Allowance for sales returns (380,000) (173,000)
============ ============
Total accounts receivable $383,000 $ 183,000
============ ============
</TABLE>
Accounts receivable consists principally of amounts due from OEMs and
reseller customers for licensing fees, royalties and direct sales of products.
OEM customer payment terms typically are one year in duration and require
payments to be made in quarterly installments. At September 30, 1999, OEM
accounts receivable amounts not yet due were $0, equal to 0% of total OEM
receivables compared to $1,000, equal to 6% of total OEM receivables at December
31, 1998. Reseller payment terms typically are standardized and similar to those
given software distributors. At September 30, 1999, reseller accounts receivable
amounts not yet due were $536,000, equal to 70% of total reseller receivables
compared to $257,000, equal to 63% at December 31, 1998.
The Company's primary credit concentrations involve domestic and
foreign OEM and reseller customers. Foreign customers are primarily located in
Western Europe, Taiwan, Singapore, Korea and Japan. Domestic customers comprised
$760,000 of accounts receivable at September 30, 1999, compared to $415,000 at
December 31, 1998. Foreign customers comprised $16,000 of accounts receivable at
September 30, 1999 compared to $13,000 at December 31, 1998.
Income Taxes
No income taxes were payable at September 30, 1999, due to the
Company's year-to-date loss. The Company had Federal net operating loss
carryforwards at December 31, 1998 of approximately $26.1 million that may
reduce taxes due in future periods and expire beginning in 2008. In certain
circumstances, as specified in the Internal Revenue Code, a 50% or more change
in ownership of the Company during any three-year period would result in
limitations on the Company's ability to utilize its net operating loss
carryforward. Such a change may have occurred as a result of the conversion into
equity in October 1999 of $3,200,000 in principal amount of the Company's
convertible debentures.
<TABLE>
Inventories
Inventories are summarized as follows:
<S> <C> <C>
(Unaudited)
Sepember 30, December 31,
1999 1998
Raw materials $ 101,000 $ 106,000
Finished goods 50,000 29,000
Less: Allowance for obsolescence (25,000) (20,000)
-------------- --------------
Total inventory $ 126,000 $ 115,000
============== ==============
</TABLE>
Net loss per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (FAS 128), Earnings per
Share. FAS 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. The adoption of FAS 128 did not have a material impact on the
Company's earnings per share. Net loss per share assuming dilution for the three
and nine month periods ended September 30, 1999 and 1998 is equal to basic net
loss per share due to the fact that the effect of common stock equivalents
outstanding during the periods is anti-dilutive.
<TABLE>
The following table sets forth the computation of basic and diluted net loss per
share:
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
Numerator:
Net loss $(786,000) $ (985,000) $ (2,276,000) $ (3,259,000)
Denominator:
Weighted average
shares outstanding 7,990,000 6,329,000 7,503,000 6,308,000
Basic and diluted
net loss per share $ (0.10) $ (0.16) $ (0.30) $ (0.52)
Common stock equivalents, consisting of warrants, stock options and convertible
securities, are anti-dilutive.
</TABLE>
Equity
In July 1999 the Company entered into Subscription and Registration Rights
Agreements to sell 781,250 shares of the Company's common stock to a new
investor for a total consideration of $1,000,000. The funds were received on
July, 14, 1999. As part of the transaction, the Company agreed to pay a finders
fee of $30,000 in options to purchase the Company's Common Stock, to an
unrelated third party.
In September 1999 a convertible note of the Company in the principal amount of
$250,000 together with accrued interest of $43,222 were converted into 451,111
shares of the Company's common stock at a conversion price of $0.65 per share.
This conversion eliminated a total liability of $293,222 in the quarter ended
September 30, 1999. In September 1999 the holder of a warrant notified the
Company to exercise the warrant. The $81,000 liability associated with this
warrant was eliminated in the quarter ended September 30, 1999. The exercise
will result in the issuance of 89,404 shares of the Company's common stock.
In September 1999 the Company received payment in full for a promissory note
from a shareholder, secured by 75,000 shares of the Compamy's common stock. The
payment of $94,465 for the principal and all accrued interest satisfied the note
and the shares were returned to the shareholder.
