1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transaction period from:
Commission File number: 0-24031
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Integrated Business Systems and Services, Inc.
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(Exact name of small business issuer as specified in its charter)
South Carolina 57-0910139
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
115 Atrium Way, Suite 128, Columbia, SC 29223
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(Address of principal executive offices)
(803) 736-5595
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(Issuer's telephone number)
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(Former Name, address or fiscal year, if changed since last report)
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. (X) YES ( ) NO
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
8,388,663 shares of no par common shares outstanding at September 30, 1998
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Transitional Small Business Disclosure Format (check one) ( ) YES (X) NO
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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
INDEX
PAGE
NUMBER
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets - September 30, 1998 and
December 31, 1997 3
Statements of Operations for the nine months ended
September 30, 1998 and 1997 4
Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of 7 - 11
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Items 1 - 6 12
SIGNATURES 13
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INTEGRATED BUSINESS SYSTEMS & SERVICES, INC.
BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,585 $ 84,649
Accounts receivable 64,650 240,523
Inventory 3,962 3,962
Prepaid commissions 22,137 14,420
Other prepaid expenses 19,321 37,410
----------------------------------
Total current assets 111,655 380,964
Capitalized software costs, net 790,755 207,642
Property and equipment, net 150,786 115,559
Other assets 2,743 3,318
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Total assets $ 1,055,939 $ 707,483
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Notes payable $ 75,469 $ 92,295
Long-term debt, current portion 39,000 36,000
Accounts payable 138,180 174,667
Accrued liabilities
Accrued compensation and benefits 86,868 68,151
Accrued payroll taxes 320,284 13,700
Other 378,189 44,914
Deferred revenue 27,835 107,803
----------------------------------
Total current liabilities 1,065,825 537,530
Long-term debt, net of current portion 551,000 78,000
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Total liabilities 1,616,825 615,530
Commitments and contingencies -- --
Stockholders' equity (deficiency):
Class A common shares, voting, no par value, 100,000,000 shares
authorized, 8,388,663 and 7,987,763 shares outstanding at
September 30, 1998 and December 31, 1997 respectively
1,976,061 1,700,959
Accumulated deficit (2,536,948) (1,609,006)
-----------------------------------
Total shareholders' equity (deficiency) (560,887) 91,953
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Total liabilities and shareholders' equity (deficiency) $ 1,055,938 $ 707,483
===================================
The accompanying notes are an integral part of these financial statements.
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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
Statements of Operations
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------------ ------------------------------
1998 1997 1998 1997
------------------------------ ------------------------------
REVENUES
Funded development and other services $ 54,665 $ 272,087 $ 380,141 $ 1,039,558
Hardware sales 37,981 44,586 88,684 279,659
Software licensing 2,779 46,150 39,369 0
Maintenance 76,924 41,449 230,546 141,161
------------------------------ ------------------------------
Total revenues 172,349 404,272 738,740 1,460,378
------------------------------ ------------------------------
OPERATING EXPENSES
Cost of revenues 109,709 174,537 367,855 701,697
Research and development costs 11,289 72,688 54,420 277,802
General and administrative 277,614 225,694 889,568 683,711
Sales and marketing 147,603 129,655 314,767 228,077
------------------------------ ------------------------------
Total operating expenses 546,215 602,574 1,626,610 1,891,287
------------------------------ ------------------------------
Loss from operations (373,866) (198,302) (887,870) (430,909)
Interest expense 22,903 38,056 40,070 69,121
------------------------------ ------------------------------
Net loss $ (396,769) $ (236,358) $ (927,940) $ (500,030)
============================== ==============================
Earnings (loss) per share:
============================== ==============================
Basic and diluted $ (0.05) $ (0.07) $ (0.11) $ (0.14)
============================== ============================
============================== ===============================
Weighted average common shares outstanding 8,142,835 3,600,000 8,142,835 3,600,000
============================== ===============================
The accompanying notes are an integral part of these financial statements.
