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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934:
For the Quarterly Period ended September 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to __________________
Commission File number 1-14798
b2bstores.com Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-3500746
------------------------------- ----------------------
(State or other jurisdiction of I.R.S. Employer ID No.
incorporation or organization)
249 East Ocean Boulevard
Suite 620
Long Beach, California 90802
----------------------------
(Address of principal executive offices)
(562) 491-7180
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
-------- -------
As of November 13, 2000, 8,621,643 shares of the Issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
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PART I FINANCIAL INFORMATION
Item 1. Financial Information
<TABLE>
<CAPTION>
Condensed Financial Statements: Page
<S> <C>
Balance Sheet as of September 30, 2000 (unaudited) 3
Unaudited Statements of Loss for the three and nine months ended
September 30, 2000, the period from June 28, 1999 (inception) through
September 30, 1999 and the period from inception (June 28, 1999)
through September 30, 2000 4
Statements of Stockholders' Equity (Deficit) audited for the period
from inception (June 28, 1999) through December 31, 1999 and unaudited
from the period January 1, 2000 through September 30, 2000 (unaudited) 5
Unaudited Statements of Cash Flows for the period from inception (June
28, 1999) through September 30, 2000, the nine months ending September
30, 2000, and the period from inception (June 28, 1999) through
September 30, 1999 6
Notes to unaudited condensed financial statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11-15
PART II OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults upon senior securities 16
Item 4: Submissions of matters to a vote of security holders 16
Item 5: Other information 16
Item 6: Exhibits and reports on form 8-K 16
Signatures 17
</TABLE>
2
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b2bstores.com Inc.
Balance Sheet
(condensed and unaudited)
<TABLE>
<CAPTION>
September 30, 2000
------------------
<S> <C>
ASSETS
Current:
Cash and cash equivalents $ 16,539,682
Marketable Securities 8,718,896
Prepaid Expenses and other current assets 94,143
-------------
Total Current Assets 25,352,721
Deposits 45,596
Property and equipment, net 211,610
-------------
$ 25,609,927
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 373,630
Accrued Expenses and Other Current Liabilities 17,867
Deferred revenue 57
-------------
Total Current Liabilities 391,554
Stockholders' equity
Preferred stock, $.01 par value - shares authorized 5,000,000; none
Common stock, $.01 par value - shares authorized 25,000,000; issued
8,621,643 and 4,021,643 86,216
Additional Paid-in Capital 35,744,462
Deficit accumulated during the development stage (10,612,305)
-------------
Total stockholders' equity 25,218,373
-------------
$ 25,609,927
=============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
3
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Statements of Loss
(condensed and unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 2000 September 30, 2000
and period from and period from
Cumulative, period from Inception (June 28, 1999) inception (June 28, 1999)
June 28, 1999 (Inception) through September 30, 1999 through September 30, 1999
to September 30, 2000 2000 1999 2000 1999
------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $ 122,479 $ 48,272 $ 1,658 $ 120,288 $ 1,658
Cost of Sales 1,180,973 610,541 17,591 1,120,465 17,591
------------ ------------ ------------ ------------ ------------
Gross Loss (1,058,494) (562,269) (15,932) (1,000,177) (15,932)
Operating Expenses
General and administrative 2,505,738 849,649 99,225 2,179,983 99,225
Sales and marketing 1,714,712 402,728 60,606 1,515,742 60,606
Technology 781,250 321,222 31,342 678,354 31,342
Fulfillment Management 383,500 63,524 14,693 335,264 14,693
Start-up Costs 55,036 0 55,036 55,036
Loss on Sale of Computer Assets 50,580 50,580 50,580
Impairment of Assets 1,902,508 1,902,508 1,902,508
Stock-based compensation relating to
general and administrative activities 216,430 0 216,430 216,430
Stock-based compensation relating to start-up
activities $ 2,906,978 270,092 $ 1,901,500 1,005,478 $ 1,901,500
------------ ------------ ------------ ------------ ------------
Total operating expenses 10,516,731 3,860,302 2,378,832 7,667,908 2,378,832
------------ ------------ ------------ ------------ ------------
Loss from operations (11,575,225) (4,422,571) (2,394,764) (8,668,085) (2,394,764)
Interest Income (expense) $ 962,920 422,206 $ 0 986,017 $ 0
------------ ------------ ------------ ------------ ------------
Net loss $(10,612,305) $ (4,000,365) $ (2,394,764) $ (7,682,068) $ (2,394,764)
============ ============ ============ ============ ============
Loss per share (basic and diluted) $ (0.46) $ (0.62) $ (0.99) $ (0.62)
============ ============ ============ ============ ============
Weighted average common shares outstanding 8,621,643 3,878,311 7,772,008 3,878,311
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
4
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b2bstores.com Inc.
