<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER 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.)
10660 Scripps Ranch Blvd., Suite 100
San Diego, California 92131
(858) 790-1212
(Address and telephone number of principal executive offices)
6138 Nancy Ridge Drive
San Diego, California 92121
(Former address)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer 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 Issuer's Common Stock, $0.001 par value,
was 3,840,925 as of November 10, 1999.
Transitional Small Business Disclosure Format (check one):
YES ________ NO X
-------
<PAGE>
C2i SOLUTIONS, INC.
REPORT ON FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1998 (Unaudited) 3
Condensed Statements of Operations for the three and nine
months ended September 30, 1999 and 1998 (Unaudited) and for
the period from Inception through September 30, 1999 (Unaudited) 4
Condensed Statements of Stockholders' Equity (Deficit) for the
periods ended December 31, 1996, 1997 and 1998 (Unaudited) and
September 30, 1999 (Unaudited) 5
Condensed Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (Unaudited), and for the period
from Inception through September 30, 1999 (Unaudited) 6
Notes to Condensed Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- -----------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,065,572 $ 135,954
Short-term investment -- 2,229,247
Accounts receivable, net -- 116,805
Prepaid expenses and other 68,054 69,475
----------- -----------
Total current assets 1,133,626 2,551,481
Property and equipment, net 59,036 117,534
Note receivable, net -- --
Other assets, net 15,845 54,379
----------- -----------
Total assets $ 1,208,507 $ 2,723,394
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 57,045 $ 136,401
Accrued payroll and related 23,291 35,455
Current portion of capital lease obligations 6,791 6,110
Other current liabilities 1,673 28,876
Stock subscriptions payable 200,000 --
----------- ----------
Total current liabilities 288,800 206,842
----------- ----------
Capital lease obligations, net of current portion 951 6,146
----------- -----------
Stockholders' Equity:
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;
3,554,931 shares issued and outstanding at
September 30, 1999 and December 31, 1998 3,555 3,542
Additional paid-in capital 7,344,424 7,466,970
Warrants to acquire common stock 223,100 223,100
Deficit accumulated during the development stage (6,621,552) (4,953,906)
Deferred compensation (30,771) (229,300)
----------- -----------
Total stockholders' equity 918,756 2,510,406
----------- -----------
Total liabilities and stockholders' equity $ 1,208,507 $ 2,723,394
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed financial statements.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
(September 17,
Three Month Periods Nine Month Periods 1996) through
Ended September 30, Ended September 30, September 30,
1999 1998 1999 1998 1999
---------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Services $ 57,480 $ 92,730 $ 458,073 $ 248,974 $ 1,078,123
Products -- 45,000 -- 59,215 118,848
--------- ---------- ----------- ---------- -----------
Total revenues 57,480 137,730 458,073 308,189 1,196,971
--------- ---------- ----------- ---------- -----------
Cost of revenues:
Services -- 39,819 255,074 112,318 522,449
Products:
Customers -- 33,769 -- 43,069 64,852
Former stockholder -- -- -- -- 17,652
--------- ---------- ----------- ---------- -----------
Total cost of revenues -- 73,588 255,074 155,387 604,953
--------- ---------- ----------- ---------- -----------
Gross profit 57,480 64,142 202,999 152,802 592,018
Selling, general and administrative expenses 381,682 814,705 1,475,219 2,083,552 6,217,284
--------- ---------- ----------- ---------- -----------
Operating loss (324,202) (750,563) (1,272,220) (1,930,750) (5,625,266)
Interest and dividend income (17,872) (80,163) (64,718) (159,444) (285,446)
Interest expense 307 516 1,119 21,366 44,645
Interest expense to former employees -- -- -- -- 3,105
Other expense (income) (3,827) 41 7,544 120,394 127,740
Loss realized on sale of short-term investment -- 60,121 48,545 60,121 703,306
Write-off of note receivable 402,936 -- 402,936 -- 402,936
--------- ---------- ----------- ---------- -----------
Net loss $(705,746) $ (731,078) $(1,667,646) $(1,973,187) $(6,621,552)
========= ========== =========== ========== ===========
Loss per share (basic and diluted) $ (0.20) $ (0.21) $ (0.47) $ (0.60)
========= ========== =========== ==========
