SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q/A-2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission File No. 33-19139-NY
RATEXCHANGE CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2936371
------------------------------- ------------------------
(State or Other Jurisdiction of (IRS Employer ID Number)
Incorporation or Organization)
100 Pine Street, Suite 500, San Francisco, CA 94111
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (415) 274-5650
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 ___ NO _X_
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
18,278,174 shares common stock as of November 20, 2001
2,000,000 shares preferred stock, Series A, as of November 20, 2001
RATEXCHANGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
PART I - FINANCIAL INFORMATION Page
Item 1 -
Financial Statements (Restated)
Consolidated balance sheet as of September 30, 2001
(unaudited) and December 31, 2000 3
Consolidated statement of operations (unaudited)
for the three months and nine months ended
September 30, 2001 and 2000 4
Consolidated statement of cash flows (unaudited)
for the nine months ended September 30, 2001 and 2000 5
Notes to consolidated financial statements 6
Item 2 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3 -
Quantitative and Qualitative Disclosures about Market Risk 25
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities 26
Item 3 - Exhibits and Reports on Form 8-K 26
SIGNATURES 26
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RATEXCHANGE CORPORATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
ASSETS September 30, December 31,
------------ ------------
2001 2000
(Unaudited)
(restated)
------------ ------------
Current assets
Cash and cash equivalents $ 2,130,884 $ 2,115,152
Accounts receivable (net of an allowance for
doubtful accounts of $9,460 at September 30, 2001
and $4,960 at December 31, 2000) 403,427 41,170
Investment securities available for sale -- 12,124,635
Notes Receivable 6,000 --
Interest receivable -- 204,755
Prepaid expenses 8,340 116,360
------------ ------------
Total current assets 2,548,651 14,602,072
Property and equipment (net of accumulated depreciation of
$655,730 and $240,791 in 2001 and 2000) 2,454,974 1,401,888
Other assets
Investment in affiliate 75,000 75,000
Deposits 195,293 184,856
------------ ------------
Total assets $ 5,273,918 $ 16,263,816
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued expenses and liabilities $ 2,174,330 $ 1,061,960
Accounts payable 450,944 1,538,910
Notes payable 522,151 --
------------ ------------
Total current liabilities 3,147,425 2,600,870
Convertible Note Payable and Accrued Interest 409,743
Accrued Lease Liabilities 5,396,799 --
------------ ------------
Total Liabilities 8,953,967 2,600,870
Stockholders' equity (deficit)
Preferred stock, $.0001 par value, 60,000,000
shares authorized; 2,000,000 issued and outstanding 200 --
Common stock, $.0001 par value; 300,000,000 shares
authorized; issued and outstanding: 18,053,000
shares in 2001 and 17,783,000 shares in 2000 1,805 1,778
Additional paid-in capital 80,965,603 72,132,890
Accumulated deficit (84,190,657) (57,393,548)
Deferred compensation (457,000) --
Notes receivable on sales of common stock -- (363,661)
Accumulated other comprehensive loss
-- (714,513)
------------ ------------
Total stockholders' equity (deficit) (3,680,049) 13,662,946
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 5,273,918 $ 16,263,816
============ ============
See notes to financial statements
Page 3
RATEXCHANGE CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
Beginning of
Development
Stage
Three Months ended Nine Months ended (September
September 30, September 30, 30, 1998)
(unaudited) (unaudited) through
-------------------------------- -------------------------------- September 30,
2001 2000 2001 2000 2001
(restated) (restated) (restated) (unaudited)
------------ ------------ ------------ ------------ ------------
REVENUE
Trading and consulting $ 410,439 $ 52,755 $ 1,120,783 $ 57,255 $ 1,212,006
EXPENSES
Selling, general and
administrative
(includes non-cash
expenses of
$1,042,000 and
$9,974,000 for the
three month periods
in 2001 and 2000 and
$5,552,000 and
$21,884,000 for the
nine month periods
in 2001 and 2000) 2,975,024 16,333,853 15,665,389 35,907,785 67,288,039
Write off advances to
potential investee -- -- -- -- 1,298,681
Depreciation and
amortization 562,826 62,983 1,417,623 164,262 1,658,414
Purchase of
subsidiaries
(non-cash) -- -- -- -- 1,597,118
Write-down of
software assets 3,010,371 -- 3,010,371 -- 3,010,371
Loss or settlement on
leases 7,039,397 -- 7,039,397 -- 7,039,397
------------ ------------ ------------ ------------ ------------
Total Expenses 13,587,618 16,396,836 27,132,780 36,072,047 81,892,020
OTHER INCOME
(EXPENSE)
Interest income 41,925 392,300 316,205 604,561 1,487,397
Interest expense (29,132) (1,581,234) (40,644) (1,882,706) (1,893,149)
Loss on securities -- -- (744,197) (744,197)
Other expenses (net) (207,107) (324,375) (207,107) (1,822,875) (2,029,982)
------------ ------------ ------------ ------------ ------------
Loss before taxes (13,371,493) (17,857,390) (26,687,740) (39,115,812) (83,859,945)
Income tax provision
(benefit) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET LOSS $(13,371,493) $(17,857,390) $(26,687,740) $(39,115,812) $(83,859,945)
============ ============ ============ ============ ============
Basic and diluted net
loss per share $ (0.75) $ (1.03) $ (1.50) $ (2.40)
Weighted average
number of shares
of common stock 17,880,391 17,356,043 17,815,821 16,334,695
See notes to the financial statements
Page 4
RATEXCHANGE CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
Beginning
of the
Development
Stage
September
30, 1998
For the nine months to
ended September 30, September 30,
2001 2000 2001
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
(restated) (restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(26,687,740) $(39,115,812) $(83,859,945)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 1,417,623 164,262 1,658,414
Write off advances to potential investee 206,898
Write-down of software assets 3,010,371 3,010,371
Stock options and warrants granted to
service providers and strategic partners 633,831 13,547,868 18,024,044
Stock options granted to employees below fair market value 1,294,694 9,127,572 11,686,126
Stock options - termination adjustment 565,875 941,564 1,612,333
Warrants issued in relation to bridge financing 1,801,775 1,657,988
Warrants for purchase of common stock
issued for services -- 1,559,461
Stock Issued for services 145,200 145,200
Purchase of outstanding shares of RateXchange -- 1,507,408
Deferred lease payments 1,286,000 1,286,000
Loss or settlement on leases 7,039,397 7,039,397
Deferred compensation 958,109 958,109
Loss on writedown of securities 744,197 744,197
Increase in security deposits (10,437) (141,960) (195,294)
(Increase) decrease in accounts receivable and other advances (55,481) (393,279) (417,766)
Increase (decrease) in accounts payable and accrued expenses (1,363,368) 246,352 1,127,987
------------ ------------ ------------
Net cash used in operating activities (11,021,729) (13,821,658) (32,249,072)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for purchase of equipment (42,900) (667,984) (1,685,580)
Purchase of Halo Stock (631,251)
Purchase of investments available for sale (26,099,845) (32,975,313)
Sale of investments available for sale 11,580,361 12,484,257 32,347,777
Investment in Affiliates (500,000) (575,000)
------------ ------------ ------------
Net cash provided by/(used in) investing activities 11,037,461 (14,283,572) (3,519,367)
CASH FLOWS FROM FINANCING ACTIVITIES
Loans and other debt -- 1,200,000 1,500,000
Proceeds from common stock sales (net) -- 29,702,360 34,809,004
Proceeds from notes receivable -- 1,590,319 1,590,319
------------ ------------ ------------
Net cash provided by financing activities -- 32,492,679 37,899,323
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 15,732 4,387,449 2,130,884
CASH and CASH EQUIVALENTS BEGINNING OF PERIOD 2,115,152 536,615 --
------------ ------------ ------------
CASH and CASH EQUIVALENTS END OF PERIOD $ 2,130,884 $ 4,924,064 $ 2,130,884
============ ============ ============
See notes to financial statements
Page 5
RATEXCHANGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTERIM FINANCIAL STATEMENTS-AS RESTATED; COMPANY BACKGROUND AND HISTORY
The interim financial statements presented herein are unaudited and have been
prepared in accordance with the instructions to Form 10-Q. These statements
should be read in conjunction with the financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31, 2000.
The results of operations and cash flows for the three and nine months ended
September 30, 2001 may not be indicative of the results that may be expected for
the year ending December 31, 2001.
The Company has restated its Form 10Q for the period ending September 30, 2001.
