<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______________ to ______________.
Commission File Number: 0-23589
C2i SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0775687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6138 NANCY RIDGE DRIVE
SAN DIEGO, CALIFORNIA 92121-3223
(619) 812-5800
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 3,542,171 as of November 10, 1998.
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
Page 1 of 14
<PAGE> 2
C2i SOLUTIONS, INC.
REPORT ON FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997 (Unaudited) 3
Condensed Statements of Operations for the three and nine months
ended September 30, 1998 and 1997 (Unaudited) and for the period
from Inception through September 30, 1998 (Unaudited) 4
Condensed Statements of Stockholders' Equity (Deficit) for the
periods ended December 31, 1997 (Unaudited) and
September 30, 1998 (Unaudited) 5
Condensed Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (Unaudited), and for the period from
Inception through September 30, 1998 (Unaudited) 6
Notes to Condensed Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
</TABLE>
Page 2 of 14
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current Assets:
Cash $ 106,410 $ 298,823
Short-term investments, net 2,909,136 --
Accounts receivable 140,542 --
Prepaid expenses and other 71,729 40,702
----------- -----------
Total current assets 3,227,817 339,525
----------- -----------
Property and equipment, net 128,160 64,065
Deferred offering costs -- 259,906
Deferred finance charges, net -- 24,412
Noncurrent prepaid 59,713 --
Other assets, net 2,161 2,775
----------- -----------
Total assets $ 3,417,851 $ 690,683
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 208,841 $ 248,942
Accrued payroll and related 22,482 59,276
Bridge notes payable, net -- 501,698
Accrued royalty due to former stockholder -- 1,345
Accrued interest payable -- 12,500
Current portion of capital lease obligations 5,901 5,326
Other current liabilities 17,645 2,026
----------- -----------
Total current liabilities 254,869 831,113
----------- -----------
Capital lease obligations, net of current portion 7,756 12,251
----------- -----------
Stockholders' Equity (Deficit):
Preferred Stock- $ .001 par value; 1,000,000 shares
authorized; no shares issued and outstanding -- --
Common Stock- $.001 par value; 10,000,000 shares authorized;
3,542,171 and 2,391,338 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 3,542 2,391
Additional paid-in capital 7,466,970 1,910,516
Warrants to acquire common stock 223,100 108,000
Deficit accumulated during the development stage (3,823,963) (1,850,776)
Deferred compensation (250,649) (322,812)
Unrealized loss on short-term investments (463,774) --
----------- -----------
Total stockholders' equity (deficit) 3,155,226 (152,681)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 3,417,851 $ 690,683
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted principles for complete financial
statements. See notes to condensed financial statements.
Page 3 of 14
<PAGE> 4
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
(Sept. 17,
Three Month Period Nine Month Period 1996) through
Ended September 30, Ended September 30, Sept. 30,
1998 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Products $ 45,000 $ 10,296 $ 59,215 $ 32,250 $ 101,263
Services 92,730 32,833 248,974 47,033 296,007
----------- ----------- ----------- ----------- -----------
Total revenues 137,730 43,129 308,189 79,283 397,270
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Products:
Customers 33,769 5,888 43,069 10,713 53,782
Former stockholder -- -- -- 11,352 17,652
Services 39,819 17,091 112,318 24,829 137,147
----------- ----------- ----------- ----------- -----------
Total cost of revenues 73,588 22,979 155,387 46,894 208,581
----------- ----------- ----------- ----------- -----------
Gross profit 64,142 20,150 152,802 32,389 188,689
Selling, general and
administrative expenses 814,705 131,748 2,083,552 1,467,283 3,945,411
----------- ----------- ----------- ----------- -----------
Operating loss (750,563) (111,598) (1,930,750) (1,434,894) (3,756,722)
Interest and dividend
income (80,163) -- (159,444) -- (159,444)
Interest expense 516 -- 21,366 -- 46,170
Other expense 41 -- 120,394 -- 120,394
Loss realized on sale of
short-term investments 60,121 -- 60,121 -- 60,121
----------- ----------- ----------- ----------- -----------
Net loss $ (731,078) $ (111,598) $(1,973,187) $(1,434,894) $(3,823,963)
=========== =========== =========== =========== ===========
Loss per share (basic
and diluted) $ (0.21) $ (0.05) $ (0.60) $ (0.94)
=========== =========== =========== ===========
Shares used in computing
loss per share 3,542,171 2,391,170 3,299,268 1,533,157
