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 NINE MONTHS ENDED SEPTEMBER 29, 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
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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 November 2, 2000, the Registrant had 3,723,834 shares of its Common
Stock, $0.001 par value, issued and outstanding.
CHINAB2BSOURCING.COM, INC.
(FORMERLY INTERNATIONAL SMART SOURCING, INC.)
FORM 10-QSB
SEPTEMBER 29, 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 5 - Other Information 10
Item 6 - Exhibits and reports on Form 8-K 10
SIGNATURE 11
ITEM 1. FINANCIAL STATEMENTS
CHINA B2BSOURCING COM., INC. AND SUBSIDIARIES
(formerly International Smart Sourcing, Inc. and Subsidiaries)
CONSOLIDATED BALANCE SHEET
September 29, 2000
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $418,527
Cash - Restricted 1,000,000
Accounts Receivable 734,055
Accounts Receivable - Related Party 45,537
Inventory 1,518,847
Prepaid expenses 214,307
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TOTAL CURRENT ASSETS 3,931,273
Property and Equipment (net) 791,899
Goodwill 1,434,005
License Agreement 412,497
Note Receivable - (including accrued interest of 49,514) 549,514
Note Receivable - Related Party 175,765
Other assets 385,687
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TOTAL ASSETS $7,680,640
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $1,326,910
Current portion of long tem debt
( including $302,162 to related parties) 908,858
Current portion of obligations under capital lease 90,084
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TOTAL CURRENT LIABILITIES 2,325,852
Long tem debt 504,843
Obligations under capital lease 89,694
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TOTAL LIABILITIES 2,920,389
STOCKHOLDERS' EQUITY
Common Stock, $0.001 par value, authorized 10,000,000
shares, issued and outstanding 3,723,834 3,724
Additional Paid-in Capital 7,705,715
DEFICIT (2,949,188)
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TOTAL STOCKHOLDERS' EQUITY 4,760,251
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,680,640
===========
See notes to consolidated financial statements.
1
CHINA B2BSOURCING COM., INC. AND SUBSIDIARIES
(formerly International Smart Sourcing, Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ---------------------------------
SEPT. 29, 2000 SEPT. 25, 1999 SEPT. 29, 2000 SEPT. 25, 1999
-------------- -------------- -------------- --------------
NET SALES $2,138,410 $1,294,933 $5,630,834 $3,747,300
COST OF GOODS SOLD 1,243,449 926,977 3,680,090 2,577,192
--------- ------- --------- ---------
GROSS PROFIT 894,961 367,956 1,950,744 1,170,108
-------- ------- --------- ---------
OPERATING EXPENSES
Selling and Shipping 293,398 425,583 918,312 645,424
General and administrative 700,420 462,709 2,105,010 1,472,230
------- ------- --------- ---------
TOTAL OPERATING EXPENSES 993,818 888,292 3,023,322 2,117,654
------- ------- --------- ---------
LOSS BEFORE INTEREST EXPENSE (98,857) (520,336) (1,072,578) (947,546)
Interest & other income 34,005 77,662 101,219 147,424
Interest expense (53,530) (48,903) (146,817) (160,483)
-------- -------- --------- ---------
NET LOSS ($118,382) ($491,577) ($1,118,176) ($960,605)
========= ========== ============ ==========
NET LOSS PER SHARE - BASIC ($0.03) ($0.15) ($0.32) ($0.35)
========== ========== ============ ===========
WEIGHTED AVERAGE COMMON SHARES 3,591,700 3,382,500 3,457,900 2,741,100
========== ========== ============ ===========
See notes to consolidated financial statements.