Shares used in computing loss per share 3,553,267 3,542,171 3,545,910 3,299,268
========= ========== =========== ==========
</TABLE>
See accompanying notes.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements of Stockholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Warrants During the
--------------------------
Additional to Acquire Development
Shares Amount Paid-In Capital Common Stock Stage
----------- ---------- ------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at Inception, September 17, 1996 -- $ -- $ -- $ -- $ --
Issuance of common stock for cash and
capital subscriptions receivable 1,050,000 1,050 156,450 -- --
Net loss and comprehensive loss -- -- -- -- (44,338)
---------- ------- ---------- -------- -----------
Balance at December 31, 1996 1,050,000 1,050 156,450 -- (44,338)
Issuance of common stock for cash and
capital subscriptions receivable 1,333,332 1,333 1,398,666 -- --
Issuance of common stock for services
rendered 8,006 8 9,075 -- --
Deferred compensation -- -- 346,325 -- --
Issuance of warrants -- -- -- 108,000 --
Net loss and comprehensive loss -- -- -- -- (1,806,438)
---------- ------- ---------- -------- -----------
Balance at December 31, 1997 2,391,338 2,391 1,910,516 108,000 (1,850,776)
Issuance of common stock and warrants 1,150,000 1,150 5,556,157 115,100 --
Exercise of common stock options 833 1 2,082 -- --
Deferred compensation -- -- (1,785) -- --
Net loss and comprehensive loss -- -- -- -- (3,103,130)
---------- ------- ---------- -------- -----------
Balance at December 31, 1998 3,542,171 3,542 7,466,970 223,100 (4,953,906)
Exercise of common stock options 12,760 13 17,532 -- --
Deferred compensation -- -- (140,078) -- --
Net loss and comprehensive loss -- -- -- -- (1,667,646)
---------- ------- ---------- -------- -----------
Balance at September 30, 1999 3,554,931 $ 3,555 $7,344,424 $223,100 $(6,621,552)
========== ======= ========== ======== ===========
<CAPTION>
Total
Stockholders'
Deferred Equity
Compensation (Deficit)
-------------- --------------
<S> <C> <C>
Balance at Inception, September 17, 1996 $ -- $ --
Issuance of common stock for cash and
capital subscriptions receivable -- 157,500
Net loss and comprehensive loss -- (44,338)
--------- -----------
Balance at December 31, 1996 -- 113,162
Issuance of common stock for cash and
capital subscriptions receivable -- 1,399,999
Issuance of common stock for services
rendered -- 9,083
Deferred compensation (322,812) 23,513
Issuance of warrants -- 108,000
Net loss and comprehensive loss -- (1,806,438)
--------- -----------
Balance at December 31, 1997 (322,812) (152,681)
Issuance of common stock and warrants -- 5,672,407
Exercise of common stock options -- 2,083
Deferred compensation 93,512 91,727
Net loss and comprehensive loss -- (3,103,130)
--------- -----------
Balance at December 31, 1998 (229,300) 2,510,406
Exercise of common stock options -- 17,545
Deferred compensation 198,529 58,451
Net loss and comprehensive loss -- (1,667,646)
--------- -----------
Balance at September 30, 1999 $ (30,771) $ 918,756
========= ===========
</TABLE>
See accompanying notes.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
(Sept. 17,
Nine Month Periods 1996) through
Ended September 30, Sept. 30,
1999 1998 1999
-------------- --------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,667,646) $(1,973,187) $(6,621,552)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 23,449 69,631 138,556
Amortization of deferred compensation 58,451 70,379 173,691
Non-cash compensation and other expenses, net 12,626 111,950 1,322,946
Loss realized on sale of short-term investment 48,545 60,121 703,306
Write-off of note receivable 402,936 ---- 402,936
Changes in operating assets and liabilities:
Accounts receivable, net 116,805 (140,542) --
Prepaid expenses and other 39,863 (90,740) (29,612)
Accounts payable (79,356) (40,101) 57,045
Accrued payroll and related (12,164) (36,794) 23,291
Accrued interest payable -- (12,500) --
Accrued royalty due to former stockholder -- (1,345) --
Other current liabilities (28,417) 15,619 459
------------ ----------- -----------
Net cash used for operating activities (1,084,908) (1,967,509) (3,828,934)
------------ ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment, net 3,659 (122,872) (186,412)
Notes receivable (382,866) -- (382,866)
Purchase of short-term investment -- (4,000,000) (4,000,000)
Proceeds from sale of short-term investment 2,180,702 566,969 3,296,694
Other assets -- 523 (55,804)
------------ ----------- -----------
