U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to _______________
Commission file number: 1-13360
CORNERSTONE INTERNET SOLUTIONS COMPANY
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
584 Broadway, Suite 509
(Address of Principal Executive Offices)
(212) 343-3920
(Issuer's Telephone Number, Including Area Code)
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 registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES / X / NO / /
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Number Outstanding
Title of Class as of March 31, 2000
Common Stock, $.01 Par Value 25,104,311
Transitional Small Business Disclosure Format: Yes / / No /X/
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated Balance Sheets at February 29, 2000
and May 31, 1999 3
Consolidated Statements of Operations for the
three-month periods ended February 29, 2000
and February 28, 1999. 4
Consolidated Statements of Operations for the
nine-month periods ended February 29, 2000 and
February 28, 1999. 5
Consolidated Statements of Cash Flows for the
nine-month periods ended February 29, 2000 and
February 28, 1999. 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
,
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 13
Item 2. Change in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submissions of Matters to a Vote by Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 29, May 31,
2000 1999
---------------------- --------------
ASSETS (unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $15,359,193 $ 2,939,596
Investments 198,206 398,348
Accounts receivable, net 1,449,769 1,024,624
Other receivables 46,507 20,587
Prepaid expenses and other 129,763 49,475
------------------- ------------------
Total current assets 17,183,438 4,432,630
Affiliation rights, net 172,500 191,667
Property and equipment, net 1,396,720 671,182
Other 140,421 200,920
------------------- ------------------
$ 18,893,079 $ 5,496,399
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt 26,102 $ 104,954
Accounts payable 939,848 830,397
Accrued payroll and related expenses 183,628 124,866
Other accrued expenses 287,437 462,592
Other current liabilities 101,351 30,000
------------------- ------------------
Total current liabilities 1,538,366 1,552,809
Long-term debt, excluding current maturities - 1,465
------------------- ------------------
Total liabilities 1,538,366 1,554,274
------------------- ------------------
Minority interest 8,802,899 938,838
Stockholders' Equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
Class C, 20 and 540 shares issued and outstanding
at February 29, 2000 and May 31,1999 - 5
Class D, 20 and 8,040 shares issued and outstanding
at February 29, 2000 and May 31, 1999, liquidation
preference of $27,500 at February 29, 2000. - 80
Common stock, $.01 par value, 50,000,000 shares
authorized and 25,028,187 and 13,121,013 shares
issued and outstanding at February 29, 2000 and
May 31, 1999 250,282 131,210
Additional paid-in capital 46,385,138 36,018,294
Deferred consulting expense (286,180) -
Accumulated other comprehensive income 198,206 398,348
Accumulated deficit (37,995,632) (33,544,650)
----------------- ------------------
Total stockholders' equity 8,551,814 3,003,287
----------------- ------------------
$ 18,893,079 $ 5,496,399
----------------- ------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
February 29, February 28,
2000 1999
-------------------- ------------
<S> <C> <C>
Internet services revenues $ 514,715 $ 835,839
Subscription revenue 27,928 -
--------------------------------
Total revenues 542,643 835,839
================================
Research and development (excludes stock
compensation of $4,254) 228,774
Cost of Services Revenue 1,094,120 891,337
Marketing, sales, and support (excludes stock
compensation of $26,728) 1,082,390 124,731
General and administrative expenses (excludes
stock compensation of $333,794) 870,824 414,304
Stock Compensation 364,776
--------------------------------
Total costs and expenses 3,640,884 1,430,372
================================
Operating loss (3,098,241) (594,533)
--------------------------------
Other income (expense):
Interest income 51,532 -
Interest expense (1,021) (1,676)
Gain on sale of investments, net -
Other income (expense), net (20,883) 392
--------------------------------
Loss before income taxes (3,068,613) (595,817)
Provision for income taxes - -
Minority interest in net loss of subsidiary, net (221,929) -
================================
Net loss (3,290,542) (595,817)
Preferred stock dividends and preferences - (844,250)
--------------------------------
Net loss to common stockholders $(3,290,542) $(1,440,067)
================================
Basic and diluted loss per share $ (.15) $ (.12)
--------------------------------
Weighted average shares of common stock 22,613,423 12,106,040
--------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
February 29, February 28,
2000 1999
----------------------------------------
<S> <C> <C>
Internet services revenues $ 2,538,901 $ 2,369,339
Subscription revenue 41,323 --
Software licensing and royalty revenue -- 38,000
============ ============
Total revenues 2,580,224 2,407,339
============ ============
Research and development (excludes stock
compensation of $4,254) 228,774
Cost of Services Revenue 3,043,012 3,129,354
Marketing, sales, and support (excludes stock
compensation of $26,728) 1,640,640 383,260
General and administrative expenses (excludes
stock compensation of $409,128) 2,515,840 1,493,208