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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30
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1998 1997
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OPERATING ACTIVITIES
Net loss $ (927,940) $ (500,030)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation 43,575 36,265
Amortization of software costs 15,302 15,302
Decrease (increase) in:
Accounts receivable 175,874 (46,004)
Inventory 0 8,842
Prepaid commissions 18,088 27,452
Prepaid expenses and other assets (7,717) (8,994)
Refundable deposits 575 0
Deferred costs 0 (178,221)
Increase (decrease) in:
Accounts payable 248,884 (37,841)
Accrued expenses 373,205 143,831
Deferred revenue (79,968) (250,201)
Payable to a related party 35,300 (18,055)
-------------------------------
Cash used by operating activities (104,822) (807,654)
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INVESTING ACTIVITIES
Purchases of property and equipment, net (78,803) (4,926)
Capitalized internal software development costs (598,415) (78,206)
-------------------------------
Cash used by investing activities (677,218) (83,132)
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FINANCING ACTIVITIES
Proceeds from (payments on) notes payable, net (49,126) 500,422
Proceeds from long-term debt 500,000 49,404
Payments on long-term debt (27,000) (27,000)
Sale of common shares 275,102 355,126
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Cash provided by financing activities 698,976 877,952
-------------------------------
Net decrease in cash (83,064) (12,834)
Cash and cash equivalents at beginning of period 84,649 15,625
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Cash and cash equivalents at end of period $ 1,585 $ 2,791
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The accompanying notes are an integral part of these financial statements.
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INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310 of Regulation
S-B promulgated by the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial Statements. In the opinion of
management, all adjustments (consisting only of those of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended September 30,
1998, are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1998. For further information, refer to the
audited financial statements and footnotes thereto included in the Company's
registration statement on Form SB-1 (File no. 333-43437).
EARNINGS PER SHARE:
The computation of basic earnings (loss) per share and diluted earnings (loss)
per share is in conformity with the provisions of Statement of Financial
Accounting Standards No. 128.
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PART I
FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information which the Company
believes is relevant to an assessment and understanding of the Company's
results of operations and financial condition. This discussion should be read
in conjunction with the financial statements and notes thereto.
Results of Operations
For the three months ended September 30, 1998 as compared to the three months
ended September 30, 1997
Revenues. Total revenues decreased $231,923 to $172,349 in the three months
ending September, 1998 from $404,272 in the three months ending September,
1997. This decrease was primarily attributable to a decrease of sales of
integration services and data collection equipment due to the increased
emphasis in the completion of FIS 2.0. This decrease was partially offset by an
increase in the hardware and software maintenance and support revenue.
Cost of Revenues. Total cost of revenues decreased $64,828 to $109,709 in the
three months ending September, 1998 from $174,537 in the three months ending
September, 1997. This decrease was attributable to a decrease in data
collection equipment costs and integrated software costs as a result of lower
sales levels.
The cost of revenues as a percentage of total revenues was 64% and 43% in the
three months ending September, 1998 and 1997, respectively. Accordingly, the
gross margin was 36% and 57% in the three months ending September, 1998 and
1997, respectively.
Research and Development. Research and development costs decreased $61,399 to
$11,289 in the three months ending September, 1998 from $72,688 in the three
months ending September, 1997. The Company continued to focus on the completion
of Version 2.0 of the FIS System. Research and development costs represented
approximately 7% and 18% of total revenues for the three months ending
September, 1998 and 1987, respectively. It is expected that the Manufacturing
Execution Management (MEM) module of Version 2.0 of the FIS System will be
available for general release during the fourth quarter of 1998. The MEM module
is the fourth and final module scheduled to complete the FIS 2.0 system.
General and Administrative. General and administrative expenses, including
interest expense, increased $36,767 to $300,517 in the three months ending
September, 1998 from $263,750 in the three months ending September, 1997. This
increase was partially attributable to the addition of an administrative
assistant to the President, a Vice President of Operations and a systems
engineer. The elimination of the in-house counsel and the reduction of salaries
of the principals as well as a reduction in rent expense associated with the
closing of the Raleigh, North Carolina office in the fourth quarter of 1997,
helped offset these increases. An increase in the professional fees accounted
for the major increase in general and administrative expenses. General and
administrative expenses, including interest expense, represented approximately
174% and 65% of total revenues in the three months ending September, 1998 and
1997, respectively.
