UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-27507
e-PERCEPTION, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0350448
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
27555 Ynez Road, Suite 203
Temecula, California 92591
(Address, including zip code, of principal executive offices)
(909) 587-8773
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ____
The number of shares of the Registrant's Common Stock, $0.001 par value,
outstanding as of May 10, 2002 was 7,972,314.
e-PERCEPTION, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
- ------------------------------
Page
----
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheet 3
as of March 31, 2002
Condensed Consolidated Statements of Operations 4
for the Three Months Ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows 5
for the Three Months Ended March 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
e-PERCEPTION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2002 - UNAUDITED
ASSETS
Current assets:
Accounts receivable, net $ 446,800
Prepaid and other current assets 12,896
-----------
Total current assets 459,696
Property and equipment, net of accumulated
depreciation and amortization 748,057
Intangible and other assets 229,505
-----------
$ 1,437,258
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 7,220
Line of credit and note payable 164,392
Current portion of long-term debt 30,452
Accounts payable and accrued expenses 568,634
Deferred revenue 76,025
-----------
Total current liabilities 846,723
Long-term debt, excluding current portion 6,991
Stockholders' equity:
Preferred stock, par value at $0.001, 10,000,000 shares authorized,
none issued and outstanding --
Common stock, par value at $0.001, 25,000,000 shares
authorized, 7,972,314 shares issued and outstanding 797
Additional paid-in capital 5,271,970
Accumulated deficit (4,679,273)
Stock subscription receivable (9,950)
-----------
Total stockholders' equity 583,544
-----------
$ 1,437,258
===========
3
e-PERCEPTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months Ended March 31,
--------------------------
2002 2001
----------- -----------
Revenues $ 504,937 $ 245,167
Cost of revenues 257,606 219,071
----------- -----------
Gross profit 247,331 26,096
Operating expenses:
Sales and marketing 393,930 260,369
Research and development 106,298 15,667
General and administrative expenses 445,210 371,537
----------- -----------
Loss from operations (698,107) (621,477)
----------- -----------
Other income (expense):
Interest expense (8,381) --
Interest income 366 5,668
Gain on disposal of fixed assets -- 612
----------- -----------
Total other income (expense) (8,015) 6,280
----------- -----------
Loss before provision for income taxes (706,122) (615,197)
Income taxes -- 1,600
----------- -----------
Net loss $ (706,122) $ (616,797)
=========== ===========
Net loss per share - basic and diluted $ (0.09) $ (0.40)
=========== ===========
Number of weighted average shares - basic and diluted 7,972,314 1,556,697
=========== ===========
4
e-PERCEPTION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Three Months Ended March 31,
----------------------------
2002 2001
------------- ------------
Cash flows used for operating activities
Net loss $(706,122) $(616,797)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 58,428 42,515
Gain on disposal of fixed assets -- (612)
Changes in assets and liabilities:
(Increase) decrease in assets
Accounts receivable 56,566 (57,712)
Prepaid and other current assets 12,906 (22,672)
Other assets (25,335) (19,756)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 162,536 73,006
Deferred revenues 36,446 27,839
--------- ----------
Total adjustments 301,547 42,608
--------- ----------
Net cash used for operating activities (404,575) (574,189)
--------- ----------
Cash flows used for investing activities:
Purchases of property and equipment (15,471) (111,483)
Proceeds from sales of property and equipment -- 3,339
--------- ----------
Net cash used for investing activities (15,471) (108,144)
--------- ----------
Cash flows provided by financing activities:
Bank overdraft 7,220 --
Principal proceeds from line of credit agreement 4,642 --
Proceeds from notes payable 6,703 --
Payments on note payable (5,051) --
Proceeds from issuance of common stock 45,000 5,185
--------- ----------
Net cash provided by financing activities 58,514 5,185
--------- ----------
Net decrease in cash and cash equivalents (361,532) (677,148)
Cash and cash equivalents, beginning of period 361,532 932,886
--------- ----------
Cash and cash equivalents, end of period $ -- $ 255,738
========= ==========
Supplemental disclosure of cash flow information:
Interest paid $ 3,197 $ --
========= ==========
Income tax paid $ -- $ 1,600
========= ==========
Increase in line of credit from accrued interest payable $ 5,184 $ --
========= ==========
Issuance of 12,500 shares of common stock in lieu of
accrued expenses to vendors $ 18,750 $ --
========= ==========
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in e-Perception's
Annual Report on Form 10-KSB for the year ended December 31, 2001.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the financial
position and results of operations as of and for the periods presented. The
results for such periods are not necessarily indicative of the results to be
expected for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. TENDER OFFER
In January 2002, e-Perception Technologies completed a tender offer with
Corporate Development Centers, Inc. ("CDC"), a Nevada corporation listed on the
OTC Bulletin Board under the symbol, "CRDM". CDC issued one (1) share of common
stock in exchange for every four (4) shares of outstanding common stock of
e-Perception Technologies. As a result of the tender offer, e-Perception
Technologies became a wholly-owned subsidiary of CDC. The name of CDC was then
changed to e-Perception, Inc. The stock currently trades on the OTC Bulletin
Board under the symbol, "EPER". The Company intends to apply for listing on the
NASDAQ Small-Cap Market if and when applicable listing requirements are met.
