UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Six Months Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NUMBER: 001-14753
----------
CHINAB2BSOURCING.COM, INC.
(FORMERLY INTERNATIONAL SMART SOURCING, INC.)
---------------------------------------------
(Exact Name of Small Business Issuer as specified in its charter)
Delaware 11-3423157
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Broad Hollow Road
Farmingdale, NY 11735
(Address of principal executive offices)
(631) 293-4650
(Issuer's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____
---------
As of July 31, 2000, the Registrant had 3,555,167 shares of its Common Stock,
$0.001 par value, issued and outstanding.
CHINAB2BSOURCING.COM, INC.
(FORMERLY INTERNATIONAL SMART SOURCING, INC.)
FORM 10-QSB
JUNE 30, 2000
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Financial Statements 4-5
Item 2 - Management's Discussion and Analysis or
Plan of Operation 6-8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 9
Item 2 - Changes in Securities and Use of Proceeds 9
Item 4 - Submission of Matters to a Vote of Security Holders 10
Item 5 - Other Information 11
Item 6 - Exhibits and reports on Form 8-K 11
SIGNATURE 12
ITEM 1. FINANCIAL STATEMENTS
CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES
(FORMERLY INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $460,619
Cash - Restricted 1,000,000
Accounts Receivable 815,226
Accounts Receivable - Related Party 44,343
Inventory 1,238,875
Prepaid Expenses 229,170
----------
Total Current Assets 3,788,233
Property and Equipment (net) 805,480
Goodwill 1,477,454
License Agreement 424,998
Note Receivable - (including accrued interest of 38,670) 538,670
Note Receivable - Related Party 187,787
OTHER ASSETS 311,699
----------
TOTAL ASSETS $7,534,321
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $1,355,179
Current portion of long tem debt 772,395
Current portion of Obligations under Capital Lease 84,410
-----------
Total Current Liabilities 2,211,984
Long tem debt 539,936
Obligations under Capital Lease 143,508
-----------
Total Liabilities 2,895,428
-----------
STOCKHOLDERS' EQUITY
Common Stock, $0.001 par value, authorized 10,000,000
shares, issued and outstanding 3,555,167 3,555
Additional Paid-in Capital 7,233,390
Deficit (2,598,052)
-----------
Total Stockholders' Equity 4,638,893
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,534,321
==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES
(FORMERLY INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- ----------------------------------
JUNE 30, 2000 JUNE 25, 1999 JUNE 30, 2000 JUNE 25, 1999
------------- ------------- ------------- -------------
NET SALES $1,782,265 $1,119,176 $3,492,424 $2,452,367
COST OF GOODS SOLD 1,112,284 777,627 2,185,190 1,650,215
------------- ------------- ------------- -------------
GROSS PROFIT 669,981 341,549 1,307,234 802,152
------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling and Shipping 297,201 115,092 624,914 219,841
General and Administrative 768,752 619,878 1,423,282 1,009,521
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 1,065,953 734,970 2,048,196 1,229,362
------------- ------------- ------------- -------------
LOSS BEFORE INTEREST EXPENSE (395,972) (393,421) (740,962) (427,210)
INTEREST & OTHER INCOME 32,515 69,586 67,214 69,586
INTEREST EXPENSE 53,927 53,863 93,287 111,580
------------- ------------- ------------- -------------
NET LOSS ($417,384) ($377,698) ($767,035) ($469,204)
============= ============= ============= =============
NET LOSS PER SHARE - BASIC ($0.12) ($0.13) ($0.23) ($0.19)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES 3,397,150 2,917,225 3,390,000 2,431,100
============= ============= ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES
(formerly International Smart Sourcing, Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
----------------------------------------
JUNE 30, 2000 JUNE 25, 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (767,035) $(469,204)
--------- ----------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation 108,848 140,983
Amortization 148,202 111,900
CHANGES IN ASSETS AND LIABILITIES:
(Increase) Decrease in Accounts Receivable (236,903) 74,383
Increase in Notes Receivable from Related Parties 21,020 102,828
Increase in Notes Receivable (21,054) 0
Increase in Inventory (451,544) (1,054)
