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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 June 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
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As of August 11, 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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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Information
Condensed Financial Statements: Page
Balance Sheet as of June 30, 2000 (unaudited) 3
Unaudited Statements of Loss for the three and
six months ended June 30, 2000, the period from June 28, 1999 (inception)
through June 30, 1999 and the period from inception (June 28, 1999)
through June 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 June 30, 2000 (unaudited) 5
Unaudited Statements of Cash Flows for the period from inception (June 28,
1999) through June 30, 2000, the six months ending June 30, 2000, and the
period from inception (June 28, 1999) through June 30, 1999 (unaudited) 6
Notes to unaudited condensed financial statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-19
PART II OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 19
Item 3: Defaults upon senior securities 20
Item 4: Submissions of matters to a vote of security holders 20
Item 5: Other information 20
Item 6: Exhibits and reports on form 8-K 21
Signatures 22
</TABLE>
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b2bstores.com Inc.
Balance Sheet
(condensed and unaudited)
<TABLE>
<CAPTION>
June 30, 2000
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ASSETS
<S> <C>
Current:
Cash and cash equivalents $ 23,426,032
Marketable Securities 3,250,000
Prepaid Expenses and other current assets 294,480
-----------------------------------------
Total Current Assets 26,970,512
Deposits 51,813
Property and equipment, net 2,358,388
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$ 29,380,713
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 313,003
Accrued bonuses 108,000
Other current liabilities 9,328
Deferred revenue 1,736
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Total Current Liabilities 432,067
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Stockholders' equity
Preferred stock, $.01 par value - shares authorized 5,000,000; none -
Common stock, $.01 par value - shares authorized 25,000,000; issued
8,621,643 86,216
Additional Paid-in Capital 35,474,370
Deficit accumulated during the development stage (6,611,940)
-----------------------------------------
Total stockholders' equity 28,948,646
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$ 29,380,713
=========================================
</TABLE>
See accompanying notes to unaudited condensed financial statements.
3
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b2bstores.com Inc.
Statements of Loss
(condensed and unaudited)
<TABLE>
<CAPTION>
Cumulative, period from Three months ended Six months ended
June 28, 1999 June 30, and period from June 30,and period from
(Inception) inception(June 28,1999) inception (June 28, 1999)
through June 30, 1999 through June 30, 1999
to June 30, 2000 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $ 74,207 $ 67,824 - $ 72,016 -
Cost of Sales 570,432 378,559 - 509,924 -
------------ ----------- -----------
Gross Loss (496,225) (310,735) - (437,908) -
Operating Expenses
General and administrative 1,656,089 707,911 - 1,330,334 -
Sales and marketing 1,311,984 748,590 - 1,113,014 -
Technology 460,028 160,527 - 357,132 -
Fulfillment Management 319,976 179,577 - 271,740 -
Start-up Costs 55,036 - - - -
Stock-based compensation relating to general and 216,430 - - - -
administrative activities
Stock-based compensation relating to start-up
activities $ 2,636,886 276,924 - 735,386 -
Total operating expenses 6,656,429 2,073,529 - 3,807,606 -
Loss from operations (7,152,654) (2,384,264) - (4,245,514) -
Interest Income (expense) $ 540,714 418,570 - 563,811 -
Net loss $ (6,611,940) $(1,965,694) - $(3,681,703) -
Loss per share (basic and diluted) $(0.23) - $(0.50) -
Weighted average common shares outstanding 8,621,643 - 7,342,522 -
</TABLE>
See accompanying notes to financial statements.
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Statement of Stockholders' Equity (Deficit)
Period from June 28, 1999 (inception) to June 30, 2000
<TABLE>
<CAPTION>
Period from June 28, 1999 (inception) to December 31, 1999 (audited)
Deficit
Accumulated
Additional during the Total
Common Stock paid-in Development stockholders'
Shares Amount capital Stage equity (deficit)
<S> <C> <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 June 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
overallotment, net, March 29, 2000 600,000 6,000 4,314,000 - 4,320,000
Stock based compensation from vesting of
options to officers - - 735,386 - 735,386
Additional expenses in connection with initial
public offering - - (63,820) - (63,820)
Net loss for the period - - - (3,681,703) (3,681,703)
Balance June 30, 2000 (unaudited) 8,621,643 $ 86,216 $35,474,370 $(6,611,940) $28,948,646
</TABLE>
See accompanying notes to financial statements.