Net cash provided by (used for) investing activities 1,801,495 (3,555,380) (1,328,388)
------------ ----------- -----------
FINANCING ACTIVITIES
Proceeds from initial public offering, net of deferred offering costs -- 5,932,313 5,672,407
Proceeds from issuance of common stock 17,545 2,083 279,628
Proceeds from issuance of Bridge Notes and warrants -- -- 600,000
Repayment of Bridge Notes payable -- (600,000) (600,000)
Repayment of capital lease obligations (4,514) (3,920) (10,533)
Deferred finance charges -- -- (26,820)
Advance from former stockholder -- -- 45,586
Repayment of advance from former stockholder -- -- (34,874)
Proceeds from stock subscriptions payable 200,000 -- 200,000
Collection of capital subscriptions receivable from stockholders -- -- 97,500
------------ ----------- -----------
Net cash provided by financing activities 213,031 5,330,476 6,222,894
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 929,618 (192,413) 1,065,572
Cash and cash equivalents at beginning of period 135,954 298,823 --
============ =========== ===========
Cash and cash equivalents at end of the period $ 1,065,572 $ 106,410 $ 1,065,572
============ =========== ===========
SUPPLEMENTAL DISCLOSURES
Non-Cash Investing and Financing Activities:
Capital subscriptions receivable from stockholders $ -- $ -- $ 197,500
Equipment acquired under capital lease obligations -- -- 18,276
Sale of equipment for note receivable 16,875 -- 16,875
Other Cash Flow Information:
Interest paid 1,119 23,082 24,880
Income taxes paid 6,410 1,824 10,634
</TABLE>
See accompanying notes.
<PAGE>
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" or "C2i") 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.
C2i is focused on business to business e-commerce and information technology
services and solutions.
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, 1999, 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. As a result of C2i's failure to meet
continued listing requirements, C2i's securities were delisted from the Nasdaq
SmallCap Market, effective with the close of business on November 8, 1999. This
recent delisting is expected to have an adverse effect on the Company's ability
to raise capital. 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 year ended December 31, 1998. Operating results
for the nine month period ended September 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999 or for any other future period.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
Comprehensive Income
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires that all components of comprehensive income, including net
income or loss, be reported in the financial statements in the period in which
they are recognized. SFAS No. 130 requires the change in net unrealized gains
(losses) on available-for-sale securities to be included in comprehensive income
(loss). As adjusted for this item, comprehensive net loss for the three and nine
month periods ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Comprehensive net loss $(705,746) $(1,094,852) $(1,667,646) $(2,436,961)
</TABLE>
2. Note Receivable
In August 1999, in connection with C2i's entering into an agreement to merge
with American Digital Network ("ADN"), C2i agreed to provide ADN with working
capital in the form of a loan prior to the closing of the merger transaction.
Amounts advanced under the loan agreement bear interest at a rate of 10% per
annum and are unsecured. The loan is due and payable immediately prior to the
consummation of the merger but no later than December 31, 1999. The loan
agreement provides that all amounts outstanding under the loan agreement,
including accrued interest shall automatically convert into shares of ADN common
stock.
During the quarter ended September 30, 1999, C2i advanced $402,936 under the
note, including $3,195 of accrued interest. In October 1999, ADN terminated the
agreement to merge. As a result of this termination and the uncertainty
regarding C2i's ability to collect the amount advanced to ADN under its loan
agreement, C2i has fully reserved for this note.
3. Capital Transactions
During the period from July 1, 1999 through September 30, 1999, the Company
granted incentive stock options to purchase an aggregate of 22,000 shares of the
Company's Common Stock, at an exercise price of $3.25 per share to a certain
employees of the Company. These options vest ratably over three years, are
exercisable at various dates, and expire ten years from date of grant, or
earlier in the event of termination of employment.