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
Page 4 of 14
<PAGE> 5
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements of Stockholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Warrants Accumulated Unrealized Total
Common Stock Additional to Acquire During the Loss on Stockholders'
----------------- Paid-In Common Development Deferred Short-Term Equity
Shares Amount Capital Stock Stage Compensation Investments (Deficit)
--------- ------ ---------- ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 1,050,000 $1,050 $ 156,450 $ -- $ (44,338) $ -- $ -- $ 113,162
Issuance of common stock
for cash and capital
subscriptions receivable 1,333,332 1,333 1,398,666 -- -- -- -- 1,399,999
Issuance of common stock for
services rendered 8,006 8 9,075 -- -- -- -- 9,083
Deferred compensation -- -- 346,325 -- -- (322,812) -- 23,513
Issuance of warrants -- -- -- 108,000 -- -- -- 108,000
Net loss for period -- -- -- -- (1,806,438) -- -- (1,806,438)
--------- ------ ---------- -------- ----------- --------- --------- -----------
Balance at December 31, 1997 2,391,338 2,391 1,910,516 108,000 (1,850,776) (322,812) -- (152,681)
Issuance of common stock and
warrants 1,150,000 1,150 5,556,156 115,100 -- -- -- 5,672,406
Issuance of common stock
option exercise 833 1 2,082 -- ---- -- -- 2,083
Deferred compensation -- -- (1,784) -- ---- 72,163 -- 70,379
Comprehensive loss:
Net loss for period -- -- -- -- (1,973,187) -- -- (1,973,187)
Other comprehensive loss--
unrealized loss on
short-term investments
available for sale
(net of tax effect of $0) -- -- -- -- -- -- (463,774) (463,774)
--------- ------ ---------- -------- ----------- --------- --------- -----------
Comprehensive loss for period -- -- -- -- -- -- -- (2,436,961)
--------- ------ ---------- -------- ----------- --------- --------- -----------
Balance at September 30, 1998 3,542,171 $3,542 $7,466,970 $223,100 $(3,823,963) $(250,649) $(463,774) $ 3,155,226
========= ====== ========== ======== =========== ========= ========= ===========
</TABLE>
See accompanying notes.
Page 5 of 14
<PAGE> 6
C2i Solutions Inc.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
Nine Month Period (Sept. 17,
Ended September 30, 1996) through
1998 1997 Sept. 30, 1998
----------- ----------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,973,187) $(1,434,894) $(3,823,963)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 58,639 8,789 98,405
Amortization of deferred compensation 70,379 4,034 93,892
Non-cash compensation and other expenses 122,942 1,209,082 1,310,320
Loss realized on sale of short-term investments 60,121 -- 60,121
Changes in operating assets and liabilities:
Accounts receivable (140,542) (26,681) (140,542)
Prepaid expenses and other (90,740) (6,619) (131,442)
Accounts payable (40,101) 104,489 208,841
Accrued payroll and related (36,794) 18,091 22,482
Accrued interest payable (12,500) -- --
Accrued royalty due to former stockholder (1,345) (4,955) --
Other current liabilities 15,619 1,808 17,645
----------- ----------- -----------
Net cash used for operating activities (1,967,509) (126,856) (2,284,241)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (122,872) (26,057) (183,905)
Purchase of short-term investments (4,000,000) -- (4,000,000)
Proceeds from sales of short-term investments 566,969 -- 566,969
Other assets 523 (2,252) (3,677)
----------- ----------- -----------
Net cash used for investing activities (3,555,380) (28,309) (3,620,613)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from initial public offering, net of
deferred offering costs 5,932,313 (93,525) 5,672,407
Proceeds from issuance of common stock 2,083 200,000 262,083
Proceeds from issuance of Bridge Notes and warrants -- -- 600,000
Repayment of Bridge Notes payable (600,000) -- (600,000)
Repayment of capital lease obligations (3,920) -- (4,618)
Deferred finance charges -- -- (26,820)
Advance from former stockholder -- 586 45,586
Repayment of advance from former stockholder -- -- (34,874)
Collection of capital subscriptions receivable
from stockholders -- 97,500 97,500
----------- ----------- -----------
Net cash provided by financing activities 5,330,476 204,561 6,011,264
----------- ----------- -----------
Net increase (decrease) in cash (192,413) 49,396 106,410
Cash at beginning of period 298,823 16,467 --
=========== =========== ===========
Cash at end of the period $ 106,410 $ 65,863 $ 106,410
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Non-Cash Financing Activities:
Capital subscriptions receivable from stockholders $ -- $ 100,000 $ 197,500
Equipment acquired under capital lease obligations -- -- 18,276
Other Cash Flows Information:
Interest paid 23,082 -- 23,280
Income taxes paid 1,824 1,600 4,224
</TABLE>
See accompanying notes.