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b2bstores.com Inc.
STATEMENT OF CASH FLOWS
(Condensed and Unaudited)
<TABLE>
<CAPTION>
Cumulative, period
from June 28,1999 Six months Period from June 28, 1999
(inception) to ended (inception) through
June 30, 2000 June 30, 2000 June 30, 1999
----------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(6,611,940) $(3,681,703) -
----------------------------------------------------------------
Adjustments to reconcile net Loss to net cash used in
operating activities:
Expense recognized in connection with issuance of common stock for 2,853,316 735,386 -
relating to start-up and general and administrative activities
Depreciation and amortization 347,424 318,891 -
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (294,480) (255,565) -
Increase in deposits (51,813) (31,017) -
Increase in deferred revenue 1,736 749 -
Increase in accrued bonuses 108,000 - -
Increase in accrued expenses 9,328 23,392 -
Increase in accounts payable 313,003 240,874 -
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Total adjustments 3,286,514 1,032,710 -
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Net cash, used in operating activities (3,325,426) (2,648,993) -
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Cash flows from investing activities:
Marketable Securities (3,250,000) (3,250,000) -
Capital expenditures (2,705,812) (2,314,405) -
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Net cash used in investing activities (5,955,812) (5,564,405) -
Cash flows from financing activities:
Loans from principal stockholder 1,399,836 575,000 -
Repayment of loans from principal stockholder (1,399,836) (1,399,836) -
Proceeds from issuance of common stock 33,027,637 32,391,637 36,667
----------------------------------------------------------------
Net cash provided by financing activities 32,707,270 31,566,801 36,667
----------------------------------------------------------------
Net Increase in Cash 23,426,032 23,353,403 36,667
Cash and cash equivalents, beginning of period - 72,629 -
Cash and cash equivalents, end of period $23,426,032 $23,426,032 $36,667
================================================================
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 financial statements
6
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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 is a comprehensive business-to-business Internet
destination for organizations of all sizes, delivers quality business-related
products and services combined with information resources through an,
integrated, user-friendly web site. In addition, b2bstores.com offers its
Integrated Merchandising Solution (IMS), which provides complete e-commerce
solutions for businesses. IMS creates a marketplace featuring the products,
services, and content selected by a business under a fully branded, co-branded,
or private label offering.
The Company's web site moves business-to-business transactions and other
business operations away from traditional modes to the Internet. This web site
is designed as a community mall, a place where business customers can 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. The Company
is developing its web site to make it user friendly and to create an experience
that is highly useful, efficient, enjoyable and informative for the business
customer.
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, consisting of normal recurring
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.
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Reclassifications
Certain prior period amounts have been reclassified to conform with 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 June 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 June 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 are insured by
Travelers Insurance Group.
Revenue Recognition
To date, the Company has generated nominal revenues from product sales.
b2bstores anticipates that its revenue will primarily be comprised of sales of
merchandise either purchased by b2bstores or placed on consignment with
b2bstores, commissions, advertising and other revenue.
The Company will recognize revenues according to:
. the type of product or service being sold,
. 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. For service and
referral sales where risk of loss is minimal, the Company will generally
recognize revenue on a
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net fee or commission basis. For auction sales where the Company incurs risk of
loss in the transactions, it will recognize gross revenues. For auction sales
where the Company acts as auctioneer and has little risk of loss, it will
recognize revenue on a net basis or transaction fee basis.
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 the credit
card transaction authorization and shipment of the merchandise until such time
that the Company is able to estimate returns.
Advertising Revenue
The Company will also earn revenue from the sale of advertising on its web
site. These revenues will be recognized as the advertisement is displayed.
Property and Equipment
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
June 30, 2000
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<S> <C>
Capitalized software development costs:
Purchased software $1,120,011
Internally developed software 743,238
Computer equipment 795,943
Furniture and equipment 43,220
Leasehold improvements 3,400
----------
2,705,812
Less: Accumulated depreciation and amortization 347,424
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Property and equipment $2,358,388
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</TABLE>
Depreciation expense for the three and six months ended June 30, 2000 was
$272,997 and $318,891 respectively.