In July 1999, the Company issued 12,760 shares of its Common Stock to a director
of the Company for total cash consideration of $17,545 as a result of the
exercise of stock options.
4. Subsequent Events
On October 29, 1999, ADN terminated the agreement to merge with C2i. C2i had
previously required the principal shareholders of ADN to pledge their common
stock holdings in ADN (the "Collateral") to C2i to secure certain of ADN's
obligations under the merger agreement. The Collateral represents approximately
78% of the total number of shares of ADN common stock outstanding and is
currently in the custody of C2i. ADN's decision to terminate the merger
agreement results in the automatic transfer to C2i of all right, title and
interest to the Collateral. C2i has asserted its right to this Collateral and
ADN, through its counsel, has advised C2i that it disagrees with C2i's assertion
of these rights. There can be no assurance that C2i will be successful in its
assertion.
On October 19, 1999, the Company issued 285,994 shares of Common Stock to two
directors of the Company in connection with the closing of its private
placement. The Company received total cash consideration of $200,000 during the
third quarter related to this private placement, which has been reflected as
stock subscriptions payable in the accompanying condensed balance sheet as of
September 30, 1999.
<PAGE>
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 26,1999.
Overview
- --------
C2i Solutions, Inc. (the "Company" or "C2i") is focused on business to business
e-commerce and information technology services and solutions. A key part of
C2i's business strategy includes actively pursuing mergers and acquisitions and
establishing additional business relationships.
From Inception through the first quarter of 1999, the Company had focused its
efforts on Y2K business opportunities. At the end of the first quarter of 1999,
the Company reorganized to focus its primary business on providing e-business/
e-commerce solutions that connect companies' new and existing IT applications to
customers and suppliers via the Internet. As a result of its strategic
realignment and restructuring, C2i completed its Y2K contracts, closed its four
regional offices and eliminated approximately 14 positions. C2i currently has no
ongoing client engagements.
On June 30, 1999 the Company signed a letter of intent to merge with privately-
held, Southern California based, American Digital Network (ADN), an Internet
Services firm offering e-commerce, connectivity, network, web site, intranet,
extranet and hosting services. On August 10, 1999, C2i and ADN executed a
definitive merger agreement. In connection with the entering into of the merger
agreement and this intended merger, C2i also agreed to provide ADN with working
capital in the form of a loan, prior to the closing of the transaction.
On October 29, 1999, ADN terminated the agreement to merge with C2i. C2i had
previously required the principal shareholders of ADN to pledge their common
stock holdings in ADN (the "Collateral") to C2i to secure certain of ADN's
obligations under the merger agreement. The Collateral represents approximately
78% of the total number of shares of ADN common stock outstanding and is
currently in the custody of C2i. ADN's decision to terminate the merger
agreement results in the automatic transfer to C2i of all right, title and
interest to the Collateral. C2i has asserted its right to this Collateral and
ADN, through its counsel, has advised C2i that it disagrees with C2i's assertion
of these rights. There can be no assurance that C2i will be successful in its
assertion, that C2i will prevail in any resulting dispute or that the costs of
enforcing C2i's rights will not have a material adverse effect on C2i.
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,
- ------------------------------------------------------------------------------
1999 and 1998
- -------------
Total revenues for the three months ended September 30, 1999, were $57,480 a
decrease of 58% over the comparable quarter of the prior year, in which revenues
totaled $137,730. This decrease in revenues resulted from the restructuring
strategy and completion of existing Y2K contracts combined with an absence of
new contracts. Revenues recognized during this period represent final amounts
due under Y2K contracts, which were not previously recognized due to
uncertainties. C2i does not currently have any ongoing client relationships and
will not have any revenues to report, at least, until such relationships are
developed. For the three months ended September 30, 1999, service revenues
accounted for 100% of total revenues. For the three months ended September 30,
1998, service revenues accounted for 67% of total revenues, with product sales
representing the remaining 33%.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Total revenues for the nine months ended September 30, 1999, were $458,073, an
increase of 49% over the comparable period of the prior year, in which revenues
totaled $308,189. The increase in revenues was the result of performance of Y2K
contracts, all of which have now been completed. For the nine months ended
September 30, 1999, service revenues accounted for 100% of total revenues,
compared with the comparable prior year period in which service revenues
accounted for 81% of total revenues, with product sales representing 19%.