Decrease in Prepaid Expenses 69,091 26,962
(Increase) Decrease in Other Assets (882) 5,242
Increase (Decrease) in Accounts Payable and Accrued Expenses 427,641 (568,519)
-------- ---------
TOTAL ADJUSTMENTS 64,419 (107,275)
-------- ---------
CASH USED IN OPERATING ACTIVITIES (702,616) (576,479)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PROPERTY AND EQUIPMENT (202,235) (212,295)
--------- ---------
CASH USED IN INVESTING ACTIVITIES (202,235) (212,295)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred Offering Costs (33,641) (834,342)
Issuance of Stock 415,000 5,951,250
Repayments of Loans (140,212) (535,926)
Proceeds from Loans 132,058 231,080
-------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 373,205 4,812,062
-------- ---------
NET INCREASE (DECREASE) IN CASH (531,646) 4,023,288
CASH - BEGINNING OF PERIOD 1,992,265 16,146
---------- ---------
CASH - END OF PERIOD $ 1,460,619 $4,039,434
=========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-QSB. Accordingly, they
do not include all of the information and disclosures required for annual
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and related footnotes included in the
Company's annual report on form 10-KSB for the year ended December 31,1999.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of June 30, 2000 and the results of operations and cash flows for
the three and six month periods ended June 30, 2000 and June 26, 1999 have been
included.
The results of operations for the three and six month periods ended June 30,
2000, are not necessarily indicative of the results to be expected for the full
year ended December 29, 2000.
2. NAME CHANGE
On June 15, 2000 the Company changed its named from International Smart
Sourcing, Inc. to ChinaB2Bsourcing.com, Inc.
3. BANK DEBT
In December 1999, the Company acquired bank financing from European American
Bank (EAB). The financing agreement includes a demand note of $1,250,000 and a
term loan of $500,000. With the proceeds of the loans the $1,000,000, revolving
line of credit with Republic National Bank was paid in full leaving $250,000
available to be drawn down on the demand note. As of June 30, 2000 the Company
owes approximately $ 953,000 on the demand note and has not drawn any funds from
the term note.
4
The loan is secured by accounts receivable, inventory and a $1,000,000
certificate of deposit that is restricted from use until the Company earns
$100,000 year-to-date net profit. In addition, there is a maximum leverage and
minimum capital base requirement. The minimum capital base was not met. On March
30, 2000 EAB issued a waiver for the minimum capital base requirement and
amended such requirement to $2,000,000. However, EAB has prohibited the Company
from drawing any additional funds from the lines of credit until further review.
4. ISSUANCE OF ADDITIONAL SHARES OF STOCK
In June 2000 the Company entered into a placement agent agreement with Network 1
Financial Securities, Inc. to offer a minimum 100,000 Shares and a maximum
500,000 at $3.00 per share as a private placement of securities to purchasers
who qualify as "Accredited Investors" under Regulation D promulgated under the
Securities Act of 1933. On June 22, 2000 the company issued 166,667 shares under
this agreement. Net proceeds from the offering after the underwriting
commissions and other related fees were $ 415,000.
5. NOTE RECEIVABLE
In June 2000 the Company renegotiated the loans that it had previously lent to
another company in July 1999 and August 1999, which were to have been repaid by
November 15, 1999. This agreement granted to the Company a security interest in
the inventory of Azurel as collateral for the loan and accrued interest. In
consideration for the security agreement the Company granted an extension of
maturity of the notes to January 31, 2001.
6. NOTES PAYABLE - RELATED PARTIES
On May 31, 2000 the company obtained two loans aggregating $ 100,000 from two of
its principal stockholders. Such loans are unsecured and are due on demand with
interest at 10% per annum.
7. STOCK OPTION AND GRANT PLAN
On April 17, 2000 the Company granted stock options to key employees. The
aggregate number of options granted was 60,500 to purchase shares the Company's
common stock, at an exercise price of $ 5.125 per share. The options vest on the
second anniversary of the grant date and expire on the fifth anniversary of the
grant date.