Page 6 of 14
<PAGE> 7
C2i Solutions, Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
1. Summary of Significant Accounting Policies
Description of Business
C2i Solutions, Inc. (the "Company) was incorporated in the State of Delaware on
September 30, 1997. The company was initially organized as a California limited
liability company under the name of Challenge 2000 International LLC (the "LLC")
on September 17,1996 ("Inception"). From Inception through September 30, 1997,
the Company operated under the name of the LLC. On September 30, 1997, the
Company reorganized as a Delaware corporation and changed its name to C2i
Solutions, Inc. On September 30, 1997, all LLC Owner Units were converted into
2,391,338 shares of the Delaware Corporation's common stock and all owner
options were converted into options to acquire 547,500 shares of such common
stock. Concurrent with the formation of the Delaware corporation, the LLC was
dissolved. The accompanying financial statements have been adjusted to give
retroactive effect to the reorganization and capital structure of the Delaware
corporation from Inception.
The Company is a provider of Y2K, EMU, and applications re-engineering services.
Its consulting solutions span a wide variety of platforms, languages and
services, from client-server to mainframe, from assessment and remediation, to
testing and re-implementation. The Company's approach utilizes a mix of hands-on
work by highly experienced technical staff along with "best of breed" tools, and
focused project management. The desired result for the Company's clients is
reduced project cycle time, lower cost and improved productivity.
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. Since Inception, the Company has been
primarily engaged in organizational activities, including raising capital,
recruiting personnel, and the marketing of its products and services. As of
September 30, 1998, the Company has not realized significant revenues and
therefore, is considered to be in the development stage.
The company's ability to transition from the development stage, and ultimately
to attain profitable operations is dependent upon its ability to raise
additional capital through debt or equity financing and the successful market
acceptance of its products and services. There can be no assurances that the
Company's products and services or its efforts to raise additional capital will
be successful. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
financial statements should be read in conjunction with the financial statements
and notes thereto, together with management's discussion and analysis of
financial condition and results of operations contained in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997. Operating
results for the nine month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
Page 7 of 14
<PAGE> 8
C2i Solutions, Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
Short-Term Investments
Short-term investments are accounted for in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Management
determines the appropriate classification of such securities at the time of
purchase and reevaluates such classification as of each balance sheet date.
Based on its intent, the Company's investments are classified as
available-for-sale and are carried at fair value, with unrealized holding gains
and losses, net of tax, included in accumulated other comprehensive income
(loss) in stockholders' equity. Realized gains and losses and declines in value
judged to be other than temporary are determined based on the specific
identification method and are reported in the statements of operations.
Fair Value of Financial Instruments
Pursuant to SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," the Company is required to estimate the fair value of all
financial instruments included on its balance sheet at September 30, 1998 and
December 31, 1997. The company considers the carrying value of such amounts in
the financial statements to approximate their fair value due to the relatively
short period of time between origination of the instruments and their expected
realization or the overall immateriality of the amounts.