Subsequent Events
In late October 1999 the holder of all the Company's long-term convertible debt
directed the Company to convert all the debt and accrued interest to shares of
the Company's common stock. When completed, this transaction will eliminate
$3,200,000 of debt and $48,542 of accrued interest. The conversion will result
in the issuance of 8,397,054 shares of the Company's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the
financial statements and the notes thereto appearing elsewhere in this Form
10-QSB.
General
recordLab Corporation (formerly Midisoft Corporation) provides software
applications and utilities for the control and enhancement of sound on personal
computers Since the Company commenced operations in 1986, the use of hardware
for sound creation has expanded dramatically, and now it is a standard feature
on nearly every computer that ships from every system manufacturer. The growth
of the Internet has fueled this expansion by permitting global distribution of
music and other audio embellished communications.
In October 1999, the Company changed its name to recordLab Corporation,
announced changes in its business and unveiled a new corporate identify that
reflects a strategy focused on providing music creation and distribution
technology over the Internet. The Company's strategy is based on its belief that
the Internet provides an ideal platform for promoting, marketing and selling
music and related products and services. The emergence of the MP3 compression
format represented a paradigm shift for the recorded music industry. The Company
intends to create the same type of transformation for the music creation
industry that serves an estimated 67 million amateur artists in the U.S.. The
Company derives the estimated number of amateur musicians from the National
Association of Music Merchants (NAMM) annual industry survey, which estimates
that one-quarter of the U.S. population is comprised of amateur musicians, and
from the U.S. Bureau of Census annual survey that the U.S. population is 270
million. NAMM also reports that one-fourth of the U.S. population spends over $6
billion on musical instruments each year.
The Company recently announced its planned website, recordLab.com, a rich
media-based music destination that will cater to the needs of millions of
amateur musicians worldwide, enabling them to realize their musical aspirations.
recordLab.com will introduce a new class of Internet-based products and services
that are "wrapped" with extensive expert know-how in the art of making music.
The first product is planned to be recordLab's Internet TapeDeck(TM), a
multi-track, digital audio recording application which the Company intends to
make freely available from the recordLab.com website. The Company expects to
sell add-on applications and utilities that provide tools for creating sound
augmentation and other audio effects.. The Company also plans to assist
musicians, songwriters and artists in using these products by delivering expert
advice from legendary music producers. The website is expected to open for
public access in the fourth quarter of 1999.
Along with these strategies, the Company seeks to enhance its core technologies
in which it has continued to invest and augment it retail distribution model
with more direct distribution. For example, in the second quarter of 1999, the
Company released a customized version of its Desktop Sheet Music(TM) product for
the religious music creation market. This customized version, called Worship
Studio(TM), features functionality tailored to the needs of music pastors and
directors who require numerous pages of easily modified sheet music each week
for use by soloist performers or choirs. In addition, this product provides a
large selection of hymns which can be transposed and modified with the Company's
proprietary software to fit particular voices of the choir and individual parts
of accompanying instruments. The Company believes that it has identified other
groups which desire compelling online musical experiences and will benefit from
the Company's expertise in music creation and Internet-centric audio and music
delivery.
Success of the Company's strategy depends in large part on the global
development of an infrastructure for providing Internet access and services.
Because global e-commerce and online exchange of information and compelling
music content on the Internet and other similar open wide area networks are new
and evolving, it is not possible to anticipate with assurance whether the
Internet will prove to be a viable commercial marketplace for the Company's
technology. Even though the Internet has experienced, and is expected to
continue to experience significant and rapid growth in the number of users and
amount of traffic, there can be no assurance that the Internet infrastructure
will continue to be able to support the demands placed on it by this continued
growth. In addition, the Internet could lose its viability because of delays in
the development or adoption of new standards and protocols to handle increased
levels of Internet activity, or increased governmental regulation. If the
necessary infrastructure or complementary services or facilities are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's ability to execute its strategy could be seriously limited and
this would materially and adversely affect its results of operations and
financial position.