On the same date, the Company granted 250,000 stock options to a member of the
Board of Directors. These options vest 20% per year over a 5-year period, and
are exercisable at $ 5.125 per share. No charge against earnings was incurred.
In June 2000, the stockholders approved an amendment to the Company's 1998 Stock
Option and Grant Plan to increase the number of shares of common stock, par
value $ .001 per share, of the Company that may be issued under the Grant Plan
from 300,000 to 800,000.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
ChinaB2Bsourcing.com, Inc. (formerly International Smart Sourcing, Inc.) was
organized as a holding company for its wholly-owned subsidiaries Electronic
Hardware Corp. (EHC) and Compact Disc Packaging Corp. (CDP) and International
Plastic Technologies, Inc. (IPT) which does business as International Smart
Sourcing and ChinaB2Bsourcing.com (collectively, the "Company").
IPT, specializes in assisting small to mid-size companies substantially reduce
their cost of manufacturing by out sourcing work to China. Through its offices
in the United States and China, IPT has put in place the infrastructure
necessary to simplify the transition of moving work to China. The services
provided include project management, source selection, engineering coordination,
quality assurance, logistics, and cost reduction. The Company's product
specialization includes tooling, injection molding and secondary operations,
castings, mechanical assemblies, electromechanical assemblies and metal
stampings.
Electronic Hardware Corporation, the Company's principal subsidiary, has over 29
years of experience in the design, marketing and manufacture of injection molded
plastic components used in industrial, consumer, and military products. The
Company believes that its long-term experience in the manufacture and assembly
of injection molded plastic components, coupled with direct access to
manufacturing facilities in China, will enable the Company to provide improved
products at lower prices with improved profit margins.
The Company, through Compact Disc Packaging Corp. has entered into an exclusive
international licensing agreement to manufacture, market, sell and sub-license
the Pull Pack (R), a proprietary Disc packaging system. The Pull Pack (R) is a
redesigned " Jewel Box", the packaging currently used for Compact Discs, CD-ROMs
and DVD.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2000 compared to the three and six
months ended June 25, 1999.
NET SALES
Net sales for the three and six months periods ended June 30, 2000 were
$1,782,265 and $3,492,424, respectively as compared to sales of $ 1,119,176 and
$2,452,367 for the three and six-month periods ended June 25, 1999. The increase
$ 663,089 or 59% for the three-month period and $ 1,040,057 or 42 % for the
six-month period was attributed to the commencement of the contract with the
Defense Supply Center in Philadelphia (DSCP) and an increase in volume by IPT.
6
GROSS PROFITS
The Company realized an overall gross profit margin percentage for the three and
six month periods ended June 30, 2000 of 38 % and 37%, respectively which
represents an increase from the 31 % and 33 % experienced during the three and
six months ended June 25, 1999. This increase can be attributed to the increase
in sales related to the contract with DSCP. Products sold to DSCP include
charges for the acquisition, handling, and distribution of products manufactured
by the company and outside suppliers. In addition products sold to DSCP are
generally more complex with more value added operations than molded plastic
components and generate a higher gross profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three and six month periods
ended June 30, 2000 were $ 1,065,953 and $ 2,048,196, respectively, as compared
to $ 734,970 and $ 1,229,362 for the three and six month periods ended June 25,
1999. The increase of $ 330,983 or 45 %for the three month period and $ 818,834
or 66 %for the six month period can be attributed to an increase in office
salaries to support the additional engineering consultants and employees hired
to facilitate the new business with the Company's manufacturing relationship
located in China. In addition, sales and marketing personnel were hired to
promote the Company and to acquire new business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements, capital
expenditures, and principal and interest payments. Historically, the Company's
primary source of liquidity has been cash flow generated internally from
operations, supplemented by bank borrowings and long term equipment financing.