9
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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 has capitalized certain software development costs in the
amount of approximately $ 1.9 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 were 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.
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.
Subsequent to June 30, 2000, there were 71,790 performance options granted
to employees relating to the second quarter bonuses.
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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 June 30, 2000, 1,209,500 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 loss per share are the same due to the options being
antidilutive in accordance with SFAS 128.
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 six months ended June 30, 2000, the Company charged to
operations approximately $735,000 relating to officers' options granted in
connection with the IPO, and vested in the first two quarters of the year.
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.
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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.
Due to changes in the market place, the Company has re-evaluated its sales and
marketing strategy. The original strategy of creating a branded site through
the use of advertising mediums to create market awareness of b2bstores.com name
has been altered in response to changing market conditions. The new strategy
which still focuses on driving the purchases through increasing traffic to the
site, will do so through strategic partnership with our existing customers. We
will not be spending the amount of money for marketing and advertising as it was
originally anticipated in our registration statement due to the change in the
above strategy.
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.
We do not undertake to update our forward-looking statements to reflect
future events or circumstances.
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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 infrastrucuture, 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. We will continue doing business on our site, along with
expanding our vendor management services of our business model. We have more
than enough cash to fund operations for next twelve months. Currently we are
not expecting any major capital expenditures. We will need to add more
employees as support as our transaction grows on our web site and as our vendor
management services grows.
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 first two quarters of 2000, we have continued to assemble
additional core assets, including the acquisition of a perpetual, nonrecoverable
license to the software technology used for our core business. This technology
will also allow us to provide vendor management and other e-commerce services to
other businesses that seek to utilize the Internet for their inventory
management requirements and business products purchasing and selling. We have
also expanded the number of our employees from 23 to 43. This growth results
from our expansion of our development team in preparation of launching our
site and expansion of our sales and marketing team hired to add new product
vendors, service vendors and content to the site. Our technology group has also
increased as it develops the electronic connectivity between the b2bstores.com
Inc. portal and our numerous vendors. All of this activity has resulted in
increased operating expenses as discussed below.
In addition to the continuing assembly of additional core assets, we have
engaged in the following activities, which are currently ongoing during the
second quarter of 2000:
Vendor Management Model We have expanded the Vendor Management services
-----------------------
portion of our business model. Vendor Management is a concept where b2b
stores.com repackages a portion or all of it products, services and content
catalog under a fully branded, co-branded or "private labeled" offering for our
partners and clients. Offering our products, services and content in this
manner allows b2bstores.com to leverage ourselves into an indirect channel sales
model, creating the
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ability to address a much larger audience of potential buyers. We are able to do
this by offering this additional e-commerce functionality to our partner's
websites, giving them the ability to add value to their constituents. This
allows b2bstores.com to access new markets and potential buyer populations
through these Vendor Management partnerships.
Expansion of our business product categories. We regularly seek to expand
--------------------------------------------
our product categories by establishing relationships with additional fulfillment
agents. These fulfillment agents are vendors that actually supply the products
purchased by our customers through our web site. The terms of any agreement
governing a relationship with a new fulfillment agent must be negotiated and
will vary on a case-by-case basis.
Introduction and expansion of business referrals. We negotiate with
------------------------------------------------
providers of financial services, accounting services, legal services and other
services to serve as service providers to customers at our web site. We are
spending time in connection with our efforts to assemble a group of service
providers willing to utilize our web site for the promotion of their services.
Provision of business information and content. We provide business
---------------------------------------------
information and other content to our customers, including:
. computer product reviews,
. news,
. stock market information, and
. downloadable driving directions.
This information is supplied by third-party content providers. We are
required to pay a fee for the content we make available through our web site. We
intend to expand our roster of content providers and the information available
through our web site. The arrangement we have with each content provider varies
on a case-by-case basis.
Sources of Revenue
We believe that we will derive our revenues from the following sources:
. product sales;
. service referral fees and commissions;
. advertising;
. "click through" fees; and
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. vendor management fees. We offer Integrated Merchandising Solution
(IMS), which provides complete e-commerce solutions for businesses.