3. NET LOSS PER SHARE
Basic net loss per share is based on the weighted average number of all common
shares issued and outstanding, and is calculated by dividing net loss per share
by the weighted average shares of common stock outstanding during the period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
With the exception of historical information, the statements set forth below
include 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.
These forward-looking statements include statements regarding potential
strategic collaborations, future capital needs and funding requirements, product
development plans, and market assessments. These statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those in the forward-looking statements. These risks and uncertainties include:
o general economic and business conditions;
o industry trends;
o our overall market penetration and competition from providers of
alternative products and services;
6
o our actual funding requirements; and
o availability, terms and deployment of capital.
OVERVIEW
e-Perception, Inc., a Nevada corporation ("e-Perception" or the "Company") is
the parent corporation of e-Perception Technologies, Inc., a Delaware
corporation, which develops, markets and supports web-based analytic tools that
enable companies in real time to gather data from their employees, customers and
suppliers and to use that data to better manage their businesses. Our solutions
are implemented by companies ranging in size from 50-person firms to Fortune 500
companies. The Company's mission is to help businesses improve their financial
results through employee productivity and customer loyalty. The Company's online
assessment tools gather feedback from employees, customers and suppliers and
then integrate such data with existing business information to produce strategic
solutions for clients. The Company's offerings consist of a suite of web based
applications. Using online assessments and operational data, e-Perception
Insight Solutions(TM) generates insights that empower management to maximize
organizational effectiveness and cost savings. We market our products primarily
through our direct sales force and strategic alliance partners to companies
across a wide variety of industries. The Company's sales team currently is
comprised of nine people, located in Southern California, Chicago, Cincinnati,
Baltimore, and Dallas. As of April 30, 2002, we provided our products and
solutions to Dell Computer, Sharp HealthCare, Johnson Controls, StorageTek,
eBay, Northwestern Mutual, Electronic Data Systems and United Technologies
Corporation, among others.
Where appropriate, references to "e-Perception", the "Company," "we" or "our"
include both e-Perception, Inc. and e-Perception Technologies, Inc.
RESULTS OF OPERATIONS
Net Revenue
Net revenue increased $259,770, or 106.0%, to $504,937 in the first quarter of
2002, as compared to the same period in 2001. This increase was primarily due to
the expansion of the Company's internal sales force and the development and
completion by the Company of new product applications. Approximately 90% of the
Company's net revenue for the first quarter of 2002 was derived from the sale of
assessment tools in the area of human relations and development, and 10% was
derived from customer loyalty initiatives.
Cost of Revenue
Cost of revenue consists of referral fees paid to third parties, operations
overhead (including launching and deploying assessment surveys) and outsourced
software development. Cost of revenue increased by $38,535 or 17.6%, in the
first quarter of 2002, as compared to the same period in 2001. This increase was
primarily due to increased staffing in the operations department and an increase
in outsourced software development.