Comprehensive Income
Pursuant to SFAS No. 130, "Reporting Comprehensive Income," the Company has
reported comprehensive income for the nine month period ended September 30, 1998
in the Condensed Statement of Stockholders' Equity.
2. Capital Transactions
Initial Public Offering
In October 1997, the Board of Directors authorized the management of the Company
to file a registration statement with the Securities and Exchange Commission,
permitting the Company to sell up to 1,150,000 shares of common stock and up to
1,150,000 warrants for the purchase of common stock to the public. The Board of
Directors also approved the issuance of underwriter's warrants to purchase up to
100,000 shares of common stock and 100,000 warrants in connection with this
proposed initial public offering.
In February 1998, the Company completed an initial public offering of 1,000,000
shares of Common Stock and 1,150,000 Warrants (which included 150,000 Warrants
pursuant to the underwriter's over allotment option). In March 1998, the
underwriter exercised its over-allotment option with respect to 150,000 shares
of Common Stock of the Company. The Company received net proceeds of $6,148,150
which includes $100 the Company received as consideration for the warrant issued
to the underwriter, after deducting an underwriting discount of 10% of the gross
proceeds of the offering and a non-accountable expense allowance of 3% of the
gross proceeds of the offering, (net of $45,000 previously paid by the Company)
and before deducting expenses of $430,743 related to the offering.
Stock Issuances
In March 1998, the Company issued 833 shares of its Common Stock to a former
employee of the Company for total cash consideration of $2,083 as a result of
the exercise of stock options.
Page 8 of 14
<PAGE> 9
C2i Solutions, Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
Stock Option Plan
In January 1998, the Company's Board of Directors and stockholders approved the
Company's 1997 Stock Option Plan (the "Option Plan"), which has an initial share
reserve of 82,500 shares of Common Stock. Under the Option Plan, options may be
granted to employees, including officers, consultants, advisors and directors,
although only employees, and directors and officers who are also employees may
receive "incentive stock options" ("ISO's") intended to qualify for certain tax
treatment. The exercise price of all nonqualified stock options ("NSO's") must
equal at least 85% of the fair market value of Common Stock on the date of
grant, and the exercise price of ISO's must be no less than the fair market
value on the day of grant. Options granted under the Option Plan are generally
immediately exercisable, vest over periods ranging from one to four years and
must be exercised within ten years.
In June 1998, the Company's stockholders approved an amendment to the Option
Plan to (a) increase by 2,650,000 the maximum number of shares of the Company's
Common Stock reserved for issuance under the Option Plan, (b) increase the limit
on the number of shares issuable on exercise of outstanding options under the
Option Plan to no more than 90% of the outstanding shares of the Company's
Common Stock, and (c) to limit to 100,000 the maximum number of shares for which
options may be granted to any employee in any fiscal year.
During 1998, the Company granted stock options to employees, consultants, and a
newly appointed director under the Option Plan as follows:
<TABLE>
<CAPTION>
Number of Range of
Date of Grant Option Type Options Exercise Prices
------------- ----------- --------- ---------------
<S> <C> <C> <C>
Jan 1998 NSO 20,500 $5.50
Jan 1998 ISO 20,000 $5.50
Mar 1998 ISO 80,000 $7.38--$8.00
Jun 1998 NSO 87,500 $7.50
Jun 1998 ISO 173,000 $7.50-$7.75
Jul 1998 ISO 20,000 $6.50
Aug 1998 ISO 105,000 $3.38--$5.75
Sep 1998 ISO 30,000 $2.88--$3.38
</TABLE>
NSO's vest ratably over four years and ISO's vest ratably over three years. All
of these options expire ten years from the date of grant or earlier in the event
of termination of employment, consulting relationship or directorship.
3. Short-Term Investments
Short-term investments as of September 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Cost Losses Fair Value
---------- ---------------- ----------
<S> <C> <C> <C>
Mutual Funds $3,372,910 $(463,774) $2,909,136
</TABLE>
The Company realized losses of $60,121 on short-term investments during the nine
months ended September 30, 1998. Unrealized losses on short-term investments
incurred during the nine months ended September 30, 1998 totaled $463,774.
