-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cm0N2zPFnvut/HKytmCwWb5q73WkRacx3o4rlCHdY7l3fhLeKJCK58Zy87b7qhCx LKpyZSKUOpmPCt9Bp6JXqA== 0001017062-01-000299.txt : 20010223 0001017062-01-000299.hdr.sgml : 20010223 ACCESSION NUMBER: 0001017062-01-000299 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOURCINGLINK NET INC CENTRAL INDEX KEY: 0000825517 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 980132465 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-28391 FILM NUMBER: 1541619 BUSINESS ADDRESS: STREET 1: 650 CASTRO STREET SUITE 210 STREET 2: C/O RICHARD S LANE ESQ CITY: MOUNTAIN VIEW STATE: CA ZIP: 94041 BUSINESS PHONE: 6509661214 MAIL ADDRESS: STREET 1: 650 CASTRO ST STREET 2: STE 210 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94041 FORMER COMPANY: FORMER CONFORMED NAME: QCS NET CORP DATE OF NAME CHANGE: 19990621 FORMER COMPANY: FORMER CONFORMED NAME: QCS CORP DATE OF NAME CHANGE: 19941216 FORMER COMPANY: FORMER CONFORMED NAME: PARKWAY CAPITAL CORP DATE OF NAME CHANGE: 19920703 10QSB 1 0001.txt FORM 10QSB DATED DECEMBER 31, 2000 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000. [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ___________ to ___________. Commission File Number: 000-28391 --------- SourcingLink.net, Inc. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 98-0132465 --------------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 16855 WEST BERNARDO DRIVE, SUITE 260, SAN DIEGO, CA 92127 - -------------------------------------------------------------------------------- (Address of principal executive offices) (858) 385-8900 - -------------------------------------------------------------------------------- (Issuer's telephone number) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [_] NO Shares of Common Stock outstanding as of February 6, 2001: 8,069,154 shares SourcingLink.net, Inc. CONTENTS --------
PART I FINANCIAL INFORMATION Page Item 1 Financial Statements Consolidated Condensed Balance Sheets as of December 31, 2000 (unaudited) and March 31, 2000 3 Consolidated Condensed Statements of Operations for the three and nine months ended December 31, 2000 and 1999 (unaudited) 4 Consolidated Condensed Statements of Cash Flows for the nine months ended December 31, 2000 and 1999 (unaudited) 5 Notes to Consolidated Unaudited Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 15 Signature 15
2 PART I FINANCIAL INFORMATION Item 1 Financial Statements SourcingLink.net, Inc. Consolidated Condensed Balance Sheets
December 31, March 31, 2000 2000 ------------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,548,876 $ 3,870,362 Short-term investments - 1,955,040 Accounts receivable, net 943,587 354,767 Other current assets 87,301 81,662 ------------- ------------ Total current assets 4,579,764 6,261,831 Property and equipment, net 524,080 375,463 Other non-current assets 59,675 64,873 ------------- ------------ Total assets $ 5,163,519 $ 6,702,167 ============= ============ LIABILITIES Current liabilities: Accounts payable and accrued liabilities $ 1,148,066 $ 1,388,538 Deferred revenue and other 238,403 288,741 ------------- ------------ Total current liabilities 1,386,469 1,677,279 STOCKHOLDERS' EQUITY Series A convertible preferred stock 246 246 Common stock 8,069 8,056 Additional paid-in capital 24,138,134 24,086,938 Unearned stock-based compensation (20,407) (219,255) Accumulated deficit (20,435,244) (18,938,586) Accumulated other comprehensive income 86,252 87,489 ------------- ------------ Total stockholders' equity 3,777,050 5,024,888 ------------- ------------ Total liabilities and stockholders' equity $ 5,163,519 $ 6,702,167 ============= ============
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 SourcingLink.net, Inc. Consolidated Condensed Statements Of Operations (Unaudited)
Three months ended December 31, Nine months ended December 31, ------------------------------- ------------------------------ 2000 1999 2000 1999 -------------- --------------- ------------- -------------- Revenue: eCommerce applications $ 97,310 $ 184,084 $ 418,840 $ 586,649 Professional services 1,113,404 - 2,414,515 154,498 ---------- ---------- ---------- ---------- 1,210,714 184,084 2,833,355 741,147 Cost of revenue: eCommerce applications 66,681 206,345 577,253 370,377 Professional services 330,119 - 639,106 129,498 ---------- ---------- ---------- ---------- 396,800 206,345 1,216,359 499,875 Gross profit 813,914 (22,261) 1,616,996 241,272 Operating expenses: Selling, general and administrative 749,217 1,080,596 2,343,347 2,517,585 Product development 192,291 300,780 760,117 785,628 Amortization of warrants issued to strategic partners 6,803 91,628 198,848 91,628 ---------- ---------- ---------- ---------- Total operating expenses 948,311 1,473,004 3,302,312 3,394,841 Operating loss (134,397) (1,495,265) (1,685,316) (3,153,569) Other expense, net (4,956) (18,911) (6,005) (20,646) Interest income 56,404 92,396 194,663 156,450 ---------- ----------- ----------- ----------- Net loss $ (82,949) $(1,421,780) $(1,496,658) $(3,017,765) ========== =========== =========== =========== Net loss per share (basic and diluted) $ (0.01) $ (0.20) $ (0.19) $ (0.47) ========== =========== =========== =========== Weighted average number of shares used in per share calculation (basic and diluted) 8,069,154 7,135,123 8,064,537 6,447,405 ========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 SourcingLink.net, Inc. Consolidated Condensed Statements of Cash Flows (Unaudited)