As discussed in Note 11, the Company modified its severance agreement with a
former executive which was not properly reflected in the previously filed 10-Q.
To correct this misstatement, the revised financial statements reflect a
$425,000 increase in compensation expense not previously recorded during the
second quarter, offset by a reduction in compensation expense of $25,000 that
should not have been reported during the third quarter. Also, there was a
$271,000 reduction in compensation expense related to the continued amortization
of option related expense which should not have been reported, consisting of
$68,000 and $203,000 in the second and third quarters respectively.
Additionally, the company recorded the related note payable plus accrued
interest totaling $409,743.
RateXchange Corporation (the "Company" or "RateXchange") is a consolidated group
of companies including the parent corporation, RateXchange Corporation
(RateXchange Corp.), and its subsidiaries, RateXchange I, Inc., Xpit Corporation
("Xpit"), RMG Partners Corporation ("RMG"), and PolarCap, Inc. (PolarCap).
PolarCap is in the process of being liquidated.
RateXchange Corporation (formerly NetAmerica.com Corporation) is a Delaware
corporation originally organized on May 6, 1987 for the purpose of seeking out
and developing any general business opportunity. The Company's operating
subsidiary RateXchange I, Inc., a Delaware corporation organized in June 1999,
has developed proprietary trading software to support its electronic trading
system for bandwidth and other telecommunications products. In March 2001, the
Company acquired Xpit.com, Inc., an Idaho corporation offering trading and risk
management systems to the futures industry. In October 2001, substantially all
of the assets acquired were sold to CQG, Inc. In April 2001, RateXchange formed
RMG Partners Corporation, a wholly owned subsidiary, to provide market-based
solutions through the use of derivative trading strategies.
RateXchange Corporation is an innovative transaction services firm that combines
the strength of traditional voice brokerage with technology-based trading
systems to help its clients understand and compete in newly commoditizing
marketplaces. RateXchange's mission is to provide an unbiased view and help
increase liquidity in these marketplaces by providing brokerage, consulting and
information services that enable network providers, energy merchants and
financial services firms to maximize the usage of their assets. The brokerage
services include traditional voice brokerage, including securities brokerage, in
addition to a proprietary trading system, the RateXchange Trading System (RTS),
that allows network providers, energy merchants, financial institutions, asset
managers and commodity traders the ability to trade bandwidth and
bandwidth-related products. The consulting
Page 6
solutions practice provides asset valuation tools, risk management strategies
and price analysis. The information services include the provision of bandwidth
pricing information, market research and comprehensive analysis for industry
segments supported by the Company's trading system.
The Company is defined as a development stage company in accordance with
Financial Accounting Standard No. 7. The Company began revenue generation
activities in 2000 but nominal revenue has been generated through September 30,
2001. The Company anticipates that the revenue growth that has occured, in
addition to other factors related to the Company's operations, will result in
the removal of the development stage company classification in the fourth
quarter of 2001.
In April 2001, as previously disclosed in the year 2000 Form 10K, the Company
received an irrevocable commitment from two investors to acquire a total of $9
million of common stock to be issued from capital shares. During the second
quarter of 2001, management was informed by those investors that they did not
expect to honor the original commitment due to the decline in the Company's
share price. As a result of this development, management is seeking a reduced
amount of financing in the amount of $2.5 million and in no event more than $3.5
million, that the Company expects to close before the end of November 2001. As
of November 20, 2001, the Company had opened escrow into which approximately
$2.9 million had been received. Additionally, on October 29, 2001, the Company
sold substantially all of the assets related its Xpit Corporation subsidiary for
$1.0 million in net cash, in addition to the retirement of a related $500,000
note payable (See Note 11 - Subsequent Events).
In November 2000, new management began to implement cost cuts in order to more
closely tie costs to revenue. Significant expense reductions have continued
through October 2001, which included, among other things, staff reductions,
settlement of outstanding obligations associated with unused equipment and
completion of certain development efforts that have significantly reduced
expenditures for outside consulting expertise. The Company believes that a
successful closing of the current financing will be sufficient to fund
operations for the next 12 months. The Company cannot make assurances that it
will be able to complete the full financing, or that such financing will be
adequate for the Company's needs.
The factors discussed above create substantial doubt about the Company's ability
to continue as a going concern and an uncertainty as to the recoverability and
classification of recorded asset amounts and the amounts and classification of
liabilities. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
NOTE 2 CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
We consider all highly liquid investment securities with original maturities of
three months or less from date of purchase to be cash equivalents. Short-term
investments consist of debt securities with maturities between three months and
twelve months.
Management determines the appropriate classification of investments at the time
of purchase and reevaluates such determination at each balance sheet date. To
date, all marketable securities have been classified as available-for-sale and
are carried at fair value with unrealized gains and losses, if any, included in
stockholders' equity. At September 30, 2001, the Company had no investments in
securities available for sale. Realized gains and losses and declines in value
of securities judged to be other than temporary are included in other income,
net. Interest and dividends on all securities are included in other income, net.
NOTE 3 SERIES A PREFERRED STOCK
In the first quarter of 2001, in conjunction with the purchase of Xpit.com., the
Company issued 2,000,000 shares of
Page 7
its Series A Convertible Preferred Stock with a cumulative dividend of 6% based
on a share price of $2.75 per share. Dividends are paid in shares of Series A
Preferred Stock. The Series A Preferred Stock is convertible on a one for one
basis into common shares of the Company at the discretion of the holders. The
holder of each share of Series A Preferred Stock has the right to one vote for
each share of Common Stock into which such share of Series A Preferred Stock
could then be converted. In the event of any liquidation, dissolution, or
winding up of the Company, whether voluntary or involuntary, the holders of the
Series A Preferred Stock are entitled to receive, prior and in preference to any
distribution of any assets or surplus funds of the Company to the holders of
common stock, the aggregate amount of $2.75 per share (as adjusted for any stock
dividend, combinations, or splits with respect to such shares). The Series A
preferred stock is not redeemable.
NOTE 4 LOSS PER SHARE AND AVERAGE SHARES OUTSTANDING
Basic loss per share is computed by dividing the net loss, less accrued
dividends on preferred stock ($82,500 and $182,000 for the three and nine months
ending September 30, 2001), by the weighted average number of common shares
outstanding. Options, warrants and convertible preferred stock on shares of
common stock were not included in computing diluted loss per share because their
effects were anti-dilutive. (10,537,000 options, 6,435,000 warrants and
2,000,000 convertible preferred shares).
NOTE 5 COMMITMENTS AND CONTINGENCIES
The Company is involved in the following lawsuits:
Martin v. RateXchange
On October 3, 2001, Gregory Martin and Patricia Whitney filed a lawsuit against
RateXchange Corporation in the United States District Court for the Western
District of Washington, C01-1565R alleging breach of contract. In 1998, Mr.
Martin was the President and CEO of NetAmerica International Corporation (NAMI),
a predecessor of RateXchange Corporation. In December of 1998 Mr. Martin was
terminated from his employment with NAMI. The claims allege breach of agreements
associated with Mr. Martin's employment. The complaint asks for damages of
approximately $150,000.
Mr. Martin had filed suit previously in the Washington State court. That matter
was dismissed following a settlement in May of 1999. Mr. Martin has now revived
his claim against the Company.
The Company was recently served with the lawsuit and has not yet responded in
court.
YellowBrix, Inc. v. RateXchange Corporation
On October 2, 2001, YellowBrix, Inc. filed a lawsuit against RateXchange
Corporation in the Circuit Court for the City of Alexandria, Virginia alleging
breach of contract. YellowBrix, Inc. provided news wire information to the
Company in 2001. The complaint asks for damages of approximately $32,000. The
Company was recently served with the lawsuit and has not yet responded in court.
RateXchange, Inc. v. PWREF/MCC-China Basin, LLC
In September of 2001, RateXchange I, Inc., one of the Company's Delaware
subsidiaries, terminated its lease and filed a lawsuit against PWREF/MCC-China
Basin, LLC, its previous landlord, alleging constructive eviction and seeking
declaratory relief. The allegations of the complaint arise from the lease for
commercial space between the parties for the property located at 185 Berry
Street, in San Francisco, California. PWREF/MCC-China Basin, LLC has recently
responded to the complaint and filed a cross-complaint against RateXchange I,
Inc. The Company has reserved $132,000 to address this matter.
Based upon the facts known to the Company at this time and the applicable law,
RateXchange does not expect the above cases to result in significant exposure to
the Company and the Company has not set aside any additional reserves for the
contingencies listed above.