Research and Development
Research and development expenses consist of personnel expenses and associated
overhead. The Company's investment in research and development increased
$90,631, or 578%, in the first quarter of 2002, as compared to the same period
in 2001. The increase was primarily attributable to staffing increases in
product development and employee recruiting.
Costs incurred in the research and development of new software products are
expensed as incurred. e-Perception expects research and development expenses to
continue to increase in absolute dollars as the Company continues to invest in
the enhancement of existing products and the development of new products.
Sales and Marketing
Sales and marketing expenses include salaries and expenses of sales and
marketing personnel, advertising and promotion expenses, customer service and
technical support, travel and entertainment, and other selling and marketing
costs. Sales and marketing expenses increased by $133,561, or 51.3%, to $393,930
in the first quarter of 2002, as compared to the same period in 2001. This
increase was primarily due to increases in personnel related expenses, web site
development costs, marketing material expenses, and trade show and travel
expenses.
7
General and Administrative
General and administrative expenses, which include personnel costs for finance,
administration, information systems, and general management, as well as
facilities expenses, professional fees, legal expenses, and other administrative
costs, increased by $73,673, or 19.8%, to $445,210 in the first quarter of 2002,
as compared to the same period in 2001. The increase was primarily due to an
increase in staffing, and higher legal and accounting expenses related to the
tender offer transaction with CDC.
Other income (expense)
Other income and expense includes interest income net of interest expense.
Interest income is primarily derived from short-term interest-bearing securities
and money market accounts. Interest expense for the first quarter of 2002 was
$8,381 compared to zero interest expense for the same period in 2001. Interest
income for the first quarter of 2002 was $366 compared to $5,668 for the same
period in 2001, primarily due to a decrease in interest income due to a lower
average balance of invested cash and short-term investments.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, our cash and cash equivalents and short-term investments were
negligible. The Company's principal cash requirements are for operating
expenses, including employee costs, funding of accounts receivable, capital
expenditures and funding of the operations. The Company's primary sources of
cash had been from private placements of the Company's preferred or common stock
and a revolving line of credit.
During the first quarter of 2002, the Company used $712,783 for operating
activities, as compared to $616,797 for the same period in 2001. The increase in
cash use was primarily due to increased operating costs, including increased
staffing, research and development and sales and marketing expenses.
San Clemente Capital, LLC, an affiliate of two of the Company's shareholders who
are former directors, has provided the Company with a revolving loan commitment
of up to $400,000 based on eligible collateral levels. The loan is secured by
certain assets of the Company. As of March 31, 2002, the outstanding balance on
such loan was approximately $164,000. The loan bears interest at a rate of 20%
per annum. The loan is due and payable in full on June 30, 2002.
The Company is planning to undertake a private placement of its common stock,
which we will seek to close in the next three months. The Company will be
dependent upon the successful completion of this private placement, and perhaps
upon the successful competition of other financing activities, in order to
operate its business over the next 12 months. Given the lack of the Company's
current cash position, such external sources of financing will be critical to
the Company's future operations. Our need for such additional financing depends
in part on our future performance, which, in turn, is subject to general
economic conditions, and business and other factors beyond our control. There
can be no assurance that we would be able to obtain such financing, or that any
financing would result in a level of net proceeds required.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "intends," "expects" and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995. Actual results could vary materially from those expressed in those
statements. If any of the following risks actually occurs, our business,
financial condition or operating results could be materially adversely affected.
The risks set forth below are not the only risks facing us. Additional risks and
uncertainties not presently known to us, or that we currently see as immaterial,
may also harm our business.
WE ARE A NEW COMPANY WITH TWO YEARS OF OPERATING HISTORY.
Our business was incorporated in March 2000, and we have commenced operations
and introduced products and services, yielding a total of $1.923 million in
revenues through December 31, 2001. We have had only a limited operating history
on which to base an evaluation of our business and prospects. Such risks and
uncertainties are frequently more severe for those companies operating in new
and rapidly evolving markets. Some of the factors upon which our success will
depend include (but are not limited to) the following:
o the rate and timing, if at all, of the additional growth and use of
Internet-based survey and assessment tools;
8
o the rate and timing, if at all, at which existing survey providers
will migrate their existing products to the Internet;
o the existence of a demand for Internet-based survey and assessment
tools;
o the emergence of competitors in our target market, and the quality and
development of their products and services; and
o the market's acceptance of our products and services.