Statement of Stockholders' Equity (Deficit)
Period from June 28, 1999 (inception) to September 30, 2000
<TABLE>
<CAPTION>
Period from June 28, 1999 (inception) to December 31, 1999 (audited) Deficit
Accumulated
Common Stock Additional during the Total
------------ paid-in Development stockholders'
Shares Amount capital Stage equity (deficit
------ ------ ------- ----- ---------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to
Founding and other stockholders: June 29, 1999 3,666,667 $36,667 $ - $ - $ 36,667
Issuance of common stock to investors: August 23, 1999 333,333 3,333 2,497,500 - 2,500,833
Issuance of common stock to directors
and consultants: September 15, 1999 21,643 216 216,214 - 216,430
Net loss for the period - - - (2,930,237) (2,930,237)
----------------------------------------------------------------
Balance December 31, 1999 4,021,643 $40,216 $ 2,713,714 $ (2,930,237) $ (176,307)
Period from January 1 to September 30, 2000 (unaudited)
Issuance of common stock in connection with initial
public offering, net February 15, 2000 4,000,000 40,000 27,775,090 - 27,815,090
Issuance of common stock in connection with over allotment,
net, March 29, 2000 600,000 6,000 4,250,180 - 4,256,180
Stock based compensation from vesting of options to officers - - 1,005,478 - 1,005,478
Net loss for the period - - - (7,682,068) (7,682,068)
----------------------------------------------------------------
Balance September 30, 2000 (unaudited) 8,621,643 $86,216 $35,744,462 $(10,612,305) $ 25,218,373
================================================================
</TABLE>
See accompanying notes to unaudited condensed financial statements.
5
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STATEMENT OF CASH FLOWS
(Condensed and Unaudited)
<TABLE>
<CAPTION>
Cumulative, period
from June 28,1999 Nine months Period from June 28, 1999
(inception) to ended (inception) through
September 30, 2000 September 30, 2000 September 30, 1999
<S> <C> <C> <C>
--------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (10,612,305) $ (7,682,068) (2,394,764)
-------------------------------------------------------------------
Adjustments to reconcile net Loss to net cash used in
Expense recognized in connection with issuance of
common stock 3,123,408 1,005,478 -
Depreciation and amortization 551,266 522,733 -
Loss on Sale of Computer Assets 50,580 50,580
Impairment of Assets 1,902,508 1,902,508
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (94,143) (55,228) (6,882)
Increase in deposits (45,596) (24,800) (45,596)
Increase in deferred revenue 57 (930) -
Increase in accrued expenses 17,868 (76,068) 3,928
Increase in accounts payable 373,630 301,501 43,549
-------------------------------------------------------------------
Total adjustments 5,879,577 3,625,773 (5,001)
-------------------------------------------------------------------
Net cash, used in operating activities (4,732,728) (4,056,295) (2,399,765)
-------------------------------------------------------------------
Cash flows from investing activities:
Marketable Securities (8,718,896) (8,718,896) -
Capital expenditures (2,737,395) (2,345,988) (97,458)
Proceeds from Sale of Computer Assets 21,432 21,432
-------------------------------------------------------------------
Net cash used in investing activities (11,434,859) (11,043,452) (97,458)
Cash flows from financing activities:
Deferred Offering Costs (104,809)
Loans from principal stockholder 1,399,836 575,000 179,836
Repayment of loans from principal stockholder (1,399,836) (1,399,836) -
Proceeds from issuance of common stock 33,027,637 32,391,637 2,753,930
-------------------------------------------------------------------
Net cash provided by financing activities 32,707,270 31,566,801 2,828,957
-------------------------------------------------------------------
Net Increase in Cash 16,539,682 16,467,053 331,734
Cash and cash equivalents, beginning of period - 72,629 -
Cash and cash equivalents, end of period $ 16,539,682 $ 16,539,682 $ 331,734
===================================================================
Non-cash items:
Deferred offering costs $ - $ 320,367 -
Supplemental cash flow information:
Interest paid on loans from principal stockholder $ 22,838 $ 22,838 -
</TABLE>
See accompanying notes to unaudited condensed financial statements
6
<PAGE>