Stock Compensation 440,110
------------ ------------
Total costs and expenses 7,868,376 5,005,822
------------ ------------
Operating loss (5,288,152) (2,598,483)
------------ ------------
Other income (expense):
Interest income 88,715 865
Interest expense (4,666) (9,800)
Gain on sale of investments, net 728,750 --
Other income (expense), net (39,372) (7,395)
============ ============
Loss before income taxes (4,514,725) (2,614,813)
Provision for income taxes -- --
Minority interest in net loss of subsidiary, net (665,787) --
============ ============
Net loss (5,180,512) (2,614,813)
Preferred stock dividends and preferences (6,750) (1,830,700)
------------ ------------
Net loss to common stockholders $ (5,187,262) $ (4,445,513)
------------ ------------
Basic and diluted loss per share $ (.31) $ (.38)
------------ ------------
Weighted average shares of common stock 16,631,522 11,556,781
------------ ------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
February 29, February 28,
2000 1999
----------------------------------
Cash flows from operating activities
<S> <C> <C>
Net loss $ (5,180,512) $ (2,614,813)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 378,286 199,500
Non-cash consulting expense 440,110 19,200
Minority interest in net loss of consolidated subsidiary 665,787 --
Gain on sale of investments (669,670) --
Changes in assets and liabilities
Accounts receivable (425,145) (800,718)
Other receivables (95,000) 79,413
Prepaid expenses and other (70,288) 162,023
Other assets 60,500 (36,720)
Accounts payable 109,450 (28,857)
Accrued expenses (116,393) (142,667)
Deferred revenue -- (9,300)
Other 56,591 --
------------
------------
Net cash used in operating activities (4,846,284) (3,172,939)
------------
------------
Cash flows from investing activities
Purchases of property and equipment (1,084,657) (40,073)
Proceeds from sale of investments 728,750 --
------------
------------
Net cash provided by (used in) investing activities (355,907) (40,073)
------------
------------
Cash flows from financing activities
Proceeds from issuances of common and preferred stock 14,040,112 3,457,800
Proceeds from exercise of stock options 3,661,993 41,305
Proceeds from exercise of warrants 578,335
Principal payments of long-term debt (80,317) (73,823)
------------
Net cash provided by financing activities 17,621,788 4,003,617
------------
Net increase (decrease) in cash and cash equivalents 12,419,597 790,605
Cash and cash equivalents
Beginning of period 2,939,596 392,200
============ ============
End of period $ 15,359,193 $ 1,182,805
------------ ------------
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
General
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and in the
opinion of management contain all adjustments (consisting of only
normal recurring entries) necessary to present fairly the financial
position of Cornerstone Internet Solutions Company (the "Company"), and
subsidiaries as of February 29, 2000 and the results of its operations
and its cash flows for the three and nine month periods ended February
29, 2000 and February 28, 1999. Certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted. The interim consolidated financial statements should be read
in conjunction with the Company's consolidated financial statements and
related notes in the May 31, 1999 Annual Report on Form 10-KSB. The
results for the three month and nine month periods ended February 29,
2000 are not necessarily indicative of the results to be obtained for
the full year.
2. Business
On July 2, 1998, the Company's shareholders ratified a proposal to
change the Company's name from Enteractive, Inc. to Cornerstone
Internet Solutions Company. Headquartered in New York, New York, the
Company is a provider of business solutions based on Internet
technologies. The Company's address is 584 Broadway, Suite 509, New
York, NY 10012 and its Internet address is www.crstone.com
On December 4, 1996, the Company signed multiple market affiliate
agreements with USWeb/CKS Corporation, now
marchFIRST.com,("marchFIRST.com") and paid $625,000 for the right to
operate USWeb/CKS affiliate offices in New York City, and certain other
markets in the Northeast portion of the United States, for a ten-year
period. The operation, which has been conducting business as USWeb/CKS
Cornerstone and recently as marchFIRST.com Cornerstone, provides a full
range of Internet and Intranet-based business solutions, including Web
site design, hosting and management, design and implementation of
database and e-commerce solutions, educational programs and Web-related
strategic consulting. The Company is obligated to pay marchFIRST.com
monthly fees equal in the aggregate to 7% of adjusted gross revenues,
as defined in its various agreements with marchFIRST.com, but not less
than certain contractual minimum fees
On February 17, 1999, the Company formed B2Bgalaxy.com, Inc. ("B2B") as
a wholly owned subsidiary of the Company. Financing for B2B included
net proceeds of $2,122,957 in April 1999 from the sale of convertible
Preferred Stock, and $14,040,112 from the private placement of common
stock in February 2000. See "Note 8-Subsidiary Transactions". The
Company established B2B to leverage its expertise in business
consulting, Internet technology and the development of business and
e-commerce solutions to create industry-specific business-to-business
e-commerce marketplaces that link buyers and sellers through
competitive on-line exchanges with a focus on improving profitability.