In order to address these risks, we must (among other things) be able to:
o successfully complete the development of our products;
o modify our products as necessary to meet the demands of our market;
o continue our efforts to develop our core products;
o attract and retain highly skilled employees; and
o respond to competitive influences.
On an ongoing basis, we cannot be certain that we will be able to successfully
address any of these risks.
WE FACE SUBSTANTIAL COMPETITION FROM BETTER ESTABLISHED COMPANIES THAT MAY HAVE
SIGNIFICANTLY GREATER RESOURCES WHICH COULD LEAD TO REDUCED SALES OF OUR
PRODUCTS.
The market for our products is competitive and is likely to become even more
competitive in the future. Increased competition could result in pricing
pressures, reduced sales, reduced margins or the failure of our products to
achieve or maintain market acceptance, any of which would have a material
adverse effect on our business, results of operations and financial condition.
Many of our current and potential competitors enjoy substantial competitive
advantages, such as:
o greater name recognition and larger marketing budgets and resources;
o established marketing relationships and access to larger customer
bases;
o substantially greater financial, technical and other resources; and
o larger technical and support staffs.
As a result, they may be able to respond more quickly than we can to new or
changing opportunities, technologies, standards or customer requirements. For
all of the foregoing reasons, we may not be able to compete successfully against
our current and future competitors.
THE COMPANY HAS A HISTORY OF LOSSES AND MAY NOT BE ABLE TO OPERATE PROFITABLY IN
THE FUTURE.
The Company experienced a net operating loss of approximately $1.272 million in
the period ended December 31, 2000, and a net operating loss of approximately
$2.688 million for the fiscal year ended December 31, 2001. There can be no
assurances that the Company will be able to operate profitably in the future. In
the event that the Company is not successful in implementing its business plan,
the Company will require additional financing in order to succeed. There can be
no assurance that additional financing will be available now or in the future on
terms that are acceptable to the Company. If adequate funds are not available or
are not available on acceptable terms, the Company may be unable to develop or
enhance its products and services, take advantage of future opportunities or
respond to competitive pressures, all of which could have a material adverse
effect on the Company's business, financial condition or operating results.
FUTURE ISSUANCES OF EQUITY SECURITIES BY THE COMPANY MAY DILUTE YOUR STOCK
OWNERSHIP.
In order to raise additional capital in the future, the Company may issue
additional equity securities. These securities will dilute your share ownership
of the Company. In addition, the Company may issue securities that are senior in
rights and preferences to the Company's common stock.
WE ARE DEPENDENT ON OUR MANAGEMENT TEAM AND THE UNEXPECTED LOSS OF ANY KEY
MEMBER OF THIS TEAM MAY PREVENT US FROM IMPLEMENTING OUR BUSINESS PLAN IN A
TIMELY MANNER OR AT ALL.
Our success depends largely upon the continued services of our executive
officers and other key management and development personnel. We are also
substantially dependent on the continued service of our existing technology
personnel because of the complexity of our products and technologies. The loss
of one or more of our key employees could seriously harm our business,
9
financial condition and results of operations. We cannot assure you that in such
an event we would be able to recruit personnel to replace these individuals in a
timely manner and on acceptable terms.
EVOLVING REGULATION OF THE INTERNET MAY AFFECT US ADVERSELY.
As the Internet continues to evolve, increasing regulation by federal, state or
foreign agencies becomes more likely. Such regulation is likely in the areas of
user privacy, pricing, content and quality of products and services. Taxation of
Internet use or other charges imposed by government agencies or by private
organizations for accessing the Internet may also be imposed. Laws and
regulations applying to the solicitation, collection or processing of personal
or consumer information could affect our activities. Furthermore, any regulation
imposing fees for Internet use could result in a decline in the use of the
Internet and the viability of Internet commerce, which could have a material
adverse effect on our business, results of operations and financial condition.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH AND ACCEPTANCE OF
THE INTERNET AS A BUSINESS TOOL.