Sales and Marketing. Sales and marketing expenses increased $17,948 to $147,603
in the three months ending September, 1998 from $129,655 in the three months
ending September, 1997. This increase was primarily attributable to an increase
in marketing materials and costs associated with the Bobbin Show. This increase
was partially offset by a decrease in marketing commission due to a decrease in
sales and a reduced salary due to a change of Sales and Marketing personnel.
Sales and Marketing expenses represented approximately 86% and 32% of total
revenues in the three months ending September, 1998 and 1997, respectively.
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For the nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997
Revenues. Total revenues decreased $721,638 to $738,740 in the first nine
months of 1998 from $1,460,378 in the first nine months of 1997. This decrease
was primarily attributable to a decrease of sales of integration services and
data collection equipment due to the increased emphasis in the completion of
FIS 2.0. This decrease was offset in part by an increase in software Licensing
revenue and in the hardware and software maintenance and support revenue.
Cost of Revenues. Total cost of revenues decreased $333,842 to $367,855 in the
first nine months of 1998 from $701,697 in the first nine months of 1997. This
decrease was primarily attributable to a decrease in data collection equipment
costs and integrated software costs as a result of lower sales levels.
The cost of revenues as a percentage of total revenues was 50% and 48% in the
first nine months of 1998 and 1997, respectively. Accordingly, the gross margin
was 50% and 52% in the first nine months of 1998 and 1997, respectively.
Research and Development. Research and development costs decreased $223,382 to
$54,420 in the first nine months of 1998 from $277,802 in the first nine months
of 1997. During the first nine months of 1998, the Company continued to focus
on the completion of Version 2.0 of the FIS System. Research and Development
costs represented approximately 7% and 19% of total revenues for the first nine
months of 1998 and 1997 respectively. It is expected that the Manufacturing
Execution Management (MEM) module of Version 2.0 of the FIS System will be
available for general release during the fourth quarter of 1998. The MEM module
is the fourth and final module scheduled to complete the FIS 2.0 system.
General and Administrative. General and administrative expenses, including
interest expense, increased $176,806 to $929,638 in the first nine months of
1998 from $752,832 in the first nine months of 1997. This increase was
partially attributable to the addition of an administrative assistant to the
President, a Vice President of Operations and a systems engineer. The
elimination of the in-house counsel and the reduction of salaries of the
principals as well as a reduction in rent expense associated with the closing
of the Raleigh, North Carolina office in the fourth quarter of 1997, helped
offset these increases. An increase in the professional fees accounted for the
major increase in general and administrative expenses. General and
administrative expenses, including interest expense, represented approximately
126% and 52% of total revenues in the first nine months of 1998 and 1997,
respectively.
Sales and Marketing. Sales and marketing expenses increased $86,690 to $314,767
in the first nine months of 1998 from $228,077 in the first nine months of
1997. This increase was primarily attributable to an increase in the
development of marketing materials, attendance at the International Hosiery
Exposition and Conference as an exhibitor, the development of a Web Site and an
increase in travel expenses. This increase was partially offset by a decrease
in marketing commission due to a decrease in sales. Sales and marketing
expenses represented approximately 43% and 16% of total revenues for 1998 and
1997, respectively.
Financial Condition at September 30, 1998
Cash and cash equivalents decreased by $83,064 during the nine months ended
September 30, 1998, and were utilized mainly for working capital needs and to
fund software completion as previously discussed.
Accounts receivable decreased by $175,874 during the period, reflecting
decreased sales of integration services and data collection equipment.
The $598,415 increase in capitalized software is mainly attributable to the
continued focus on completion of Version 2.0 of the FIS System.
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The $528,295 increase in current liabilities during the period is due to the
continued effort to complete FIS 2.0, research and development focus and cash
availability. Management believes that it will be able to service these
payables out of cash generated through operations and planned financing
transactions.
Overall, the Company's current liabilities exceeded its current assets at
September 30, 1998 by $954,170.