In May 1999, B2B introduced FOODgalaxy.com, the first such marketplace,
designed to lower the cost of food and supplies for restaurants and
other food service providers through increased price competition.
Launched in July, 1999, FOODgalaxy.com enables restaurants to post a
customized inventory list online and requires suppliers to continually
submit their latest product bids. This competitive process is designed
to decrease the cost of goods to buyers and significantly reduce the
time traditionally devoted to the comparative price shopping process.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company's continuing losses from operations could impact the Company's
ability to meet its obligations as they become due. In November 1998,
the Company consummated a private placement of 1,600 shares of newly
created Class D Preferred Stock for net proceeds of approximately
$1,970,000. In April 1999 B2B received $2,122,957 from the sale of
Preferred Stock, and $15,000,113 from the private placement of common
stock in early 2000, of which $14,040,112 was received as of February
29,2000. Between December 1, 1999 and February 2000 the Company
received $1,786,480 from the exercise of options and warrants. The
Company recently hired a CEO to manage the Cornerstone Internet
Services division as part of its plan to attain profitability. The B2B
segment will continue to incur losses as it builds its customer base
and market share.
3. Affiliation Rights
Fees for affiliation rights were paid to marchFirst.com for the right
to join the marchFirst.com network and operate as an affiliate. The fee
is being amortized over the 10-year life of the agreement with
marchFirst.com. Affiliation rights at February 29, 2000 were net of
accumulated amortization of $137,500.
7
<PAGE>
4. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
5. Convertible Preferred Stock Class D
On November 10, 1998 the Company raised $1,969,900, net of related
expenses, through a private placement of 1,600 shares of Class D
Convertible Preferred Stock (Class D Preferred Stock) at a purchase
price of $1,250 per share. The holders of Class D Preferred Stock have
the right, at any time commencing after the earlier of (I) June 30,
2000 or (II) if the closing price of the common stock shall have been
at least $1.50 per share on 15 trading days during any 20-consecutive
trading day period, to convert each share of Class D Preferred Stock
into such whole number of shares of common stock equal to the aggregate
stated value of the Class D Preferred Stock to be converted divided by
$1.00, subject to adjustment. Each share of Class D Preferred Stock has
a liquidation preference of $1,375 per share. The Class D Preferred
Stock is entitled to vote on all matters submitted to the holders of
the Company's common stock, at 1,250 votes per share, pays no dividends
and is not redeemable. In the third quarter of fiscal 1999, the closing
price of the Company's Common Stock was at least $1.50 per share on 15
trading days during a consecutive 20 day trading period and accordingly
the holders of Class D Preferred Stock have the unrestricted right to
convert each share of Class D Preferred Stock as described above. In
fiscal 1999, the Company issued 7,320 shares of Class D Preferred Stock
in exchange for Class B and Class C Preferred Stock. During fiscal
1999, 880 shares of Class D Preferred Stock were converted into
1,100,000 shares of Common Stock. Between December 3, 1999 and January
6, 2000, 8,020 shares of Class D Preferred Stock were converted into
10,025,000 shares of Common Stock. As of February 29, 2000, there were
20 shares of Class D Preferred Stock issued and outstanding and
convertible into 25,000 shares of Common Stock.
6. Convertible Preferred Stock Class A and C
On December 12, 1996, the Company completed a private placement of 84
units, each unit consisting of 80 shares of Class A Convertible
Preferred Stock (Class A Preferred) and 50,000 common stock purchase
warrants to purchase in the aggregate 4,200,000 shares of Common Stock
at an exercise price of $4.00 per share and expiring December 13, 2001
(the "Warrants"). Proceeds from the private placement were
approximately $7,869,100, net of related expenses of $531,000. The
Class A Preferred Stock has a stated value of $1,250 per share.
On November 19, 1997, the Company offered to exchange the 4,200,000
Warrants for common stock (the "Exchange Offer"), whereby for each 2.8
warrants exchanged, the Company issued one share of its Common Stock.