The Company markets its products on a worldwide basis to: (i) original
equipment manufacturers (OEMs), which "bundle" one or more of recordLab's
products with their own products, (ii) distributors and resellers, which
directly supply the retail distribution channel, (iii) end users, catalog
companies, and businesses; and (iv) through on-line Internet sales. Sales to
software distributors and resellers, together with direct sales, represented 87%
and 73% of revenues in the three and nine months ended September 30, 1999, and
OEM and Internet product sales represented 13% and 27% of revenues during the
same periods. International sales accounted for 0% of the Company's revenues
during the three and nine months ended September 30, 1999. During the three and
nine months ended September 30, 1999, three customers individually accounted for
more than 10% of the Company's total revenues and together represented 89% and
90% of net revenues for those periods.
The principal competitive factors affecting the music creation software
and Internet music creation and distribution markets include product
functionality, ease of use, performance and reliability; customer service and
support; product availability; vendor credibility; brand awareness; ability to
keep pace with technological change; and price. Although the Company believes
that its products currently compete favorably with respect to these factors,
there can be no assurance that the Company can achieve an improved competitive
position in the face of increasing competition from new products and
enhancements introduced by existing competitors and new companies entering its
markets. Markets for the Company's products are characterized by significant
price competition, and the Company expects it will continue to face increasing
pricing pressures. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial position and results of operations.
Certain of the Company's competitors have substantially greater
financial, marketing or technical resources than the Company. There can be no
assurance that other companies have not developed or marketed or will not
develop or market products that are superior to those of the Company, that are
offered at substantially lower prices than those of the Company or that have or
will achieve greater market acceptance than those of the Company.
The Company's revenues include sales of software, software licenses and
services, less returns. Cost of revenues includes the costs of manuals,
diskettes and duplication, packaging materials, paper goods, product assembly,
warehousing and logistics services. Cost of revenues as a percentage of sales is
lower for OEM and Internet product sales than for distributor and direct sales
because fewer direct costs are involved. Sales and marketing expenses consist
primarily of salaries of sales and marketing personnel, customer service and
technical support costs, advertising and promotion expenses. General and
administrative expenses reflect salaries of administrative personnel, legal and
accounting costs and general operating expenses including rent and insurance.
Research and development expenses consist mainly of personnel and equipment
costs required to conduct the Company's development efforts.
Revenues from sales to distributors and resellers and direct sales are
recognized when products are shipped. The Company's software sales agreements
generally do not involve significant support obligations to customers subsequent
to delivery. Revenues from products licensed to OEMs and others, consisting of
one-time license fees, are recognized at the time the software master is
delivered and when the criteria for fixed fee revenue recognition under
Statement of Position No. 97-2 "Software Revenue Recognition" are satisfied.
Additional royalty use or unit copy royalty fees are recognized when they are
received pursuant to license agreements upon notification of shipment or
distribution from OEMs and others.
Seasonality
Sales to distributors tend to be greater in the fourth quarter as
consumers buy software to supplement their holiday computer hardware purchases.
OEM sales are concentrated in a small number of large customer contracts and
tend to occur sporadically.
Direct sales generally increase when software upgrades become available.
<TABLE>
Comparison of three and nine months ended September 30, 1999 and 1998
This table provides comparative results of the three and nine month
periods ended September 30, 1999 and 1998. A general discussion of these
results follows.
<S> <C> <C> <C> <C>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
% of Revenue % of Revenue % of Revenue % of Revenue
Net Sales Revenue 100% 100% 100% 100%
Gross Profit 83% 58% 82% 59%
Sales & Marketing Expense 71% 55% 90% 75%
General & Administrative Expense 137% 69% 182% 89%
Research & Development 18% 19% 34% 40%
Total Operating Expenses 225% 143% 306% 204%
Net Operating Income (Loss) -142% -85% -224% -145%
Other (Income) Expense -17% -84% -67% -99%
Net Income (Loss) -159% -169% -291% -244%
</TABLE>
Revenues for the three months ended September 30, 1999 were $493,000, a
decrease of $89,000, or 15%, compared to $582,000 for the same period in 1998.
