Softlock.com, Inc. - For the nine months ended December 31, 2001...

Softlock.com, Inc. - Recent Material Event

Item 1. Legal Proceedings."

BENEFICIAL CONVERSION AND ACCRETION

For the nine months ended December 31, 2001 and 2000, the Company recorded the following in connection with its Series A, B and C preferred stock issuances:


	2001		2000
Beneficial conversion feature:
Series A	$	--	$	1,969,781
Series B		--		7,355,160
Accretion of dividends on Series A		393,754		454,360
Accretion of dividends on Series C		420,000		--
Accretion of costs on Series A		14,760		--

Total	$	828,514	$	9,779,301

EARNINGS PER SHARE

Basic and diluted net loss per share are computed using the weighted average number of common shares outstanding during the periods presented. Earnings per share exclude the effects of stock options, warrants and convertible preferred stock because the inclusion of such securities would be anti-dilutive.

PREPAID ROYALTIES

In December 1999, the Company entered into an agreement with Intel for the use of certain of Intel's technology. In connection with such agreement, the Company paid $75,000 and issued 224,514 shares of its common stock to Intel. Under the agreement, the Company had the right to recoup a portion of the shares issued if Intel failed to meet its performance obligations. None of the stock may be recouped after June 30, 2001. The fair value of the forfeitable shares has been recorded as a reduction of stockholders' equity. The value of such forfeitable shares were remeasured at each reporting period.

SOFTLOCK.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2001

(UNAUDITED)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Management has assessed the impact of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on the financial statements of the Company and has determined that the Company does not currently have any agreements which meet the criteria of a derivative financial Instrument as defined under SFAS 133. The Company has adopted this accounting standard as of January 1, 2001, as required.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements (as this term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and information relating to the Company that is based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company, including, but not limited to, statements related to the Company's future cash and financing requirements. Forward-looking statements involve known and unknown risks and uncertainties which may cause the actual results in future periods to differ materially from what is anticipated. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in this section and elsewhere in this Report and the risks discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000. The Company does not assume responsibility for the accuracy and completeness of these forward-looking statements and undertakes no obligation to update forward-looking statements. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes included herein and our annual report on Form 10-KSB for the year ended December 31, 2000.

RECENT DEVELOPMENTS

On October 11, 2001, the Company announced that it was offering its intellectual property, including its patent portfolio, for sale. The offer was made in accordance with the terms of the order entered by the Superior Court of Massachusetts, Middlesex County, Cambridge Division (Civil Action No. 2001-2709) which authorized the Company to seek a buyer for these assets and to present the offers to the Court for approval of sale, free and clear of all encumbrances, upon notice to creditors, stockholders and a court determination that the proposed sale is fair and reasonable. The Superior Court also entered an order authorizing the Company to revise the terms of compensation of its President, Dr. Jonathan Schull. Under the terms of the order, Dr. Schull's compensation will be reduced from $175,000 to $125,000, annually, and he will be entitled to receive a percentage of the net proceeds derived from the sale of the patent portfolio. The revision to the employment agreement with Dr. Schull requires the approval of the Company's preferred stockholders. For further discussion of this civil action, see "Legal Proceedings."

BACKGROUND

Except as otherwise noted, all references to the "Company" include SoftLock.com, Inc. doing business as Digital Goods and its subsidiary, SoftLock Services.

The Company has incurred recurring net losses from operations since its inception and has recorded limited revenues. The Company incurred a net loss of $6,425,012 and $15,373,788 for the nine months ended December 31, 2001 and the fiscal year ended December 31, 2000, respectively, and its accumulated deficit is $30,520,444 at December 31, 2001.

On May 1, 2001 the Company announced a significant reduction of operations to conserve cash and reduce expenditures while at the same time maintaining the integrity of its intellectual property. The Company announced the layoff of 39 employees including all vice presidents and the president and Chief Executive Officer, leaving four employees remaining with the Company.