Continued expansion in the sales of our products depends on the adoption of the
Internet as a widely used channel for corporate information, products and
services. This business model is not yet proven and may not be successful. The
Internet may not prove to be a viable commercial medium due to inadequate
development of the necessary infrastructure, such as a reliable network
backbone, or timely development of complementary products, such as high speed
modems. Additionally, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity, security, reliability, cost, ease of use,
accessibility, and quality of service. If the Internet does not continue to
become a widespread communications medium and commercial marketplace, the demand
for our products could be significantly reduced, which could have a material
adverse effect on our business, results of operations, and financial condition.
OUR SYSTEMS MAY BE VULNERABLE TO SECURITY RISKS OR SERVICE DISRUPTIONS THAT
COULD HARM OUR BUSINESS.
Our system servers are vulnerable to physical or electronic break-ins and
service disruptions, which could lead to interruptions, delays, loss of data or
the inability to process customer requests. Such events could be very expensive
to remedy and could damage our reputation, discouraging existing and potential
customers from using our products. Although in the past we have not experienced
attempts at physical or electronic break-ins, we may experience break-ins in the
future. Any such events could substantially harm our business, financial
condition and results of operations.
WE MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW PRODUCTS OR ENHANCEMENTS TO OUR
EXISTING PRODUCTS AT A RATE REQUIRED BY OUR RAPIDLY CHANGING MARKET.
Our future success depends on our ability to develop new products or
enhancements to our existing products that keep pace with rapid technological
developments and that address the changing needs of our customers. Although our
products are designed to operate with a variety of network hardware and software
platforms, we will need to continuously modify and enhance our products to keep
pace with changes in Internet-related hardware, software, communication, browser
and database technologies. We may not be successful in either developing such
products or timely introducing them to the market. In addition, uncertainties
about the timing and nature of new network platforms or technologies or
modifications to existing platforms or technologies could increase our research
and development expenses. The failure of our products to operate effectively
with the existing and future network platforms and technologies used by our
customers would limit or reduce the market for our products, result in customer
dissatisfaction and seriously harm our business, results of operations and
financial condition.
IN ORDER TO EXECUTE OUR GROWTH PLAN WE MUST CONTINUE TO ATTRACT, RETAIN, AND
MOTIVATE HIGHLY SKILLED EMPLOYEES, AND WE FACE SIGNIFICANT COMPETITION FROM
OTHER SOFTWARE AND INTERNET COMPANIES IN DOING SO.
To execute our growth plan we must attract and retain highly qualified
personnel. We need to hire additional personnel in virtually all operational
areas, including sales, marketing, research and development, operations and
technical support, customer service and administration. Competition for these
personnel is intense, especially for engineers with high levels of experience in
designing and developing software and Internet-related products. We cannot
assure you that we will be successful in attracting and retaining qualified
personnel. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. Many of the companies we
compete against for experienced personnel have greater resources than us. If we
fail to attract new personnel or retain and motivate our current personnel, our
business and future growth prospects could be severely harmed.
10
OUR PRODUCT FEATURES ARE STILL BEING DEVELOPED.
Although our basic products have been developed, a number of significant product
enhancements are still under development, and we still need to undertake
significant effort to "fine tune" the assessment capabilities of the products.
Furthermore, e-Perception faces the difficult task of creating working systems
that will interface with client companies' database systems. If we fail to
create working systems that interface with client companies' systems to their
satisfaction, our revenues and operating results would be harmed.
THE MARKET MAY NOT ACCEPT OUR PRODUCTS AND OUR PRODUCTS MAY NOT ADDRESS THE
MARKET'S REQUIREMENTS.
Our products are targeted to the survey and assessment market, a market in which
there are many competing service providers and technologies in use. Accordingly,
the demand for our products and services is very uncertain. Our products provide
a new alternative solution for the market. The market may not accept our
products. Even if our products achieve market acceptance, our products may fail
to address the market's requirements adequately. If the products using our
technologies do not achieve or sustain market acceptance, our business will be
materially harmed.