Revenues for the first nine months of 1999 were $783,000, a decrease of
$553,000, or 41%, compared to $1,336,000 for the same period in 1998. Sales to
software distributors and resellers, together with direct sales were $429,000
and $572,000, representing 87% and 73% of revenues in the three and nine months
ended September 30, 1999, compared to $460,000 and $1,043,000 which represented
79% and 78% of revenues for the same periods in 1998. OEM sales were $64,000 and
$211,000 representing 13% and 27% of revenues in the three and nine months ended
September 30, 1999 and $122,000 and $293,000 representing 21% and 22% of
revenues respectively for the same periods in 1998. International sales
accounted for 0% of the Company's revenues for the three and nine months ended
September 30, 1999 and 14% and 8% for the same periods in 1998.
The Company has begun positioning itself to provide an array of music
creation products and services through the Internet for amateur musicians and
songwriters. These efforts are in addition to the Company's strategy to enhance
its core technologies and augment its retail distribution with more direct
distribution models. The Company believes that successful execution of this
strategy will result in higher gross margins for its software business. These
development efforts may not result in timely introduction of new products, and
these new products may not be commercially successful. Inability to successfully
develop new products, delays in the introduction of these new products, or
lower-than-anticipated demand for these products could have a material and
adverse effect on the Company's business and results of operations.
Gross profit for the three and nine months ended September 30, 1999 was
$410,000 and $645,000, an increase of $72,000 for the three months and a
decrease of $140,000 for the nine months, respectively, compared to $338,000 and
$785,000 for the same periods in the prior year. As a percentage of revenues,
gross margin increased to 83% and 82% in the three and nine months ended
September 30, 1999 from 58% and 59% for the same periods in 1998. This
difference is the result of a higher percentage of OEM and direct sales of
packaged software , compared to other software sales, in the three and nine
month periods ended September 30, 1999 versus the same periods in 1998. The
Company's OEM sales generate licensing royalties without distribution or
packaging costs, resulting in higher gross margins than the Company's other
products. Additionally, the Company's direct sales of packaged software makes it
possible for the Company to benefit from retail price points, contributing to
gross margin improvements.
Sales and marketing expenses for the three and nine months ended
September 30, 1999 were $348,000 and $708,000, an increase of $26,000 for the
three months and a reduction of $288,000 for the nine months ended September 30,
1999, compared to $322,000 and $996,000 for the same periods in the prior year.
These changes resulted from reductions in advertising and personnel costs during
the first two quarters of 1999 compared to the same periods in 1998. As a
percentage of revenues, sales and marketing expenses increased to 71% and 90% in
the three and nine months ended September 30, 1999 from 55% and 75% for the same
periods in 1998. This percentage increase resulted from lower revenues in the
first nine months of 1999, as compared to the same period in 1998.
General and administrative expenses for the three and nine months ended
September 30, 1999 were $673,000 and $1,422,000, an increase of $273,000 and
$234,000, respectively, compared to $400,000 and $1,188,000 for the same periods
of the prior year. These added costs, occurring in the third quarter, reflect
the Company's preparation for implementation of its new strategic plan for the
Internet and e-commerce. As a percentage of revenues, these expenses for the
three and nine months ended September 30, 1999 increased to 137% and 182% from
69% and 89% for the same periods in 1998, as a result of increased costs and
lower revenues in the three and nine month periods ending September 30, 1999.
Research and development expenses for the three and nine months ended
September 30, 1999 were $90,000 and $269,000, a decrease of $22,000 and
$266,000, respectively, compared to $112,000 and $535,000 for the same periods
in the prior year. As a percentage of revenues, research and development
expenses changed to 18% and 34% in the three and nine months ended September 30,
1999 from 19% and 40% for the same periods in 1998.
Interest and other income for the three and nine months ended September
30, 1999 was $8,000 and $16,000, compared to $4,000 and $12,000 for the same
periods of the prior year. Interest and other expense for the three and nine
months ended September 30, 1999 was $93,000 and $538,000 compared to $493,000
and $1,337,000 for the same periods in 1998. Interest expense includes one-time
non-cash charges of $0 and $280,000 in the three and nine months ended September
30, 1999, related to valuation of $450,000 of convertible debt and to discount
amortization of $60,000 and $167,000, respectively, on detachable warrants
issued through September 1999. Interest expense for the three and nine month
periods ended September 30, 1998 included one-time non-cash charges of $432,000
and $1,154,000, related to valuation of $1,500,000 of convertible debentures,
and to discount amortization of $43,000 and $109,000, respectively, on
detachable warrants issued through September 1998. The balance of the expense,
totaling $91,000 in the first nine months of 1999 and $74,000 for the same
period last year, represents accrued interest and issuance costs on the
Company's debt.