Liquidity and Capital Resources
Since its inception the Company has primarily financed its operations through
revenues from operations, including funded research and development revenues,
and occasional short term loans from the Company's principals or their
acquaintances. The Company, however, has had a net loss every year of its
existence except 1994, in which year it had net income of $31,373; therefore,
the Company's operations have led to a growing working capital deficit and a
decrease in shareholders' equity. Accordingly, the Company has had liquidity
problems from time to time. As of September 30, 1998 the shareholders' deficit
was $560,887. As of September 30, 1998 the Company's working capital deficit
was $954,170.
In December 1995, the Company entered into a factoring arrangement that is
currently being administered as a short term borrowing arrangement
collateralized by accounts receivable, which generally permits borrowing of up
to 75% of accounts receivable. In February 1996, the Company entered into a
loan for $180,000 collateralized by substantially all of the assets of the
Company. This loan is being repaid in sixty equal monthly installments.
The Company also issued two convertible promissory notes in March 1997 in the
principal amount of approximately $190,000 to two investors, and, in March
1997, executed a promissory note to a significant vendor of the Company in the
amount of approximately $320,000 in connection with various payments owed to
this vendor.
On June 3, 1997, the Company sold 1,300,000 shares of Common Stock at a price
of $0.50 (Cdn.) per share for gross proceeds to the Company, after payment of a
commission to Wolverton Securities Ltd. ("Wolverton"), of approximately
$420,000. After deducting offering costs of approximately $100,000, the net
proceeds to the Company from that offering were approximately $320,000.
In the fourth quarter of 1996, the Company made a strategic decision to
concentrate on completing the FIS System Version 2.0, and initiating the sales
and marketing efforts relating thereto. Accordingly, during the period this
development continues, the Company expects a reduction in revenues and an
increase in sales and marketing expenses.
On November 26, 1997, the Company consummated an initial public offering of its
common stock. In this initial public offering, the Company sold 2,500,000
shares of Common Stock at a price of $1.00 (Cdn) per share for for gross
proceeds to the Company, after payment of Wolverton's commission, of
approximately $1,587,000. After deducting offering costs of approximately
$368,000, the net proceeds to the Company from that offering were approximately
$1,219,000. The Company used a portion of these proceeds to repay the
promissory note to a significant vendor of the Company in the amount of
approximately $320,000 discussed above.
In addition, in connection with the consummation of the initial public
offering, one of the convertible notes issued by the Company in March 1997 in
the principal amount of $116,700 was converted into shares of Common Stock. The
other convertible note in the principal amount of $70,532 plus approximately
$5,100 in interest was repaid by the Company with a portion of the proceeds
from the initial public offering.
On April 24, 1998, the Company issued 100,000 shares of Common Stock at a price
of $1.00 (Cdn.) per share pursuant to the exercise by Wolverton of 100,000 of
the Warrants. The gross proceeds to the Company from the exercise of such
Warrants were approximately $69,000.
On May 12, 1998, the Company issued 50,000 shares of Common Stock at a price of
$1.00 (Cdn.) per share pursuant to the exercise of 50,000 of the Warrants. The
gross proceeds to the Company from the exercise of such Warrants were $35,000.
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On May 19, 1998, the Company issued 50,000 shares of Common Stock at a price of
$1.00 (Cdn.) per share pursuant to the exercise of 50,000 of the Warrants. The
gross proceeds to the Company from the exercise of such Warrants were $34,000.
On June 12, 1998, the Company completed a private placement of five-year
convertible notes in the amount of $500,000 (or C$715,000, using an exchange
rate of US$1.00 - C$1.43) and non-transferable share purchase warrants
entitling the holders to purchase an aggregate of 541,000 common shares of the
Company. The notes, which bear interest at the rate of 12% per year, may be
converted into common shares of the Company at a conversion price of US$.923
(or C$1.32) during the first year and during each of the remaining four years
of the term of the notes, a conversion price that is higher than the conversion
price in the previous year by US$0.175 (or C$0.25) per share.
On July 21, 1998, the Company issued 50,000 shares of Common Stock at a price
of $1.00 (Cdn.) per share pursuant to the exercise of 50,000 of the Warrants.