IMS creates a market place featuring the products, services, and
content selected by a business under a fully branded, co-branded, or
private label offering. As of June 30, 2000 we have signed 17 IMS
contracts through this IMS partner program.
We will recognize revenues according to:
. the type of product or service being sold,
. 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. For service and
referral sales where risk of loss is minimal, we will generally recognize
revenue on a net fee or commission basis. For auction sales where we incur risk
of loss in the transactions, we will recognize gross revenues. For auction sales
where we act as auctioneer and have little risk of loss, we will recognize
revenue on a net basis or transaction fee basis. To date, our current revenues
are derived from product sales.
Seasonality
Although we have a limited operating history, we expect to experience
seasonal variations in our e-commerce and advertising revenue, especially during
the summer period, when user traffic levels are expected to decline. Our e-
commerce revenue may be affected by stronger consumer goods sales during the
fourth calendar quarter of the year. In addition, our advertising revenue may
experience the same seasonal and cyclical patterns as those in traditional
media, where advertising increases ahead of the year-end holiday buying season.
Results of Operations
We incurred a net loss of approximately $2.0 million for the three month
and $3.7 million for the six month period ended June 30, 2000. At June 30, 2000
we had an accumulated deficit of $6.6 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. Because
of our expansion plans, we expect to incur significant operating losses for the
foreseeable future. Although we are expecting revenue growth in current
periods, such growth may not be substantial and, therefore, these current
periods 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 sustained.
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Revenues. Revenues were nominal for the three months and six months
ending June 30, 2000, totaling approximately $68,000 and $72,000, respectively.
We continue to operate as a development stage company, which means that,
although we have commenced our planned principal operations, we have not
obtained significant revenues as of yet.
Cost of Sales. Cost of sales includes the costs of the products or service
sold, which was approximately $79,000 for the three-month period and $82,000 for
the six-month period ending June 30, 2000 and overhead costs of approximately
$300,000 for the three-month period and $428,000 for the six-month period ending
June 30, 2000, which are necessary to support and keep the site functioning
properly for all 24 hour periods.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and related costs for our officers, management,
administrative, finance, legal, and human resources department, as well as
support services and professional service fees. The general and administrative
expenses for three months ending June 30, 2000 are approximately $708,000. They
are mainly comprised of salaries, bonuses and related costs of $215,000,
facility management costs of $144,000, professional services of $152,000,
directors' and officers' insurance costs of $50,000, travel and entertainment
costs of $60,000, and employee relations' expense of $42,000. The general and
administrative expenses for period ending six months ending June 30, 2000 are
approximately $1,330,000. They are mainly comprised of salaries, bonuses and
related costs of $448,000, facility management costs of $240,000, professional
services of $250,000, directors' and officers' insurance costs of $90,000,
travel and entertainment costs of $174,000, and employee relations' expense of
$43,000.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of salaries for sales and marketing personnel, advertising, trade
shows, and travel and entertainment costs, including costs of attending trade
shows. The sales and marketing expense of approximately $749,000 for the three
months ended June 30, 2000 was mainly comprised of salaries and related costs of
$319,970, and advertising and marketing costs of $371,000. The sales and
marketing expense of approximately $1,113,000 for the six months ended June 30,
2000 was mainly comprised of salaries and related costs of $494,000, advertising
and marketing costs of $462,000 and employee relations' costs of $121,000. Due
to changes in the market place, the Company has re-evaluated its sales and
marketing strategy. The original strategy of creating a branded site through
the use of advertising mediums to create market awareness of b2bstores.com name
has been altered in response to changing market conditions. The new strategy
which still focuses on driving the purchases through increasing traffic to the
site, will do so through strategic partnership with our existing customers.
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We will not be spending the amount of money for marketing and advertising as it
was originally anticipated in our registration statement due to the change in
the above strategy.