Nine months ended December 31, -------------------------------- 2000 1999 ----------- ----------- Cash flows from operating activities: Net loss $(1,496,658) $(3,017,765) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 181,073 89,056 Unrealized foreign exchange loss 2,005 4,157 Loss on retirement of fixed assets - 9,177 Amortization of warrants issued to strategic partners 198,848 91,628 Changes in operating assets and liabilities-net (880,071) 399,353 ----------- ----------- Net cash used in operating activities (1,994,803) (2,424,394) Cash flows from investing activities: Purchases of fixed assets (329,690) (198,057) Maturities of short-term investments 1,955,040 - ----------- ----------- Net cash provided by (used in) investing activities 1,625,350 (198,057) Cash flows from financing activities: Proceeds from exercise of stock options 29,127 571,873 Proceeds from issuance of common stock 22,082 7,309,076 Payments on capital lease - (6,246) ----------- ----------- Net cash provided by financing activities 51,209 7,874,703 Effect of exchange rate changes on cash (3,242) 316 ----------- ----------- Net increase (decrease) in cash and cash equivalents (321,486) 5,252,568 Cash and cash equivalents, beginning of the period 3,870,362 1,266,880 ----------- ----------- Cash and cash equivalents, end of the period $ 3,548,876 $ 6,519,448 =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 SourcingLink.net, Inc. NOTES TO UNAUDITED FINANCIAL STATEMENTS 1. Basis of presentation: - -------------------------- On July 20, 1999, the stockholders of the Company approved a proposal to change the Company's name from QCS.net Corporation to SourcingLink.net, Inc. The name change became effective as of that date upon the Company's filing of its Amended and Restated Certificate of Incorporation with the Delaware Secretary of State. The interim consolidated condensed financial statements of SourcingLink.net, Inc. ("SourcingLink" or the "Company") are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results of the Company for the interim periods. The results of operations for the three and nine months ended December 31, 2000 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2001. The year-end balance sheet data at March 31, 2000 was derived from the Company's audited financial statements. All prior period share and per share amounts have been restated to reflect the 1 for 4 reverse stock split, which was effective August 25, 1999. The consolidated condensed financial statements include the accounts of SourcingLink.net, Inc. and its wholly-owned subsidiary. All significant intercompany transactions and account balances have been eliminated in consolidation. This financial information should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10-KSB for the fiscal year ended March 31, 2000. 2. Computation of net loss per share: - -------------------------------------- Net loss per share is presented on a basic and diluted basis. Basic earnings (loss) per share is computed by dividing the income (loss) by the weighted average number of shares of Common Stock outstanding for the period. Diluted earnings per share are computed by giving effect to all dilutive potential shares of Common Stock that were outstanding during the period. For the Company, dilutive potential shares of Common Stock consist of incremental shares of Common Stock issuable upon the exercise of stock options and warrants and conversion of preferred stock for all periods. Basic and diluted earnings (loss) per share are calculated as follows for the three and nine months ended December 31, 2000 and 1999 (unaudited):
Three months ended December 31, Nine months ended December 31, ------------------------------- ------------------------------ 2000 1999 2000 1999 ---------- ------------ ------------ ------------ Net loss $ (82,949) $(1,421,780) $(1,496,658) $(3,017,765) ========== ============ ============ ============ Weighted average shares outstanding for the period 8,069,154 7,135,123 8,064,537 6,447,405 Net loss per share $ (0.01) $ (0.20) $ (0.19) $ (0.47) ========== ============ ============ ============
At December 31, 2000, the Company had outstanding options and warrants to purchase 685,939 and 768,824 shares of Common Stock, respectively, compared to 847,125 and 768,824 options and warrants outstanding at March 31, 2000. These options and warrants were not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive. 3. Comprehensive loss: - ----------------------- Comprehensive loss for the three months ended December 31, 2000 and 1999 was $84,527 and $1,417,414, respectively. For the nine months ended December 31, 2000 and 1999 the comprehensive loss was $1,497,895 and 6 $3,013,292, respectively. The difference between comprehensive loss and net loss is the treatment of cumulative foreign currency translation adjustments. 4. Recent pronouncements: - ------------------------- Effective July 1, 2000 the Company adopted the Emerging Issues Task Force No. 00-2 "Accounting for Web Site Development Costs" ("EITF 00-2"). EITF 00-2 sets forth the requirements for capitalization or expense treatment of various web site development costs depending on certain criteria. During the second and third quarters of fiscal year 2001, the Company capitalized a total of $106,000 of web site development costs and will amortize such costs over their estimated useful life of two years. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement was to become effective for all quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments - Deferral of the Effective Date of Statement No. 133." Statement No. 137 defers the effective date of Statement No. 133 until fiscal years beginning after June 15, 2000. The Company will adopt Statement No. 133 on April 1, 2001, and does not expect such adoption to affect our results of operations, financial position or cash flows. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), providing the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is applying SAB 101 to its financial statements as of the first quarter of fiscal year 2001. The adoption of SAB 101 did not have a material impact on our results of operations, financial position or cash flows. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25." This interpretation has provisions that were effective after staggered dates, including provisions that were effective after December 15, 1998 and others that became effective after June 30, 2000. The adoption of this interpretation has not and will not have a material impact on our results of operations, financial position or cash flows. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Report, including, without limitation, statements containing the words "may," "will," "believes," "anticipates," "expects" or the negative or other variations thereof or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of SourcingLink to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the factors discussed under the caption "Risk Factors" below, and are discussed in more detail in the "Risks Related to Our Business" section of SourcingLink's Annual Report on Form 10-KSB for the fiscal year ended March 31, 2000. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. SourcingLink disclaims any obligation to update any such factors or to announce publicly the results of any revisions of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. Overview SourcingLink is an application service provider, or ASP, and has developed an Internet-based turnkey solution for business-to-business eCommerce that enables retailers to organize, automate and significantly reduce the cost of their preorder merchandise sourcing activities by searching for and connecting directly with retail merchandise suppliers around the globe. For merchandise suppliers, the solution provides a sales tool and electronic forms for the exchange of company and product information. 7 Through fiscal 2000, SourcingLink's revenues were generated principally from eCommerce Applications consisting of fees for access to and use of SourcingLink's solutions. A portion of this revenue is derived from desktop solutions, primarily from use of the InspectLink(TM) inspection data application with one long-standing customer. Our focus for eCommerce applications, however, is our core Internet sourcing solution, MySourcingCenter(TM), which was released on a Microsoft platform in the first quarter of fiscal year 2001. In March 2000, SourcingLink entered into a services contract with Paris, France- based Carrefour S.A. (the "Carrefour contract"), under which SourcingLink will receive a minimum of $9 million for services to be performed over a three-year period which began April 1, 2000. The Carrefour contract followed an announcement by Carrefour, the world's second largest retailer, that it, Sears, Roebuck & Co. and Oracle Corporation were forming a new company named GlobalNetXchange ("GNX"), for the purpose of connecting electronically and facilitating certain merchandise buying activities with suppliers worldwide. Under our contract, we will assist Carrefour with its implementation of GNX functionality and processes. IBM Agreements Original IBM Agreements. SourcingLink entered into a multi-faceted eCommerce agreement with IBM in the third quarter of fiscal year 1998, as an amendment to an earlier 1996 agreement under which SourcingLink became an active participant in IBM's e-commerce group. Under the 1998 contract, referred to in the discussion below as the "IBM agreement" or the "Agreement," IBM had been providing most of the sales and marketing effort, worldwide help desk support and project management for SourcingLink through the expiration of the contract on September 30, 1999. Under the same Agreement, IBM also provided the network and server infrastructure supporting SourcingLink's solutions. Payments to IBM for these services were based on a percentage of sales under a revenue sharing provision of the Agreement, and were accounted for as cost of sales. Through September 30, 1999, SourcingLink assisted IBM with certain sales and marketing efforts for the Company's solution, and billed IBM at cost for such services. These billings to IBM have been recorded as Professional Services revenue, and amounted to $129,000 in the nine months ended December 31, 1999. As these services were on a cost-reimbursement basis, there was an equal and offsetting cost of revenue, and thus no gross profit margin associated with this Professional Services revenue. Effective October 1, 1999, SourcingLink began performing its sales and project management in-house; therefore, there is no further revenue from professional services to IBM after September 30, 1999. New agreements were entered into with IBM as of October 1, 1999, as discussed below. New IBM Agreements. Effective October 1, 1999, SourcingLink entered into a new network services and infrastructure agreement with IBM. In addition, the Company entered into a separate agreement to define its on-going co-marketing relationship with IBM. As mentioned above, the cost of these services was historically based on revenue sharing, and was all included in cost of revenue. Beginning October 1, 1999, the accounting for these new agreements was as follows: . For the infrastructure agreement, which included the housing of servers in IBM's secure data management center, the Company paid IBM under a combined fixed and variable price structure, based upon the level of service. Payments for these services were accounted for as cost of revenue. . For the co-marketing agreement, which includes use of the IBM logo and e- business mark on Company marketing material and our website and participation with IBM at its e-commerce trade show booths, there are no payments required under SourcingLink's present status as a premier IBM e- business partner. The Company elected not to renew the infrastructure portion of its agreement with IBM upon expiration of that agreement on September 30, 2000. The Company has accommodated its infrastructure needs at lower cost by acquiring equipment and locating it at a third-party hosted site. Accumulated Losses From its inception in 1993 through December 31, 2000, SourcingLink has incurred net losses of approximately $20.4 million, primarily as a result of costs to develop its technology, to develop and introduce its sourcing solutions, to establish marketing and distribution relationships, to recruit and train a sales and marketing group and to build an administrative organization. The Company's prospects must be considered in light of its operating history, and the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly 8 companies in new, unproven and rapidly evolving markets. The limited operating history of the Company makes the prediction of future results of operations difficult or impossible and, therefore, there can be no assurance that the Company