No income taxes were payable at September 30, 1999, due to the
Company's year-to-date loss. The Company had Federal net operating loss
carryforwards at December 31, 1998 of approximately $26.1 million that may
reduce taxes due in future periods and expire beginning in 2008. In certain
circumstances, as specified in Section 382 ofthe Internal Revenue Code, a 50% or
more change in ownership of the Company during any three-year period would
result in limitations on the Company's ability to utilize its net operating loss
carryforward. Such a change may have occurred in October 1999 upon the
conversion into equity of $3,200,000 in principal amount of the Company's
convertible debentures and associated warrants.
Liquidity and Capital Resources
As of September 30, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of $242,000 and net accounts receivable of
$383,000. This compares to cash and cash equivalents of $270,000 and net
accounts receivable of $183,000 at December 31, 1998.
The Company's current liabilities at September 30, 1999 were $1,789,000
compared to $1,803,000 at December 31, 1998. As of September 30, 1999, working
capital totaled a negative $989,000, compared to a negative $1,181,000 at
September 30, 1998. The Company's operating activities used cash of $2,161,000
for the nine months ended September 30, 1999, primarily caused by operating
losses of $1,754,000 for the same period, net of non-cash charges.
The Company sold $250,000 of secured convertible notes on March 30,
1999, in accordance with the Securities Purchase Agreement discussed in the
Company's 10-KSB/A filed with the SEC on April 30, 1999. The notes bear interest
at the rate of 1% per annum payable annually in cash, or shares of the Company's
common stock, and are convertible into 1,000,000 shares of the Company's common
stock. The note holder also received five-year detachable warrants to purchase
500,000 shares of common stock for $0.75 per share. On April 30, 1999 the
Company sold another $200,000 of convertible notes bearing interest at 1% per
annum, payable annually in cash, or shares of the Company's common stock, and
convertible into 250,000 shares of common stock. The note holder received
five-year detachable warrants to purchase 250,000 shares of the Company's common
stock for $1.75 per share. This creditor held all the Company's senior secured
convertible notes of $3,200,000 at September 30, 1999. In October 1999 this
creditor notified the Company that it intends to convert all its debt and
related accrued interest into shares of the Company's common stock.
In June 1999 the Company opened two lines of credit with Key Bank of
Washington for $750,000 each, or $1,500,000 combined. These lines of credit
jointly obligate the Company and the Company's senior secured creditor, who as
indicated above held $3,200,000 of the Company's secured convertible notes at
September 30, 1999.These credit lines were expanded to $1,000,000 each, or
$2,000,000 combined, on July 15, 1999. All outstanding principal and interest
must be paid on both lines by March 4, 2000. The amount borrowed under the lines
at September 30, 1999 was $400,000 and at November 17, 1999 was $1,000,000.
On July 14, 1999 the Company entered into Subscription and Registration
Rights Agreements to sell 781,250 shares of the Company's common stock, in a
private placement exempt from registration under Regulation D of the Securities
Act of 1933, to a new investor for total consideration of $1,000,000. The funds
were received on July 14, 1999. As part of the transaction, the Company paid a
finder's fee of $30,000 in the form of the Company's common stock, to an
unrelated third party.
To date, the Company has financed its operations principally through
net proceeds from two public offerings and multiple private placements of debt
and equity. The Company believes that cash on hand, along with cash generated
from the sale of products and collections of accounts receivable, will be
sufficient to meet the Company's requirements for the next few months and that
the lines of credit, so long as they are available, will provide working capital
through early 2000 . The Company's ability to fund continued operations beyond
that point depends on raising additional capital. Should the Company be unable
to raise additional capital, the Company will be required to significantly
reduce operations, reduce expenses, and may find it necessary to file for
protection under the bankruptcy code. Such steps would likely have a material
adverse effect on the Company's ability to establish profitable operations in
the future. The Company will continue to pursue financing arrangements to
increase its cash reserves. There can be no assurance the Company will be
capable of raising additional capital or that the terms upon which such capital
will be available to the Company will be acceptable.