One customer accounted for 93% of the Company's total revenues for the nine
months ended September 30, 1999. Two customers accounted for 97% of the
Company's total revenues (58% and 39%) for the nine months ended September 30,
1998.
No cost of revenues were incurred for the three months ended September 30,
1999, since these revenues relate to the final amounts due under Y2K contracts,
which had not been previously recognized due to uncertainties. Cost of revenues
were 56% ($255,074) of total revenues for the nine months ended September 30,
1999. These costs consisted primarily of personnel related costs of providing
consulting services. Cost of revenues were 53% ($73,588) of total revenues and
50% ($155,387) of total revenues for the comparable three and nine month periods
in 1998, which also represented primarily personnel related costs of providing
consulting services.
The Company incurred selling, general and administrative expenses for the three
month period ended September 30, 1999, totaling $381,682 compared with $814,705
for the comparable prior year period. This decrease in selling, general and
administrative expenses is a result of recent restructuring efforts,
specifically the closure of four regional offices and the elimination of
approximately 14 positions. During the nine months ended September 30, 1999, the
Company incurred selling, general and administrative expenses totaling
$1,475,219, a decrease of 29% over the comparable prior year period total of
$2,083,552. This decrease was also primarily the result of these restructuring
efforts.
Interest and dividend income was $17,872 and $64,718 for the three and nine
months ended September 30, 1999, respectively, compared with $80,163 and
$159,444 for the three and nine months ended September 30, 1998, respectively.
This decrease for the periods in 1999 reflects a substantial decrease in
interest-earning balances in 1999 compared to the 1998 balances. Interest
expense totaled $307 and $1,119 for the three and nine months ended September
30, 1999, respectively, which consisted of interest on capital lease
obligations, compared with total interest expense of $516 and $21,366 for the
three and nine months ended September 30, 1998, respectively.
The Company originally invested a portion of the net proceeds from its initial
public offering, in a mutual fund (the "Short-Term Investment"). During the
first quarter of 1999, the Company sold the entire balance of the Short-Term
Investment it held on December 31, 1998, and realized additional losses totaling
$48,545. The Company received net proceeds aggregating $2,180,702. The Company
has invested the proceeds from the sale of this Short-Term Investment in
fully-insured, money market accounts and short-term U.S. government treasury
bills.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
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, 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 net proceeds of $5,672,407, including
proceeds from the exercise of the underwriter's overallotment option received in
March 1998. During the third quarter of 1999, the Company raised an additional
$200,000 through a private placement of its common stock. Additionally, the
Company received $17,545 from the exercise of stock options. Funds from these
sources have been and are expected to continue to be used as working capital to
fund the Company's operations, including purchases of capital equipment.
The Company's operating activities used net cash of $1,084,908 and $1,967,509
during the nine month periods ended September 30, 1999 and 1998, respectively.
This decrease in cash used for operating activities in 1999 compared to 1998
results primarily from a smaller net loss for the 1999 period, which can be
attributed to recent restructuring efforts.
The Company's investing activities provided cash of $1,801,495 during the nine
months ended September 30, 1999 and used cash of $3,555,380 during the nine
month period ending September 30, 1998, respectively. The increase in cash
provided by investing activities in 1999 compared to cash used in 1998 relates
to the proceeds from the sale of the short-term investment totaling $2,180,702,
and net proceeds from the sale of property and equipment of $3,659 which were
partially offset by cash advances under the note receivable totaling $382,866
during 1999, compared with $4,000,000 of cash used to purchase a short-term
investment, $122,872 used to purchase property and equipment and proceeds from
the sale of the short-term investment totaling $566,969 during 1998.
The Company's financing activities provided net cash of $213,031 and $5,330,476
during the nine months ended September 30, 1999 and 1998, respectively. The cash
provided by financing activities in 1999 represents $200,000 received for stock
subscriptions, $17,545 received from the exercise of stock options and cash used
to repay capital lease obligations of $4,514, compared to 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) which 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, 1999, the Company had cash and cash equivalents of
$1,065,572 and working capital of $844,826 compared with cash and the short-term
investment of $2,365,201 and working capital of $2,344,639 at December 31, 1998.