will grow or that it will be able to achieve or sustain profitability. The Company's success depends to a significant degree upon the Company's ability to raise additional capital, and continued contributions of key management, engineering, sales and marketing, and finance personnel, certain of whom would be difficult to replace. The loss of the services of any of the key personnel or the inability to attract or retain qualified management and other personnel in the future, or delays in hiring required personnel, could have a material adverse effect on the Company's business, operating results or financial condition. Also, the Company's success is highly dependent on its ability to execute in a timely manner its new sales and marketing plans, including obtaining a critical mass of retail buyers and their suppliers as users of our application services and obtaining additional customers for our professional services, of which no assurance can be made. Results of operations for the three and nine months ended December 31, 2000 and 1999 Revenue. Total revenue for the three months ended December 31, 2000 increased $1.0 million, or 558%, to $1.2 million, from $184,000 in the three months ended December 31, 1999. This includes an increase in Professional Services revenue to $1.1 million this year with no such revenue in the same three-month period one year ago. This services revenue is attributable to the Carrefour contract, a three-year, $9 million services agreement that began April 1, 2000. Revenue from eCommerce Applications decreased by $87,000 to $97,000 from $184,000 in the prior year's third quarter. The majority of this decrease is related to the desktop solutions SourcingLink provides for use by its major customer in managing inspection and shipping tracking data. Revenue from these applications is based on the number of transactions and amount of data routed over the network, and the quantity of and charges for such data was less in this year's third quarter than in the same period a year ago. Total revenue for the nine months ended December 31, 2000 increased $2.1 million, or 282%, to $2.8 million, from $741,000 in the nine months ended December 31, 1999. The nine-month increase in Professional Services revenue was $2.2 million, to $2.4 million from $154,000 last year. As in the three-month period, this increase is attributable to the services provided under the Carrefour contract. The Professional Services revenue in the prior year was primarily for sales and marketing services paid for by IBM under an agreement that was concluded by SourcingLink effective September 30, 1999, as described above. Revenue from eCommerce Applications decreased by $168,000 to $419,000 from $587,000 for the nine-month period one year ago. This decrease is attributable to the reduced quantity of and charges for data routed over the Company's desktop solution in the second and third quarters of this year. A portion of the eCommerce revenue in both the current and prior years is from subscriptions of suppliers that have been made available to SourcingLink by Paris, France-based Promodes, which was acquired by Carrefour late in calendar 1999. As previously mentioned, Carrefour has contracted with GNX for facilitating certain buying activities electronically with its merchandise suppliers. Therefore, the potential exists that these subscribers will not renew their subscriptions to our application in the future. The Company is pursuing new retail customers with suppliers that could adopt our solution, and has recently released a version of its solution targeted at the Home Improvement segment of the retail market. The Company is working with House2Home (formerly HomeBase, Inc.) in the U.S and Baumax in Europe to register their buyers and suppliers for the use of MySourcingCenter(TM) for Home Improvement, and will be marketing the solution to other buyers and suppliers in that vertical market. The Company also has a multi-year consulting contract with Carrefour that will provide revenue over a three-year period, as previously described, and is actively seeking additional customers for our professional services. Due to the Carrefour contract, the Company expects that Professional Services revenue will continue to comprise a significant portion of the Company's overall revenue in the fourth quarter of the fiscal year ending March 31, 2001. However, the current phase of the project was in full deployment throughout the third quarter, and revenue under the contract is not likely to maintain the quarter-to-quarter growth evident through the first three quarters of this fiscal year. In the eCommerce Application area, the Company's solution for the Home Improvement industry involves marketing directly to merchandise suppliers, a group that includes small and highly dispersed target customers. Cost of Revenue. For the three months ended December 31, 2000, the cost of revenue increased $191,000, or 92%, to $397,000 from $206,000 in the prior three-month period. This increase in total cost of revenue includes Professional Services costs of $330,000, with no such costs in last year's third quarter. The addition of these costs was partially offset by a decrease in eCommerce Applications cost of revenue of $139,000, or 68%, to $67,000 from $206,000 in the same period one year ago. In the services area, the cost of revenue is attributable to the labor and other expenses related 9 to the Carrefour contract. In eCommerce Applications, the decrease in cost of revenue is primarily due to the completion on September 30, 2000 of the most recent IBM agreement for infrastructure support and hosting. Last year's third quarter marked the commencement of that agreement, which included substantially higher hosting costs than the Company obtained under a co-location arrangement that went into effect October 1, 2000, and thus this year's third quarter cost of eCommerce Applications revenue is less than that of the prior year. Total gross profit for the three-month period increased $836,000 to $814,000, or 67% of revenue, from a loss of $22,000 in the three months ended December 31, 1999. The increase