2
CHINA B2BSOURCING COM., INC. AND SUBSIDIARIES
(Formerly International Smart sourcing, Inc. and subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 29, 2000 SEPTEMBER 25, 1999
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,118,176) ($960,605)
------------ ----------
Adjustments to reconcile net income (loss) to net cash
PROVIDED BY OPERATING ACTIVITIES:
Depreciation 147,733 215,033
Amortization 217,574 167,850
Non-cash compensation related to issuance of stock options - 47,340
CHANGES IN ASSETS AND LIABILITIES:
Increase in Accounts Receivable (156,876) (268,690)
(Increase) Decrease in Accounts Receivable from Related Parties (50) 635,061
Increase in Inventory (731,516) (29,827)
Decrease (Increase) in Prepaid Expenses 99,579 (65,242)
Decrease (Increase) in Interest Receivable 1,144 (7,259)
Increase in Other Assets (90,830) (223,614)
Increase (Decrease) in accounts payable and accrued expenses 400,478 (540,249)
-------- ---------
TOTAL ADJUSTMENTS (112,764) (69,597)
--------- --------
NET CASH USED IN OPERATING ACTIVITIES (1,230,940) (1,030,202)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (184,510) (174,868)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred Offering Costs (36,648) -
Notes Receivable - (500,000)
Issuance of Stock 890,500 5,112,936
Repayments of Loans (212,140) (996,167)
Proceeds from loans 200,000 231,080
-------- -------
NET CASH PROVIDED IN FINANCING ACTIVITIES 841,712 3,847,849
-------- ---------
NET (DECREASE) INCREASE IN CASH (573,738) 2,642,779
CASH - BEGINNING OF PERIOD 1,992,265 16,146
---------- ---------
CASH - END OF PERIOD $1,418,527 $2,658,925
=========== ==========
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 September 29, 2000 and the results of operations and cash flows
for the three and nine-month periods ended September 29,2000 and September
25,1999 have been included.
The results of operations for the three and nine-month period ended
September 29, 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 name 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 September 29, 2000 the
Company owes approximately $ 932,000 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. In June
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. In July 2000 the Company issued an
additional 166,667 shares. The net proceeds were $ 435,000. In July and
September 2000 the Company issued an aggregate of 8,000 shares of
common stock, pursant to the exercise of warrant, for net proceeds of
$40,500.
5. NOTE RECEIVABLE
In June 2000 the Company renegotiated the loans that it had made to
Azurel Ltd. 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. On August 17, 2000
the Company obtained two additional 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
of 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 also 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 three wholly-owned
subsidiaries International Plastic Technologies, Inc. (IPT) which does
business as International Smart Sourcing and ChinaB2Bsourcing,
Electronic Hardware Corp. (EHC) and Compact Disc Packaging Corp. (CDP)
(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 nine-months ended September 29,2000 compared to the
three and nine-months ended September 25, 1999.
NET SALES
Net sales for the three and nine-months periods ended September 29,
2000 were $2,138,410 and $5,630,834, respectively as compared to sales
of $ 1,294,933 and $3,747,300 for the three and nine-month periods
ended September 25, 1999. The increase of $843,477 or 65% for the
three-month period and $1,883,534 or 50 % for the nine-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 nine-month periods ended September 29, 2000 of 42% and 35%,
respectively which represents an increase from the 28% and 31%
experienced during the three and nine-months ended September 25,
1999.This increase can be attributed to the increase in sales related
to the contract with DSCP. Revenues from 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 products and generate a higher gross
profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three and
nine-month periods ended September 29, 2000 were $993,818 and $
3,023,322 respectively, as compared to $ 888,292 and $ 2,117,654 for
the three and nine-month periods ended September 25, 1999. The increase
of $ 105,526 or 12% for the three-month period and $ 905,668 or 43%for
the nine-month period can be attributed to an increase in office
salaries and additional engineering consultants and employees hired to
facilitate 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 and additional personnel were hired
to support future shipments of product to DSCP.
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. However, in the past two
years the company has generated additional cash flow from the public
and private sale of equity securities. The Company's cash decreased to
$ 1,418,527 on September 29,2000 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 has enough cash to maintain the existing operations through
the 4th Quarter. The Company is in the process of negotiating
additional lines of credit.
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. On August 17, 2000
the Company obtained two additional 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.
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. In July the Company received net
proceeds of $435,000 from a private placement of 166,667 shares of
Common Stock $ .001 par value of the Company sold at $3.00 per share.
In July and September 2000 the Company issued an aggregate of 8,000
shares of common stock, pursant to the exercise of warrant, for net
proceeds of $40,500.
Cash flows used in operating activities was $ 1,230,940 for the
nine-months ended September 29, 2000 on a net loss of $1,118,176.
Cash used in investing activities for the nine-months ended September
29, 2000 and September 25, 1999 was $184,510 and $174,868 respectively,
which consisted of cash for the purchase of tooling, molds, machinery
and equipment and computers. Net cash provided by financing activities
for the nine-months ended September 29, 2000 was $ 841,712. Cash of
$200,000 was provided from borrowings on available credit lines, which
was offset by principal payments on loans of $ 212,140.
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.
9
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
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
29, 2000
10
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
NOVEMBER 13,2000 /s/Andrew Franzone
---------------- ---------------------------------
Date Andrew Franzone
Chief Executive Officer
NOVEMBER 13,2000 /s/Steven Sgammato
---------------- ---------------------------------
Date Steven Sgammato
Chief Financial Officer
11