Based on management's current operating plan, the Company believes that its
existing resources will be sufficient to fund operations through March 2000.
However, the Company expects to continue to experience operating losses through
at least March 2000, and longer if no client relationships are developed before
then. C2i will be required to seek additional capital to continue its operations
beyond that time. There can be no assurances that C2i will be successful in
obtaining additional capital and C2i has no commitments or agreements to obtain
such capital. If C2i is unable to obtain the necessary capital, it will be
required to significantly curtail its activities or cease operations.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
The Company's ability to achieve sustained profitability will be dependent upon
a number of factors, including its ability to generate future revenues. If the
Company cannot generate sufficient revenues from future contracts, which it may
be unable to do, the Company will be required to raise capital from the sale of
equity securities or the issuance of indebtedness. Such sales or issuances may
not be effected at favorable terms, if at all. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders is
likely to result.
C2i has been required to meet certain financial tests (including net tangible
assets of $2 million and a minimum bid price of the common stock of $1.00) to
maintain its listing on the Nasdaq SmallCap Market. Due to its continuing
losses, and inability to raise sufficient additional equity, C2i failed to meet
the net tangible asset continued listing requirements. As a result, C2i's
securities were delisted from the Nasdaq SmallCap Market, effective with the
close of business on November 8, 1999. C2i's securities are eligible for trading
on the OTC Bulletin Board and may become subject to the regulations applicable
to penny stocks. Investors may find it more difficult to obtain timely and
accurate quotes and execute trades in the Company's securities and the liquidity
of C2i's securities may be impaired and its trading price may be reduced. Before
C2i's securities can be listed on the Nasdaq SmallCap Market, it will need to
satisfy the more stingent initial listing requirements (which require, among
other things, net tangible assets of $4 million and a minimum bid price of $4.00
per share). C2i may not be able to meet these requirements.
Business Risks and Uncertainties
- --------------------------------
C2i has a Limited Operating History; Limited Experience in Information
Technology Solutions and Lack of Current Contracts
C2i was founded in September 1996, has a limited operating history and is in the
development stage. C2i has limited experience in providing information
technology solutions. Although C2i has completed a limited number of projects,
C2i has not completed a large scale IT project. There can be no assurance that
C2i will be successful in completing large scale IT projects. As a result, C2i's
operations to-date have not produced significant revenues. C2i may not generate
any future revenues from the sale of its services or products. Since C2i does
not currently have any ongoing client relationships, it will not generate any
revenues at least until such relationships are developed.
History of Operating Losses; Need for Additional Financing; Delisting from
Nasdaq
C2i has experienced significant operating losses since its inception in
September 1996. As of September 30, 1999, C2i's accumulated deficit was
approximately $6,622,000. Losses have been principally the result of the various
costs associated with C2i's selling, general and administrative expenses as C2i
commenced operations, and began marketing activities and losses on investments.
C2i expects that it will incur operating losses through at least March 2000, and
longer if no client relationships are developed before then. C2i believes that
its existing capital resources will enable it to fund its operations until
approximately March 31, 2000. C2i will be required to seek additional capital to
continue its operations beyond that time. C2i has no commitments for any future
funding, and C2i may not be able to obtain additional capital in the future. If
C2i is unable to obtain the necessary capital, it will be required to
significantly curtail its activities or cease operations.
C2i has been required to meet certain financial tests (including net tangible
assets of $2 million and a minimum bid price of the common stock of $1.00) to
maintain its listing on the Nasdaq SmallCap Market. Due to its continuing
losses, and inability to raise sufficient additional equity, C2i failed to meet
the net tangible asset continued listing requirements. As a result, C2i's
securities were delisted from the Nasdaq SmallCap Market, effective with the
close of business on November 8, 1999. C2i's securities are eligible for trading
on the OTC Bulletin Board and may become subject to the regulations applicable
to penny stocks. Investors may find it more difficult to obtain timely and
accurate quotes and execute trades in the Company's securities and the liquidity
of C2i's securities may be impaired and its trading price may be reduced. Before
C2i's securities can be listed on the Nasdaq SmallCap Market, it will need to
satisfy the more stingent initial listing requirements (which require, among
other things, net tangible assets of $4 million and a minimum bid price of $4.00
per share). C2i may not be able to meet these requirements.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Risk of Shares Being Characterized as Penny Stocks; Impaired Liquidity of the
Shares
The SEC has adopted regulations which define a "penny stock" to be any equity
security that has a market price (as therein defined) less than $5.00 per share
or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about current quotations for the
securities and about commissions payable to both the broker-dealer and the
registered representative. Finally, broker-dealers must send monthly statements
to purchasers of penny stocks disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to shares if:
* They are listed on the Nasdaq SmallCap Market;
* Certain price and volume information is publicly available on a current
and continuing basis; and,
* The issuer meets certain minimum net tangible assets or average revenue
criteria.