in gross profit is attributable to the increase in Professional Services revenue, and associated profit, under the Carrefour contract, as well as to the decrease in the cost of infrastructure support, as described above. For the nine-month period, the cost of revenue increased $716,000, or 143%, to $1.2 million from $500,000 last year. This includes an increase in cost of revenue for both eCommerce Applications and Professional Services. As in the third quarter, the nine-month cost increase in Professional Services is attributable to labor and related expenses for the Carrefour contract. For eCommerce Applications, SourcingLink's cost of revenue for both the current and prior year nine-month periods consists primarily of fees paid to IBM for infrastructure support of the Company's application services within the IBM Global Network. The prior year included three months under the most recent Agreement, and six months under a prior arrangement with IBM in which fees were based on revenue sharing, and were substantially less. The current year includes six months under the new Agreement, through its completion on September 30, 2000, resulting in the higher costs this year. As previously mentioned, the Company obtained lower costs for its network infrastructure under a co-location arrangement, and did not renew its infrastructure contract with IBM after it expired in September 2000. Accordingly, the cost of eCommerce Applications revenue decreased substantially in this year's third quarter as compared to the first two quarters of the current year. Total gross profit in this year's nine months increased $1.4 million to $1.6 million, or 57% of revenue, from $241,000, or 33% of revenue, in the nine months ended December 31, 1999. As in the three- month period, the increase in gross profit is primarily attributable to the increase in Professional Services revenue and its associated profit. Operating Expenses Selling, General and Administrative Expenses. In the quarter ended December 31, 2000, the Company's selling, general and administrative expenses decreased by $331,000, or 30%, to $749,000 from $1.1 million in the quarter ended December 31, 1999. The decrease in these expenses is primarily due to reduced overall wages and legal fees, and the deployment of certain employees to work on the Carrefour contract with the classification of their related expense as Cost of Revenue. For the nine months ended December 31, 2000, selling, general and administrative expenses decreased $174,000, or 7%, to $2.3 million from $2.5 million in the same nine months of the prior year. For the nine-month period, the impact of expanding the management team and hiring an administrative, sales and project management staff during the last half of fiscal year 2000, with such personnel costs carrying forward into the current fiscal year, nearly offset the recent cost decreases, associated with the shift of certain expenses to cost of sales and other expense reductions described above. The Company expects that its sales and marketing expenses will increase as it begins to market its new solution to buyers and suppliers in the Home Improvement retail industry, and incurs additional labor and other costs related to its management and the marketing of its solutions and professional services. Product Development Expenses. Product development expenses during the three months ended December 31, 2000 decreased by $109,000, or 36%, to $192,000 from $301,000 in the three months ended December 31, 1999. The decrease in product development expenses is primarily due to a reduction in labor costs, as well as the capitalization and amortization of website development costs beginning July 1, 2000 under the guidance provided in Emerging Issues Task Force Issue No. 00- 2. For the nine-month period, product development expenses decreased $26,000, or 3%, to $760,000 from $786,000 for the same period last year. The Company completed a major enhancement of its Internet product during the first quarter of this fiscal year, and higher management and development personnel costs were incurred in that quarter as compared to the same period last year, nearly offsetting on a nine-month basis the recent decreases in product development costs described above. Stock-based Compensation. The cost of warrants for the purchase of SourcingLink common stock issued to two strategic partner companies during fiscal year 2000 is being amortized over the periods associated with the business agreements underlying the warrants. The amount of expense was determined under the Black- Scholes valuation method, and the related amortization amounted to $7,000 in the third quarter of fiscal year 2001, and $199,000 for the first nine 10 months of this fiscal year. Such amortization began in the third quarter of last year, and the related expense amounted to $92,000 for both the three and nine- month periods ended December 31, 1999. The remaining unamortized compensation expense of $20,000 will be amortized over the next three fiscal quarters. Other Expense, net and Interest Income. The principal component of other expense, net is the exchange loss on foreign currency transactions with SourcingLink's subsidiary in France. Primarily as a result of these foreign currency transactions, other expense, net was $5,000 in the current year's third quarter compared to $19,000 in the same period one year ago. For the nine- month periods, the current year result is an expense of $6,000 compared to an expense of $21,000 in the prior year. Interest income was $56,000 and $92,000 for the three months ended December 31, 2000 and 1999, respectively, and $195,000 and $156,000 for the nine months ended December 31, 2000 and 1999, respectively. In August 1999, SourcingLink completed a private placement of 1,258,000 shares of its common stock and received net proceeds of $7.3 million after offering costs. While a portion of these proceeds have been consumed in operations since the offering, the increase in interest income in the prior year's three-month period and the current year's nine-month period is primarily attributable to the increase in cash