MATERIAL CHANGES IN RESULTS OF OPERATIONS
The following is a discussion of material change in results of operations for
the three and nine-month periods ending April 30, 1999 and 1998.
NET LOSSES
For the quarters ended April 30, 1999 and 1998, the Company incurred net losses
of $432,943 and $684,962, respectively. For the nine-month periods ended April
30, 1999 and 1998, the Company incurred net losses of $1,645,542 and $2,133,598
respectively. Cumulative losses from April 1, 1996 to April 30, 1999, the
Development Period, totaled $8,730,631. Explanations of these results are set
forth below. The Company expects to continue to incur operating losses until
such time, if ever, it may generate adequate revenues from its service
offerings.
REVENUE
For the quarter ended April 30, 1999 the Company recorded revenue of $201,344 as
compared to $260,324 for the quarter ended April 30, 1998. For the nine-month
period ended April 30, 1999, the Company recorded revenue of $718,812 as
compared to $415,345 for the same period ended April 30, 1998. Migration, the
Company's core business accounted for $28,942 of gross revenue for the
three-month period ended April 30, 1999, as compared to $67,409 for the same
period in 1998. Groupware accounted for $131,779 of gross revenue for the
three-month period ended April 30, 1999, as compared to $135,295 for the same
period in 1998. Year 2000 accounted for $34,989 of gross revenue for the
three-month period ended April 30, 1999 as compared to $57,620 for the same
period in 1998. Professional services accounted for $5,634 of gross revenue for
the three-month period ended April 30, 1999 as compared to $0 for the same
period in 1998.
The Company expects to generate revenue from (a) the sale of (i) transformation
services for end-users of IBM midrange computing systems and software
development services related to client/server migration; (ii) Year 2000
consulting, analysis, remediation and training services; and (iii) GroupWare
services, consisting primarily of the performance of application software
development services relating to Lotus Notes and ICC products and related
instructional services; and (b) the licensing of the Company's proprietary
software and third party proprietary software products. The Company is not able
to project the amount or proportion of revenue expected to be received from each
of the foregoing activities as the Company has not offered each of its services
for a sufficient period of time to have such knowledge.
In the autumn of 1996, the Company positioned itself to market transformation
services utilizing the Company's client/server migration software, targeting the
IBM mid-range computer market. In this regard, the
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Company planned to enhance its client/server migration software in the 1997 and
1998 Fiscal Periods. Such plan received less attention during such period as the
Company shifted its attention to the opportunity presented by the demand for the
Year 2000 remediation services. The Company has expanded its marketing and sales
efforts to promoting Year 2000 services in both the information technology field
and embedded systems. The Company has negotiated relationships with vendors of
Year 2000 software tools. In mid 1997, the Company was offering Year 2000
services. The Company continues to market migration solutions and Groupware
relationship management software. The Company has entered into agreements with
Canadian and United States sales representation companies to implement the
Company's marketing and sales strategies. Currently, the Company is bidding on
Year 2000 remediation projects, software conversion projects and Groupware
implementations ranging in size from $100,000 to $2,000,000. There can be no
assurance that the Company will enter into any firm contracts with respect to
any of such projects.
EXPENSES
The Company is in the development stage and since April 1, 1996 has incurred
costs relating to the start up of operations. These costs consist of, but are
not limited to, raising capital, establishing a facility, recruiting personnel,
acquiring and installing furniture and equipment, acquiring development and
accounting software, developing its client/server migration software and
marketing and sales efforts.
Cost of Sales
The Company's variable costs of software consulting, translation services and
development are in a direct relation to the volume of sales and anticipated
revenues. As a percentage of revenue, these costs will vary depending on the
nature of the sale and the product mix required to achieve customer needs. Sales
based on mature product will yield a higher margin while specific project type
environments may call for a higher degree of manpower and travel costs.
The Company will continue product development of the core software product to
enable the Company to broaden its impact on many vendor environments. The
development of translators to translate application code from any type of
machine language to virtually any target platform will serve as the benchmark of
the Company to respond effectively to end user requirements. The key to this
objective is a responsive, knowledgeable development team.
For the period ended April 30, 1999 and all comparative periods reported, costs
of software consulting, translation services, and development have been combined
and included in cost of sales in the accompanying statement of operations.
For the quarters ended April 30, 1999, and April 30, 1998, cost of consulting
services accounted for $79,716 and $80,794, respectively. For the nine-month
periods ended April 30, 1999 and 1998, cost of consulting services expenses were
$133,876 and $141,899 respectively. Cumulatively, the cost of consulting
services accounted for $1,459,503. The Company anticipates managed growth in
this area as people are added to satisfy consulting services provided by the
Company.
Cost of software transformation services accounted for $73,429 of total expenses
for the quarter ended April 30, 1999. Comparatively, the Company spent $277,967
for the same quarter ended April 30, 1998 and has spent $1,664,113 cumulatively
in the development stage. For the nine-month periods ended April 30, 1999 and
1998, software transformation services were $364,176 and $304,536 respectively.
The Company anticipates adding people to this area by the fiscal year ending
July 31, 1999, but, only if contracts are in hand. This growth will depend on
the volume of conversion services and year 2000 scan and repair services
provided to our customers.