Page 8
NOTE 6 COMPREHENSIVE LOSS
The comprehensive loss for the three and nine month periods ending September 30,
2001 and 2000 was:
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss $(13,371,493) $(17,857,390) $(26,687,740) $(39,115,812)
Other Comprehensive
Income:
Unrealized losses on short-term investments (521,513) (117,965)
------------ ------------ ------------ ------------
Comprehensive loss $(13,371,493) $(18,378,903) $(26,687,740) $(39,233,777)
============ ============ ============ ============
NOTE 7 OPERATING LEASES
The Company has entered into various operating leases associated with its
delivery hubs, including various telecommunications routing equipment and other
infrastructure. In addition, it has entered into various leases for office space
and related office equipment, including computers and software. These operating
leases have since been settled or restructured, as described below.
Future annual minimum lease payments related to equipment and office space under
non-cancelable operating leases as of September 30, 2001 were:
Year
2001 (Last three months) $ 393,320
2002 1,936,586
2003 4,895,888
----------
$7,225,794
==========
During the second quarter, the Company and Forsythe McArthur ("Forsythe")
entered into a Restructure Agreement with respect to an equipment lease on
delivery hub equipment. The terms of the Restructure Agreement required 12
monthly payments of $74,056 beginning on May 1, 2001, 12 monthly payments of
$148,113 beginning on May 1, 2002 followed by one payment on May 1, 2003 of
$4,184,544. In September, Forsythe agreed to allow RateXchange to withhold
scheduled payments through December 31, 2001, subject to a proposed further
restructuring of the lease.
The proposed modified Restructure Agreement between RateXchange and Forsythe is
subject to the successful closing of a minimum of $2 million in financing prior
to December 31, 2001. The proposed terms call for a $5.95 million five-year
convertible note issued to Forsythe, with interest of 9% per annum, payable
quarterly in cash or RateXchange common stock. The corresponding leased assets
would then be carried on RateXchange's balance sheet. No principal repayments
are required prior to the August 31, 2006 maturity date, and the note is
convertible at maturity at a 20% discount to the prevailing market price of
RateXchange common stock. In consideration for agreeing to modify the
Restructure Agreement, Forsythe will receive warrants to purchase $250,000 worth
of RateXchange common stock based on a price equal to 130% of the average
closing price in October 2001, or $0.48. The warrants will not be exercisable
until October 31, 2002. Because the outcome of the financing is not known at
this time, the Company's September 30, 2001 financial statements do not reflect
the impact of this pending modification to the Restructure Agreement.
As reported in the previous quarters, management has been re-examining its
business plans, including aspects of the business related to the delivery hubs
and evaluating alternative uses for such leased equipment. During the third
quarter, management concluded that it cannot determine a use for such equipment
in its ongoing operations. As a
Page 9
result of the related assets being no longer utilized in the Company's
operations, RateXchange took a $6.4 million charge for the acceleration of
remaining contractual obligations and costs associated with the Forsythe lease
arrangement.
Also during the third quarter, the Company settled claims and additional
outstanding lease obligations related to assets and facilities that no longer
fit with the revised operating plan. In August 2001, the Company settled its
outstanding litigation with Switch and Data Facilities Company. The settlement
had a value of $368,000, including a cash payment of $250,000 and Company stock
valued at $118,000.
The Company also settled the terms of its collocation lease with Telecity by
providing consideration of $275,000 in cash and an agreement to pay $95,000 over
six months in return for elimination of all liabilities related to the lease,
which totaled approximately $1.2 million.
Additionally, the Company agreed to settle an obligation to Science Applications
International Corp. ("SAIC") for goods and services associated with delivery hub
equipment. Currently, there is an amount payable to SAIC of approximately
$158,000, with $50,000 payable in cash and the balance payable in 175,000 shares
of restricted RateXchange common stock.
The Company has an existing lease with Lawson Software for accounting software
that it no longer utilizes. The Company has suspended lease payments since
September 2001, when negotiations began regarding a concession. An outstanding
obligation of $263,000 remains on the lease, and has been fully expensed.
On October 5, 2001 RateXchange signed an 18-month sub-lease for new office space
at 100 Pine Street in San Francisco's financial district. Monthly payments are
approximately $7,800.
NOTE 8 AGREEMENT WITH AMEREX BANDWIDTH
In September 2001, the Company and Amerex extended their agreement through
December 31, 2001. Under the new terms of the extended agreement, the Company
maintains its receipt of 70% on all bandwidth brokerage commission revenue
generated, and decreases its payment of monthly expenses associated with this
revenue from approximately $70,000 per month to $15,000 per month for the
remainder of the year.
In July 2001, RateXchange agreed to preliminary non-binding terms for the
purchase of all of the outstanding stock of Amerex Bandwidth, Ltd., subject to
the signing of a Definitive Agreement and the successful completion of a minimum
of $3 million in financing. The transaction was structured as a stock-for-stock
purchase, with a portion of the purchase price payable in stock upon the
achievement of certain revenue targets. Assuming a successful closing, Amerex
Bandwidth would operate as a wholly-owned subsidiary of RateXchange and would
remain in its Houston offices. Once RateXchange's current financing is
completed, the Company will continue to explore mutually agreeable terms for the
acquisition of Amerex Bandwidth. Should the stock purchase not occur, the
Company expects to continue its partnership agreement under mutually agreeable
terms. Because the future terms of our agreement with Amerex are not known at
this time, the Company's September 30, 2001 financial statements do not reflect
the impact of this potential acquisition.
NOTE 9 RMG PARTNERS
In April 2001, the Company formed RMG Partners Corporation (RMG) as a wholly
owned subsidiary created to provide market-based solutions through the use of
derivative trading strategies. RMG principals receive 85% of revenues, which is
used to cover payroll and all of the operating expenses of RMG. In connection
with his hiring, the CEO of RMG has been given the right to acquire a specific
number of shares of the Company with additional purchase rights upon achievement
of revenue targets in the future. This deferred compensation is reflected as a
component of equity in the balance sheet and is being amortized over a period of
12 months. The Company has granted an affiliate of the principals of RMG the
right to purchase RMG for $300,000 commencing in April 2002.
NOTE 10 NEW ACCOUNTING STANDARD
In the first quarter of 2001, the Company was required to adopt the provisions
of Financial Accounting Standard Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133) as amended by FAS
Page 10
137 and FAS 138. This statement establishes accounting and reporting standards
for derivative contracts and for hedging activities. As the Company does not
currently use any derivative instruments or engage in hedging activities,
adoption of this new standard had no impact on the Company's consolidated
results of operations or consolidated financial position.
NOTE 11 Severance Agreement with Former Officer
In May 2001, the Company renegotiated the terms of the severance included in its
employment agreement with Donald Sledge, former Chairman and CEO of RateXchange
Corporation. Upon his leaving the Company, Mr. Sledge was originally to receive
one year's salary, or $300,000, in addition to a $150,000 severance payment in
cash and the accelerated vesting of certain stock option grants. In lieu of the
original agreement, the Company renegotiated these terms to payments of $25,000
cash in May 2001, $25,000 cash in July 2001 and the issuance of a $400,000
two-year convertible promissory note from the Company with interest at 7.0% per
annum. The principal can be converted to shares of common stock at $2.75 per
share conversion rate at any time during the term. Additionally, an option to
purchase 300,000 shares of common stock that was granted to Mr. Sledge was
terminated as part of the negotiation.
NOTE 12 SUBSEQUENT EVENTS
Sale of Xpit Corporation Assets to CQG, Inc.
On October 29, 2001 the Company sold all of the material assets of the Company's
Xpit Corporation subsidiary, including the RateXchange Futures System ("RFS"),
to CQG, Inc. ("CQG"), a privately-held quotation services company. The assets
were sold to CQG in exchange for $1.5 million in cash. Additionally, the Company
can earn royalties of up to $650,000 over the next four years if CQG achieves
future revenue targets via the RFS platform.
In view of the sale to CQG, the Company recorded a $3.0 million non-cash charge
in the third quarter to reflect the impairment in the value of the Xpit
Corporation assets, principally the carrying value of the RFS platform.
Additionally, the $500,000 note payable associated with the original Xpit
purchase price, payable to affiliates of two of RateXchange's Directors, was
paid in full, plus accrued interest. Net cash proceeds to the Company, after
payment of the note and expenses associated with the transaction, were $902,000.