The Company's cash decreased to $ 1,460,619 on June, 2000 from $1,992,265 on
December 31, 1999. In December of 1999, the Company acquired bank financing from
European American Bank (EAB). The financing agreement includes a demand note of
$1,250,000 and a term loan of $ 500,000. The loan is secured by accounts
receivable, inventory and a $ 1,000,000 certificate of deposit, which is
restricted from use until the Company earns $100,000 year-to-date net profit. In
addition, there is a maximum leverage and minimum capital base requirement. The
minimum capital base was not met at December 31, 1999. On March 30, 2000, EAB
issued a waiver for the minimum capital base requirement and amended such
requirement to $ 2,000,000. However, EAB prohibited the Company from drawing any
additional funds from the lines of credit until further review.
7
The Company will require additional cash to maintain the existing operations
through the 4th Quarter and is in the process of negotiating additional lines of
credit.
On May 31, 2000 the Company obtained $ 100,000 unsecured loan from two of its
principal stockholders. The loan is a demand note with interest of 10% per year.
Interest will be paid monthly.
In June 2000 the Company entered into a Placement Agent Agreement with Network 1
Financial Securities, Inc. to offer for sale in a private placement a minimum of
100,000 Shares of Common Stock and a maximum of 500,000 Shares of Common Stock
at a purchase price of $ 3.00 per share. On June 22, 2000 the Company received
net proceeds of $ 415,000 from a private placement of 166,667 shares of Common
Stock $ .001 par value of the Company sold at $3.00 per share.
Cash flow used in operating activities was $ 702,616 for the six months ended
June 30, 2000 on a net loss of $ 767,035. The increase in accounts receivable
and increase in accounts payable were the result of an increase volume of
business.
Cash used in investing activities for the six months ended June 30, 2000 and
June 25, 1999 was $ 202,235 and $ 212,295, respectively, which consisted of cash
for the purchase of tooling, molds, machinery and equipment and computers.
Net cash provided by financing activities for the six months ended June 30, 2000
was $ 373,205. Cash of $ 132,058 was provided from borrowings on available
credit lines, which was offset by principal payments on loans of $ 140,212.
CAUTIONARY FACTORS REGARDING FUTURE OPERATING RESULTS
The matters discussed in this form 10-QSB other than historical material are
forward-looking statements. Any such forward-looking statements are based on
current expectations of future events and are subject to risks and
uncertainties, which could cause actual results to vary materially from those,
indicated. Actual results could differ due to a number of factors, including
negative developments relating to unforeseen order cancellations or push outs,
the company's strategic relationships, the impact of intense competition and
changes in our industry. The Company assumes no obligation to update any
forward-looking statements as a result of new information or future events or
developments.
8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about April 20, 1999 a former non-officer employee of the Company filed a
complaint against EHC with the Division of Human Rights of the State of New York
("Division") charging violation of the Americans with Disabilities Act covering
disabilities relating to employment. The Company is vigorously defending this
action and believes, with no assurance, that it has a meritorious defense.
Although the ultimate outcome of the action cannot be determined at this time,
the Company does not believe that the outcome will have a material adverse
effect on the Company's financial position or overall trends in results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since the Initial Public Offering on April 23, 1999 through the six-months
ending, June 30, 2000 the Company used an aggregate of $4,896,994 of proceeds of
which $642,500 was used for repayment of debt. This amount represents a material
change from the $382,500 allocated to repayment of debt in the Use of Proceeds
section of the Company's registration statement on Form SB-2, filed with the
Securities and Exchange Commission on April 23, 1999, and is the result of an
additional $260,000 of loans made to the Company by the stockholders. $227,103
was used for repayment of a bank loan to Republic National Bank of New York,
$739,890 was used for costs related to the initial public offering, $729,614,
was used for working capital, $ 484,581 was used for tooling, $747,655 was used
for inventory purchases and staffing, $296,711 was used for sales and marketing,
$120,650 was used for costs associated with being a public company, $75,000 was
used for Federal Income taxes, $87,745 was used for research and development,
$43,200 was used for CDP licensing agreements and cost associated with CDP,
$84,048 was used for travel to China and $27,400 was used on facilities and
equipment. Additionally, $500,000 was loaned to Azurel Ltd. for short-term
material financing at an annual interest rate of 8% in connection with the
execution of an exclusive supply agreement between the Company and Azurel Ltd.