Trade Debt and Other Matters
As of September 30, 1999, the Company had $91,000 of accounts payable
that were current, $64,000 extended to between 31 and 60 days and $642,000
extended over 60 days. The level of extended accounts payable results from the
Company's negative operating cash. The Company has entered into plans with some
vendors to extend payments beyond due dates in the original purchase orders.
While the Company believes that payment plans will continue to be accepted,
there is no certainty that the Company will be able to continue to meet extended
payment terms. The Company has entered into settlement agreements with some
vendors, eliminating the amounts owed. The Company has received demand letters
from certain vendors requesting immediate payment of amounts owing them totaling
approximately $520,000. Six of these vendors have initiated litigation and
received judgments. The remaining unpaid balance of these judgments is
approximately $172,000. Some vendors have declined sales on credit terms to the
Company and others have required cash on delivery terms. The Company has
negotiated changes in delivery date commitments, but has not failed to make
product shipments because of supply problems from its vendors.
YEAR 2000 Issues
The Year 2000 or Y2K problem is somewhat predictable in its timing, but
unpredictable in its effects. In order to conserve limited computer memory, many
computer systems, software programs, and other microprocessor dependent devices
were created using only two digit dates, such that 1998 was represented as 98.
These systems may not recognize certain 1999 dates, and the year 2000 and
beyond, with the result that processors and programs may fail to complete the
processing of information or revert back to the year 1900. As we approach the
year 2000, we expect computer systems and software used by many companies in a
wide variety of applications to experience operating difficulties unless they
are modified or upgraded to process information involving, related to, or
dependent upon the century change. Failures could incapacitate systems essential
to the functioning of commerce, building systems, consumer products, utilities,
and government services locally as well as worldwide. Significant uncertainty
exists concerning the scope and magnitude of problems associated with Y2K.
The Company has established a Y2K Task Force to address these risks.
The Y2K Task Force, comprised of the CEO, CFO and Director of Information
Technology, is leading the Year 2000 risk management efforts. The Y2K Task Force
is coordinating the identification and testing of computer hardware and software
applications, with a goal to ensure availability and integrity of the
information systems and the reliability of the operational systems utilized by
the Company.
The Year 2000 Project at recordLab Corporation uses the following five-phase
methodology and approach:
The first two phases are "work in progress" and are being updated on an ongoing
basis.
Phase I - Inventory. Collect a comprehensive list of components that may be
affected by the Year 2000 issues. Components are categorized into facilities,
hardware, software, and services.
Phase II - Assessment. Evaluate the inventory to determine which components will
function properly with the turn of the century and rank components based on
their potential impact to the Company. Each component is assigned priority as
follows:
Based on assigned priorities from Phase I and II, the following phases will be
carried out to the critical components first, followed by important components,
then inconvenient components and finally non-essential components if resources
and time are available. The Company has completed testing of all critical and
important components and is committed to achieving Y2K compliance for these
components by November 30, 1999. Testing on all inconvenient and non-essential
components should be finished by November 30, 1999 and complete Y2K compliance
is scheduled to be accomplished before November 30, 1999.
Phase III - Remediation. Analyze all components affected by Year 2000,
identifying problem areas and repairing / replacing non-compliant components.
Phase IV - Testing. Thorough testing of all affected systems, including present
and future date testing to simulate Year 2000 dates.
Phase V - Implementation. Place all components that have been successfully
tested into production.
Information systems are being tested with a licensed software program,
diagnostic tools designed for personal computers and servers that will identify
Y2K issues related to computer hardware, software and data. To date, this
testing appears to have been successful and has yielded no significant problems.
With the constant introduction of new computer equipment and software,
information systems testing will continue throughout the year.
The Company does not currently utilize Electronic Data Interchange
(EDI) with any of its partners or vendors but will thoroughly test any EDI
situation that may arise between now and March 1, 2000. If critical suppliers do
not satisfy the Company's Year 2000 compliance requirements, alternative
suppliers will be identified. As a contingency plan, inventory levels may be
raised prior to December 1999 to assure continued delivery of products to
customers through March 2000.