b2bstores.com Inc.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Business
b2bstores.com Inc. ("b2bstores" or the "Company"), a development stage
enterprise, was incorporated on June 28, 1999 under the laws of the State of
Delaware. The Company was developed as a comprehensive business-to-business
Internet destination for organizations of all sizes, to deliver quality
business-related products and services combined with information resources
through an, integrated, user-friendly web site. The Company developed its web
site to move business-to-business transactions and other business operations
away from traditional modes to the Internet. The web site was designed as a
community mall, a place where business customers could visit a "virtual
storefront" or product category of their choice, seek out services from
professionals, research issues important to their business and meet and
communicate with customers, suppliers, colleagues and competitors.
In June 2000, as a result of several months of turmoil in the financial
markets surrounding the Dot Com industry, the Company hired the investment
banking firm of Houlihan Lokey Howard & Zukin to help it review and identify its
strategic business alternatives. In July, the company's CEO, Mr. Woojin Kim,
resigned, and in August the company announced a reorganization of its existing
business. The effect of the reorganization was the resignation or lay-off of 50
people, termination of operational contracts and the sale of most of the
company's operating assets. The Company eliminated its Sales & Marketing and
Development departments completely, and retained only a skeleton staff in
operations and administration. While the web site is still up and functional the
company is not pursuing any expansion of this business at this time. The
company, since the reorganization, is operating in a positive cash flow position
while the Investment Bankers continue to review the opportunities available to
the Company.
In the event that the Company executes a definitive agreement to merge or
sell the Company, the Board has authorized the issuance of options to purchase
50,000 shares to each of Jay Raubvogel and David Walke, both directors of the
Company, at an exercise price of the closing price of the Company's stock on the
date of execution and a lump sum payment of $100,000 to Randall K. Davis,
another of the Company's directors. In addition, upon the effective date of a
merger, the Board has agreed to authorize the settlement of the employment
agreement of Richard Kandel, Chairman of the Board of the Company, for a lump
sum payment of $400,000 or a lump sum payment of the remaining amount of total
compensation left on the employment agreement at the effective date of the
merger, whichever is less, in exchange for Mr. Kandel's execution of a general
release of the Company's obligations under the employment agreement.
Basis of Presentation
The financial statements included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company's management believe that the disclosures are
adequate to make the information presented not misleading.
These statements reflect all adjustments, which, in the opinion of
management, are necessary for fair presentation of the information contained
herein. These financial statements should be read in conjunction with the
audited financial statements and notes thereto for the period from June 28, 1999
(Inception) to December 31, 1999 included in the Company's Registration
Statement on Form SB-2MEF (No. 333-30376), which was declared effective by the
Securities and Exchange Commission on February 14, 2000. The Company follows the
same accounting policies in the preparation of its interim reports .
Results of operations for the interim periods may not be indicative of
annual results.
Reclassifications
7
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Certain prior period amounts have been reclassified to conform to the
current period's presentation.
Cash and Cash Equivalents
The Company invests certain of its excess cash in debt instruments of the
US Government, municipalities and their agencies, money market accounts, and of
high quality corporate issuers and 99% of the balances are held at one broker.
All highly liquid instruments with an original maturity of three months or less
are considered cash equivalents.