available for investment as a result of this private placement. Income Taxes. SourcingLink recorded a net loss of $1.5 million during the nine months ended December 31, 2000, and had net losses of $4.5 and $1.5 million in fiscal 2000 and 1999, respectively. Accordingly, no provision for income taxes was recorded in any of these periods. As of December 31, 2000, SourcingLink had net operating loss carryforwards for United States income tax purposes of approximately $13 million. These losses expire at various dates between 2011 and 2020. The Internal Revenue Code of 1986, as amended, contains provisions that limit the use in any future period of net operating loss and credit carryforwards upon the occurrence of certain events, including a significant change in ownership interests. A valuation allowance has been recorded for the tax benefit of the net operating loss carryforwards and the deferred tax assets of SourcingLink due to the fact that, as of the present time, it is more likely than not that such assets will not be realized. Fluctuations in Quarterly Operating Results Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future. We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of future performance. Our operating results could fall below the expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations would likely adversely affect the market price of our common stock. Our quarterly operating results may vary depending on a number of factors, including: demand for our solutions and services; actions taken by our competitors, including new product introductions and enhancements; delays or reductions in spending for, or the implementation of, supply chain management solutions by our customers and potential customers as companies review eCommerce applications; ability to scale our network and operations infrastructure; ability to develop, introduce and market our solutions and services on a timely basis; changes in our pricing policies or those of our competitors; ability to expand our sales and marketing operations, including hiring additional personnel; size and timing of sales of our solutions and services; success in maintaining and enhancing existing relationships and developing new relationships with strategic partners; ability to control costs; technological changes in our markets; deferrals of customer subscriptions in anticipation of new developments or features of our solutions; customer budget cycles and changes in these budget cycles; and general economic factors. We have incurred operating expenses to expand our management team and sales and marketing operations, fund greater levels of product development, increase general and administrative support, develop new partnerships, increase our professional services and support capabilities and improve our operational and financial systems. If our revenues do not increase along with these expenses, our business, operating results and financial condition could be seriously harmed and net losses in a given quarter could be even larger than expected. In addition, because our expense levels are relatively fixed in the near term and are based in part on expectations of our future revenues, any decline in our revenues to a level that is below our expectations would have a disproportionately adverse impact on our operating results. Liquidity and Capital Resources SourcingLink's cash and cash equivalents at December 31, 2000 were $3.5 million, a decrease of $321,000 from March 31, 2000. However, this decrease is net of $2 million from the maturity during the first quarter of funds that were in 11 short-term investments at March 31, 2000. Cash used in operating activities for the nine months ended December 31, 2000 was $2.0 million, compared to $2.4 million for the nine months ended December 31, 1999. The cash usage in each period was primarily due to the operating losses. Accounts receivable at December 31, 2000 is nearly entirely attributable to amounts due under our services contract with Carrefour. We believe that our current working capital, including cash to be received in the quarter ending March 31, 2001 under our services contract with Carrefour, will be sufficient to meet our working capital requirements for the next 12 months. We plan to actively seek additional equity investment to fund operations beyond that period. If such efforts are unsuccessful, we will need to reduce operating spending significantly, which would materially and adversely affect SourcingLink's business. The Company currently does not have a bank credit line. The Company does not intend to pay cash dividends with respect to capital stock in the foreseeable future. Recent Accounting Pronouncements Effective July 1, 2000 the Company adopted the Emerging Issues Task Force No. 00-2 "Accounting for Web Site Development Costs" ("EITF 00-2"). EITF 00-2 sets for the requirements for capitalization or expense treatment of various web site development costs depending on certain criteria. During the second and third quarters of fiscal year 2001, the Company capitalized a total of $106,000 of web site development costs and will amortize such costs over their estimated useful life of two years. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement was to become effective for all quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments - Deferral of the Effective Date of Statement No. 133." Statement No. 137 defers the effective date of Statement No. 133 until fiscal years beginning after June 15, 2000. The Company will adopt Statement No. 133 on April 1, 2001, and does not expect such adoption to affect our results of operations, financial position or cash flows. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), providing the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company is applying SAB 101 to its financial statements as of the first quarter of fiscal year 2001. The adoption of SAB 101 did not have a material impact on our results of operations, financial position or cash flows. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25." This interpretation has provisions that were effective after staggered dates, including provisions that were effective after December 15, 1998 and others that became effective after June 30, 2000. The adoption of this interpretation has not and will not have a material impact on our results of operations, financial position or cash flows. RISK FACTORS The market for our solution is at an early stage. We need a critical mass of retailers and their merchandise suppliers to implement and use our solution. The market for Internet-based supply chain management solutions and services is at an early stage of development. Our success depends on a significant number of retailers and their merchandise suppliers implementing our solution. The implementation of our solution by major retailers and their merchandise suppliers is controlled by multiple parties in the retail organization. In many cases, these organizations must change established business practices and conduct business in new ways. Our solution has not yet achieved significant market acceptance. Unless a critical mass of retailers and their merchandise suppliers implement our solution, our solution may not achieve market acceptance and our business would be seriously harmed. 12 We have a history of losses and expect to incur losses in the future. We incurred net losses of $4.5 million in fiscal 2000 and $1.5 million in the first nine months of fiscal 2001. As of December 31, 2000, we had an accumulated deficit of approximately $20.4 million. While the Carrefour contract will provide a total of $9 million of revenue over the three-year period that began April 1, 2000, we still expect to derive a portion of our future revenues from subscription fees of our Internet sourcing solution, which is based on an unproven business model. With Carrefour's acquisition of Promodes and subsequent formation, along with Sears, Roebuck & Co. and Oracle Corporation, of GlobalNetXchange, we may lose current subscribing suppliers of the former Promodes central buying organization. While we are seeking additional customers for our professional services, no contract other than the Carrefour contract has yet been secured. Moreover, we expect to incur significant sales and marketing, product development, and general and administrative expenses. As a result, we expect to incur significant losses in the future unless additional revenue is obtained. We believe that our current working capital, including amounts to be received under the Carrefour contract, will be sufficient to meet our working capital requirements for the next 12 months. We plan to actively seek additional equity investment to fund operations beyond that period. If such efforts are unsuccessful, we will need to reduce operating spending significantly, which would materially and adversely affect our business. We expect to depend on our solution to augment revenue from our consulting contract with Carrefour in the future. Our solution and related services have accounted for substantially all of our prior revenues. We anticipate that revenues from our solution will constitute substantially all of our non-service revenues for the foreseeable future. Consequently, an inability to achieve our target pricing or to generate demand or a failure to achieve market acceptance for our solution would seriously harm our business. Likewise, if we fail to perform under the Carrefour contract, our ability to collect the minimum payments due to us under the contract, which amount to a total of $9 million over the three-year period that began April 1, 2000, would be seriously harmed. Implementation of our solutions by large retailers is complex, time consuming and expensive. We frequently experience long sales and implementation cycles. Our supply chain management solution is often viewed as an enterprise-wide solution that must be deployed with many users within a large retailer's sourcing organization. An enterprise-wide adoption by large retailers is characterized by long sales cycles beginning with pilot studies and concluding with retailers strongly encouraging their merchandise suppliers to subscribe to our solution. In many cases, our customers must change established business practices and conduct business in new ways. In addition, they must generally consider a wide range of other issues before committing to use our product, including product benefits, integration, interoperability with existing computer systems, scalability, functionality and reliability. As a result, we must educate potential customers on the use and benefits of our solution. It takes several months to finalize an enterprise-wide adoption and the implementation must often be approved by a number of management levels within the customer organization. The implementation of our solution requires a commitment of resources by our customers and third-party professional services organizations. Entering into an agreement with a customer for the adoption of our solution does not assure that the customer will in fact make such adoption or assure the time frame in which the adoption may occur. A delay or change of these commitments may adversely affect our financial results of any particular quarter. We are currently planning to market our solutions to buyers within a retail company, and directly to suppliers, in addition to targeting enterprise-wide rollouts for large retailers. There can be no assurance that such a strategy will shorten sales cycles or result in significant new subscribing customers for our solutions. We derive most of our revenue from one retailer, and if we are not able to retain this retailer as a customer our revenues would be reduced and our financial results would suffer. Our largest customer accounts for a substantial majority of our revenues. We may not be able to retain our key retail customers or these customers may decrease their commitment to require their suppliers to use our solution. Any substantial decrease or delay in sales to suppliers of one or more of our key retail customers, or sales of services to a key customer, could harm our sales or financial results. 