Software development accounted for $85,553 of total expenses for the quarter
ended April 30, 1999. Comparatively, the Company spent $119,886 for the same
quarter in 1998 and has spent $494,388 cumulatively in the development stage.
For the nine-month periods ended April 30,1999 and 1998, software development
costs were $240,979 and $329,806, respectively. The increases in costs of
product development are expected to continue as the Company expands its product
offerings.
Costs of professional services accounted for $23,907 of total expenses for the
quarter ended April 30, 1999. Comparatively, the Company spent $0 for the same
quarter in 1998 and has spent $23,907 cumulatively in the
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development stage. For the nine-month periods ended April 30, 1999 and 1998,
costs of professional services were $23,907 and $0 respectively. The Company
anticipates managed growth in this area as professional service contracts are
signed.
General and Administrative
General and administrative costs consist primarily of management and
administrative staff, professional services, office and occupancy costs.
Significant costs are attributed to the Company being a reporting public
company. This status has increased audit and legal costs significantly. The
Company anticipates that its General and Administrative costs (as a
percentage of costs) will decline as the Company's operations expand.
General and administrative expense accounted for $338,395 of expenses for the
quarter ended April 30, 1999. Comparatively, the Company spent $295,517 for the
same quarter in 1998 and has spent $3,970,123 cumulatively in the development
stage. General and administrative expenses accounted for $1,224,593 of expenses
for the nine-month period ended April 30, 1999 compared to $1,565,388 for the
nine-month period ended April 30, 1998. The decrease in general and
administrative expenses related to decreased salaries, consulting fees, and the
elimination of amortization and other costs associated with software marketing
rights. The Company's general and administrative expenses consisted primarily of
salaries, rent, consulting fees, advertising and costs associated with being a
reporting public company such as legal, audit, and investor relations.
MATERIAL CHANGES IN FINANCIAL CONDITION
The following is a discussion of the material changes in financial condition
from July 31, 1998 to April 30, 1999.
Current assets at April 30, 1999 were $184,215 as compared to $589,930 at
July 31, 1998. The basis for this decrease in current assets is as follows.
Accounts receivable totaled $126,122 at April 30, 1999 as compared to $419,933
at July 31, 1998. The decrease was the result of the Company's collection
efforts and decreased sales during the nine months.
The Company recorded material changes to accrued expenses. Accrued expenses were
$74,617 at April 30, 1999 as compared to $230,201 at July 31, 1998. This
decrease is due to the payment of certain accrued expenses using available cash.
The Company issued Common Stock for cash in the quarter ended April 30, 1999.
The Company recorded Additional paid-in capital of $221,338 and Common Stock of
$1,663 for the period.
Deficit accumulated during the development stage totaled $(8,730,631) as
compared to $(7,085,089) at July 31, 1998. The discussion of losses incurred
for the periods are outlined in the Results of Operations above.
Liquidity and Capital Resources
The Company has funded its activities through April 30, 1999 primarily from
the net proceeds of private placement of its securities and, to a lesser
extent, from cash flow from operations and the proceeds of two bank loans.
One of the bank loans has been paid. The outstanding principal balance of the
other bank loan as of April 30, 1999 is approximately $16,415 and the loan
bears interest at an annual rate equal to 2.5% over the bank prime rate of
interest in effect from time to time. Repayment of the loan, together with
interest thereon, is secured by a lien on substantially all of the fixed
assets of the Company and the personal guarantees of the Company's executive
officers and directors.
At April 30, 1999, the Company had a deficit accumulated during the development
stage of ($8,730,631), current assets of $184,215 and current liabilities of
$291,655. During the three-month period ended April 30, 1999, the Company sold
1,663,077 shares of Common Stock for proceeds of $223,000 to Thomson Kernaghan,
a registered broker dealer. Otherwise, the Company did not incur any additional
long-term debt. The Company will continue to raise capital through these
or similar vehicles to fund operating activities and other capital
requirements. Failure to obtain such equity capital could have a material
adverse impact on the Company's
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ability to expand its operations. There can be no assurance that equity capital
will be available to the Company on acceptable terms or at all.
In addition, implementation of the Company's business plan will require capital
resources substantially greater than those currently available to the Company.
The Company may determine, depending on the opportunities available to it, to
seek additional debt or equity financing to fund the cost of continuing
expansion. To the extent that the Company finances expansion through the
issuance of additional equity securities, any such issuance would result in
dilution of the interests of the Company's stockholders. Additionally, to the
extent that the Company incurs indebtedness or issues debt securities to finance
expansion activities, it will be subject to all of the risks associated with
incurring substantial indebtedness, including the risks that interest rates may
fluctuate and cash flow may be insufficient to pay the principal of, and
interest on, any such indebtedness.
The Company has no current arrangements with respect to, or sources of,
additional financing, and it is not contemplated that its existing stockholders
will provide any portion of the Company's future financing requirements. There
can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all. The inability of the Company to obtain
financing when needed will have a material adverse effect on the Company,
including possibly requiring the Company to significantly curtail or cease its
operations.
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