Marketable Securities
The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents; those with an original
maturity greater than 90 days are considered marketable securities. At September
30, 2000, short-term investments consist of investments in high-quality
corporate issuers and have been classified as held to maturity. Unrealized gains
and losses for the period ending September 30, 2000 were not significant. All
short-term investments and 99% of cash equivalents are held at one broker.
Accordingly, the Company is subject to credit risk if the broker is unable to
repay the balance in the account or deliver the Company's securities. The
Company manages this credit risk by only investing in high-quality money market
instruments, municipal securities, and corporate issuers. These funds, all held
at one broker, are insured by Travelers Insurance Group.
Revenue Recognition
To date, the Company has generated nominal revenues from product sales.
The Company has recognized its revenues according to:
. The structure of the contract negotiated with the individual vendor,
and
. The substantive nature of the risks of ownership we incur in
connection with the sale and shipment of the product.
For product sales involving substantive risk of ownership, the Company will
generally recognize revenue at the gross transaction value.
Currently, policy-setting groups of the Emerging Issues Task Force and the
Financial Accounting Standards Board are reviewing the guidelines under which
revenue is recognized on a gross basis versus a net basis. As the Company
currently recognizes certain of its revenue on a gross basis, there is a risk
that future guidelines may require the Company to change, retroactively, its
revenue recognition policy. This could cause the Company to report markedly
lower revenues than currently anticipated. Although such a change would cause
the Company to report markedly lower revenues and costs of products, it would
not change the Company's reporting with respect to other expenses, net revenue
or earnings before and after tax.
The Company will allow customers to return merchandise in certain
circumstances; accordingly, the Company will not recognize revenue from the sale
of those products covered by the return policy until the return policy period
has expired or the customer's right of return has expired. The Company will
recognize the sales amount as deferred revenue upon verification of
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the credit card transaction authorization and shipment of the merchandise, until
such time that the Company is able to estimate returns.
The company does not anticipate recording any material sales, of product
from it web site in the future, as a result of its reorganization.
Property and Equipment
Property and equipment, net consists of the following:
September 30, 2000
------------------
Capitalized software development costs $628,066
Computer equipment 108,930
Furniture and equipment 8764
Leasehold improvements 3400
--------
749,160
Less: Accumulated depreciation and amortization 537,550
--------
Property and equipment $211,610
--------
Depreciation expense for the three and nine months ended September 30, 2000 was
$203,842 and $522,733 respectively.
As part of the Company's announced reorganization, many of the company's assets,
which were no longer necessary to operations, were sold. The sales of these
assets are reflected in a loss of $50,579, as shown in loss on sale of assets
for the quarter. An asset impairment charge of approximately $1.9 million was
recorded to write-down, to net realizable value, the remainder of the Company's
fixed assets as a result of the reorganization and the Company's determination
that the book value of those assets would not be recoverable under any currently
identifiable business direction.
Capitalized Software Development Costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs.
The Company had capitalized certain of these software development costs in
the amount of approximately $ 2.0 million in connection with its online
services. The majority of these costs were in connection with purchasing the
perpetual, non-revocable license to the software technology used for the e-
commerce platform from Netgateway upon which the Company has built its e-
commerce portal. As part of this transaction, the Company no longer has any
future obligations to Netgateway. The costs associated with research and
development of such technology was expensed as incurred. Software development
costs incurred subsequent to establishing technological feasibility have been
capitalized. Technological feasibility is established upon the completion of a
detailed program design (in the absence of any high risk issues or
uncertainties). Capitalized software costs are being amortized over a period of
two years. Maintenance costs incurred in connection with the software are being
expensed as incurred.
During the quarter ended September 30, 2000 the Company announced a
strategic reorganization to bring its operations inline with probable new
business opportunities; this reorganization included the elimination of its
software development department. Subsequent to
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the quarter end the company negotiated an exclusive license for use of this
software. As a result of these events, the Company has determined that the book
value of these assets would not be recoverable under any currently identifiable
business direction and has therefore taken an asset impairment charge, writing
the assets down to what it feels can reasonably be recaptured over the assets 2
year remaining life.