Private Placement of $2.5 million Convertible Subordinated Notes
As of November 20, 2001, the Company was in the process of raising $2.5 million,
and in no event more than $3.5 million, in a private placement financing, which
the Company expects will close before the end of November. The offering consists
of 50 units, with each unit consisting of a ten-year $50,000 12% convertible
subordinated note and warrants to acquire 12,500 shares of RateXchange common
stock. The conversion price of the note and the exercise price of the warrants
will be the greater of $0.35 or the closing price of RateXchange common stock as
evidenced by the last trade on the AMEX prior to the closing of the sale of the
units. The warrants will be exercisable for three years following the closing.
The offering is on a best efforts basis, with current funds raised being held in
an escrow account. However, upon closing, all funds raised, less the expenses of
the offering, will be made available for use by the Company. No assurances can
be made that the Company will complete the full funding. As of November 20,
2001, approximately $2.9 million had been received in the escrow account.
Establishment of a Broker/Dealer Operation
RateXchange plans to supplement its transaction services business with a
traditional broker/dealer operation focused on the trading and brokerage of
stocks, bonds and derivatives thereof. Management believes the current
retrenchment and consolidation in the brokerage business provides the
opportunity to capitalize on the availability of high quality employees. Given
the volatility of the market for telecom debt and equity securities, RateXchange
has seen considerable interest in bandwidth pricing and other telecom related
data from institutional fund managers. RateXchange owns a NASD approved
broker/dealer, has entered into an initial clearing agreement with a bulge
bracket clearing firm, and has begun its recruiting process. The Company
anticipates beginning NASD fully approved brokerage operations in January of
2002.
NOTE 12 RELATED PARTY REVENUE
In October 2001, the Company successfully completed the process of obtaining a
broker/dealer license for its subsidiary, RMG Partners Corporation. With this
approval, the Company can continue to pursue its various consulting and risk
management services. Prior to obtaining this separate license, the Company
completed certain of its consulting and risk management transactions through a
registered broker/dealer in which certain Company personnel have a financial
interest.
Page 11
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated
Financial Statements and the notes thereto presented in "Item 1 - Financial
Statements." The information set forth in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" includes
forward-looking statements that involve risks and uncertainties. Many factors
could cause actual results to differ materially from those contained in the
forward-looking statements below. See "Outlook."
The Company is defined as a development stage company in accordance with
Financial Accounting Standard No. 7. The Company began revenue generation
activities in 2000 but nominal revenue has been generated through September 30,
2001. The Company anticipates that the revenue growth that has occurred, in
addition to other factors related to the Company's operations, will result in
the removal of the development stage company classification in the fourth
quarter of 2001.
GENERAL DEVELOPMENT OF BUSINESS
RateXchange Corporation is an innovative transaction services firm that combines
the strength of traditional voice brokerage with technology-based trading
systems to help its clients understand and compete in newly commoditizing
marketplaces. RateXchange's mission is to provide an unbiased view and help
increase liquidity in these marketplaces by providing the following services
that enable network providers, energy merchants and financial services firms to
maximize the usage of their assets:
o Brokerage Services - These services include traditional voice
brokerage, including securities brokerage, in addition to a
proprietary trading system, the RateXchange Trading System
(RTS), that allows network providers, energy merchants,
financial institutions, asset managers and commodity traders
engaged on the RTS the ability to trade bandwidth and
bandwidth-related products.
o Consulting Solutions - The consulting solutions practice
provides asset valuation tools, risk management strategies and
price analysis.
o Information Services - These services include the provision of
bandwidth pricing information, market research and
comprehensive analysis for industry segments supported by the
Company's trading system.
RateXchange plans to supplement its transaction services business with a
traditional broker/dealer operation focused on the trading and brokerage of
stocks, bonds and derivatives thereof. Management believes the current
retrenchment and consolidation in the brokerage business provides the
opportunity to capitalize on the availability of high quality employees. Jon
Merriman, Chairman and CEO of RateXchange, has significant depth of experience
in the brokerage business. Merriman's representative background includes:
management of Wells Fargo Van Kasper's Capital Markets area, where he oversaw
research, sales, trading, derivatives and syndicate; formation of an equity
brokerage and investment banking operation at Dabney/Resnick/Imperial LLC, which
was subsequently acquired by Imperial Credit Industries; management of the
equity market neutral hedge fund Merriman Capital Management Inc; and employment
as a risk arbitrage trader and investment banker at Bear, Stearns and Merrill
Lynch & Co., respectively.
Given the volatility of the market for telecom debt and equity securities,
RateXchange has seen considerable interest in bandwidth pricing and other
telecom related data from institutional fund managers. Senior management of
RateXchange, as well as the company's Board of Directors, has considerable
experience and contacts in the securities business and believes there is an
opportunity to drive bandwidth information revenues through a traditional NASD
broker/dealer structure. RateXchange owns a NASD approved broker/dealer, has
entered into an initial clearing agreement with a bulge bracket clearing firm,
and has begun its recruiting process. The company anticipates beginning NASD
fully approved brokerage operations in January of 2002.
Page 12
On August 18, 2001, RateXchange entered into an agreement with Reuters Group
PLC, a major financial news organization with over 600,000 subscribers
worldwide, to offer real-time bandwidth pricing information and market
commentary. The companies expect to formally and jointly announce the agreement
in the fourth quarter of 2001, after the completion of beta testing and
successful deployment of the service. The Company expects that this arrangement,
if successful, will strengthen RateXchange's branding as a recognized leader in
bandwidth pricing information.
On August 14, 2001, RateXchange and Dorado Software announced a strategic
agreement to automate Internet Protocol or "IP" service delivery in the
bandwidth trading marketplace. Dorado's software can reserve, deliver and
monitor services in the bandwidth trading market, overcoming many of the
challenges of managing the delivery of IP services.
On July 31, 2001, RateXchange announced that it had completed development of its
new Metro Bandwidth Trading Service designed to allow customers to buy and sell
metro bandwidth capacity. This new product is a solution for trading metro
capacity and helps break down the local loop bottleneck that currently exists.
This trading solution was developed in close cooperation with several optical
metropolitan-area network providers. The Metro Bandwidth Trading Service was
designed to accommodate the needs of both these new metro providers, as well as
being available for use by the incumbent providers. The service is expected to
facilitate overall bandwidth trading by addressing a critical area in today's
market - connectivity at the local level.
On July 16, 2001, RateXchange announced an agreement with Avantrust, LLC, a
joint venture between American International Group, Inc. (NYSE:AIG) and Dun &
Bradstreet (NYSE:DNB), whereby Avantrust Passport and TradeCredit Insurance will
be provided to participants on all RateXchange telecom markets. As a result, all
RateXchange buyers will have their credit information available to do business,
and all qualified sellers will be able to arrange for trade credit insurance to
cover against buyer non-payment. This product offering provides a unique value
proposition to RateXchange's sellers, who will have insured payments on approved
parties, as well as RateXchange's buyers, who can avoid cash deposits or letters
of credit. The Company expects this product offering to be available for all RTS
bandwidth markets including TDM bandwidth and IP trading products.
Results of Operations for Three and Nine Months Ended September 30, 2001
The following table summarizes our results of operations for the three
and nine month periods ending September 30, 2001, compared to the same periods
of 2000.
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Restated) (Restated) (Restated)
Revenue $ 410,439 $ 52,755 $ 1,120,783 $ 57,255
Recurring Operating Expenses $ 3,537,850 $ 16,396,836 $ 17,083,012 $ 36,072,047
Non-Recurring Operating Expenses $ 10,049,768 -- $ 10,049,768 --
Net income (loss) $(13,371,493) $(17,857,390) $(26,687,740) $(39,115,812)
Third quarter results:
Revenue
The Company generated revenue of $410,439 for the three-month period ending
September 30, 2001. Revenue in this period was primarily from consulting fees,
and to a lesser extent trading commissions. In the comparable period of 2000,
the Company generated revenue of $52,755, primarily from consulting fees.
Page 13
Recurring Operating Expenses
Total recurring operating expenses for the third quarter ending September 30,
2001 were $3.5 million compared to $16.4 million for the third quarter of 2000,
reflecting an improvement of 77% year-over-year. The decrease in recurring
operating expenses was primarily a result of staff reductions, a significant
decrease in option and warrant expense related to employees and service
providers, and the elimination of expenses not directly tied to revenue growth.