There can be no assurance that C2i's securities will qualify for exemption from
the penny stock restrictions. If C2i's shares were subject to the rules on penny
stocks, the market liquidity for these shares would be adversely affected.
Need to Develop New Products and Services Unrelated to Year 2000 Solutions
Risks; Associated with Potential Unspecified Acquisitions
To date, C2i has generated substantially all of its revenues from its Year 2000
solutions. C2i plans to actively pursue business opportunities unrelated to the
Year 2000 problem in the information technology consulting services market
through mergers and acquisitions, although no specific acquisitions are
currently in negotiation or planned. Any such future acquisitions would be
accompanied by the risks commonly encountered in acquisitions of companies.
Such risks include, among other things:
. The assumption of unforeseen liabilities;
. The difficulty of assimilating the operations and personnel of the
acquired companies;
. The potential disruption of C2i's business;
. The inability of C2i's management to maximize the financial and
strategic position of C2i by the incorporation of acquired technology or
business into C2i's service offerings;
. The difficulty of maintaining uniform standards, controls, procedures
and policies;
. The potential loss of key employees of the acquiring or acquired
companies; and
. The impairment of relationships with employees consultants, customers,
and suppliers as a result of changes in management.
No assurance can be given that C2i will undertake acquisition activities, will
complete any acquisitions, or that if an acquisition does occur it will not
materially and adversely affect C2i or will be successful in enhancing C2i's
business. If C2i proceeds with one or more significant acquisitions, a
substantial portion of C2i's available cash could be used to consummate those
transactions. Alternatively, C2i might issue equity securities as consideration
for an acquisition, which might result in significant dilution of the
stockholders' ownership interest in C2i, or C2i could issue debt securities to
finance an acquisition, which might reduce the book value and earnings per share
of C2i common stock. The accounting for business acquisitions by C2i is likely
to involve the recognition of significant goodwill and intangible assets in
connection with the acquisition and, as a result, would typically result in
substantial charges against C2i's reported future operating results.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Customer and Supplier Concentration; No Follow-On Business
A large portion of C2i's revenues have been dependent on a few customer
projects. C2i derived approximately 93% of its revenues for the nine months
ended September 30, 1999, from one customer and 92% of its revenues for the year
ended December 31, 1998 from two customers. As of December 31, 1998, 100% of the
accounts receivable balance related to two customers. In addition, C2i has
experienced a supplier concentration, with 93% of its total cost of revenues for
the nine months ended September 30, 1999, resulting from purchases from one
supplier, and 32% of its total cost of revenues for the year ended December 31,
1998, resulting from purchases from two suppliers. As a result of C2i's decision
not to pursue additional Y2K projects, C2i currently has no ongoing projects or
expectations of future projects from its previous customers, including
significant customers. The loss of these significant customers and the absence
of any current revenue generating client relationships is expected to have a
material adverse effect on C2i's business, financial condition and results of
operations.
Intense Industry Competition in the Information Technology Services Industry;
Competitive Disadvantages
The market for information technology service providers is highly competitive.
C2i's lack of resources and limited experience compared to other providers makes
it extremely vulnerable to competition from larger companies, all of which
benefit from greater recognition, larger lists of reference clients and
significantly greater financial, technical and marketing resources. Leading
competitors have proven products which can provide them with a significant
advantage over C2i because C2i's services have not been widely deployed and
therefore present potential customers with uncertainty not associated with
existing solutions from larger companies. In addition, many of C2i's potential
clients for future product and service offerings are likely to be reluctant to
choose small companies as key suppliers or service providers due to concerns
about long term viability and, especially in the case of high profile projects,
the consequences to the organization of a failure of a proposed solution. There
can be no assurance that C2i will overcome these disadvantages.
