Dividends on Preferred Stock. Dividends on Preferred Stock includes the allocation of the proceeds received to the warrants issued and beneficial conversion features of the Series A Preferred Stock of $12.8 million, $1.5 million for the Series B Preferred Stock and $1.9 million for the Series C Preferred Stock. Additionally, dividends of $0.4 million were accrued from each date of issuance through conversion or December 31, 2001. Dividends accrued on the Series A and Series B Preferred Stock were paid in-kind with common shares at the time of conversion during 2001. The Series C Preferred Stock does not provide for stated dividends. We will continue to accrue dividends through the date that that the Series B Preferred Stock is converted into common stock. LIQUIDITY AND CAPITAL RESOURCES Our principal potential sources of liquidity are cash on hand, cash generated from operations and cash provided from financing activities. As of December 31, 2002, we had cash, cash equivalents and short-term investments of $0.6 million. During 2002, we used $9.4 million in operating activities reflecting a net loss of $8.1 million. Cash used in operating activities also reflects: a) $1.8 million of depreciation and amortization; b) $0.7 million of non-cash stock compensation; c) $1.6 million for the non-cash extraordinary gain on extinguishment of debt; d) $0.4 million for the non-cash termination of lease obligation; and e) $1.8 million in cash used in other working capital changes. During 2001, we used $18.3 million in operating activities, comprised principally of a net loss of $24.5 million. Cash used in operating activities also reflects $2.2 million for non-cash stock compensation and interest expense for the conversion feature of the Hewlett-Packard note, $2.1 million of depreciation and amortization, $2.9 million in non-cash extraordinary expense for warrants issued to Hewlett-Packard in connection with the modification of the existing convertible note in April 2000, $2.3 million of non-cash extraordinary gain related to the extinguishment of the convertible note with Hewlett-Packard in November 2001 and a $1.3 million increase in cash provided by other working capital changes. During 2000, we used $26.8 million in operating activities, comprised principally of a net loss of $39.1 million. Cash used in operating activities also reflects $7.2 million for non-cash stock compensation and interest expense for the conversion feature of the Hewlett-Packard note, $2.1 million of depreciation and amortization, $1.2 million in professional fees paid by issuing common shares, $0.7 million write-off of deferred offering costs and note receivable and a $1.1 million increase in cash provided by other working capital changes. During 2002, we used approximately $0.2 million in investing activities reflecting capital expenditures compared to capital expenditures of approximately $0.5 million in 2001. During 2000, investing activities provided $4.6 million in net cash. This amount reflects $8.0 million received upon the maturities of short-term investments, as partially offset by reinvestment of $1.5 million, investment in notes receivable of $0.3 million and $1.6 million in capital expenditures and capitalized software development costs. During 2002, financing activities provided net cash of $7.4 million, primarily the result of the issuance of 400 shares of Series C Preferred Stock, 799 shares of Series D Convertible Preferred stock and 15.0 million shares of our common stock for warrants exercised, less offering and registration costs of $0.5 million. During 2001, financing activities provided net cash of $18.5 million, primarily the result of the issuance of $17.3 million of preferred stock and $2.6 million from the issuance of 17.0 million shares of our common stock. Additionally, we received $1.1 million in proceeds from the exercise of outstanding stock options and warrants and purchases under stock purchase plans and incurred approximately $1.9 million of offering placement and registration costs. Additionally, we paid $0.5 million in cash to extinguish approximately $3.8 million of convertible notes. During 2000, financing activities provided net cash of $16.6 million, primarily the result of the issuance of 1.5 million shares of our common stock. Additionally, we received $1.0 million in proceeds from the exercise of outstanding stock options and warrants and purchases under stock purchase plans and incurred approximately $0.5 million of offering costs, a portion of which were subsequently written-off. During the second quarter of 2001, the company commenced implementation of a cost cutting program. Initiatives included the closing of offices in Edmond, Oklahoma and Chicago, Illinois, a voluntary 25 percent base pay deferral and bonus elimination by senior management, realignment of development expenses in conjunction with customers' near-term implementation schedules and lower vendor service costs. During the third quarter of 2001, the company continued its efforts to reduce its cost structure. The reductions included a reduction in the then current workforce of approximately 45 percent, salary reductions for remaining employees, including additional salary reductions by senior management, and expense reductions including travel, administrative and vendor service costs. As a result of these changes, the gross cash operating expenses were decreased to approximately $1.0 million per month (excluding non-cash items) during late 2001. During the third quarter and into the fourth quarter of 2002, the company has taken and continues to take additional measures to reduce its cost structure. The reductions have included headcount reductions at the executive level, negotiations with significant vendors and other expense reductions including travel, administrative and vendor service costs. As a result of these changes, the gross cash operating expenses have decreased to approximately $0.8 million per month (excluding non-cash items) during the fourth quarter of 2002 and into early 2003. We have incurred operating losses and negative cash flow in the past and expect to incur operating losses and negative cash flow through 2003. Our spending may increase in the future for further technology and product development and other technology and database costs. We also expect increases in customer operations expense to be incurred after corresponding increases in contracted revenues. Our independent auditors have issued their Independent Auditors' Report on the Company's consolidated financial statements for the fiscal year ended December 31, 2002 with an explanatory paragraph regarding the Company's ability to continue as a going concern. We have generated net losses for the years ended December 31, 2000, 2001 and 2002 and have generated an accumulated deficit of $85.3 million as of December 31, 2002. We have incurred operating losses and negative cash flow in the past and expect to incur operating losses and negative cash flow during 2003. During the second quarter of 2001 we began to experience delays in signing small supplier customers which were an important component of our expected implementation revenues for the second quarter of 2001 and these delays have continued into 2002. These efforts are a part of our retailer "community development" activities. We continue to pursue sales efforts with the small suppliers and still believe that they will become subscribers to our services. Due to these delays, we have focused our sales efforts on leading customers, particularly retailers, each of which could have a greater incremental effect on increasing subscription revenues. An increase in the number of leading customers is critical to generating positive cash flow from operations. The delay in generating revenues creates a need for us to obtain additional capital in 2003 in order for us to execute our current business plan successfully. The amount of capital will be dependent upon (a) our services achieving market acceptance, (b) the timing of additional customer signings, (c) our ability to sustain current decreased levels of spending, and/or (d) the amount of, if any, unanticipated expenditures. There can be no assurance as to whether, when or the terms upon which any such capital may be obtained. Any failure to obtain an adequate and timely amount of additional capital on commercially reasonable terms could have a material adverse effect on our business, financial condition and results of operations, including our ability to continue as a going concern. We currently have 300 million shares of common stock authorized for issuance by our stockholders. As of March 25, 2003, we have either issued or reserved nearly all of it for (a) future conversion of issued preferred stock and (b) exercises of issued warrants and stock options. For the last 24 months we have obtained working capital primarily from the sale and issuance of common stock or warrants. If the stockholders at the 2003 annual meeting of stockholders of the Company do not authorize additional shares of common stock for sale and issuance by us, this historical source of working capital will no longer be available to us. The Company leases its office and storage space under operating leases. The terms range from month-to-month up to five years and include options to renew. The Company also leases office equipment under various non-cancelable lease agreements. Future minimum lease payments under non-cancelable operating leases at December 31, 2002 follows:
Appears in 2 contracts
Sources: Annual Report (Vialink Co), Annual Report (Vialink Co)