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 28, 2002
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
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 22, 2002, the Registrant had 3,760,934 shares of its Common Stock,
$0.001 par value, issued and outstanding.
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
FORM 10-QSB
JUNE 28, 2002
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheet 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4 - 7
Item 2 - Management's Discussion and Analysis or
Plan of Operation 7 - 9
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 10
Item 6 - Exhibits and Reports on Form 8-K 10
SIGNATURE 11
Exhibits 99.1 and 99.2 12-13
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
(FORMERLY CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEET
JUNE 28, 2002
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 23,078
Accounts receivable - net of allowance for
doubtful accounts of $15,000 1,056,043
Note receivable-related party 19,522
Inventories 1,604,533
Prepaid expenses and other current assets 187,740
--------------
TOTAL CURRENT ASSETS 2,890,916
Property and equipment - net 553,645
Other assets 215,100
--------------
$ 3,659,661
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,613,498
Deferred revenue 79,165
Line of credit 799,595
Current portion of long tem debt 98,419
Current portion of obligations under capital leases 56,486
--------------
TOTAL CURRENT LIABILITIES 2,647,163
Long term debt (including $140,996 to officer/shareholders) - less current portion 281,567
Obligations under capital leases - less current portion 67,771
--------------
TOTAL LIABILITIES 2,996,501
--------------
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.001 par value, 10,000,000 shares authorized,
3,760,934 shares issued and outstanding 3,761
Additional paid-in capital 7,971,928
Accumulated deficit (7,312,529)
--------------
TOTAL STOCKHOLDERS' EQUITY 663,160
--------------
$ 3,659,661
==============
See notes to consolidated financial statements.
1
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
(FORMERLY CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
NET SALES $ 2,629,259 $ 2,507,545 $ 4,942,622 $ 4,653,511
COST OF GOODS SOLD 1,825,209 1,748,831 3,418,397 3,197,326
--------------- --------------- --------------- ---------------
GROSS PROFIT 804,050 758,714 1,524,225 1,456,185
--------------- --------------- --------------- ---------------
OPERATING EXPENSES
Selling and shipping 210,734 321,346 433,710 605,202
General and administrative 649,281 620,053 1,388,024 1,312,143
--------------- --------------- --------------- ---------------
TOTAL OPERATING EXPENSES 860,015 941,399 1,821,734 1,917,345
--------------- --------------- --------------- ---------------
LOSS FROM OPERATIONS (55,965) (182,685) (297,509) (461,160)
Interest and other income 1,008 4,140 3,071 8,454
Interest and other expenses (61,135) (42,703) (81,235) (71,875)
--------------- --------------- --------------- ---------------
NET LOSS $ (116,092) $ (221,248) $ (375,673) $ (524,581)
=============== =============== =============== ===============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.03) $ (0.06)$ (0.10) $ (0.14)
=============== =============== =============== ===============
WEIGHTED AVERAGE COMMON SHARES 3,760,934 3,732,563 3,760,934 3,725,934
=============== =============== =============== ===============
See notes to consolidated financial statements.
2
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
(FORMERLY CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
------------------------------
June 28, June 29,
2002 2001
------------- ---------------
Cash flows from operating activities:
Net loss $ (375,673)$ (524,581)
------------- ---------------
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash expenses related to issuance of stock and stock warrants - 156,250
Depreciation and amortization 102,828 130,744
Changes in assets and liabilities:
Accounts receivable (279,643) 36,525
Receivable from related party - (7,859)
Inventories (364,912) 76,192
Prepaid expenses and other current assets 260,424 (167,067)
Other assets (135,586) (135,717)
Accounts payable and accrued expenses 465,281 (159,283)
Due to related party - 17,265
Deferred revenue (122,467) 295,028
------------- ---------------
Total adjustments (74,075) 242,078
------------- ---------------
Net cash used in operating activities (449,748) (282,503)
------------- ---------------
Cash flows from investing activities:
Collection of note receivable from related parties 136,171 -
Expenditures for property and equipment (19,853) (49,416)
------------- ---------------
Net cash provided by (used in) investing activities: 116,318 (49,416)
------------- ---------------
Cash flows from financing activities:
Capital lease repayments (35,523) (57,735)
Proceeds from borrowings 307,844 687,350
Principal payments and repayment of loans (62,291) (189,269)
------------- ---------------
Net cash provided by financing activities 210,030 440,346
------------- ---------------
Increase (decrease) in cash (123,400) 108,427
Cash - beginning of year 146,478 188,213
------------- ---------------
Cash - end of period $ 23,078 $ 296,640
============= ===============
See notes to consolidated financial statements.
