U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
/ 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 12
,
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 15
Item 2. Change in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submissions of Matters to a Vote by Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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
================================
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
Research and development (excludes stock
compensation of $4,254) 228,774 -
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)
Loss on sale of investments, net (59,080) -
Other income (expense), net (38,197) 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
============ ============
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
Research and development (excludes stock
compensation of $4,254) 228,774 --
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 669,670 --
Other income (expense), net 19,708 (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 60,499 (36,720)
Accounts payable 109,451 (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 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 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
marchFIRST.com 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 April 1999 B2B
received $2,122,957 from the sale of Preferred Stock, and $14,975,113
from the private placement of common stock in early 2000, of which
$14,040,112 was received as of February 29, 2000. For the nine months
ended February 29, 2000 the Company received $3,661,993 from the
exercise of options. 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 C
As of February 29, 2000, there were 20 shares of Class C Preferred
Stock outstanding, which are convertible into an aggregate of 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
November, 1999 500 and 20 shares of Class C Preferred were converted
into 505,132 and 20,205 shares of common stock, respectively. The Class
C Preferred Stock paid dividends of 12% of stated value through June
30, 1999, payable in common stock. 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, 40,213 shares of Common Stock were
issued in payment of all preferred stock dividends.
8
<PAGE>
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.
On February 29, 2000 B2B consummated a private placement of 5,357,180
shares 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. Of the net proceeds, $6,841,838 was allocated
to Paid in Capital, and $7,198,274 to Minority Interest.
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. Due to the Company's control of
B2B, 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. Through February 28, 2000, the
consolidated financial statements reflect approximately 97% of B2B's
net loss for fiscal 1999 and B2B's entire net loss for the nine months
ended February 29, 2000. Commencing March 1, 2000, the consolidated
financial statements will reflect 49.9% of B2B's results.
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
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 per share.
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 B2B 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 exercise price
of $1.4335 per share were exercised.
11. Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Accordingly, 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.
10
<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>
11
<PAGE>
The comprehensive loss for the three and nine months ended February 29, 2000 was
($3,227,331) and ($5,387,404), respectively.
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 this increase
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 Business Solutions Segment adversely impacted billing
and collections, resulting in an increase in accounts receivable from May 31,
1999. The loss of any of these customers would have a material adverse effect on
the results of operations of the Company.
12
<PAGE>
Expenses
Cost of Services Revenue-Cost of services revenue was $3,043,012 and $3,129,354,
in the nine months ended February 29, 2000 and February 28, 1999, respectively.
Cost of 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 revenue 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 (all incurred in the quarter ended
February 29, 2000), and $0 in the same nine-month period last year. These costs
are related to the development of technology for 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, $301,721 relates to Company stock
options arising from services provided to the Internet Business Solutions
Segment, and $138,389 applies to B2B stock options, granted for 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 component in the other income for the current fiscal
year was the November 1999 sale of common stock from the exercise of warrants
held by the Company in another entity, which resulted in a gain of $728,750.
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.
Results of Operations-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
customer in February 2000. 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
revenues, excluding the 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.
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Expenses
Cost of Services Revenue - Cost of services revenue was $1,094,120 and $891,337,
in the quarters ended February 29, 2000, and February 28, 1999, respectively.
Cost of services revenue 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 relates to company stock
options arising from services provided to the Internet Business Solutions
Segment, and $138,389 relates to B2B stock options, granted for 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, and through April 7,
2000, the Company received $79,040 from the exercise of stock
options.
(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 B2B consummated a private placement of
5,357,180 shares of Common Stock for $2.80 per share. The net
proceeds of the offering were $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 proceeds from the B2B 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. 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 project 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.
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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 included 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
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 2002, 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
15
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K - None
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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
17