The gross proceeds to the Company from the exercise of such Warrants were
approximately $32,900.
On August 19, 1998, the Company issued 50,000 shares of Common Stock at a price
of $1.00 (Cdn.) per share pursuant to the exercise of 50,000 of the Warrants.
The gross proceeds to the Company from the exercise of such Warrants were
approximately $32,900.
On August 21, 1998, the Company issued 30,000 shares of Common Stock at a price
of $1.00 (Cdn.) per share pursuant to the exercise of 30,000 of the Warrants.
The gross proceeds to the Company from the exercise of such Warrants were
approximately $19,200.
On September 15, 1998, the Company issued 50,000 shares of Common Stock at a
price of $1.00 (Cdn.) per share pursuant to the exercise of 30,000 of the
Warrants. The gross proceeds to the Company from the exercise of such Warrants
were approximately $32,700.
The Company expects that the proceeds from its capital raising activities along
with revenues generated from operations will be adequate to meet the Company's
projected working capital and other cash requirements for at least the next 3
months, which is the period the Company believes will be required to implement
and achieve its business objectives. Management intends, however, to closely
follow the Company's progress and to reduce expenses if the Company's
strategies do not result in sufficient revenues within a reasonable period. Any
such reduction will involve scaling back, delaying or postponing those
development activities that are not essential to the Company achieving its
stated objectives. In any event, the working capital deficit will continue to
grow unless and until revenues increase sufficiently to meet expenditure
levels.
The Year 2000
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's vendors,
working either alone or in conjunction with other software or systems, will not
accept input of, store, manipulate or output dates in the years 1999, 2000 or
thereafter without error or interruption (commonly know as the "Year 2000"
problem). The Company has conducted a review of its business systems, including
its computer systems, and is querying its vendors as to their progress in
identifying and addressing problems that their computer systems may face in
correctly processing date information as the year 2000 approaches and is
reached. However, there can not be assurance that the Company will identify all
such Year 2000 problems in its computer systems or those of its vendors or
resellers in advance of there occurrence or that the Company will be able to
successfully remedy any problems that are discovered. The expenses of the
Company's efforts to identify and address such problem, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company's business,
financial condition and results of operations. Maintenance or modification
costs will be expensed as incurred, while the costs of any new software will be
capitalized over the software's useful life.
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This form 10-QSB contains forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The Company
cautions readers of this Form 10-QSB that such forward- looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from those expressed or implied by such forward-looking
statements. Although the Company's management believes that their expectations
of future performance are based on reasonable assumptions within the bounds of
their knowledge of their business and operations, there can be no assurance
that actual results will not differ materially from their expectations. Factors
which could cause actual results to differ from expectations included, among
other things, the risks associated with start-up companies, including start-up
losses, liquidity problems, uncertainty of revenues, markets, profitability and
the need for additional funding; the risks that the Company may be unable to
raise additional capital through private financings, debt or equity offerings
or collaborative arrangements with others on acceptable terms; intense
competition from a variety of competitors with greater resources and market
acceptance; the Company's limited experience in assembling a sales and
marketing team and strategy; the potential need to make continuing significant
investments in software development in response to rapidly evolving
technologies and technological shifts; the risks associated with the potential
loss of one or more key customers of the Company; the Company's dependence upon
key personnel; the challenges and uncertainties in the implementation of the
Company's expansion and development strategies; and other factors described in
other reports filed by the Company with the Securities and Exchange Commission.
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PART II
OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
The Company is not party to any pending litigation.
Item 2 CHANGES IN SECURITIES
This item is not applicable.
Item 3 DEFAULTS UPON SENIOR SECURITIES
This item is not applicable.
Item 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
This item is not applicable.
Item 5 OTHER INFORMATION
This item is not applicable.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
There were no Form 8-K filings during the period.
The Financial Data Schedule is included herein as Exhibit 27.
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto, duly authorized.
Integrated Business Systems and Services, Inc.
(Registrant)
/s/ Harry P.Langley
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Harry P. Langley
President, Treasurer, Chief Executive
Officer, Chief Financial Officer and
Chairman of the Board
Date: November 13, 1998