Stockholders' Equity
On February 15, 2000, the Company completed its initial public offering
("IPO") of 4,000,000 shares of its common stock at $8.00 per share. Net proceeds
to the Company aggregated approximately $27.8 million (net of underwriters'
commission and offering expenses of $4.2 million). Additionally, on March 29,
2000, the over-allotment option on the common stock offering was exercised in
full, resulting in an additional issuance of 600,000 shares of common stock with
net proceeds of approximately $4.3 million to the Company (net of underwriters'
commission and offering expenses of $500,000).
The Company used approximately $1.4 million of the net proceeds of the IPO
to repay in full the principal and interest due on a loan made by Enviro-Clean
of America Inc., a principal stockholder of the Company.
The Company issued warrants to purchase up to 400,000 shares of common
stock to the underwriter representatives in connection with the IPO.
The Company granted 1,000,000 options to officers of the Company in
connection with their initial employment by the Company.
During the third quarter there were 76,382 performance options granted to
employees relating to the second quarter bonuses.
1999 Performance Equity Plan
The Company has a Performance Equity Plan that authorizes the granting of
up to 2,000,000 shares of common stock to key employees, officers, directors and
consultants. Awards consist of stock options (both nonqualified options and
options intended to qualify as "Incentive" stock options under Section 422 of
the Internal Revenue Code of 1986, as amended), registered stock awards,
deferred stock awards, stock appreciation rights and other stock-based awards,
as described in the plan. As of September 30, 2000, 1,285,882 options were
granted under the plan to employees and directors.
Loss Per Share
Basic loss per share is based only on the weighted average number of common
shares outstanding for the period. Diluted loss per share is similar to basic
loss per share except that the weighted average number of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if dilutive potential common shares, such as options
and warrants, had been issued. Dilutive potential common shares are excluded
from the computation if their effect is antidilutive.
Basic and diluted losses per share are the same because the options are
antidilutive in accordance with SFAS 128.
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Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Under the intrinsic
value based method, compensation cost is the excess, if any, of the fair market
value of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock.
During the nine months ended September 30, 2000, the Company charged
to operations approximately $885,478 relating to officers' options granted in
connection with the IPO, and vested through the first three quarters of the
year, and approximately $120,000 relating to officers' options granted in
connection with the IPO and vesting over the next 12 months for officers who
left the company's employment during the September quarter, but have 12 months
to exercise their options.
Income Taxes
The company has not generated any taxable income to date and therefore
has not paid any federal or state income taxes since inception. The Company has
provided a full valuation allowance on the deferred tax asset created from these
taxable losses due to the uncertainty of future income streams and limitation
provisions created by the completion of the IPO.
Item 2. Management's Discussions and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This report includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate to
our future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms
and phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained
under Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. These factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing levels;
changes in political, social and economic conditions and local regulations;
changes in technology and the development of new technology; foreign currency
fluctuations; reductions in sales to any significant customers; changes in sales
mix; industry capacity; competition; disruptions of established supply channels;
manufacturing capacity constraints; and the availability, terms and deployment
of capital. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected.
In June 2000, as a result of several months of turmoil in the financial markets
surrounding the Dot Com industry, the Company hired the investment banking firm
of Houlihan Lokey Howard &
11
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Zukin to help it review and identify its strategic business alternatives. In
July the Company's CEO, Mr. Woojin Kim resigned, and in August the Company
announced a reorganization of its existing business. The original strategy of
creating a Business-2-Business branded site through the use of advertising
mediums to create market awareness of the b2bstores.com name was determined to
not be feasible in light of the changed market conditions. The effect of the
reorganization was the resignation or lay-off of approximately 50 people,
termination of operational contracts and the sale of most of the Company's
operating assets. The Company eliminated its Sales & Marketing and Development
departments completely, and retained only a skeleton staff in operations and
administration. While the web site is still up and functional the Company is not
pursuing any expansion of this business at this time. The Company, since the
reorganization, is operating in a positive cash flow position while the
Investment bankers continue to review the opportunities available to the
Company.
We do not undertake to update our forward-looking statements to reflect
future events or circumstances.
Overview
b2bstores.com Inc. is a development stage company which was formed in June
1999 and assembled a core set of operating assets during the remainder of 1999.