Risks
In the event such third parties cannot provide the Company with
products, services, or systems that meet the Year 2000 requirements on a timely
basis, or in the event Year 2000 issues prevent such third parties from timely
delivery of products or services required by the Company, the Company's results
of operations could be materially adversely affected. To the extent Year 2000
issues cause significant delays in, or cancellation of, decisions to purchase,
the Company's products or services, the Company's business, results of
operations, and financial position would be materially adversely affected. The
Company is assessing these risks and in some cases has initiated formal
communications with significant suppliers and customers to determine the extent
to which the Company is vulnerable to these third parties' failure to remediate
their own Year 2000 issues. There can be no assurance the Company will identify
and remediate all significant Year 2000 risks, or that such risks will not have
a material adverse effect on the Company's business, results of operations, or
financial position. Accordingly, the Company will continue to develop
contingency plans in anticipation of unexpected Year 2000 events. Based on its
assessment of year 2000 risks to date, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues.
Contingency Plans
Since the Year 2000 problem is pervasive, few, if any, companies can
make absolute assurances that they will identify and remediate all Y2K risks.
Accordingly, the Company expects the risk assessment and contingency planning to
remain an ongoing process leading up to and beyond the year 2000. In addition,
the potential Year 2000 problem is being addressed as part of the Company's
overall emergency preparedness program that includes contingency planning for
other potential major catastrophes like earthquakes, fires and floods.
The Company's approach to Financial Risk has two main areas of focus.
Secure the broadest insurance coverage available at a reasonable cost and avoid
exclusions or restrictions of coverage, if possible. The Company will explore
other Financial Risk Transfer products and/or Y2K specific insurance coverage to
the extent that it becomes available at economically feasible levels.
Estimated Costs
The Company is continuing to assess the potential impact of the century
change on its business, results of operations, and financial position. The total
cost of these Year 2000 compliance activities is anticipated to be immaterial to
the Company's financial position or its results of operations. If there should
be significant problem(s) achieving Year 2000 compliance, there is no assurance
that the Company will have the financial or other resources to properly address
the problem(s). The cost of internal resources dedicated to the Year 2000 has
not been estimated at this time.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and such statements are subject to the safe
harbors created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to (a) the ability to fund continued operations out of additional
capital infusion and (b) the success of the Company's approach to dealing with
year 2000 issues. The forward-looking statements included herein are based on
current expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Company will
continue to develop and introduce new music, strategic and Internet products on
a timely basis, that rapid changes in technology will not make the Company's
products obsolete or otherwise reduce their ability to compete in the
marketplace, that competitive conditions within the industry will not change
materially or adversely, that the use of multimedia PC's in homes and small
offices will continue to grow, that management's decision to focus the Company's
resources on music and sound products will reduce certain expenses from the
levels which were experienced in 1997 and 1998, and that there will be no
material adverse change in the Company's operations or business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, there can be no
assurance that the forward-looking information will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -
In 1997, an entity ("Claimant") which sold substantially all of its
assets to the Company in 1995 demanded that the Company arbitrate
certain claims arising from the sale. The claims aggregated in
excess of $1 million. The parties reached an agreement in July 1998
outside of arbitration. In exchange for the mutual release of all
claims and counterclaims, the Company agreed to provide total
consideration of $420,000, $25,000 in cash and the remainder
comprised of forgiveness of $112,000 in debt and issuance of
approximately 630,000 recordLab common shares. The Company agreed
to file a registration statement for these shares within 30 days
after final authorization by the shareholders in 1998, but has not
filed the registration statement as of this date. Payments totaling
$20,000 have been made. The debt of $112,000 has been fully
reserved and expense of $283,000 for the additional common shares
has been booked as of December 31, 1998. recordLab agreed to remove
restrictive legends on 166,667 of previously issued shares. The
Company believes that the Claimant subsequent actions nullified
this agreement. The 630,000 common shares have not been issued. In
July 1999 the Company demanded the return of the cash payments and
16,667 shares of the common stock issued, withdrew its forgiveness
of the debt and the terms of settlement are being reconsidered. The
Company has not yet received a response to its demand.