3
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 28, 2002
(UNAUDITED)
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 28, 2001.
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 28, 2002 and the results
of operations and cash flows for the six month periods ended June 28,
2002 and June 29, 2001 have been included.
The results of operations for the six-month period ended June 28,
2002, are not necessarily indicative of the results to be expected for
the full year ending December 27, 2002.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered
recurring losses, and was not in compliance with their credit line's
minimum tangible net worth covenant. In addition, the bank that
provided the Company with its credit facility was closed by the
Connecticut Banking Department on June 27th, 2002, with the F.D.I.C.
assuming receivership of the failed bank. This condition raises
substantial doubt about the Company's ability to continue as a going
concern. Management's plans with respect to this matter include,
replacing their financing arrangement through an alternative lending
institution, raising additional funds through equity or debt financing
and ultimately achieving profitable operations. The Company is in
discussions with various financial institutions to replace its line of
credit. In the interim, the F.D.I.C. has continued to service the
Company's credit facility, although it is uncertain at this time what
the ultimate disposition of the facility will be. The accompanying
financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
4
2. RECENT ACCOUNTING PRONOUNCEMENTS
FASB 145
On April 30, 2002, the FASB issues SFAS No. 145, "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No.13, and
Technical Corrections." The rescission of SFAS No.4, "Reporting Gains
and Losses from Extinguishments, and SFAS No.64, "Extinguishments of
Debt made to Satisfy Sinking Fund Requirements," which amended SFAS
No.4 will affect income statement classification of gains and losses
from extinguishment of debt. SFAS No.4 requires that gains and losses
from extinguishment of debt be classified as an extraordinary item, if
material. Under SFAS No. 145, extinguishment of debt is now considered
a risk management strategy by the reporting enterprise and the FASB
does not believe it should be considered extraordinary under the
criteria in APB Opinion No.30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria in APB Opinion No. 30.
SFAS No. 145 will be effective for fiscal years beginning after May
15, 2002. Upon adoption, extinguishments of debt shall be classified
under the criteria in APB Opinion No. 30.
FASB 146
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullified Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when
the liability is incurred. A fundamental conclusion reached by the
FASB in this statement is that an entity's commitment to a plan, by
itself, does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The Company has not yet determined the impact
of SFAS No.146 on its financial position and results of operations, if
any.
3. CONTINGENCIES
The Company has been named as a defendant in three employment
discrimination complaints, which it believes are without merit, and is
vigorously defending. As of June 28, 2002, no specific damages related
to the complaints have been asserted.
5
4. SEGMENT AND GEOGRAPHIC INFORMATION
The Company views its operations as principally two segments, the
manufacturing and assembly of injection molded plastic components and
outsourcing of injection molded plastic components and their
assemblies. The segments share a common workforce and office
headquarters, which preclude an allocation of all overhead components.
Overhead items that are specifically identifiable to a particular
segment are applied to such segment. The Company's segment information
for the three months and six months ended June 28, 2002 and June 29,
2001 are as follows:
Manufacturing Corporate
and and
Assembly Outsourcing Other Consolidated
---------------- -------------- ------------- ----------------
Three Months ended June 28, 2002
Sales to unaffiliated customers $ 2,175,711 $ 453,548 $ - $ 2,629,259
Segment assets 2,550,018 962,389 147,254 3,659,661
Segment income (loss) $ 123,560 $ (207,378) $ (32,274) $ (116,092)
Manufacturing Corporate
and And
Assembly Outsourcing Other Consolidated
---------------- -------------- ------------- ----------------
Three Months ended June 29, 2001
Sales to unaffiliated customers $ 1,827,555 $ 679,990 $ - $ 2,507,545
Segment assets 2,451,163 1,842,091 434,634 4,727,888
Segment income (loss) $ 241,121 $ (258,572) $ (203,797) $ (221,248)
Manufacturing Corporate
and and
Assembly Outsourcing Other Consolidated
---------------- -------------- ------------- ----------------
Six Months ended June 28, 2002
Sales to unaffiliated customers $ 3,965,607 $ 975,515 $ 1,500 $ 4,942,622
Segment assets 2,550,018 962,389 147,254 3,659,661
Segment income (loss) $ 104,890 $ (407,168) $ (73,395) $ (375,673)
Manufacturing Corporate
and And
Assembly Outsourcing Other Consolidated
---------------- -------------- ------------- ----------------
Six Months ended June 29, 2001
Sales to unaffiliated customers $ 3,487,122 $ 1,166,389 $ - $ 4,653,511
Segment assets 2,451,163 1,842,091 434,634 4,727,888
Segment income (loss) $ 369,839 $ (584,821) $ (309,599) $ (524,581)
6
5. SUBSEQUENT EVENTS
Subsequent to June 28, 2002, two officers/ stockholders of the Company loaned
the organization a total of an additional $100,000, with interest at ten percent
per annum. The officers/stockholders are forgoing any repayment of principal on
all loans to the Company for a period of one year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission (SEC) recently issued proposed guidance
for disclosure of critical accounting policies. The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain and
may change in subsequent periods. The company plans to adopt the disclosure
requirements regarding critical accounting policies once the final rules are
required to be adopted.