Total recurring cash operating expenses decreased 69% to $2.0 million compared
to $6.4 million for the third quarter of 2000. The decrease was a result of
staff reductions, cost reductions associated with the completion of systems
development efforts, and the elimination of delivery equipment costs. The major
components of our recurring cash expenses for the third quarter of 2001 were:
Recurring Cash Expenses
o $925,000 in payroll costs during the third quarter of 2001
compared to $1,910,000 in the third quarter of 2000;
o $309,000 in outside services during the third quarter of 2001
compared to $725,000 during the third quarter of 2000, and;
o $222,000 in delivery equipment costs for the third quarter of
2001 compared to $1,719,000 in the third quarter of 2000
(excluding the acceleration of $6.4 million of remaining lease
commitments as described below).
Total recurring non-cash operating expenses for the third quarter decreased 84%
to $1.6 million compared to $10.0 million for third quarter of 2000. This
decrease was primarily due to the significant decrease in option expense related
to service providers and employees no longer with the Company. The major
components of our non-cash expenses for the third quarter of 2001 were:
Recurring Non-Cash Expenses
o $643,000 related to amortization of deferred lease payments.
There were no such expenses in the same period of 2000
o $160,000 compared to $1,484,000 in the third quarter of 2000
for amortization expense associated with the year 2000 grant
of below market stock options to employees;
o $563,000 compared to $63,000 for the third quarter of 2000 for
depreciation expense;
o $93,000 compared to $8,095,000 for the third quarter of 2000
for options and warrants to service providers
Non-Recurring Operating Expenses
Other non-recurring operating expenses for the third quarter amounted to
approximately $10.1 million compared to none in the third quarter of 2000.
During the quarter, the Company recognized the acceleration of $7.0 million in
lease obligations, settlements and costs associated with equipment and
facilities no longer in use, in addition to a $3.0 million write-down of Xpit
Corporation assets subsequently sold to CQG, Inc., principally the carrying
value of the RFS platform. Of these non-recurring charges, $9.5 million were
non-cash. $5.3 million of these charges are related to the Forsythe lease, are
currently due in May 2003 and will be rescheduled for payment in August 2006
upon successful completion of the Company's current funding round.
Interest Income/Expense:
Page 14
Interest income for the third quarter of 2001 was $42,000 compared to $392,000
for the third quarter in 2000. The decrease in interest income is due to less
interest earned on a smaller average investment portfolio. Interest expense of
$29,000 for the third quarter was primarily attributable to the $500,000 note
payable, which was subsequently repaid during the fourth quarter upon the sale
of the Xpit Corporation assets.
Other Expenses
Other non-recurring expenses for the third quarter amounted to approximately
$207,000 compared to $325,000 in the third quarter of 2000, due to cost cutting
measures enacted by the Company during the third quarter of 2001.
Net Loss:
During the third quarter of 2001, the Company incurred a loss of $13.4 million
compared to $17.9 million during the third quarter of 2000. The major components
of the net loss for the third quarter were $7.0 million in non-recurring charges
associated with leased assets no longer in use, a $3.0 million write-down on the
value of the Xpit Corporation assets, and additional cash expenditures of $2.0
million associated with operating the business. These cash expenditures were
down from $2.5 million in the second quarter of 2001, representing a 20%
quarter-over-quarter improvement.
Due to the recognition of one-time charges associated with unused equipment and
facilities and the write-down of the Xpit assets, the Company expects future
results to more directly reflect current operations.
Nine-month results:
Revenue
The Company generated revenue of $1,121,000 for the nine-month period ending
September 30, 2001, primarily from consulting fees, and to a lesser extent
trading commissions. In the comparable period of 2000, the Company generated
$57,000, primarily from consulting fees.
Recurring Operating Expenses
Total recurring operating expenses for the nine-months ending September 30, 2001
were $17.1 million compared to $36.1 for the same period in 2000, reflecting a
decrease of 53%. This decrease was primarily due to the significant decrease in
option expense related to service providers and employees no longer with the
Company during 2001.
Total recurring cash operating expenses for the nine-month period decreased 29%
to $10.1 million compared to $14.2 for the same period in 2000. The decrease was
a result of cost reductions associated with the completion of systems
development efforts, staff reductions, and the elimination of expenses not
directly tied to revenue growth. The major components of our cash expenses for
the nine-month period ending September 30, 2001 were:
Recurring Cash Expenses
o $3,247,000 in payroll costs during the nine-month period
compared to $3,880,000 during the same period of 2000;
o $2,084,000 in outside services compared to $2,584,000 during
the same period in 2000, and;
o $2,436,000 for delivery equipment costs compared to $2,454,000
in the same period in 2000.
Page 15
Total recurring non-cash operating expenses for the nine-month period ending
September 30, 2001 decreased 68% to $7.0 million from $22.0 million for 2000,
primarily due to the significant decrease in option expense related to service
providers and employees no longer with the Company. The major components of our
recurring non-cash expenses for the nine-month period ending September 30, 2001
were:
Recurring Non-cash Expenses
o $1,295,000 compared to $9,128,000 for the same period in 2000
for amortization expense associated with the year 2000 grant
of below market stock options to employees;
o $1,418,000 compared to $164,000 for the same period in 2000
for depreciation expense;
o $958,000 for deferred and accrued compensation. There were no
such expenses in the similar period of 2000;
o $633,000 for option revaluation related to terminated
employees. There were no such expenses in the similar period
of 2000;
o $379,000 compared to $11,711,000 in the same period of 2000
for options and warrants granted to service providers;
o $1,286,000 related to amortization of deferred lease payments.
There were no such expenses in the same period of 2000.
o $577,000 of accruals related to contingent liabilities. The
comparable amount in the 2000 period was $250,000.
Non-Recurring Operating Expenses
Other non-recurring operating expenses for the nine-month period ending
September 30, 2001 amounted to approximately $10.1 million compared to none in
the similar period of 2000. During the third quarter of 2001, the Company
recognized the acceleration of $7.0 million in lease obligations, settlements
and costs associated with equipment and facilities no longer in use, in addition
to a $3.0 write-down of Xpit Corporation assets subsequently sold to CQG, Inc.
Of these non-recurring charges in the third quarter, $9.5 million were non-cash.
$5.3 million of these charges are related to the Forsythe lease, are currently
due in May 2003 and will likely be rescheduled for payment in August 2006 upon
completion of the Company's current funding round.
Interest Income/Expense:
Interest income for the first nine months of 2001 was $316,000 compared to
$605,000 for the same period in 2000. The decrease in interest income is due to
less interest earned on a smaller average investment portfolio. Interest expense
of $41,000 for the nine-month period was primarily attributable to the $500,000
note payable, which was subsequently repaid during the fourth quarter upon the
sale of the Xpit Corporation assets.
Other Expenses:
Other non-recurring expenses for the nine-month period ending September 30, 2001
amounted to approximately $1.0 million compared to $1.8 million in the similar
period of 2000. During the first two quarters of 2001, the Company recognized a
loss on sale of securities held of $0.7 million.
Net Loss:
Page 16
During the nine-month period ending September 30, 2001, the Company incurred a
loss of $26.7 million compared to $39.1 million during the same period of 2000.
The major components of the net loss for the recent nine-month period were $7.1
million in non-recurring charges associated with leased assets, a $3.0 million
write-down on the value of the Xpit Corporation assets, and additional cash
expenditures of $10.1 million associated with operating the business.
LIQUIDITY AND CAPITAL RESOURCES
RateXchange has financed its operations to date primarily through the sale of
equity securities. The Company has been unprofitable since inception and has
incurred net losses in each year.
Cash and cash equivalents at September 30, 2001 were $2.1 million compared to
$4.9 million on June 30, 2001 and $14.2 million on December 31, 2000.
As previously disclosed in the year 2000 Form 10K, in April 2001, the Company
received an irrevocable commitment from two investors to acquire a total of $9
million of newly issued common shares of the Company. During the second quarter
of 2001, management was informed by those investors that they did not expect to
honor the original commitment due to the decline in the Company's share price.
As a result of this development, in addition to the expense reductions
undertaken by the Company, management is in the process of raising $2.5 million,
and in no event more than $3.5 million, in a private placement of convertible
subordinated notes, which it expects to close before the end of November. As of
November 20, 2001, the Company has opened escrow into which approximately $2.9
million has been received. Management expects that this financing will be
sufficient to fund its operations for at least the next twelve months (See Note
11 - Subsequent Events).