These assets include a management team, a technology infrastructure, financing
and our basic web site, www.b2bstores.com, which first became available in
September 1999. In February 2000, we completed our Initial Public Offering
("IPO").
Since the introduction of our site, our web site has provided our customers
with the ability to purchase online business products and supplies in a growing
number of categories. Through our reorganization we have retained the ability to
business on our site, however as a significant part of our reorganization we
have reduced our headcount to a maintenance crew; virtually eliminating our
marketing, fulfillment and technology departments. We have more than enough cash
to fund operations for the next twelve months. Currently we are not expecting
any major capital expenditures.
In a letter to the Board of Directors dated July 10, 2000, Woo Jin Kim,
Chief Executive Officer of the Company, submitted notice of his intent to
terminate his employment. The Board accepted this resignation of employment and
notice of the Board's decision was delivered to Mr. Kim. Chief Financial Officer
Mark Voorhis has replaced Mr. Kim on an interim basis. Subsequent to his
resignation of employment, Mr. Kim's resignation from the Board of Directors was
deemed effective. In addition, on July 12, 2000, Garrick Hileman submitted a
letter of resignation from the Board of Directors, which was accepted by the
Board.
During the third quarter of 2000, we have reorganized the companies
operations to conserve its resources. As part of the reorganization the company
accepted resignations or terminated approximately 50 employees, retaining a
staff of six (6). We have also terminated all major operational contracts,
licenses and/or agreements, sold off all excess equipment, licensed our
technology and adjusted the carry value of our prepaids and fixed assets to
reflect their current market value. The company does not anticipate any material
business being transacted through our web site while operating in this mode.
Presently, the Company has focused its main attention to its reorganization
and strategic business alternatives while maintaining minimal business
activities and is actively considering proposals presented to the Board of
Directors.
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Sources of Revenue
We believe that any revenues we derive will come from product sales for the
foreseeable future.
We will recognize revenues according to:
. The structure of the contract negotiated with the individual vendor,
and
. The substantive nature of the risks of ownership we incur in
connection with the sale and shipment of the product.
For product sales involving substantive risk of ownership, we will
generally recognize revenue at the gross transaction value.
To date, our current revenues are derived from product sales.
Seasonality
Given our current operating structure, we do not see seasonal fluctuations
as having a material impact on our revenues.
Results of Operations
We incurred a net loss of approximately $4.0 million for the three month
and $7.7 million for the nine-month period ended September 30, 2000. At
September 30, 2000 we had an accumulated deficit of $10.6 million. The net
losses and accumulated deficit resulted from our lack of substantial revenues,
while incurring development and operational costs and stock based compensation
expense in the first six months and losses on the sale of assets and market
value asset adjustments in the last 3 months as part of our reorganization.
Because of our reorganization during the current quarter this past performance
should not be considered indicative of future performance. We may never achieve
significant revenues or profitability or if we achieve significant revenues, it
may not be in our current line of business.
Revenues. Revenues were nominal for the three months and nine months ending
September 30, 2000, totaling approximately $48,000 and $120,000, respectively.
Due to the company's reorganization, we do not see continued sales growth in
this business line. We continue to operate as a development stage company.
Costs and Expenses. Any specific comparisons of the company's overhead
costs for the three month and year to date periods would be misleading as the
company initiated a reorganization mid way through the 3/rd/ quarter ended
September 30, 2000. This reorganization had significant impact on the company's
operating overhead costs. The major costs and components of overhead included in
our 3rd quarter operating loss were: costs of the products or services sold,
which were approximately $72,000, approximately $586,000 in payroll, $204,000 in
depreciation and amortization, $70,000 in insurance, $125,000 in Marketing &
Promotions, and $132,000 in professional fees for approximately $1,189,000 in
operational
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costs, and additional costs of approximately $185,000 in severance, $184,000 in
contract termination fees, and approximately $400,000 for costs related to the
strategic review of the business opportunities for an additional amount of
approximately $769,000 in other costs.