RESULTS OF OPERATIONS
For the three months and six months ended June 28, 2002 compared to the three
and six months ended June 29, 2001.
NET SALES
Net sales for the three and six month period ended June 28, 2002 were $2,629,259
and $4,942,622 respectively, compared to sales of $2,507,545 and $4,653,511 for
the three and six-month period ended June 29, 2001. The increase of $121,714 or
5% for the three-month period and $289,111 or 6% for the six-month period was
attributed to the continuation of the contract with the Defense Supply Center in
Philadelphia (DSCP), and completion of tooling orders.
GROSS PROFITS
The Company realized an overall gross profit margin percentage for the three and
six-month period ended June 28, 2002 of 30.6% and 30.8% respectively, as
compared to 30.3% and 31.3% experienced during the three and six-month period
ended June 29, 2001. This increase of .3% for the three-month period and
decrease of .5% for the six-month period can be attributed to the deterioration
and resulting correction of some pricing percentages on various government
orders experienced during the period.
7
OPERATING EXPENSES
Selling and Shipping
Selling and shipping expenses for the three and six-month period ended June 28,
2002 were $210,734 and $433,710 respectively, as compared to $321,346 and
$605,202 for the three and six-month period ended June 29, 2001. The decrease of
$110,612 or 34.4% for the three-month period and $171,492 or 28.3% for the
six-month period is primarily attributable to a decrease in payroll and related
expenses and consulting fees.
General, and Administrative Expenses
General and administrative expenses for the three and six-month period ended
June 28, 2002 were $649,281 and $1,388,024 respectively, as compared to $620,053
and $1,312,143 for three and six-month period ended June 29, 2001. The increase
of $29,228 or 4.7% for the three-month period and $75,881 or 5.8% for the
six-month period is primarily attributable to an increase in insurance costs of
approximately $20,000, an increase in rent expense of $25,000 and an increase in
professional fees of approximately $30,000.
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 flows generated internally from
operations. When cash flows have been insufficient to meet the Company's cash
needs, the Company has supplemented its cash needs with bank borrowings and long
term equipment financing. The Company's cash decreased to $23,078 at June 28,
2002 from $146,478 at December 28, 2001.
Cash flow used in operating activities was $449,748 for the six-months ended
June 28, 2002 on a net loss of $375,673. The increase in accounts receivable is
the result of increases in sales for the period. The increase in inventory is
the result of the Company's buildup of inventory to respond to increased
government orders and shipments. The decrease in prepaid expenses and other
current assets is a result of the expensing of deposits on materials and molds
associated with tooling and production orders that were completed during the
six-months ended June 28, 2002. Net cash provided by investing activities for
the six-month period ended June 28, 2002 was $116,318, this consisted of cash
collections of $136,171 from notes receivable from related parties offset by
$19,853 for purchases of tooling, molds, machinery and equipment.
Net cash provided by financing activities for the six-month period ended June
28, 2002 was $210,030. Cash of $307,844 was provided from the bank line of
credit. Cash of $62,291 was used to make principal payments on loans and the
bank credit line and $35,523 to make capital lease repayments.