In connection with the Exchange Offer, the Company received the written
consent of the participating preferred stockholders to amend the terms
of the Class A Preferred to delay the date when the Class A Preferred
Stock can first be converted into common stock from May 1, 1998 to July
1, 1999 and modify certain redemption features of the Class A
Preferred. Holders of 6,260 shares of the Class A Preferred Stock
agreed to the terms of the Exchange Offer. As a result, on February 6,
1998, the Company issued 1,397,323 shares of common stock in exchange
for the cancellation of 3,912,500 Warrants. The fair value of the
common stock issued approximated the fair value of the canceled
Warrants. Subsequently, the Company redesignated the 6,260 shares of
Class A Preferred held by the stockholders who approved the Exchange
Offer as Class C Convertible Preferred Stock (Class C Preferred). Such
preferred shareholders were entitled to receive a dividend at 12% per
year of the stated value of the Class C Preferred for the period from
April 30, 1998 to June 30, 1999. In accordance with the terms of the
Preferred Stock exchange offer discussed below, all dividends
associated with Class C Preferred exchanged were relinquished.
Dividends are payable in common stock and for those Class C Preferred
shares still outstanding after the exchange offer, such dividends
amounted to $81,000 for the year ended May 31, 1999 and $6,750 for the
nine months ended February 29, 2000. In July, 1999 the Company issued
40,213 shares of Common Stock in full payment of the Preferred Stock
dividends.
As of February 29, 2000, there were 20 shares of Class C Preferred
Stock outstanding, which are convertible into 20,205 shares of Common
Stock. Each share of Class C Preferred is convertible into the whole
number of shares of common stock equal to the aggregate stated value of
the Class C Preferred Stock to be converted divided by the lesser of
(i) $2.00 or (ii) 50% of the average closing price for the common stock
for the last ten trading days in the fiscal quarter of the Company
prior to such conversion. The Company has the option to redeem all, or
any portion of on a pro rata basis, the Class C Preferred at any time
upon 30 days prior written notice, at a redemption price equal to 110%
of the stated value.
The conversion rate of the Class C Preferred (when calculated on the
basis of dividing the stated value by $2.00 only) will be subject to
adjustments to protect against dilution in the event of stock
dividends, stock splits, and certain other events. In July, 1999 and
February, 2000 500 and 20 shares of Class C Preferred were converted
into 505,132 and 20,205 shares of common stock respectively.
On April 27, 1998, the Company notified the holders of the Class A
Preferred that the Company would redeem the remaining 460 shares of
outstanding Class A Preferred as of May 28, 1998 at a price per share
equal to 1.1 multiplied by the stated value of each share of Class A
Preferred. Holders of 340 shares of Class A Preferred exercised their
right to convert such Class A Preferred Stock to Common Stock, which
resulted in the issuance of 348,361 shares of common stock in June
1998. 120 shares of Class A Preferred were redeemed for $165,000 in May
1998.
8
<PAGE>
In October 1998, the Company offered to exchange one share of its Class
D Preferred Stock for one share of Class C Preferred Stock. There were
6,260 shares of Class C Preferred Stock outstanding at the time of the
offer. On November 25, 1998 the Company issued 5,720 shares of Class D
Preferred Stock in exchange for a like amount of Class C Preferred
Stock pursuant to the exchange offer.
7. Private Placement of Common Stock
On July 24, 1998 the Company consummated a private placement of
1,768,750 unregistered shares of Common Stock, for $1 per share. The
net proceeds of the offering were approximately $1,487,900.
8. Subsidiary Transactions
In fiscal 1999 B2B received from a third party $37,064 of fixed assets
in exchange for 20.6% of its common shares outstanding, which resulted
in an increase in the Company's paid-in-capital of $27,369. In
addition, on April 30, 1999 B2B sold 2,400 shares of convertible
preferred stock ("Preferred Stock") for net proceeds of $2,122,957. The
stated value of a share of the Preferred Stock is $1,000. B2B's
Preferred Stock has a liquidation preference equal to its stated value
and, upon liquidation, the holders may exchange each share of Preferred
Stock for 400 shares of the Company's Common Stock in lieu of the
liquidation preference. If such an exchange occurs, the Company has the
option exercisable until September 30, 2000 to purchase any of the
Preferred Stock at 1.5 times the stated value of the Preferred Stock.
The Preferred Stock does not provide for dividends and has voting
rights equal to the number of shares of common stock into which it is
convertible. If by September 30, 2000 B2B consummates a public offering
of equity in excess of $5 million, each share of Preferred Stock
automatically converts into 1,667 shares of B2B's Common Stock or
converts based on 75% of the Common Share price in the financing,
whichever results in a higher number of Common Shares. If B2B does not
consummate the financing by September 30, 2000, then the holder of the
Preferred Stock must at their option either convert each Preferred
Share into 1,667 Common Shares of B2B or 400 Common Shares of the
Company. If the holder elects Company Common Stock, the Company will
have the option prior to the conversion to purchase the Preferred Stock
at 1.5 times stated value.