In addition to the above costs and expenses the company incurred approximately
$270,000 and $1,005,478 for the three months and nine months ended September 30,
2000 respectively in stock based compensation. This consists of expense relating
to officers options vested in connection with the IPO, and $120,000 for options
to vest within the next 12 months for those officers who left the company during
the last quarter. There are additional options that were granted in connection
with the IPO that will vest over the next two years and create compensation
charges of approximately $190,000.
Other expenses. During the quarter ended September 30, 2000 and in
conjunction with its reorganization the company sold off a portion of its
computer assets for a loss of approximately $50,000, and took an asset
impairment charge against the remainder of its assets. This reorganization
included the elimination of its software development department. Subsequent to
the quarter end the company concluded negotiations on an exclusive license for
use of their software platform. As a result of these events the company has re-
evaluated the value of its capitalized software and taken an asset impairment
charge, writing its value down to what we feel can reasonable be recaptured over
the assets 2 year remaining life. This resulting asset impairment charge was
approximately $1,900,000. The company does not anticipate having to take any
further asset impairment charges as a result of the reorganization.
As a result of all of the above, the net loss to shareholders for the three
months and nine months ended September 30, 2000 was $4.00 and $7.68 million
respectively. On a basic and diluted per share basis, the net loss to common
shareholders for the three months and nine months ended September 30, 2000 was
$(.46) and $ (.99) per share respectively.
Liquidity and Capital Resources
For the nine months ended September 30, 2000, cash provided by financing
activities of $31.6 million was primarily due to our initial public offering of
4,000,000 shares of its common stock at $8.00 per share and sale of an
additional 600,000 shares pursuant to the over-allotment option granted to the
underwriters in the IPO. Net proceeds to us from the IPO (and the over-allotment
option) aggregated approximately $32.1 million (net of underwriters' commission
and offering expenses of approximately $4.7 million). This amount should satisfy
our cash requirements for the next 12 months.
In connection with the IPO, bonuses in the aggregate amount of $105,000
were paid.
We used approximately $1.4 million of the net proceeds of the IPO to repay
in full the principal and interest due on a loan made by Enviro-Clean of America
Inc., a principal stockholder of the Company.
As of September 30, 2000, our primary source of liquidity consisted of cash
and cash equivalents derived from the IPO. At September 30, 2000, the Company
had cash and cash equivalents of approximately $16,500,000.
For the nine months ended September 30, 2000, cash used in operating
activities was $4,056,295. Cash used in operating activities consisted mostly of
net operating losses and increases in accounts payable and accrued expenses
offset by prepaid expenses and other
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current assets. We expect this amount to significantly reduce in the future as a
result of our reorganization.
Net cash used in investing activities was $11,043,452 million for the nine
months ended September 30, 2000. Our investing activities were for investing in
marketable securities and for capital expenditures, which included the purchase
of the perpetual non-revocable license to the software technology used for the
e-commerce platform from Netgateway on which the Company has built its
e-commerce portal. As a part of this transaction, the Company no longer has any
future obligations to Netgateway.
Risks relating to our financial condition
In addition to the other information included in this report, the following
factors should be considered in evaluating our business and future prospects:
Because we have a very short operating history, there is no track record to
indicate that we will successfully manage our business or achieve profitability.
Our business prospects are subject to all the risks, expenses and uncertainties
encountered by any new company.
As a result of our reorganization our operating expenses should not exceed
our revenue and interest income for the near term. We have generated only
nominal revenues for the nine months ended September 30, 2000 and have incurred
a net loss of $7.68 million, and, since inception, have incurred a net loss of
$10.6 million. However, since our reorganization, our monthly operating expenses
do not exceed our monthly interest income, therefore allowing us significant
time to evaluate our business opportunities.
We have more than enough cash to fund operations for the next twelve months.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
On August 25, 2000, Woojin Kim, the former CEO of the Company, filed suit
against the Company in the Superior Court of the State of California, County of
Los Angeles, for unspecified damages alleging violation of public policy, breach
of contract and breach of the implied covenant of good faith and fair dealing in
regard to the Company's acceptance of Mr. Kim's resignation of employment. The
suit was subsequently dismissed, without prejudice, due to a forum selection
clause in Mr. Kim's employment contract.