On May 18, 2001, the Company entered into an agreement (the "Agreement") with ContentGuard, Inc. pursuant to which the Company provided ContentGuard with access to content provider data and agreed to promote the orderly transition of content providers to ContentGuard. The Company received a cash fee of $50,000 when the Agreement was signed. In addition, for each closing by ContentGuard of a contract with a Company content provider, plus delivery of certain data, and, for each closing by the Company of a ContentGuard contract in substantially the same form as the Company contract with an existing Company content provider, plus delivery of certain data, the Company will receive additional fees.

CORPORATE STRUCTURE

The Company currently consists of SoftLock.com, Inc. d/b/a Digital Goods and its wholly owned operating subsidiary, SoftLock Services, Inc. In 1998, the Company underwent a stock transfer and exchange of 7,097,266 shares of restricted common stock for all of the issued and outstanding shares of SoftLock Services, wherein the owners of SoftLock Services became the majority owners of the Company. Prior to this transaction, the Company (then known as Fieldcrest Corporation) operated as a shell company organized to locate and acquire an operating company. All operations presented herein are those of the acquired operating company. This transaction also resulted in a change in reporting year from March 31 to December 31, the fiscal year end of SoftLock Services.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2001 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2000

Total revenues for the three months ended December 31, 2001 were $0, as compared to $339,926 earned during the three months ended December 31, 2000. The decrease is a result of the ceasing of operations.

Cost of sales decreased to $0 for the three months ended December 31, 2001 as compared to $95,267 for the three months ended December 31, 2000. The decrease is a result of ceasing of operations.

Operating expenses totaled $658,446 for the three months ended December 31, 2001 as compared with $3,817,255 for the same period in 2000. The decrease is due to the ceasing of operations.

Research and development costs decreased to $0 for the three months ended December 31, 2001 versus $1,069,371 for the same period in 2000. The decrease is due to the ceasing of operations.

Selling and marketing costs decreased to $0 in the third quarter of 2001 as compared to $962,518 in the third quarter of 2000. The decrease is due to the ceasing of operations.

General and administrative costs for the three months ended December 31, 2001 were $658,446 as compared to $1,785,366 for the same period in 2000, a decrease of $1,126,920. Although the Company ceased operations, general and administrative expenses were ongoing throughout the quarter. The expenses include the transition costs of winding down the operations, including legal, insurance and consulting fees. Amortization expenses for website and product development remained constant.

Other income, net decreased to ($953) for the three months ended December 31 2001, from $58,685 for the same period in 2000. This change is from a decrease in investment earnings on the Company's cash reserves.

NINE MONTHS ENDED DECEMBER 31, 2001 AS COMPARED TO NINE MONTHS ENDED DECEMBER 31, 2000

Total revenues for the nine months ended December 31, 2001 were $86,879 as compared to $443,472 earned during the nine months ended December 31, 2000. The revenue for the period ending March 31, 2001 was $80,459 which was the majority of the income prior to ceasing operations.

Cost of sales increased to $138,242 for the nine months ended December 31, 2001 as compared to $121,800 for the nine months ended December 31, 2000. The cost of sales for the period ending March 31, 2001 was $96,370 prior to ceasing operations.

Operating expenses totaled $6,589,731 for the nine months ended December 31, 2001 as compared with $10,077,337 for the same period in 2000. The decrease is due to the ceasing of operations.

Research and development costs decreased to $1,016,100 for the nine months ended December 31, 2001 versus $2,740,546 for the same period in 2000. The decrease is due to the ceasing of operations.

Selling and marketing costs decreased to $1,624,603 in the first nine months of 2001 as compared to $3,291,359 in the first nine months of 2000. The decrease is due to the ceasing of operations.

General and administrative costs for the nine months ended December 31, 2001 were $3,949,027 as compared to $4,745,432 for the same period in 2000. Included in the above costs are legal fees, consulting, amortization costs and all other related operating expenses.