In the fourth quarter of 2000, new management began to implement cost cuts in
order to more closely tie costs to revenue. Significant expense reductions have
continued through October 2001, which included, among other things, the sale of
the Xpit assets, staff reductions, elimination of obligations related to leased
equipment and facilities, and the elimination of nearly all outside consulting
services. Although the Company expects its current financing will be sufficient
to meet its needs, it cannot make assurances that it will be able to raise the
total amount, or that such amount will be adequate for the Company's needs.
The factors discussed above create substantial doubt about the Company's ability
to continue as a going concern and an uncertainty as to the recoverability and
classification of recorded asset amounts and the amounts and classification of
liabilities. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
The Company has continued to lower its operating costs, including a reduction in
its workforce, a further reduction in management salaries and the elimination of
additional operating expenses, including all consulting expenses. Management is
working aggressively on these factors to ensure that it is fully able to execute
on its current business plan. We have taken the following steps to achieve
profitability:
o We completed the sale of the Xpit assets to CQG help
strengthen the Company's balance sheet, reduce the monthly
cash burn, and allow the Company to focus on its core
businesses of brokerage, consulting and information services.
o We are pursuing additional revenue generating opportunities
such as the establishment of a securities broker/dealer that
may accelerate our development of a financial services
business model;
o We have re-negotiated or settled existing claims and
obligations with respect to unused equipment and space at a
discount to the value of the associated liabilities;
o Upon the successful completion of our current financing above
a minimum of $2 million, we will effect a restructuring of our
agreement with respect to the operating lease underlying our
delivery equipment, resulting in the creation of a $5.95
million five-year 9% convertible note, with interest payable
in cash
Page 17
or Ratexchange common stock. This will reduce our cash expense
associated with this lease from $74,000 per month through
April 2002 and $148,000 per month through April 2003, to
approximately $44,000 per month through August 2006, and will
extend an increased balloon payment from $4.2 million to $5.95
million out an additional 39 months to August 2006;
o We have reduced our number of employees and associated
personnel costs; our employee headcount in our San Francisco
location has been reduced from 37 at December 31, 2000 to 11
currently. Including the five employees at our subsidiary RMG
Partners, there are a total of 16 employees; and
o We have significantly reduced our marketing and public
relations costs.
Net cash used in operating activities was $11.0 million for the nine months
ending September 30, 2001, compared to $13.8 million for the comparable period
in 2000. Net cash used in operating activities during the first nine months of
2001 was due primarily to:
o Costs associated with accelerating the deployment of the
RateXchange Trading System;
o Ongoing business development activities;
o Settlement of claims and lease obligations related to unused
equipment and space.
Net Cash provided by investing activities was $11.0 million for the first nine
months of 2001, due primarily to the sale of marketable securities.
We are executing an overall business plan that will require additional capital
for, among other uses:
o Funding operating losses and ongoing working capital needs;
o Development of additional products and services, such as IP
and Metro Trading products;
o Support of the operating expenses of Amerex Bandwidth; and
o Development and growth of a securities broker/dealer
We currently anticipate that our available funds, consisting of cash, cash
equivalents and investments, combined with those funds raised through the sale
of the Xpit assets and the anticipated net proceeds from our current financing,
will be sufficient to meet our anticipated needs for working capital and capital
expenditures through at least the next 12 months. Our future long-term capital
needs will depend significantly on the rate of growth of our business, the
timing of expanded service offerings, the success of these services once they
are launched and our ability to adjust our operating expenses to an appropriate
level if the growth rate of our business is slower than expected. Any
projections of future long-term cash needs and cash flows are subject to
substantial uncertainty. If our available funds and cash generated from
operations are insufficient to satisfy our long-term liquidity requirements, we
may seek to sell additional equity or debt securities, obtain additional lines
of credit, curtail expansion of our services or potentially liquidate selected
assets. If we issue additional securities to raise funds, those securities may
have rights, preferences or privileges senior to those of the rights of our
common stock and our stockholders may experience dilution. We cannot be certain
that additional financing will be available to us on favorable terms when
required, or at all.
Our business and operations have not been materially affected by inflation
during the periods for which financial information is presented.
OUTLOOK
RateXchange is a transaction services firm that combines the strengths of
traditional voice brokerage and technology-based trading systems to help its
clients understand and compete in newly commoditizing industries. As
Page 18
a neutral entity that acts as agent rather than taking positions, the Company
provides a window to evolving commodity marketplaces by providing information
and consulting, similar to the securities industry. The Company also provides a
neutral trading system, which offers buyers and sellers the dual benefits of
price discovery and anonymity. Customers of RateXchange who are interested in
trading bandwidth, such as telecommunications firms, energy merchants and
financial services companies, seek in-depth, unbiased market information and
pricing on bandwidth, as well as a trusted system to execute their trades. The
Company's information services group provides pricing data, supported with
market research and comprehensive analysis for industry segments supported by
RateXchange's trading systems. The Company's consulting services practice
provides asset valuation tools, risk management strategies and price analytics.
This combination of RateXchange services helps create liquidity in the
marketplace - generating increased trading activity and price information that
the Company reflects back into the market.
We plan to move into the brokering of additional products that fit into the
brokerage, consulting and information services model. We are pursuing the
formation of a securities broker-dealership that may accelerate our development
of a financial services business model.
We are a development stage company and we are subject to all the risks inherent
in the establishment of a new business enterprise. To address these risks, we
must:
o Establish market acceptance for our electronic trading system
and other products and services;
o Continue to retain, attract and motivate qualified personnel;
o Effectively manage our capital to support the expenses of
developing and marketing new products and services;
o Implement and successfully execute our business and marketing
strategy; and
o Respond to competitive developments and market conditions in
the global communications industry.
The foregoing contains forward-looking statements that involve risks and
uncertainties, including but not limited to changes in our business strategy,
our inability to raise sufficient capital, general market trends and conditions,
and other risks detailed below in "Factors That May Affect Future Results."
Actual results may vary materially from any future results expressed or implied
by the forward-looking statements.
Forward-Looking Statements
This Outlook section, and other sections of this document, include certain
"forward-looking statements" within the meaning of that term in Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Act of 1934,
including, among others, those statements preceded by, following or including
the words "believe," "expect," "intend," "anticipate" or similar expressions.
These forward-looking statements are based largely on our current expectations
and are subject to a number of risks and uncertainties. Our actual results could
differ materially from these forward-looking statements. Important factors to
consider in evaluating such forward-looking statements include:
o Changes in our business strategy or an inability to execute
our strategy due to unanticipated changes in the market;
o Our ability to raise sufficient capital to meet operating
requirements;
o Various competitive factors that may prevent us from competing
successfully in the marketplace;
o Changes in external competitive market factors or in our
internal budgeting process which might impact trends in our
results of operations, and
o Other risks described below in "Factors That May Affect Future
Results."
Page 19
In light of these risks and uncertainties, there can be no assurance that the
events contemplated by the forward-looking statements contained in this Form
10-Q will in fact occur.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a highly competitive and rapidly changing market that involves a
number of risks. While we are optimistic about our long-term prospects, the
following discussion highlights some risks and uncertainties that should be
considered in evaluating our growth outlook.
We will need additional capital in the future and it may not be available on
acceptable terms.
As previously discussed, we will need additional funds for enhancement of the IP
and Metro Trading products, support of the operations of Amerex Bandwidth,
general and administrative costs and to fund losses before achieving
profitability. We will need to raise additional funds through additional equity
and/or debt financing to meet our capital requirements. We cannot assure you
that such financings will be available in amounts or on terms needed to meet our
requirements, or at all. Further, our lack of tangible assets to pledge could
prevent us from establishing a source of financing. The inability to raise all
needed funding would adversely affect our ability to successfully implement the
objectives of our business plan.
As a development stage company with a limited operating history in a new and
rapidly changing industry, it is difficult to evaluate our business and
prospects.
We are a development stage company. Our activities to date have concentrated
primarily on planning and developing our electronic trading system for trading
bandwidth and other telecommunications products. In September 2000, we began
operating the RateXchange Trading System for trading bandwidth. Accordingly, we
have a limited operating history on which to base an evaluation of our business
and prospects. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
online commerce. There can be no assurance that we will be successful in
addressing these risks and our failure to do so could have a material adverse
effect on our business and results of operations.
We have a history of losses and expect to incur losses in the future, and we may
never achieve profitability.
At September 30, 2001, our accumulated deficit since inception was $84,051,914,
including $39,823,000 related to stock grants, options and warrants. For the
third quarter of 2001, we incurred a net loss of $13,592,512, consisting of
$7,039,000 in non-recurring charges associated with unused lease equipment and
facilities, including warrant and stock option charges, and a $3,010,000
write-down of the Xpit assets. We have incurred a net loss in each year of our
existence, and have financed our development stage operations primarily through
sales of equity securities. We have recorded nominal revenues from operations.