Item 2 Changes in Securities
(d). Use of Proceeds
On February 14, 2000, the Company's Registration Statement on Form SB-2MEF
covering the Offering of 4,000,000 shares of the Company's Common Stock,
Commission file number 333-30376 was declared effective. The net proceeds of the
offering to the Company (after deducting expenses) were $27,815,090. On March
29, 2000, the over-allotment option was also exercised and declared effective,
resulting in the proceeds (after deducting expenses) of $4,320,000, which were
received upon settlement on April 3, 2000. During the first two quarters, the
net proceeds have been used for the following purposes in the approximate
amounts listed:
Repayment of indebtedness and related interest..................... $ 1,423,000
Development costs.................................................. 1,610,000
Purchases of machinery and equipment............................... 695,000
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Working capital.................................................... 3,009,000
Other purposes including:
investments, including commercial paper, short-term municipal
securities, and money markets funds................................ 25,398,090
----------
$32,135,090
Item 3 Defaults Upon Senior Securities
There have been no material defaults with respect to any indebtedness of
the Company to be disclosed pursuant to this item.
Item 4 Submissions of Matters to a vote of Security Holders
There have been no matters submitted to a vote of security holders during
the quarter ended September 30, 2000.
Item 5. Other Information
. Resignation of the Chief Executive Officer
In a letter to the Board of Directors dated July 10, 2000, Woo Jin Kim,
Chief Executive Officer of the Company, submitted notice of his intent to
terminate his employment. The Board accepted this resignation of employment and
notice of the Board's decision was delivered to Mr. Kim. Chief Financial Officer
Mark Voorhis has replaced Mr. Kim on an interim basis. Subsequent to his
resignation of employment, Mr. Kim's resignation from the Board of Directors was
deemed effective. In addition, on July 12, 2000, Garrick Hileman submitted a
letter of resignation from the Board of Directors, which was accepted by the
Board.
. Hiring of Investment Banking Firm
In June, upon authorization of the Board of Directors, the Company hired
the investment banking firm of Houlihan Lokey Howard & Zukin to review strategic
alternatives available to the company and its shareholders. Among the
alternatives that Houlihan Lokey will research will be acquisitions, mergers and
other alliances that will help the company execute its growth strategy. The
investment bankers have continued their review of strategic alternatives through
the third quarter of 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------
3.1 Certificate of Incorporation (incorporated by reference to the
exhibits of the Company's Registration Statement on Form SB-2 (Reg.
No. 333-30376) dated October 6, 1999).
3.1(a) Amendment to Certificate of Incorporation (incorporated by reference
to the exhibits of the Company's Registration Statement on Form SB-2
(Reg. No. 333-30376) dated October 6, 1999).
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3.2 By-Laws (incorporated by reference to the exhibits of the Company's
Registration Statement on Form SB-2 (Reg. No. 333-30376) dated
October 6, 1999).
3.2(a) Amended Bylaws (incorporated by reference to the exhibits of the
Company's Registration Statement on Form SB-2/A (Reg. No. 333-30376)
dated December 2, 1999).
4.1 Specimen Common Stock Certificate (incorporated by reference to the
exhibits of the Company's Registration Statement on Form SB-2 (Reg.
No. 333-30376) dated October 6, 1999).
4.2 Form of Representatives' Warrant Agreement, including form of
Representatives' Warrant (incorporated by reference to the exhibits
of the Company's Registration Statement on Form SB-2 (Reg. No. 333-
30376) dated October 6, 1999).
4.2(a) Amended Form of Representatives' Warrant Agreement (incorporated by
reference to the exhibits of the Company's Registration Statement on
Form SB-2 (Reg. No. 333-30376) dated January 1, 2000).
27.1 Financial Data Schedule at June 30, 2000.*
*filed herewith
(b) Reports on 8-K:
The Company had no reports during the quarter on Form 8-K.
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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.
Date: November 14, 2000 b2bstores.com Inc.
(Registrant)
/s/ Richard Kandel
------------------------
Richard Kandel
Chairman of the Board
/s/ Mark Voorhis
------------------------
Mark Voorhis
Chief Financial Officer
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