Unrealized holding losses on short-term investments, net of tax, included in
accumulated other comprehensive loss in stockholders' equity at September 30,
1998 were $463,774.
Page 9 of 14
<PAGE> 10
C2i Solutions, Inc.
(A Development Stage Company)
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-QSB contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Such statements are only predictions and actual events or results may differ
materially. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this Item 2 as well as those discussed in
the Company's Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission on March 31,1998.
Overview
C2i Solutions, Inc. ("the Company") is a provider of Y2K, EMU, and applications
re-engineering services. The Company's consulting solutions span a wide variety
of platforms, languages, and services, from client-server to mainframe, from
assessment and remediation to testing and re-implementation. The Company's
approach utilizes a mix of hands-on work by highly experienced technical staff,
along with "best of breed" tools, and focused project management. The desired
result for the Company's clients is reduced project cycle time, lower cost and
improved productivity.
The following discussion should be read in conjunction with the attached
condensed financial statements and notes thereto.
Results of Operations for the three and nine month periods ended September 30,
1998 and 1997
Total revenues for the three months ended September 30, 1998 were $137,730 an
increase of 219% over the comparable quarter of the prior year, in which
revenues totaled $43,129. For the three months ended September 30, 1998 service
revenues accounted for 67% of total revenues and product sales represented 33%.
Total revenues for the three months ended September 30, 1997 consisted of
service revenues of 76% and revenues from product sales of 24%.
Total revenues for the nine months ended September 30, 1998 were $308,189 of
which 81% represented service revenues, with the balance representing product
sales. Total revenues for the nine months ended September 30, 1997 totaled
$79,283, of which 59% was service revenues and 41% was revenue from product
sales. Two customers accounted for 97% of the Company's revenues for the nine
months ended September 30, 1998 (58% and 39%). Three customers accounted for 91%
of the Company's revenues for the nine months ended September 30, 1997 (62%, 19%
and 10%).
Cost of revenues were 53% ($73,588) of total revenues for the third quarter of
fiscal 1998 and 50% ($155,387) of total revenues for the nine months ended
September 30, 1998. These costs consisted primarily of personnel related costs
of providing consulting services and the costs of products sold. Cost of
revenues were 53% ($22,979) of total revenues and 59% ($46,894) of total
revenues, respectively, for the comparable prior year periods in 1997
representing the costs of products sold, including third party royalties
relating to licensed technology.
Gross margin percentages were 47% for the third quarter of both fiscal 1998 and
1997. For the nine months ended September 30, 1998 the gross margin percentage
was 50% compared to the prior year to date gross margin percentage of 41% which
reflects a more favorable mix of service revenues relative to product revenues
in 1998.
Page 10 of 14
<PAGE> 11
C2i Solutions, Inc.
(A Development Stage Company)
The Company incurred selling, general and administrative expenses for three and
nine month periods ended September 30,1998 totaling $814,705 and $2,083,552,
respectively, compared with $131,748 and $1,467,283, respectively, for the
comparable prior year periods. These increases in 1998 resulted primarily from
increased personnel and related expenses due to a greater number of employees,
increased facilities expenses in connection with the relocation to larger
offices, the establishment of regional offices, expansion of operations,
increased travel and marketing expenses incurred in connection with the overall
scale-up of Company's operations and business development efforts, and higher
legal, accounting and other general and administrative expenses associated with
becoming a public company.
Interest and dividend income was $80,163 and $159,444, respectively, for the
three and nine months ended September 30, 1998, compared with $0 for the three
and nine months ended September 30, 1997. This increase in 1998 reflects
interest and dividends earned from the short-term investment of the net proceeds
from the Company's initial public offering, which closed on February 27,1998.
Interest expense totaling $516 and $21,366 respectively, for the three and nine
months ended September 30, 1998 was related to capital lease obligations and the
debt financing completed in October 1997.