Technology expenses. Technology expenses consist primarily of the
management of the hardware and software systems necessary to operate an internet
sales portal. Portal issues include the electronic communications between the
company's web-based systems and the numerous product and service vendors
represented on the site. The technology expense of approximately $161,000 for
the three months ended June 30, 2000 were mainly comprised of salaries and
related costs of $83,000, and depreciation expense of $53,000. The technology
expense of approximately $357,000 for the six months ended June 30, 2000 were
mainly comprised of salaries and related costs of $206,000, depreciation expense
of $64,000, and subscription fees of $48,000. We expect these expenses to
continue to grow as business expands.
Fulfillment management expenses. Fulfillment management expenses consist
of all customer service issues relating to the "customer experience" in shopping
at the b2b portal and the management of all vendor fulfillment issues (delivery
of the products to the customers). The fulfillment management expense of
approximately $180,000 for the three months ended June 30, 2000 was mainly
comprised of salaries and related costs of $160,000, and service fees of $9,000.
The fulfillment management expense of approximately $272,000 mainly comprised of
salaries and related costs of $203,000, professional fees of $32,000, employee
relations' cost of $24,000 and service fees of $9,000. We expect these expenses
will continue to grow as we expand our business.
Stock-based compensation expense. Stock-based compensation expense of
approximately $277,000 and $735,000 for three months and six months ended June
30, 2000 respectively consists of expense relating to officers options vested in
connection with the IPO. 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 $865,000.
Interest Income earned on our cash management account for the three months
and six months ended June 30, 2000 was $419,000 and $564,000 respectively.
As a result of all of the above, the net loss to shareholders for the
three months and six months ended June 30, 2000 was $2.0 and $3.7 million
respectively. On a basic and diluted per share basis, the net loss to common
shareholders for the three months and six months ended June 30, 2000 was $ (.23)
and $ (.50) per share respectively.
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Liquidity and Capital Resources
For the six months ended June 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 June 30, 2000, our primary source of liquidity consisted of cash and
cash equivalents derived from the IPO. At June 30, 2000, the Company had cash
and cash equivalents of approximately $23,000,000.
For the six months ended June 30, 2000, cash used in operating activities
was $2,649,000. 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 current assets. We expect these expenses to grow
as we transition from a development stage company.
Net cash used in investing activities was $5.6 million for the six months
ended June, 30, 2000. Our investing activities were for investing in marketable
securities and for capital expenditures which mainly comprised of purchasing 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.
We may not be able to grow our business as planned or even become a profitable
business. We began our commercial operations in September 1999 and have a
limited operating history upon which you may evaluate us. Our business
prospects are subject to all the risks, expenses and uncertainties encountered
by any new company. We also face the
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risks inherent in operating in the rapidly evolving markets for Internet
products and services.
Because our operating expenses and capital expenditures will outpace our
revenues, we will incur significant losses in the near term. We expect to incur
significant operating expenses and make relatively high capital expenditures as
we develop our Internet business. These operating expenses and capital
expenditures will initially outpace revenues and result in significant losses in
the near term. We have generated only nominal revenues for six months ended
June 30, 2000 and have incurred a net loss of $3.7 million, and, since
inception, have incurred a net loss of $6.6 million. Because our executive
officers lack significant management experience, we may not be able to
effectively manage our growth.
The growth of our business may place a significant strain on our management
team and we may not be able to effectively manage our growth. None of our
executive officers has significant experience in managing a company or
overseeing a company's rapid growth. Our new business focus on Vendor Management
Agreements may not prove to be profitable.
We have more than enough cash to fund operations for the next twelve months.
Currently we are not expecting any major capital expenditures. We will need to
add more employees as support as our transaction grows on our web site and as
our vendor management services grows.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not currently a party to any pending legal proceeding, nor
is any of the Company's property subject to any pending legal proceeding.
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 $4,320,000, which were
received upon settlement on April 3, 2000. During the first two quarters, the
net proceeds have been used for the following purposes:
<TABLE>
<S> <C>
Repayment of indebtedness and related
interest...............................................$ 1,422,676
</TABLE>
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<TABLE>
<S> <C>
Development
costs.................................................. 1,863,249
Purchases of machinery and equipment................... 839,163
Working capital........................................ 1,333,970
Other purposes including:
investments, including commercial paper, short-term
municipal securities, and money markets funds.......... 26,676,032
-----------
$32,135,090
</TABLE>
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 June 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.
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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).
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.
(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: August 11, 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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