WE MAY FACE UNKNOWN PRODUCT DEFECTS THAT COULD PREVENT MARKET ACCEPTANCE AND
INTEGRATION OF OUR PRODUCTS AND COULD RESULT IN LOSS OF REVENUES AND/OR BUSINESS
FAILURE.
Products as complex as those that we offer frequently contain undetected defects
or errors. Despite testing, defects or errors may occur which could result in
loss of or delay in revenues, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation,
increased insurance costs and/or increased service costs, any of which could
materially harm our business. In addition, we provide implementation,
customization, consulting and other technical services in connection with the
implementation and ongoing maintenance of our products. Such services typically
involve working with sophisticated software, computing and communication
systems. Our failure or inability to meet customer expectations or project
milestones in a timely manner could also result in a loss of or delay in
revenues, loss of market share, failure to achieve market acceptance, injury to
our reputation and increased costs. Any significant defects or errors in our
products might discourage customers from purchasing our products and services.
Such defects or errors could also result in tort or warranty claims. Although we
attempt to reduce the risk of losses resulting from such claims through warranty
disclaimers and liability limitation clauses in our sales and licensing
agreements, these contractual provisions may not be enforceable in every
instance. Furthermore, insurance coverage may not adequately cover us for such
claims. If the liability-limiting provisions in our contracts are not upheld for
any reason, or if liabilities arise that are not contractually limited or
adequately covered by insurance, our business could be materially harmed.
IF WE FAIL TO PROVIDE SERVICES TO SUPPORT OUR PRODUCTS, OUR REVENUES AND
PROFITABILITY WOULD BE HARMED.
Our services are integral to the successful deployment of our solutions. If our
professional services organization does not effectively implement and support
our products or if we are unable to expand our professional services
organization and effectively use strategic third-party partners to provide
services directly to customers to keep pace with sales, our revenues and
operating results would be harmed. In addition, if we are unable to expand our
professional services organization and effectively use these strategic third
party partners to provide these services directly to our customers, we may be
required to increasingly subcontract with third parties to help provide these
services to implement and support our products, which will result in lower gross
margins. In addition, since we generally recognize revenues on performance of a
client assessment sold together with our implementation services over the period
those services are performed, delays in providing implementation services will
delay our recognition of revenue.
CHANGES IN TECHNOLOGIES COULD RESULT IN A FAILURE OF OUR PRODUCTS TO ACHIEVE
MARKET ACCEPTANCE.
The emerging nature of the Internet requires us to continually refine our
products, particularly in response to competitive products. This rapid rate of
change also means that any refinements to our future products will need to be
introduced as quickly as possible. In addition, if new Internet, networking or
communication technologies or standards are widely adopted, or if other
technological changes occur, we may need to expend significant resources to
adapt our products. We may not succeed in developing and marketing new products
that respond to competitive and technological developments and changing customer
needs. This could materially harm our business.
WE MUST MANAGE GROWTH TO ACHIEVE PROFITABILITY.
To be successful, we will need to implement additional management information
systems, develop further our operating, administrative, financial and accounting
systems and controls and maintain close coordination among our executive,
11
engineering, accounting, finance, marketing, sales and operations organizations.
Any failure to manage growth effectively could materially harm our business.
WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS.
The software and Internet industries are characterized by the existence of a
large number of patents, trademarks and copyrights and frequent litigation based
on allegations of patent infringement or other violations of intellectual
property rights. As the number of entrants into our market increases, the
possibility of an intellectual property claim against us grows. Our technology,
products and services may not be able to sustain any third party claims or
rights against their use. Any intellectual property claims, with or without
merit, could be time-consuming and expensive to litigate or settle and could
divert management attention from administering our core business.
WE ARE DEPENDENT FOR A PORTION OF OUR REVENUES ON RESELLERS, AND IF THEY ARE NOT
SUCCESSFUL MARKETING OUR TECHNOLOGY, OUR ABILITY TO MAINTAIN OR INCREASE OUR
REVENUES WILL BE HARMED.
We sell a percentage of our technology through resellers in the United States
and abroad. We have no control over our third-party distributors, their shipping
dates, or the volumes of systems shipped by them. These companies may not use
our products in volumes anticipated by us. If they fail to do so, our revenues
will be harmed.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS COULD SERIOUSLY HARM
OUR BUSINESS.