The Company invested the net proceeds from its initial public offering, net of
anticipated near-term working capital requirements, in a mutual fund (the
"Short-Term Investment"). The proceeds that the Company anticipated would be
used to satisfy near-term working capital requirements were invested in money
market accounts. The Short-Term Investment is a publicly held mutual fund traded
on the New York Stock Exchange, which invests in interest-bearing, debt
instruments. During the three months ended September 30,
1998, the Short-Term Investment was impacted by unusual financial market events,
which caused its fair market value to decline. During the three months ended
September 30, 1998, the Company realized losses of $60,121 and experienced
unrealized losses of $363,774 on the Short-Term Investment. The Company has been
monitoring this investment daily and has met regularly with its investment
advisor about alternative courses of action. The Company intends to continue to
monitor this Short-Term Investment in consultation with its investment advisor
and its Board of Directors, and will attempt to recover its losses. As of
November 10, 1998, there has been a recovery of $128,555 of the unrealized
losses offset by additional realized losses totaling $76,169. However, there can
be no assurance that such recovery will be sustained or continue, or that there
will be no further decline in the value of the Short-Term Investment resulting
in a greater unrealized loss. Any further losses would adversely affect the
Company's financial condition.
Liquidity and Capital Resources
From Inception through February 1998, the Company financed its operations
primarily through the proceeds from the issuance of Common Stock and a bridge
financing completed in October 1997, resulting in an aggregate of approximately
$958,000 from the sale and issuance of debt and equity securities, including
warrants. In February 1998, the Company completed an initial public offering of
its Common Stock. This offering provided the Company with the net proceeds of
approximately $5,672,407, including proceeds from the exercise of the
underwriter's overallotment option received in March 1998. Funds from these
sources have been and are expected to continue to be used as working capital to
fund expansion of the Company's infrastructure and internal operations,
including purchases of capital equipment and the hiring of additional personnel.
Page 11 of 14
<PAGE> 12
C2i Solutions, Inc.
(A Development Stage Company)
The Company's operating activities used net cash of $1,967,509 and $126,856
during the nine-month periods ended September 30, 1998 and 1997, respectively.
This increase in cash used for operating activities in 1998 compared to 1997
results primarily from the larger net loss for the 1998 period as a result of
the Company's continued expansion of its operations, as well as an increase in
accounts receivable and prepaid expenses.
The Company's investing activities used cash of $3,555,380 and $28,309 during
the nine months ended September 30, 1998 and 1997, respectively. This increase
in cash used for investing activities in 1998 compared to 1997 results from the
purchase of $4,000,000 of short-term investments with the excess net proceeds
from the Company's initial public offering which was offset by proceeds from the
sale of short-term investments totaling $566,969, and $122,872 in purchases of
property and equipment during 1998, compared to $26,057 during the same period
in 1997.
The Company's financing activities provided net cash of $5,330,476 and $204,561
during the nine months ended September 30, 1998 and 1997, respectively. This
increase in cash provided by financing activities in 1998 compared to 1997
results from an increase in net proceeds from the sale of common stock totaling
$5,934,396 during 1998 (of which $5,932,313 related to the Company's initial
public offering) compared with net proceeds of $200,000 and collection of a
capital subscription receivable of $97,500 during the same period of 1997 which
was offset by $93,525 of cash used for deferred offering costs. The net cash
increase during the nine month period ended September 30, 1998 was partially
offset by cash used to repay the bridge notes ($600,000) and capital lease
obligations ($3,920) in 1998.
As of September 30, 1998, the Company had cash and net short-term investments of
$3,015,546 and working capital of $2,972,948 compared with cash of $298,823 and
a working capital deficit of ($491,588) at December 31, 1997. Based on
management's current operating plan and anticipated personnel increases, the
Company believes that its existing resources will be sufficient to fund
operations through the balance of 1998. However, the Company expects to continue
to experience operating losses and to use cash in operations through at least
the end of the first quarter of 1999.
The Company's ability to achieve sustained profitability will be dependent upon
a number of factors, including its ability to generate future revenues. Although
the Company is pursuing business development opportunities, which it hopes will
produce future revenues, there can be no assurance that the Company will be able
to successfully negotiate any additional contracts, or that any such current or
future contracts will provide the Company with expected benefits.