As of June 30, 2000 this note receivable, originally due November 15, 1999 has
not been repaid. In June 2000 the Company received collateral guarantees on the
inventory of Azurel Ltd. with regards to these notes receivable.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- - - ------------------------------------------------------------
The company held its Annual Meeting of Stockholders on June 15, 2000. At the
Annual Meeting, the Company's stockholders voted (i) to elect David Kassel,
Andrew Franzone, Harry Goodman, Mitchell Solomon, Bao-Wen Chen, and Carl Seldin
Koerner to serve as directors of the Company until the 2001 Annual Meeting of
Stockholders and until their respective successors are duly elected and
qualified; (ii) to approve an amendment to the Company's 1998 Stock Option and
Grant Plan to increase the total number of shares of common stock of the Company
that may be issued there under from 300,000 to 800,000; and (iii) to approve an
amendment to the Company's Certificate of Incorporation to change the Company's
name from International Smart Sourcing, Inc. to ChinaB2Bsourcing.com, Inc., each
as described in the Company's Proxy Statement distributed to stockholders in
connection with the Annual Meeting. Set forth below are the results of the
stockholder votes at the Annual Meeting on the foregoing matters.
Election of Directors
NOMINEE VOTES IN FAVOR VOTES
WITHHELD
David Kassel 2,789,778 750
Andrew Franzone 2,789,778 750
Harry Goodman 2,789,778 750
Mitchell Solomon 2,789,778 750
Bao-Wen Chen 2,789,778 750
Carl Seldin Koerner 2,789,778 750
Approval of Amendment to the Company's 1998 Stock Option and Grant Plan.
VOTES IN FAVOR VOTES WITHHELD ABSTENTIONS
- - - -------------- -------------- -----------
2,760,278 8,250 22,000
Approval of Amendment to the Certificate of Incorporation.
VOTES IN FAVOR VOTES WITHHELD ABSTENTIONS
2,771,028 7,500 12,000
10
ITEM 5. OTHER INFORMATION
EXCLUSIVE SUPPLY AGREEMENT BETWEEN THE COMPANY AND AZUREL LTD.
The Company entered into an exclusive supply agreement with Azurel
Ltd. (Azurel) dated July 7, 1999 ("the Agreement"). Pursuant to
the Agreement, the Company loaned $500,000 to Azurel in exchange
for the exclusive right to supply Azurel with any and all products
imported by or on behalf of Azurel. In addition, the Company
received warrants, expiring December 31, 2004, to purchase 100,000
shares of Azurel common stock at a purchase price of $ 1.50 per
share.
On December 23, 1999, the terms of the loan agreement were
extended allowing principal payments to begin on January 15, 2000.
In consideration for extending the principal payments, the Company
received an additional 50,000 warrants to purchase shares of
Azurel Ltd. Common stock at an exercise price of $1.50 per share.
Interest continues to accrue at 8 % per year on all unpaid
balances.
On June 28, 2000 the Company entered into a security agreement
with Azurel Ltd. This agreement granted to the Company a security
interest in the inventory of Azurel as collateral for the loan
and accrued interest. In consideration for the security agreement
the Company granted an extension of the maturity of the notes to
January 31, 2001
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are filed as part of this report:
EXHIBIT DESCRIPTION
3.3 Amendment to the Certificate of Incorporation dated June 19,
2000.
10.27 Placement Agent Agreement with Network 1 Financial
Securities, Inc. dated June 12, 2000.
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2000
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHINAB2BSOURCING.COM, INC
AUGUST 11, 2000 ________________________________
- - - --------------- Andrew Franzone
Chief Executive Officer
AUGUST 11, 2000 ________________________________
- - - --------------- Steven Sgammato
Chief Financial Officer
12