We generally rely on copyrights, trademarks, trade secret laws and software
security measures, along with employee and third-party nondisclosure agreements,
to establish and protect our proprietary intellectual property rights, products
and technology. Our products are typically sold pursuant to contracts that
restrict the use of the products to the customer's internal purposes. We
distribute our software under agreements that are signed by our distribution
partners and our end-users. Despite our precautions taken to protect our
software, unauthorized parties may attempt to reverse engineer, copy, or obtain
and use information we regard as proprietary. Policing unauthorized use of our
products is difficult and software piracy is a persistent problem. Additionally,
the laws of some foreign countries do not protect our proprietary rights to the
same extent as do the laws of the United States. We cannot assure you that our
reliance on contracts with third parties, or copyright, trademark, trade secret
protection or our software security measures, will be enough to be successful
and profitable in the industry in which we compete.
FUTURE SALES OF RESTRICTED SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON
STOCK AND LIMIT OUR ABILITY TO COMPLETE ADDITIONAL FINANCING.
Although our shares are currently trading on the OTC Bulletin Board, the volume
of trading of our common stock and the number of shares in the public float are
small. Sales of a substantial number of shares of our common stock into the
public market in the future could materially adversely affect the prevailing
market price for our common stock. In connection with our acquisition of our
Delaware subsidiary, we issued 6,872,314 shares of common stock, all of which
will become eligible for resale pursuant to Rule 144 of the Securities Act in
early 2003. Such a large "over-hang" of stock eligible for sale in the public
market may have the effect of depressing the price of our common stock, and make
it difficult or impossible for us to obtain additional debt or equity financing.
THE MARKET PRICE OF OUR STOCK COULD BE VOLATILE.
The market price of our common stock has been subject to volatility and, in the
future, the market price of our common stock may fluctuate substantially due to
a variety of factors, including:
o quarterly fluctuations in our operating income and earnings per share
results;
o economic conditions;
o disputes concerning patents or proprietary rights;
o sales of common stock by existing holders;
o loss of key personnel; and
o securities class actions or other litigation.
12
OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS.
The results of operations for any quarter are not necessarily indicative of
results to be expected in future periods. Our operating results have in the past
been, and will continue to be, subject to quarterly fluctuations as a result of
a number of factors. These factors include, but are not limited to:
o market acceptance of existing or new products;
o competitive product introductions;
o our ability to control or adjust research and development, marketing,
sales and general and administrative expenses in response to changes
in revenues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in financial market risk as originally discussed in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Description of Document
2.1(1) Agreement and Plan of Reorganization, dated as of November
20, 2001, by and between the Company and e-Perception, Inc.
3.1(2) Articles of Incorporation
3.2 Certificate of Amendment to the Articles of Incorporation
3.2(3) Bylaws
10.1 Standard Office Lease by and between Arden Realty Limited
Partnership and e-Perception Technologies, Inc.
(1) Incorporated by reference to the corresponding exhibit on the
Registrant's Form 8-K dated January 24, 2002.
(2) Incorporated by reference to the corresponding exhibit on the
Registrant's Form 10-SB dated October 1, 1999.
(3) Incorporated by reference to the corresponding exhibit on the
Registrant's Form 10-SB dated October 1, 1999.
(b) The following reports on Form 8-K were filed during the quarter ended
March 31, 2002:
1. Report of Form 8-K filed on January 24, 2002 related to the
Agreement and Plan of Reorganization dated as of November 20,
2001 between the Company and e-Perception Technologies, Inc.;
2. Report of Form 8-K filed on February 15, 2002 related to the
change in the Company's accountants; and
3. Report of Form 8-K/A filed on April 8, 2002. related to the
Agreement and Plan of Reorganization dated as of November 20,
2001 between the Company and e-Perception Technologies, Inc.
13
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
e-PERCEPTION, INC.
Date: May 14, 2002 By: /s/ William E. Richardson
------------------------------------
William E. Richardson
Chief Executive Officer and Director
(Principal Executive Officer and
Principal Financial Officer)
14