13 Our customers are all in, or supplying goods to, the retail industry. A significant change or downturn in this industry could adversely affect our business. We face intense competition. If we are unable to compete successfully, our business will be seriously harmed. The market for business-to-business eCommerce solutions in general, and supply chain management solutions in particular, is extremely competitive, evolving and characterized by continuous rapid development of technology. Competition to capture business users is intense and is expected to increase dramatically in the future, which will likely result in price reductions, reduced profit margins and a decrease in our market share, which could have a serious adverse impact on our business. Indirect competitors are traditional Value Added Network solution providers that have extended their network connections over the Internet and both new and traditional companies that are focused on trading exchanges that allow merchandise buyers and sellers to access each other on channels within new or existing portals. One or more of these companies may develop and add preorder merchandise sourcing capabilities to their existing product offerings, and new exchanges such as GlobalNetXchange will focus on retail merchandise procurement, giving these companies a broader or more comprehensive solution than our solution, which could adversely affect our business. We expect that additional established and emerging companies will seek to enter our market as it continues to develop and expand. In the professional services area there are many established consulting companies, several of which are large or multi-national, with extensive experience and personnel. We may not be able to compete successfully against competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. We depend on our key personnel. Our future performance depends on the continued service of our senior management, product development and sales and product marketing personnel. The loss of the services of one or more of our key personnel could seriously harm our business. As described in our report on Form 10-QSB for the quarter ended September 30, 2000, our Chief Executive Officer, Sean Maloy, passed away in October 2000. Our founder and Chairman of the Board, Marcel van Heesewijk, has been appointed CEO on an interim basis. Our future success depends on our ability to retain a CEO for the Company on a permanent basis, and on our continuing ability to attract, hire, train and retain a substantial number of highly skilled managerial, technical, sales, marketing, customer support and professional services personnel. In addition, new hires frequently require extensive training before they achieve desired levels of productivity. Competition for qualified personnel is intense, and we may fail to retain our key employees or to attract or retain other highly qualified personnel. Our software may contain errors or defects. Our software is complex and, accordingly, may contain undetected errors or failures when first introduced. This may result in loss of, or delay in, market acceptance of our solution. We have in the past discovered programming errors in our new releases after their introduction. We have experienced delays in release and customer frustration during the period required to correct these errors. We may discover errors in the future, including scalability limitations, in new versions after release. In order to manage our growth and the expansion of our services business, we will need to improve and implement new systems, procedures and controls. We have retained, and plan to hire additional, new personnel in an expanded geographic scope to service our customer base. We are performing services for Carrefour in France and elsewhere around the world. These activities subject us to certain regulations in such countries and involve difficulties and expense in staffing and managing such operations, resulting in substantial demands on our management resources. Our ability to compete effectively and to manage future expansion of our services and operations, if any, will require us to continue to improve our financial and management controls, reporting systems, project management and procedures on a timely basis, and expand, train and manage our employee work force. We may encounter difficulties in transitioning a portion of our business to a services focus, and our personnel, systems, procedures and controls may be inadequate to support our future operations. 14 We depend on increasing use of the Internet and on the growth of eCommerce. If the use of the Internet and eCommerce do not grow as anticipated, our business will be seriously harmed. Our success depends on the increased acceptance and use of the Internet as a medium of commerce on a global basis. Rapid growth in the use of the Internet is a recent phenomenon. As a result, acceptance and use may not continue to develop at historical rates and a sufficiently broad base of business customers may not adopt or continue to use the Internet as a medium of commerce. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products. Our business would be seriously harmed if: . Use of the Internet, the web and other online services does not continue to increase or increases more slowly than expected; . The infrastructure for the Internet, the web and other online services does not effectively support expansion that may occur; or . The Internet, the web and other online services do not create a viable commercial marketplace, inhibiting the development of eCommerce and reducing the need for our solutions. Additional risk factors are discussed in more detail in the "Risks Related to Our Business" section of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 2000. PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K b. Reports on Form 8-K No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter for which this report is filed. SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 14, 2001 SourcingLink.net, Inc. By: /s/ Gary Davidson ------------------- Gary Davidson, Vice President Finance and Administration, Chief Financial Officer 15 -----END PRIVACY-ENHANCED MESSAGE-----