In February 2000 B2B consummated a private placement of unregistered
Common Stock for $2.80 per share, resulting in net proceeds of
$14,975,113, of which $14,040,112 was received on or before February
29,2000.
9
<PAGE>
As a result of the above transactions, at February 29, 2000 the Company
owned 49.9% of B2B's common stock or 38% of B2B, assuming the
conversion of B2B's Preferred Stock. The results of B2B are
consolidated with those of the Company and the minority interest is
presented in the accompanying consolidated balance sheet. Due to the
insignificance of the minority common shareholders' investment in B2B,
the consolidated financial statements reflect approximately 97% of
B2B's net loss for fiscal February 28, 1999 and B2B's entire net loss
for the nine months ended February 29, 2000.
Based on the market price of the Company's Common Stock on the date of
issuance, B2B's Preferred Stock had a non-cash beneficial conversion
feature of $1,257,600. Such portion of the proceeds was allocated to
additional paid-in capital and will be recognized as an expense in
minority interest over the seventeen month period from the issuance of
B2B's Preferred Stock to September 30, 2000, the first date that
conversion to the Company's common stock can occur. The amortization is
calculated using the effective interest method, increases minority
interest in the consolidated balance sheet and amounted to
approximately $666,000 for the nine months ended February 29, 2000.
9. Non-Cash Consulting Expense
On October 28, 1999 options to purchase 400,000 shares of Common Stock
were granted to consultants with an exercise price of $2.69. The total
cost computed under the Black Scholes method was an aggregate of
$452,000 which was recorded as deferred consulting expense and is being
expensed over the six month vesting period. This transaction has no
impact on total stockholders' equity.
In the nine months ended February 29, 2000, options to purchase 165,500
shares of B2Bgalaxy Common Stock were granted to certain providers of
outside services who agreed to accept compensation in stock options.
The exercise prices range from $.60 to $2.00, and the total cost
computed under the Black Scholes method was an aggregate of $273,902,
which was recorded as deferred consulting expense and is being expensed
over the shorter of the vesting period or the period of service. This
transaction has no impact on total stockholders' equity.
10. Subsequent Events
Subsequent to February 29, 2000 and through April 7, 2000, and options
to purchase 55,139 shares of Common Stock at an average price of
$1.4335 were exercised.
11. Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Reportable operating segments are
determined based on the Company's management approach. The management
approach, as defined by SFAS No. 131, is based on the way that the
chief operating decision-maker organizes the segments within an
enterprise for making operating decisions and assessing performance.
While the Company's results of operations are primarily reviewed on a
consolidated basis, the chief operating decision-maker also manages the
enterprise in two segments: (I) Internet Business Solutions Segment,
(II) B2B Marketplace Segment. The Internet Business Solutions Segment
provides a full range of Internet and Intranet-based business
solutions, including Web site design, hosting and management, design
and implementation of database and e-commerce solutions, educational
programs and Web-related strategic consulting. The B2B Marketplace
Segment creates industry-specific business-to-business e-commerce
marketplaces that link buyers and sellers through competitive on-line
exchanges with a focus on improving profitability. Eliminations consist
of intercompany balances.
9
<PAGE>
Nine Months Ended February 29, 2000
<TABLE>
<CAPTION>
B2B Marketplace Internet Business Eliminations Total
Segment Solutions
Segment
<S> <C> <C> <C>
Net revenues $ 41,323 $2,538,901 $2,580,224
Operating loss (2,889,138) (2,399,014) (5,288,152)
Interest income 53,941 34,774 88,715
Interest expense - 4,666 4,666
Depreciation and amortization 188,586 189,700 378,286
Expenditures for long lived assets 903,118 181,539 1,084,657
Total assets 15,033,158 5,339,971 (1,480,050) 18,893,079
</TABLE>
Three Months Ended February 29, 2000
<TABLE>
<CAPTION>
B2B Marketplace Internet Business Eliminations Total
Segment Solutions
Segment
<S> <C> <C> <C>
Net revenues $ 27,928 $514,715 $542,643
Operating loss (1,564,259) (1,504,354) (3,098,241)
Interest income 29,966 21,566 51,532
Interest expense - 1,021 1,021
Depreciation and amortization 95,837 68,245 164,082
Expenditures for long lived assets 304,128 105,820 409,948
Total assets 15,033,158 5,339,971 (1,480,050) 18,893,079
</TABLE>
In the prior year there was only the Internet Business Solutions segment.