If the Company cannot generate sufficient revenues from current and future
contracts, of which there can be no assurance, the Company will be required to
raise capital from the sale of equity securities or the issuance of
indebtedness. There is no assurance that such sales or issuances can be effected
at favorable terms, if at all.
Year 2000 Compliance
Many currently installed computer systems and software products are not capable
of distinguishing 20th century dates from 21st century dates. As a result, in
less than two years, computer systems and/or software used by many companies in
a very wide variety of applications will experience operating difficulties
unless they are modified or upgraded to adequately process information
involving, related to or dependent upon the century change. Significant
uncertainty exists in the software and information services industries
concerning the scope and magnitude of problems associated with the century
change. In light of the potentially broad effects of the Year 2000 on a wide
range of business systems, the Company's products and services may be affected.
Page 12 of 14
<PAGE> 13
C2i Solutions, Inc.
(A Development Stage Company)
The Company utilizes and is dependent upon data processing computer hardware and
software to conduct its business. The Company has completed its assessment of
its own computer systems and based upon this assessment, the Company believes
its computer systems are "Year 2000 compliant;" this is, capable of adequately
distinguishing 21st century dates from 20th century dates. However, there can be
no assurance that the Company has or will timely identify and remediate all
significant Year 2000 problems in its own computer systems, that remedial
efforts subsequently made will not involve significant time and expense, or that
such problems will not have a material adverse effect on the Company's business,
operating results and financial condition. If unforeseen internal disruptions
occur, the Company believes that its existing disaster recovery program, which
includes the manual processing of certain key transactions, would significantly
mitigate the impact.
The Company has made only limited efforts to determine the extent of and
minimize the risk that the computer systems of the Company's suppliers are not
Year 2000 compliant, or will not become compliant on a timely basis. The Company
expects that the process of making inquiries with these suppliers will be
ongoing through the end of 1999. If Year 2000 problems prevent any of the
Company's suppliers from timely delivery of products or services required by the
Company, the Company's operating results could be materially adversely affected.
However, the Company estimates that its costs to address the Year 2000 issues
relating to its suppliers will not be material, and that these costs will be
funded from its operating cash flows. The Company has identified and will
continue to identify alternative suppliers in the event its preferred suppliers
become incapable of timely delivery of products or services required by the
Company. The Company's suppliers are generally locally or regionally based,
which tends to lessen the Company's exposure from the lack of readiness of any
single supplier. The Company's estimates of Year 2000 costs relating to its
suppliers are management's best estimates, which were derived from numerous
assumptions of future events, including the continued availability of certain
resources, third party remediation plans with regard to Year 2000 issues, and
other factors. There can be no assurance that these estimates are correct and
actual results could differ materially from these estimates.
PART II: OTHER INFORMATION
ITEM 2: Changes in Securities and Use of Proceeds
Pursuant to the Company's Registration Statement on Form SB-2 (No.333-39425),
declared effective by the Commission on February 13, 1998, the Company completed
its initial public offering in February 1998, and the overallotment in March
1998, resulting in aggregate net proceeds to the Company of $5,672,407, after
deducting underwriting discounts and commission and the offering expenses
payable by the Company.
Proceeds of the initial public offering were used to repay the Bridge Notes and
accrued interest thereon, totaling $621,412, $17,920 of which was paid to a
former executive officer of the Company. The Company also used $106,882 to
purchase machinery, equipment and other capital additions, $3,723 to repay
capital leases and accrued interest, $821,265 to pay employees' and officers'
salaries and related payroll taxes, $166,175 for occupancy costs, $86,280 for
advertising and promotion, $116,477 for recruiting, $370,196 for other general
corporate purposes and realized and unrealized investment losses totaling
$364,451, net of related interest and dividend income. The remaining proceeds
from the initial public offering have been invested in short-term investments
pending their use.
ITEM 5: Other Information
Proposals of stockholders intended to be presented at the next Annual Meeting of
Stockholders of the Company must be received by the Company at 6138 Nancy Ridge
Drive, San Diego, California 92121-3223, no later than January 27, 1999.
Page 13 of 14
<PAGE> 14
C2i Solutions, Inc.