Other income, decreased to $216,082 for the nine months ended December 31, 2001 from $266,555 for the same period in 2000. The income for 2001 was primarily from investment earnings on the Company's cash reserves and sale of customer lists and the domain name, "Passwords.com".

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operations totaled $6,527,638 for the nine months ended December 31, 2001 as compared with $8,568,268 for the same period in 2000. The decrease in cash used was due to ceasing of operations. At December 31, 2001 working capital was at a deficit of $610,869.

During the nine months ended December 31, 2001 the company purchased property and equipment totaling $97,851. Principle payments on long-term debt used cash of $214,273 for the nine months ended December 31, 2001.

Until the issuance of the Order by the Superior Court of Massachusetts (as described under Part II, Item 1. Legal Proceedings), SoftLock had considered a Chapter 11 reorganization or Chapter 7 liquidation proceeding, as the forum to maintain the status quo among the creditors and stockholders as well as the vehicle in which to market and liquidate the remaining assets and distribute the net proceeds to the creditors and the stockholders. Currently, the Court's Order provides SoftLock with a procedure to market, sell or license the remaining assets pursuant to a similar procedure to that used in a bankruptcy proceeding.

SoftLock believes that this process, as an alternative to a bankruptcy, will accomplish many of the same objectives for the creditors and stockholders under a much shorter time schedule and, in all likelihood, at less administrative expense. Upon the creditors' valid claims being paid in full, any balance will be distributed to stockholders. Although the Company's present plans are to proceed with a sale outside of bankruptcy, no assurance can be given that the Company will not choose to seek protection of the bankruptcy laws.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Other than as set forth below, the Company is not a party to any legal proceedings which management believes to be material, and there are no such proceedings which are known to be contemplated for which the Company anticipates a material risk of loss.

On June 26, 2001, litigation was commenced in the Superior Court of Massachusetts, Middlesex County, Cambridge Division (the "Court") against the Company's subsidiary SoftLock Services, Inc. ("SoftLock"). The claim was brought by SoftLock's landlord, Wellesley/Rosewood Maynard Mills Ltd. Partnership, seeking to recover past due rental payments. On August 3, 2001, the Court issued an Order regarding the sale of SoftLock's assets in which SoftLock is restrained from selling or transferring in any manner, other than in the ordinary course of business, any and all of its assets without prior Order of the Court and it was further ordered that SoftLock shall locate a purchaser and negotiate the terms of any proposed sale. It was further ordered that prior to the proposed sale SoftLock shall file a Motion to Approve a sale, setting forth certain information, documentation, statement of marketing efforts and opinion of value. Upon the Court's satisfaction of certain conditions being met, a hearing will be held to approve the sale.

The Court also entered an order authorizing the Company to revise the terms of Dr. Jonathan Schull's compensation. Dr. Schull's compensation will be reduced from $175,000 to $125,000, annually, and he will be entitled to receive a percentage of the net proceeds derived from the sale of the patent portfolio.

The Company is subject to this and other litigation from time to time in the ordinary course of business.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company has solicited the consents of the Company's preferred stockholders to the revisions of Dr. Schull's employment agreement with the Company as set forth above under the caption "Recent Developments." As of the date of this filing, such consents have not been received by the Company.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1

Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Chief Executive Officer.

31.2

Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Chief Financial Officer.

32.1

Certification by the Chief Executive and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

Current Report on Form 8-K was filed with the SEC on July 12, 2001 (Item 5. Other Events. Reporting the delisting of the Company's Common Stock from the NASDAQ SmallCap Market and threat of stockholder litigation regarding cessation of business operations.)

Current Report on Form 8-K was filed with the SEC on August 7, 2001 (Item 5. Reporting issuance of court order regarding disposition of Company's assets.)

Current Report on Form 8-K was filed with the SEC on October 16, 2001 (Item 5. Reporting commencement of offering of the Company's patent portfolio for sale and authorization to revise the employment agreement of Dr. Jonathan Schull.)

SIGNATURES

In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.