In April 2001, we closed on a revolving line of credit agreement with a bank
that provides for a maximum borrowing of up to $1,500,000, subject to certain
conditions, at an interest rate of prime plus 1.75%. The loan is secured by
substantially all the assets of the Company and is unconditionally guaranteed by
three officers/shareholders, each limited to $250,000.
The bank that provided the Company with the credit facility was closed by the
Connecticut Banking Department on June 27th, 2002, with the F.D.I.C. assuming
receivership of the failed bank. Management's plans with respect to this matter
include, replacing their financing arrangement through an alternative lending
8
institution, raising additional funds through equity or debt financing and
ultimately achieving profitable operations. The Company is in discussions with
various financial institutions to replace its line of credit. In the interim,
the F.D.I.C. has continued to service the Company's credit facility, although it
is uncertain at this time what the ultimate disposition of the facility will be.
Subsequent to June 28, 2002, two officers/ stockholders of the Company loaned
the organization a total of an additional $100,000, with interest at ten percent
per annum. The officers/stockholders are forgoing any repayment of principal on
all loans to the Company for a period of one year.
In the event that the Company is unable to find other sources of credit or
working capital, operations of the Company would have to be limited.
The auditors' report on the Company's financial statements, in our annual Form
10-KSB, included an explanatory paragraph about the Company's ability to
continue as a going concern. The Company expects that it will require a minimum
of $105,000 to fund its operations and meet its debt service obligation for the
fiscal year ending December 27, 2002. As of August 7, 2002, the Company has
approximately $110,000 of availability on its credit line. In addition,
management is seeking to raise additional funds through additional debt and/or
equity financing, although there is no assurance it will be successful in
securing such financing. If the Company is not successful, the Company may need
to make certain reductions in its operations to maximize its available cash
resources until additional funds can be raised.
CAUTIONARY FACTORS REGARDING FUTURE OPERATING RESULTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in three employment discrimination
complaints, which it believes are without merit, and is vigorously defending.
As of June 28, 2002, no specific damages related to the complaints have been
asserted.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on June 4, 2002. At the
Annual Meeting, the Company's stockholders voted (i) to elect David Kassel,
Andrew Franzone, Harry Goodman, Mitchell Solomon, and Carl Seldin Koerner to
serve as directors of the Company until the 2003 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 (the
"Grant Plan") to increase the total number of shares of common stock, par value
$.001 per share, of the Company (the "Common Stock") that may be issued under
the Grant Plan from 800,000 to 1,000,000.
The election of directors and the amendment to change the Company's Stock Option
and Grant Plan were both approved by a majority vote of stockholders.
ITEM 5. OTHER INFORMATION
In April 2001, we closed on a revolving line of credit agreement with a bank
that provides for a maximum borrowing of up to $1,500,000, subject to certain
conditions, at an interest rate of prime plus 1.75%. The loan is secured by
substantially all the assets of the company and is unconditionally guaranteed by
three officers/shareholders, each limited to $250,000.
The bank that provided the Company with a credit facility was closed by the
Connecticut Banking Department on June 27th, 2002, with the F.D.I.C. assuming
receivership of the failed bank. Management's plans with respect to this matter
include, replacing their financing arrangement through an alternative lending
institution, raising additional funds through equity or debt financing and
ultimately achieving profitable operations. The F.D.I.C. has continued to
service the Company's credit facility. The Company is in discussions with
various financial institutions to replace the line of credit. Subsequent to June
28, 2002, two officers/ stockholders of the Company loaned the organization a
total of an additional $100,000, with interest at 10% per annum. The
officers/stockholders are forgoing any repayment of principal on all loans to
the Company for a period of one year.
Additionally, in June 2002, EHC was awarded a one-year extension of its contract
with the United States Government Defense Supply Center Philadelphia (DSCP). EHC
estimates the full value of the extension to be approximately $5,000,000. The
extension commenced on June 21, 2002 and terminates on June 20, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
99.1 and 99.2
Reports on 8-K:
No reports were filed on Form 8K during the quarter ended June 28,
2002.
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.
INTERNATIONAL SMART SOURCING, INC.
August 12, 2002 /S/David Kassel
--------------------------------
- ------------ David Kassel
Date Chairman and Chief Executive Officer
August 12 , 2002 /S/Arthur Myers
--------------------------------
- ------------ Arthur Myers
Date Chief Financial Officer
11