Dependence on Key Personnel; Management of Restructuring of Information
Technology Operations
C2i's success will, to a large extent, depend upon the continued services of its
executive officers who have limited experience at managing a business like C2i's
or in evaluating potential strategic alternatives. The loss of services of any
of these four executive officers may materially and adversely affect C2i. C2i's
employment agreements with its key personnel may be terminated by either party,
with or without cause, with the exception of its agreement with Mr. Whalen. Mr.
Whalen's employment agreement has a term of five years, expiring in May 2002,
and limits C2i's ability to terminate him, except for cause, and provides for
six months severance pay, unless Mr. Whalen voluntarily resigns his position.
Mr. Wooten's and Ms. Hessler's employment agreements are terminable at will, but
if either individual's employment with C2i is terminated prior to March 2004 for
any reason, other than cause, that individual will receive two years severance
pay unless that individual voluntarily resigns his or her position. If Mr.
Wooten or Ms. Hessler are terminated prior to March 2004 for cause, they will
receive six months severance. Mr. Hartman's employment agreement is terminable
at will, but if his employment with C2i is terminated prior to March 2004 for
any reason other than cause, Mr. Hartman will receive six months severance pay
unless he voluntarily resigns his position. C2i has key man life insurance in
the amount of $1,000,000 on Mr. Whalen.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Concentration of Share Ownership and Voting Power Among Directors and Officers
The directors and officers of C2i control approximately 50.5% of the voting
power and therefore have the votes required to elect all of C2i's directors and,
hence, will be able to control the affairs of C2i. In addition, the directors
and officers of C2i will have a substantial portion of all the votes required to
amend C2i's Certificate of Incorporation and By-laws and effect or preclude
fundamental corporate transactions involving C2i, including the acceptance or
rejection of any proposals relating to a merger of C2i or an acquisition of C2i
by another entity, in each case without the approval of any of C2i's other
stockholders.
Year 2000 Compliance
- --------------------
Many currently installed computer systems and software products are not capable
of distinguishing 20/th/ century dates from 21/st/ century dates. As a result,
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.
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", and therefore are capable of
adequately distinguishing 21/st/ century dates from 20/th/ century dates.
However, there can be no assurance that the Company has properly identified and
remediated all significant Year 2000 problems in its own computer systems, 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. 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.
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
PART II: OTHER INFORMATION
Items 1, 3, 4 and 5 are not applicable and have been omitted.
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 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 $132,868 to purchase
machinery, equipment and other capital additions, $12,146 to repay capital
leases and accrued interest, $2,057,301 to pay employees' and officers' salaries
and related payroll taxes, $409,594 for occupancy costs, $253,513 for
advertising and promotion, $155,100 for recruiting, $534,832 for other general
corporate purposes, and realized investment losses totaling $453,028 net of
related interest and dividend income. The remaining proceeds from the initial
public offering have been invested in fully insured, money market accounts and
short-term U.S. government treasury bills pending their use.
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, 1999.
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
27.1 Financial Data Schedule
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
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 12, 1999 By: /s/ John Anthony Whalen, Jr.
---------------------------------------
John Anthony Whalen, Jr., President
and Chief Executive Officer
Dated: November 12, 1999 By: /s/ Diane E. Hessler
---------------------------------------
Diane E. Hessler
Chief Financial Officer (Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,065,572
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 407,536
<INVENTORY> 0
<CURRENT-ASSETS> 1,133,626
<PP&E> 123,893
<DEPRECIATION> 64,857
<TOTAL-ASSETS> 1,208,507
<CURRENT-LIABILITIES> 288,800
<BONDS> 951
0
0
<COMMON> 3,555
<OTHER-SE> 915,201
<TOTAL-LIABILITY-AND-EQUITY> 1,208,507
<SALES> 0
<TOTAL-REVENUES> 458,073
<CGS> 0
<TOTAL-COSTS> 255,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,119
<INCOME-PRETAX> (1,667,646)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,667,646)
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