12. Comprehensive Income
The amounts related to investments reported in net income and other
comprehensive income for the nine months ended February 29, 2000 are
comprised of the following:
<TABLE>
<CAPTION>
Net income:
<S> <C>
Gain on sale of investments $ 728,750
----------
Other comprehensive income:
Holding gain arising during period, net of tax 96,203
Reclassification adjustment, net of tax (296,345)
-----------
Net loss recognized in other comprehensive income (200,142)
-----------
Total impact on comprehensive income $ 528,608
===========
</TABLE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis should be read in conjunction with the Consolidated
Financial Statements of Cornerstone Internet Solutions Company and Subsidiaries
and Notes to the Consolidated Financial Statements included elsewhere in this
Form 10-QSB.
Results of Operations - Nine Months Ended February 29, 2000 and February 28,
1999
Revenues-Revenues were $2,580,224 and $2,407,339, in the nine months ended
February 29, 2000, and February 28, 1999, respectively. Despite the year over
year increase in revenues during the third quarter, Internet Services revenues
for the quarter ended February 29,2000 were lower than the same quarter of the
prior fiscal year. This decrease reflects the reversal of $220,000 of prior
quarter revenue due to a settlement with a customer, as well as the result of
not realizing anticipated contracts from both new and existing customers. The
loss of development and project management personnel led to the Company's
inability to efficiently fulfill its contracts. Revenues include $41,323 of
subscription revenue derived from its B2B Marketplace Segment. The Company
anticipates that revenues will be impacted in the future by its ability to
expand its services in existing accounts in both segments, and to grow its
client base. There were three customers that individually comprised more than
10% of revenue and in the aggregate amounted to 23% of accounts receivable as of
February 29, 2000, and 43% of total revenues for the nine months ended February
29, 2000. Delays in meeting project milestones in the Internet Services Segment
adversely impacted billing and collections, resulting in higher Accounts
Receivable. The loss of any of these customers would have a material adverse
effect on the results of operations of the Company.
10
<PAGE>
Expenses
Cost of Services Cost of services were $3,043,012 and $3,129,354, in the nine
months ended February 29, 2000 and February 28, 1999, respectively. Cost of
Internet Services revenues as a percentage of related revenues decreased to 118%
from 130% of related revenues in the nine months ended February 29, 2000 and
February 28, 1999, respectively, due to increased volume and improved cost
management. The Company expects that as it secures additional contracts the cost
of services as a percentage of revenues will continue to decrease.
Marketing, sales, and support Marketing, sales, and support expenses were
$321,897 and $383,260 for the Internet Business Solutions Segment, and
$1,318,743, and $0 for the Company's B2B Marketplace Segment for the nine months
ended February 29, 2000 and February 28, 1999, respectively. The increase
results from the consolidation of B2B formed in the last quarter of fiscal 1999
and from increases in personnel to support the growth of the Company and B2B's
operations.
General and Administrative Expenses General and administrative expenses were
$2,515,840 and $1,493,208 in the nine months ended February 29, 2000 and
February 28, 1999, respectively. The 68% increase relates primarily to the added
cost resulting from the Company's B2B Marketplace Segment consisting of
personnel and overhead costs to support the development of the B2B segment.
During the nine months ended February 29, 2000, general and administrative
expenses incurred by the B2B Marketplace Segment were $1,244,555.
Research and Development Research and development expenses were $228,774 in the
nine months ended February 29, 2000, and $0 in the same nine-month period last
year. These costs are related to the development of the Company's B2B
Marketplace Segment.
Stock Compensation Stock compensation expenses were $440,110 and $0,in the nine
months ended February 29,2000 and February 28,1999, respectively. These expenses
reflect agreements with providers of certain outside services to accept
compensation in stock options. Of this amount, $301,332 applies to options in
the Company, arising from services provided to the Internet Business Solutions,
and $138,389 applies to B2Bgalaxy stock options, granted in compensation of
services provided to support the B2B Marketplace Segment. The total cost of
these non-cash items was computed under the Black Scholes method to be an
aggregate of $725,902, and is being expensed over the shorter of the service
period or the vesting period, which varies by vendor.
Other Income and (Expense) Other income and (expense) was $773,427 and ($16,330)
in the nine months ended February 29, 2000 and February 28, 1999 respectively.
The primary factor in the other income for the current fiscal year was the
$728,750 gain on sale of investments.
Gain on sale --In November 1999 the Company received $728,750 in income from the
sale of common stock from the exercise of warrants held by the Company in
another entity.