We expect to incur net losses for the foreseeable future. We may never achieve
or sustain significant revenues or profitability on a quarterly or annual basis.
If the RateXchange Trading System does not achieve commercial acceptance, our
results will suffer.
We expect to rely largely on fees and commissions from transactions facilitated
on the RateXchange Trading System and related consulting services for the
foreseeable future. Online trading of telecommunications bandwidth currently has
only limited market acceptance. As a result, our future ability to gain
commercial acceptance of the RateXchange Trading System is critical to our
success. Any failure to successfully gain commercial acceptance of the
RateXchange Trading System would not only have a material adverse effect on our
business and operating results, but also on our ability to seek additional
revenue opportunities.
We depend on the efforts of the Amerex Bandwidth, Ltd. brokers who execute
trades with the assistance of our trading system to generate revenues for us.
In September 2000, we entered into a strategic alliance with Amerex Bandwidth,
Ltd., a leading energy and power broker. Under our agreement with Amerex, Amerex
brokers execute trades for the sale or purchase of
Page 20
telecommunications capacity, Internet protocol products and/or other
telecommunications-related products with the assistance of our trading system,
and we share with Amerex the revenues generated by these trades. As a result, we
depend on the efforts of the Amerex brokers who execute those trades to generate
revenues for us. There can be no assurance that these brokers will be successful
in expanding our business.
Our agreement with Amerex, which terminates at the end of 2001, currently
obligates us to pay for a portion of Amerex's operating expenses. Our failure to
renew this agreement on terms acceptable to us could adversely affect our
business.
Pursuant to our agreement with Amerex, although we receive 70% of any
commissions generated by voice brokerage sales effected by Amerex, we are
currently obligated to pay up to $15,000 monthly, reduced recently by amendment
from $70,000, to cover Amerex's negative operating expenses. Current monthly
brokerage commissions approximate $20,000. Based on current bandwidth trading
activity, we estimate that Amerex's negative cash flow from these operations
approximates $50,000 per month. Our agreement with Amerex terminates at the end
of 2001. We cannot assure that we will be able to extend this agreement on terms
acceptable to us, if at all, or if we do that our monthly obligation to pay for
Amerex's negative operating expenses will not increase substantially. Our
failure to extend this agreement, or, in the alternative, internally develop or
otherwise acquire an adequate bandwidth voice brokerage operation would
adversely affect our business.
We may not be able to compete successfully against current and future
competitors.
The market for the brokerage of bandwidth and related commodities, both
regulated and unregulated, is new, rapidly evolving and highly competitive. We
expect competition in this market to intensify in the future. Several of the
existing online exchanges and brokers, such as E-Speed, Intercontinental
Exchange and Altra currently operate online marketplaces in commodities and have
large established customer bases. These companies may start bandwidth trading
marketplaces. Our ability to compete with them will depend largely upon our
ability to capture market share.
In addition, we compete with companies who trade, broker or otherwise assist in
the buying and selling of telecommunications bandwidth. Therefore, we currently
or potentially compete with a variety of other companies, including
lead-generation services and traditional offline brokers. Many companies, such
as Band-X, and Arbinet, offer services to buyers and sellers of bandwidth and
other telecommunications products. The increased use and acceptance of any other
method of facilitating the buying and selling of excess telecommunications
bandwidth may adversely impact the commercial viability of the RateXchange
Trading System.
Large telecommunications and energy companies have the ability and resources to
compete in the online bandwidth trading services market if they choose to do so,
including launching their own online exchanges or other trading services. Many
of our competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we have. In
addition, a number of these competitors may combine or form strategic
partnerships. As a result, our competitors may be able to offer, or bring to
market earlier, products and services that are superior to our own in terms of
features, quality, pricing or other factors. Our failure to compete successfully
with any of these companies could have a material adverse effect on our business
and results of operations.
Increased pressure created by any present or future competitors, or by our
competitors collectively, could have a material adverse effect on our business
and operating results. Increased competition may result in reduced commissions
and loss of market share. Further, as a strategic response to changes in the
competitive environment, we may from time to time make certain pricing, service
or marketing decisions or acquisitions that could have a material adverse effect
on our business and operating results. There can be no assurance that we will be
able to compete successfully against current and future competitors. In
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures on us.
We face online commerce security risks.
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We rely on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential information, such as bank account or credit
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography, or other events or developments
will not result in a compromise or breach of the algorithms used by us to
protect transaction data. Any compromise of our security could have a material
adverse effect on our reputation and us. A party who is able to circumvent our
security measures could misappropriate proprietary information or cause
interruptions in our operations. We may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. To the extent that our activities or
those of third party contractors involve the storage and transmission of
proprietary information, such as bank account or credit information, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability which could have a material adverse effect on
our business and results of operations.
We may be adversely affected by government regulations and legal uncertainties
associated with the Internet.
Laws and regulations directly applicable to Internet communications, commerce
and advertising are becoming more prevalent, but the legislative and regulatory
treatment of the Internet remains largely unsettled. The U.S. Congress has
adopted Internet laws regarding copyright, taxation and the protection of
children. In addition, a number of other legislative and regulatory proposals
under consideration by federal, state, local and foreign governments could lead
to additional laws and regulations affecting, among other things:
o the right to collect and use personally identifiable
information;
o pricing;
o intellectual property;
o online content;
o user privacy;
o taxation;
o access charges;
o distribution;
o liability for third-party activities; and
o characteristics and quality of products and services.
For example, the growth and development of the market for Internet commerce may
prompt calls for more stringent consumer protection laws in the United States
that may impose additional burdens on companies conducting business over the
Internet.
The adoption of any additional laws or regulations may decrease the growth of
the Internet or other online services, which could, in turn, reduce the demand
for our products and services and increase our cost of doing business, or
otherwise have an adverse effect on our business and results of operations.
Moreover, courts may seek to apply existing laws not explicitly relating to the
Internet in ways that could impact the Internet, and it may take years to
determine whether and how laws such as those governing intellectual property,
privacy, libel and taxation will affect the Internet and our use of it.
We plan to facilitate transactions between numerous customers residing in
various states and foreign countries, and such jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in each such
state and foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could have a material adverse effect on our business
and results of operations.
We have registered our subsidiary RMG as a securities broker/dealer and, as
such, are subject to substantial regulations. Our failure to comply with these
regulations would adversely affect our business.
We have registered our wholly owned subsidiary RMG Partners Corp. with the SEC
as a securities broker/dealer,
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and as a result are subject to extensive regulation under federal and state
laws. The principal purpose of regulation and discipline of broker/dealers is
the protection of customers and the securities markets rather than protection of
creditors and stockholders of broker/dealers. The SEC is the federal agency
charged with administration of the federal securities laws. Much of the
regulation of broker/dealers, however, has been delegated to self-regulatory
organizations, such as the National Association of Securities Dealers, Inc.
("NASD"), and national securities exchanges. The NASD is our primary
self-regulatory organization. These self-regulatory organizations adopt rules
(which are subject to approval by the SEC) that govern the industry and conduct
periodic examinations of member broker/dealers. Broker-dealers are also subject
to regulation by state securities commissions in the states in which they are
registered. The regulations to which broker/dealers are subject cover all
aspects of the securities business, including net capital requirements, sales
methods, trading practices among broker/dealers, capital structure of securities
firms, record keeping and the conduct of directors, officers and employees. The
SEC and the self-regulatory bodies may conduct administrative proceedings, which
can result in censure, fine, suspension or expulsion of a broker/dealer, its
officers or employees. If we fail to comply with these rules and regulations,
our business would be materially and adversely affected.
We may face liability for information retrieved from our web site.
Due to the fact that material may be downloaded from our web site and
subsequently distributed to others, there is a potential that claims may be made
against us for negligence, copyright or trademark infringement or other theories
based on the nature and content of such material. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify us for all liability that may be imposed. Any costs or
imposition of liability that is not covered by insurance or in excess of
insurance coverage could have a material adverse effect on our business and
results of operations.
We are at risk of capacity constraints and face system development risks.
There may be a significant need to upgrade the capacity of the RateXchange
Trading System in order to handle thousands of simultaneous users and
transactions. Our inability to add additional software and hardware or to
develop and upgrade further our existing technology, transaction processing
systems or physical infrastructure to accommodate increased traffic on these
systems or increased trading volume through our online trading or transaction
processing systems may cause unanticipated system disruptions, slower response
times, degradation in levels of customer service and impaired quality and speed
of trade processing, any of which could have a material adverse effect on our
business and operating results.