(A Development Stage Company)
ITEM 6: Exhibits and Reports on Form 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended
September 30, 1998.
Items 1, 3 and 4 are not applicable and have been omitted.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------ -----------------------
<S> <C>
10.12 Amendment to Employment agreement dated July 14, 1998 by and
between the Company and Diane E. Hessler
27.1 Financial Data Schedule
</TABLE>
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.
C2i SOLUTIONS,INC.
Dated: November 13, 1998 By: /s/ JOHN ANTHONY WHALEN, JR.
----------------------------------------
John Anthony Whalen, Jr., President
and Chief Executive Officer
Dated: November 13, 1998 By: /s/ DIANE E. HESSLER
----------------------------------------
Diane E. Hessler
Chief Financial Officer (Principal
Financial and Accounting Officer)
Page 14 of 14
<PAGE> 1
EXHIBIT 10.12
AMENDMENT TO EMPLOYMENT AGREEMENT DATED JULY 14, 1998 BY AND
BETWEEN THE COMPANY AND DIANE E. HESSLER
July 14, 1998
Diane E. Hessler
1717 Turnberry Drive
San Marcos, CA 92069
Dear Diane:
This letter is the "Amendment" to your employment letter dated September 18,
1997, which set forth the basic terms and conditions of your employment with
Challenge 2000 International LLC, currently known as C2i Solutions, Inc. as a
result of a name change on September 30, 1977 ("C2i"). Effective as of July 14,
1998, your employment letter is amended as follows:
17. TERMS OF EMPLOYMENT. The term of this Agreement is at will. C2i may
terminate your employment with or without cause at any time. If you are
terminated for any reason, within a period of five years commencing on the date
that you sign this Agreement, other than cause you will receive six month's
salary continuation, payable in a lump sum in accordance with C2i's standard
payroll practices, in lieu of notice.
If you resign you shall not be entitled to salary continuation. Upon any
termination, or resignation, you shall be entitled to payment for accrued
vacation and for salary and bonuses accrued for service actually rendered prior
to the date of such termination.
For purposes of this Agreement "cause" shall mean (i) a willful failure by
you to substantially perform your duties, other than a failure resulting from
your complete or partial incapacity due to physical or mental illness or
impairment, or (ii) a willful act by you which constitutes gross misconduct and
which is materially injurious to C2i.
If your employment is terminated by C2i during this five year period for
any reason other than cause all stock option grants to you of Common Stock of
C2i Solutions, Inc. will immediately become 100% vested as of the termination
date. You will then have a minimum of 60 days from the termination date in which
to exercise your options, in accordance with the terms of the Option
Agreements.
All other terms and conditions of the September 18, 1997 employment letter
remain the same, and in full force and effect.
1
<PAGE> 2
In order to confirm your acceptance of this Amendment, please sign and return
this letter no later than Friday, July 17, 1998, at 5:00 P.M. PDST. If there is
any matter in this letter, which you wish to discuss further, please do not
hesitate to speak to me.
Very truly yours,
C2i Solutions, Inc.
By: /S/ John Anthony Whalen, Jr.
----------------------------------------
John Anthony Whalen, Jr.
President/CEO
JAW/deh
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
I agree to the terms of employment set forth in this Amendment.
Dated: 7/14, 1998
/S/ Diane E. Hessler
----------------------------------------
Diane E. Hessler
Address: 1717 Turnberry Dr.
----------------------------------------
San Marcos, CA 92069
----------------------------------------
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 106,410
<SECURITIES> 2,909,136
<RECEIVABLES> 140,542
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,227,817
<PP&E> 189,050
<DEPRECIATION> 60,890
<TOTAL-ASSETS> 3,417,851
<CURRENT-LIABILITIES> 254,869
<BONDS> 7,756
0
0
<COMMON> 3,542
<OTHER-SE> 3,151,684
<TOTAL-LIABILITY-AND-EQUITY> 3,417,851
<SALES> 59,215
<TOTAL-REVENUES> 308,189
<CGS> 43,069
<TOTAL-COSTS> 155,387
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,366
<INCOME-PRETAX> (1,973,187)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,973,187)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,973,187)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