Income tax benefit No income tax benefit was recorded in the nine months ended
February 29, 2000 and February 29, 1999. Using the standards set forth in
Financial Accounting Standard No. 109, management cannot currently determine
whether the Company will generate taxable income during the period that the
Company's net operating loss carry forward may be applied towards the Company's
taxable income, if any. Accordingly, the Company has established a valuation
allowance against all of its deferred tax assets.
Quarterly results -Quarter Ended February 29, 2000 and February 28, 1999
The Company expects its quarterly results to vary significantly in the future.
The number of customer contracts signed and the ability of the solutions to be
readily implemented by the development staff significantly influence revenues.
Further market acceptance of the Company's offerings is dependent on (1) the
growth and utilization of the Internet as a medium for commerce, (2) the success
of marchFIRST.com in establishing and positioning the marchFIRST.com brand in
the territories where the Company operates (3) the degree of market acceptance
of the Company's offerings and (4) the success of offerings by competitors. The
Company does not expect seasonal factors to be a significant influence on
revenues.
Revenues-Revenues were $542,643 and $835,839, in the quarters ended February 29,
2000 and February 28, 1999, respectively. The decrease in revenues is the result
of a reversal of $220,000 of prior quarter revenue due to a settlement with a
client. Revenue also includes $27,928 of subscription revenue derived from its
B2B Marketplace Segment. The Company anticipates that revenues will be impacted
in the future by its ability to expand its services in existing accounts and
grow its client base. There were four customers that individually comprised more
than 10% of revenue for the quarter, and in the aggregate amounted to 48% of
accounts receivable as of February 29, 2000, and 94% of gross revenues before
settlement for the three months ended February 29, 2000. The loss of any of
these customers would have a material adverse effect on the results of
operations of the Company.
11
<PAGE>
Expenses
Cost of Services Cost of services were $1,094,120 and $891,337, in the quarters
ended February 29, 2000, and February 28, 1999, respectively. Cost of Services
expenses as a percentage of related revenues increased to 202 % from 107 % of
related revenues in the quarters ended February 29, 2000 and February 28, 1999,
respectively due to decreased volume and personnel turnover. The Company expects
that as it secures additional contracts the cost of revenues as a percentage of
revenues will decrease.
Marketing, Sales, and Support Expenses-Marketing, sales, and support expenses
were $167,294, and $124,731 for the Internet Business Segment, and $915,096 and
$0 for the B2B Marketplace Segment, in the quarters ended February 29, 2000 and
February 28, 1999, respectively. The increase results from the initial sales,
marketing, and support expenses for the B2B Segment.
General and Administrative Expenses General and administrative expenses were
$870,824 and $ 414,304 in the quarters ended February 29, 2000, and February 28,
1999, respectively. The 110% increase relates primarily to the added personnel
and overhead costs to support the growth of the B2B operation. During the three
months ended February 29, 2000, general and administrative expenses incurred by
the Company's B2B Marketplace Segment were $341,260.
Stock Compensation Stock compensation expenses were $364,776 and $0,in the
quarters ended February 29,2000 and February 28,1999, respectively. These
expenses reflect agreements with providers of certain outside services to accept
compensation in stock options. Of this amount, $226,387 applies to options in
the Company, arising from services provided to the Internet Business Solutions,
and $138,389 applies to B2Bgalaxy stock options, granted in compensation of
services provided to support the B2B Marketplace Segment. The total cost of
these non-cash items was computed under the Black Scholes method to be an
aggregate of $725,902, and is being expensed over the shorter of the service
period or the vesting period, which varies by vendor.
Other Income and (Expense) Other income and (expense) was $29,628 and ($ 1,284)
in the quarters ended February 29, 2000 and February 28, 1999 respectively.
Income tax benefit No income tax benefit was recorded in the quarters ended
February 29, 2000 and February 28, 1999. Using the standards set forth in
Financial Accounting Standard No. 109, management cannot currently determine
whether the Company will generate taxable income during the period that the
Company's net operating loss carry forward may be applied towards the Company's
taxable income, if any. Accordingly, the Company has established a valuation
allowance against all of its deferred tax assets.
Liquidity and Capital Resources
Since June 1, 1999, the Company's principal sources of capital have been as
follows:
(i) On July 24, 1998, the Company consummated a private placement of
1,768,750 unregistered shares of Common Stock for $1.00 per share.
The net proceeds of the offering were approximately $1,487,900.
(ii) On November 10, 1998, the Company consummated a private placement of
1,600 shares of newly created Class D Preferred Stock for $1,250 per
share. Net proceeds to the Company were $1,969,900.
(iii) In fiscal 1999, the Company received $991,373 from the exercise of
warrants and options, and in the nine months ended February 29,
2000, the Company received $3,661,993 from the exercise of warrants
and options. Subsequent to February 29, 2000, the Company received
$79,039.75 from the exercise of options and warrants.