In March 1997, a former sales representative ("Plaintiff") filed
suit in Michigan against recordLab under a certain manufacturer's
representative agreement entered into between the parties in
November 1994. Plaintiff claims that the Company breached this
agreement by failing to pay commissions and is seeking damages in
excess of $75,000. recordLab denies that it failed to pay
commissions under the agreement and is asserting counterclaims for
over payments and return credits. Damages asserted by the Company
equal the damages claimed by the plaintiff. The parties are
awaiting a trial date, which is reportedly to occur sometime during
1999. The ultimate outcome cannot be determined at this time, but
the Company believes that it has meritorious defenses and is
vigorously defending against the claim.
On April 3, 1997 the Company began arbitration proceedings against
a former customer. On September 24, 1997, the Company was awarded a
judgment in the amount of $194,983.37 against the former customer.
The amount of the award represents the sum of 1) $160,000.00, the
unpaid portion of the base annual license royalty under the
Company's OEM License Agreement and 2) $34,983.37, representing
interest on the unpaid installments from their respective due dates
through the date of the award computed at 12% per annum. In
November 1998, the former customer exhausted its appeals when the
Washington State Court of Appeals denied the former customer's
appeal motion, thereby terminating the appellate process. In March
1999, the Company amended the judgment to add attorneys' fees and
interest accrued since the original judgment was entered. The total
amount of the amended judgment is $247,925.34. The Company is
pursuing collection in Washington State and has engaged a
California law firm to enforce judgment in the state of California,
the headquarters location of the former customer.
The Company has received demand letters from certain vendors
requesting immediate payment of amounts owing them totaling
approximately $520,000. Seven of these vendors have initiated
litigation for claims totaling approximately $175,000 and six of
these have received judgments of which the remaining unpaid balance
is approximately $172,000. The Company has reached settlement
agreements with some vendors and is negotiating with the remainder.
Some vendors have declined sales on credit terms to the Company and
others have required cash on delivery or in advance terms.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS -
In July 1999 the Company entered into a Subscription and
Registration Rights Agreements to sell 781,250 shares of the
Company's common stock , in a private placement exempt from
registration under Regulation D of the Securities Act of 1933, to a
new investor for a total consideration of $1,000,000. The funds
were received on July 14, 1999 and have been used for working
capital. As part of the transaction, the Company to paid a finder's
fee of $30,000 to an unrelated third party in the form of the
Company's common stock.
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 ON FORM 8-K.
a) EXHIBITS - The following exhibits are filed as part of this
report:
Exhibit No.
27 Financial Data Schedule
b) Reports on Form 8-K - None
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
recordLab CORPORATION
(Registrant)
Date: November 18, 1999
BY: /S/ Gary M. Cully
Gary M. Cully, Vice President of Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET DATED SEPTEMBER 30, 1999 AND THE STATEMENT OF OPERATIONSFOR THE THREE AND
NINE MONTHS ENDING SEPTEMBER 30, 1999, FOUND ON PAGES 3 AND 4 OF THE COMPANY'S
10-QSB FOR THE THIRD QUARTER OF 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 242 0
<SECURITIES> 0 0
<RECEIVABLES> 802 0
<ALLOWANCES> (419) 0
<INVENTORY> 126 0
<CURRENT-ASSETS> 800 0
<PP&E> 1,106 0
<DEPRECIATION> (978) 0
<TOTAL-ASSETS> 1,179 0
<CURRENT-LIABILITIES> 1,789 0
<BONDS> 2,728 0
0 0
0 0
<COMMON> 22,059 0
<OTHER-SE> (25,397) 0
<TOTAL-LIABILITY-AND-EQUITY> 1,179 0
<SALES> 783 493
<TOTAL-REVENUES> 783 493
<CGS> 138 83
<TOTAL-COSTS> 2,399 1,111
<OTHER-EXPENSES> 17 (1)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 505 86
<INCOME-PRETAX> (2,276) (786)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,276) (786)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,276) (786)
<EPS-BASIC> (0.30) (0.10)
<EPS-DILUTED> (0.30) (0.10)
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