Our business and operations would suffer in the event of system failures.
Our success, in particular our ability to successfully facilitate bandwidth and
derivative trades and provide high quality customer service, largely depends on
the efficient and uninterrupted operation of our computer and communications
hardware systems. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunication failures,
break-ins, earthquake and similar events. Despite the implementation of network
security measures and redundancy, our servers are vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions, which could
lead to interruptions, delays, loss of data or the inability to accept and
fulfill customer orders.
If we do not respond effectively to technological change, our service could
become obsolete and our business will suffer.
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To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of the RateXchange Trading System
and. The Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies and
the emergence of new industry standards and practices that could render our
existing systems and proprietary technology obsolete. Our success will depend,
in part, on our ability to license leading technologies useful in our business,
enhance our existing services, develop new services and technology that address
the increasingly sophisticated and varied needs of our prospective customers,
and respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of the RateXchange Trading System and other proprietary
technology entails significant technical and business risks. There can be no
assurance that we will successfully use new technologies effectively or adapt
our systems and proprietary technology to user requirements or emerging industry
standards. Our failure to adapt in a timely manner for technical, legal,
financial or other reasons, to changing market conditions or customer
requirements, could have a material adverse effect on our business and results
of operations.
If we do not effectively manage growth, our ability to provide trading services
will suffer.
To manage the expected growth of our operations and personnel, we will be
required to improve existing, and implement new, transaction-processing,
operational and financial systems, procedures and controls, and to expand, train
and manage a growing employee base. Further, we will be required to maintain and
expand our relationships with various hardware and software vendors, Internet
and other online service providers and other third parties necessary to our
business. If we are unable to manage growth effectively, we will be materially
adversely affected.
We need to hire and retain qualified personnel to sustain our business.
We are currently managed by a small number of key management and operating
personnel. We do not maintain "key man" insurance on any employee. Our future
success depends, in part, on the continued service of our key executive,
management and technical personnel, many of whom have recently been hired, and
our ability to attract highly skilled employees. If any key officer or employee
were unable or unwilling to continue in his or her present position, our
business could be harmed. From time to time we have experienced, and we expect
to continue to experience, difficulty in hiring and retaining highly skilled
employees. If we are unable to retain our key employees or attract, assimilate
or retain other highly qualified employees in the future, that may have a
material adverse effect on our business and results of operations.
Our success is dependent on our ability to protect our intellectual property.
Our performance and ability to compete is dependent to a significant degree on
our proprietary technology, including, but not limited to the design of the
RateXchange Trading System. We regard our copyrighted material, software design,
trade secrets and similar intellectual property as critical to our success, and
we rely on trademark and copyright laws, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. We cannot assure you that
we will be able to secure significant protection for any of our intellectual
property. It is possible that our competitors or others will adopt product or
service names similar to our marks, thereby inhibiting our ability to build
brand identity and possibly leading to customer confusion.
We generally have entered into agreements containing confidentiality and
non-disclosure provisions with our employees and consultants who have limited
access to and distribution of our software, documentation and other proprietary
information. We cannot assure you that the steps we take will prevent
misappropriation of our technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions we have taken, it
might be possible for a third party to copy or otherwise obtain and use our
software independently. Policing unauthorized use of our technology is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford us little or no
effective protection of our intellectual property.
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Effective trademark, service mark, copyright and trade secret protection may not
be available in every country where our services are made available online. In
the future, we may also need to file lawsuits to enforce our intellectual
property rights, protect our trade secrets and determine the validity and scope
of the proprietary rights of others. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of resources,
which could have a material adverse effect on our business and operating
results.
The volatility of our securities prices may increase.
The market price of our common stock has in the past been, and may in the future
continue to be, volatile. A variety of events may cause the market price of our
common stock to fluctuate significantly, including:
o Quarter to quarter variations in operating results;
o Adverse news announcements;
o The introduction of new products and services;
o Market conditions in the telecommunications industry in
general, Internet-based services and commodity voice
brokerage; and
o General market conditions.
In addition, the stock market in recent years has experienced significant price
and volume fluctuations that have particularly affected the market prices of
equity securities of many companies in our business and that often have been
unrelated to the operating performance of such companies. These market
fluctuations have adversely impacted the price of our common stock and may do so
in the future.
Any exercise of outstanding options and warrants will dilute then-existing
stockholders' percentage of ownership of our common stock.
We have a significant number of outstanding options and warrants. The exercise
of all of the outstanding options and warrants would dilute the then-existing
stockholders' percentage ownership of our common stock. Any sales resulting from
the exercise of options and warrants in the public market could adversely affect
prevailing market prices for our common stock. Moreover, our ability to obtain
additional equity capital could be adversely affected since the holders of
outstanding options and warrants may exercise their options and warrants at a
time when we would also wish to enter the market to obtain capital on terms more
favorable than those provided by the options. We lack control over the timing of
any exercise or the number of shares issued or sold if exercises occur.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Short Term Investments
Our exposure to market risks for changes in interest rates relate primarily to
investments in debt securities issued by U.S. government agencies and corporate
debt securities. We place our investments with high credit quality issuers and,
by policy, limit the amount of the credit exposure to any one issuer.
Our general policy is to limit the risk of principal loss and ensure the safety
of invested funds by limiting market and credit risk. All highly liquid
investments with less than three months to maturity are considered to be cash
equivalents. Investments with maturities between three and twelve months are
considered to be short-term investments. Investments with maturities in excess
of twelve months are considered to be long-term investments. We do not expect
any material loss with respect to our short-term investment portfolio.
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.
Switch & Data Facilities Company v. RateXchange Corporation
In August of 2001 this action was dismissed following settlement of the
claims. In exchange for a full release and the dismissal, the Company
paid $250,000 in cash and issued 200,000 shares of restricted common
stock to Switch & Data.
Martin v. RateXchange
On October 3, 2001, Gregory Martin and Patricia Whitney filed a lawsuit
against RateXchange Corporation in the United States District Court for
the Western District of Washington, C01-1565R alleging breach of
contract. In 1998, Mr. Martin was the President and CEO of NetAmerica
International Corporation (NAMI), a predecessor of RateXchange
Corporation. In December of 1998 Mr. Martin was terminated from his
employment with NAMI. The claims allege breach of agreements associated
with Mr. Martin's employment. The complaint asks for damages of
approximately $150,000.
Mr. Martin had filed suit previously in the Washington State court.
That matter was dismissed following a settlement in May of 1999. Mr.
Martin has now revived his claim against the Company.
The Company was recently served with the lawsuit and has not yet
responded in court.
YellowBrix, Inc. v. RateXchange Corporation
On October 2, 2001, YellowBrix, Inc. filed a lawsuit against
RateXchange Corporation in the Circuit Court for the City of
Alexandria, Virginia alleging breach of contract. YellowBrix, Inc.
provided news wire information to the Company in 2001. The complaint
asks for damages of approximately $32,000. The Company was recently
served with the lawsuit and has not yet responded in court.
RateXchange, Inc. v. PWREF/MCC-China Basin, LLC
In September of 2001, the RateXchange, Inc., one of the Company's
Delaware subsidiaries, filed a lawsuit against PWREF/MCC-China Basin,
LLC, its previous landlord, alleging constructive eviction and seeking
declaratory relief. The allegations of the complaint arise from the
lease for commercial space between the parties for the property located
at 185 Berry Street, in San Francisco, California. PWREF/MCC-China
Basin, LLC has recently responded to the complaint and filed a
cross-complaint against RateXchange, Inc. The Company has reserved
$132,000 to address this matter.
Based upon the facts known to the Company at this time and the
applicable law, RateXchange does not expect the above cases to result
in significant exposure to the Company and the Company has not set
aside any additional reserves for the contingencies listed above.
Item 2. Changes in Securities and Use of Proceeds.
a) Not applicable.
b) Not applicable.
c) Not applicable
d) Not applicable.
Item 3. Exhibits and Reports on Form 8-K
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Exhibits
4.1 Certificate of Designation of Series A Convertible Preferred Stock
Form 8-K
none
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. Dated this 12th day of November, 2001.
RATEXCHANGE CORPORATION
By: /s/ D. Jonathan Merriman
------------------------------------
D. Jonathan Merriman
Chairman and Chief Executive Officer
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