(iv) On April 30,1999, B2B received net proceeds of $2,122,957 in a
private placement from the sale of 2,400 shares of B2B Preferred
Stock.
(v) On February 29, 2000 B2Bgalaxy.com consummated a private placement
of 5,357,180 shares of Common Stock for $2.80 per share. The net
proceeds of the offering were approximately $14,975,113, of which
$14,040,112 was received by February 29, 2000.
The Company had cash and cash equivalents of $15,359,193 and $2,939,596 at
February 29, 2000 and May 31, 1999, respectively. The increase of $12,419,597
primarily reflects the B2Bgalaxy private placement of 5,357,180 shares, offset
by the funding of operating activities, purchases of property and equipment and
payments of long-term debt of $80,317. Accounts receivable increased from
$1,024,624 as of May 31, 1999 to $1,449,769 as of February 29, 2000, an increase
of 41%, due to delays in meeting projects milestones, which in turn delayed
billing and collections. Capital expenditures were $1,084,657 and $40,073 in the
nine months ended February 29, 2000 and February 28, 1999 respectively. The
increase is primarily related to the development of the B2B Marketplace Segment.
12
<PAGE>
The Company anticipates that capital expenditures will continue to increase as
revenues increase as a result of equipping staff or contractors to service
customers.
The Company's continuing losses from operations could impact the Company's
ability to meet its obligations as they become due. The Independent Auditors'
report for the fiscal year ended May 31, 1999 includes an explanatory paragraph
regarding the Company's ability to continue as a going concern. As part of its
business plan to enhance liquidity, the Company has reduced its operating
expenses related to its Internet Business Solutions Services, and is continuing
its activities designed to increase its revenues. The Company or B2B also may
also seek to obtain additional funds for operations. However, these funds may
not be sufficient to meet the Company's or B2B's longer-term cash requirements
for operations. In addition there can be no assurance that the Company or B2B
will be able to obtain additional financing. Based on management's assessment of
the demand for Internet based professional services, the Company may
significantly alter the level of expenses. Management believes that based on
funds on hand at February 29, 2000 and anticipated revenues, operations can
continue until at least through December 2000.
New Accounting Pronouncement
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by Statement of Financial Accounting Standards No. 137,
in fiscal year 2001, for which the Company is presently assessing its impact on
the consolidated financial statements, if any.
Year 2000 Compliance
To date, the Company has not encountered any significant effects of the Year
2000 problem, either internally or with third parties. This does not guarantee
that problems will not occur in the future or have not yet been detected.
Forward looking statements
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to develop its products, the success of
its marchFIRST.com Cornerstone subsidiary and of its B2Bgalaxy.com subsidiary,
as well as general market conditions, competition and pricing. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included in this Form 10-QSB will prove to be accurate. In light of significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company, or any other person, that the objectives and plans of the Company will
be achieved.
Inflation
The past and expected future impact of inflation on the financial statements is
not significant.
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
The Company issued 479,503 shares of Common Stock pursuant to the exercise of
options in the quarter ended February 29, 2000. The options had an exercise
price ranging from $.813 to $3 per share. The Common Stock was issued pursuant
to the exemption contained in Section 4 (2) of the Securities Act of 1933, as
amended. The Company issued 87,500 shares of Common Stock pursuant to the
exercise of warrants at a price of $4 in the quarter ended February 29,2000.
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K - None
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CORNERSTONE INTERNET SOLUTIONS COMPANY
-----------------
(Registrant)
/S/ Ken Gruber
Date: April 14, 2000 ------------------------------
Ken Gruber
Executive Vice President
And Chief Financial and Accounting Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-QSB for the quarterly period ended February 29, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> DEC-01-2000
<PERIOD-END> FEB-29-2000
<CASH> 15,359,193
<SECURITIES> 208,206
<RECEIVABLES> 1,449,769
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,183,438
<PP&E> 3,090,617
<DEPRECIATION> 1,693,897
<TOTAL-ASSETS> 18,893,079
<CURRENT-LIABILITIES> 1,538,366
<BONDS> 0
0
33
<COMMON> 250,282
<OTHER-SE> 8,301,499
<TOTAL-LIABILITY-AND-EQUITY> 18,893,079
<SALES> 0
<TOTAL-REVENUES> 542,643
<CGS> 1,094,120
<TOTAL-COSTS> 3,640,884
<OTHER-EXPENSES> 38,197
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,021)
<INCOME-PRETAX> (3,068,613)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (221,929)
<CHANGES> 0
<NET-INCOME> (3,290,542)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
