-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M0sEaQeLh/cwsJVG/FV7aT0F08K9rESCZXuRiecmBwKEM+81bmBOk0p0Zv+EANo1 W2f7ns6MfZvZBYsDFwpZkA== 0000921895-00-000310.txt : 20000420 0000921895-00-000310.hdr.sgml : 20000420 ACCESSION NUMBER: 0000921895-00-000310 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNERSTONE INTERNET SOLUTIONS CO /DE/ CENTRAL INDEX KEY: 0000929648 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 223272662 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13360 FILM NUMBER: 604995 BUSINESS ADDRESS: STREET 1: 584 BROADWAY SUITE 509 CITY: NEW YORK STATE: NY ZIP: 10012 BUSINESS PHONE: 2123433920 MAIL ADDRESS: STREET 1: 584 BROADWAY SUITE 509 CITY: NEW YORK STATE: NY ZIP: 10012 FORMER COMPANY: FORMER CONFORMED NAME: ENTERACTIVE INC /DE/ DATE OF NAME CHANGE: 19940907 10QSB 1 FORM 10QSB 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/ 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 CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries Consolidated Balance Sheets
February 29, May 31, 2000 1999 ---------------------- -------------- ASSETS (unaudited) Current Assets: 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 ----------------- ------------------
See notes to consolidated financial statements. 3 Cornerstone Internet Solutions Company and Subsidiaries Consolidated Statements of Operations (unaudited)
Three months ended February 29, February 28, 2000 1999 -------------------- ------------ 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 --------------------------------
See notes to consolidated financial statements 4 Cornerstone Internet Solutions Company and Subsidiaries Consolidated Statements of Operations (unaudited)
Nine months ended February 29, February 28, 2000 1999 ---------------------------------------- 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 ------------ ------------
See notes to consolidated financial statements 5 Cornerstone Internet Solutions Company and Subsidiaries Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended February 29, February 28, 2000 1999 ---------------------------------- Cash flows from operating activities 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 ------------ ------------
See notes to consolidated financial statements 6 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 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 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 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 Nine Months Ended February 29, 2000
B2B Marketplace Internet Business Eliminations Total Segment Solutions Segment 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
Three Months Ended February 29, 2000
B2B Marketplace Internet Business Eliminations Total Segment Solutions Segment 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
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:
Net income: 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 ===========
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 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 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 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 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27--Financial Data Schedule (b) Reports on Form 8-K - None 14 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 EX-27 2 ARTICLE 5 FDS FOR 10-QSB
5 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. 3-MOS MAY-31-2000 DEC-01-2000 FEB-29-2000 15,359,193 208,206 1,449,769 0 0 17,183,438 3,090,617 1,693,897 18,893,079 1,538,366 0 0 33 250,282 8,301,499 18,893,079 0 542,643 1,094,120 3,640,884 38,197 0 (1,021) (3,068,613) 0 0 0 (221,929) 0 (3,290,542) (0.15) (0.15)
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