1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 333-25937
Crosswalk.com, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1831588
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4100 Lafayette Center Dr. Suite 110
Chantilly, VA 20151
-------------------------------
(Address of principal executive offices)
(703) 968-4808
-------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant: (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.
(1) Yes X No
As of May 2, 2001 there were 7,926,971 shares of the Registrant's common stock
outstanding.
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PAGE
NUMBER
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2000
and March 31, 2001..................................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 2001................................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 2001................................... 5
Notes to Condensed Consolidated Financial Statements......................... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 10
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk................. 15
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.......................................................... 15
ITEM 2: Changes in Securities and Use of Proceeds.................................. 15
ITEM 3: Defaults Upon Senior Securities............................................ 15
ITEM 4: Submission of Matters to a Vote of Security Shareholders................... 16
ITEM 5: Other Information.......................................................... 16
ITEM 6: Exhibits and Reports on Form 8-K........................................... 16
SIGNATURES and EXHIBITS...................................................... 17
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CROSSWALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, March 31,
2000 2001
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,272,256 $ 1,536,475
Short-term investments 936,737 201,886
Accounts receivable including unbilled receivables of $54,646 and
$69,440 at December 31, 2000 and March 31, 2001, respectively 1,200,591 923,202
Deferred costs 356,842 311,444
Notes receivable from officers 22,111 22,417
Other current assets 37,559 39,456
------------ ------------
Total current assets 3,826,096 3,034,880
------------ ------------
LONG TERM INVESTMENTS 619,546 280,059
PROPERTY AND EQUIPMENT, net 1,452,311 1,233,084
OTHER ASSETS:
Deposits 91,151 92,104
Deferred costs 64,083 19,172
Intangible assets, net 5,256,366 4,958,786
------------ ------------
Total other assets 5,411,600 5,070,062
------------ ------------
TOTAL ASSETS $ 11,309,553 $ 9,618,085
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 428,964 $ 263,921
Accrued liabilities 598,578 519,155
Deferred revenue 509,946 447,604
------------ ------------
Total current liabilities 1,537,488 1,230,680
------------ ------------
OTHER LIABILITIES:
Accounts payable 105,002 110,578
Deferred revenue 227,649 153,795
Other liabilities 78,415 79,913
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, 5,000,000 shares authorized,
80,000 shares issued and outstanding 80 80
Common stock, $.01 par value, 20,000,000 shares authorized,
7,926,971 shares issued and outstanding 79,270 79,270
Common stock warrants 127,660 127,660
Additional paid-in capital 41,228,118 41,228,118
Accumulated deficit (32,074,972) (33,399,246)
Accumulated other comprehensive loss:
Net unrealized gain on available-for-sale securities 843 7,237
------------ ------------
Total stockholders' equity 9,360,999 8,043,119
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,309,553 $ 9,618,085
============ ============
See accompanying notes.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
For the Three Months
Ended March 31,
--------------------------------
2000 2001
------------ ------------
OPERATING REVENUES:
Advertising/sponsorship sales $ 1,499,695 $ 1,026,670
Retail sales 135,997 12,154
Internet services 15,999 25,481
------------ ------------
Total operating revenues 1,651,691 1,064,305
OPERATING EXPENSES:
Cost of goods and services 808,721 338,859
Crosswalk operations 1,599,704 901,896
Sales and marketing 1,241,097 418,906
General and administrative 834,772 734,817
------------ ------------
Total operating expenses 4,484,294 2,394,478
------------ ------------
LOSS FROM OPERATIONS (2,832,603) (1,330,173)
OTHER INCOME NET:
Interest income 54,908 35,623
Interest expense - (2,192)
Loss on sale of property and equipment - (27,532)
------------ ------------
OTHER INCOME NET 54,908 5,899
------------ ------------
Net loss before cumulative effect of a change
in accounting practice (2,777,695) (1,324,274)
Cumulative effect of a one-time adjustment to
reflect change in revenue and cost recognition (1,407,589) -
------------ ------------
NET LOSS $ (4,185,284) $ (1,324,274)
============ ============
Amounts per common share:
Net loss before cumulative effect of a change
in accounting practice ($ 0.36) ($ 0.17)
Cumulative effect of a one-time adjustment to
reflect change in revenue and cost recognition ($ 0.19) -
------------ ------------
Net loss per common share (basic and diluted) ($ 0.55) ($ 0.17)
============ ============
Weighted average number of common
shares outstanding 7,623,572 7,926,971
============ ============
See accompanying notes.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
--------------------------------
2000 2001
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (4,185,284) $ (1,324,274)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 193,902 206,124
Amortization 295,408 302,785
Loss on disposal of property and equipment - 27,532
Stock compensation expense 7,693 -
Common stock issued in lieu of cash for advertising 256,250 -
Changes in operating assets and liabilities:
Accounts receivable 543,474 277,389
Notes receivable from officer - (306)
Deposits (2,153) (953)
Deferred costs (138,615) 90,309
Other current assets (1,688) (1,897)
Accounts payable (1,812,909) (159,467)
Accrued liabilities (266,134) (77,925)
Deferred revenue 1,723,133 (136,196)
------------ ------------
Net cash used in operating activities (3,386,923) (796,879)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (153,698) (19,356)
Sales and maturities of investments 3,226,277 1,267,106
Purchase of investments - (186,652)
------------ ------------
Net cash (used in) provided by investing activities 3,072,579 1,061,098
------------ ------------
FINANCING ACTIVITIES:
Cost of issuing common stock in lieu of cash (11,229) -
------------ ------------
Net cash (used in) provided by financing activities (11,229) -
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (325,573) 264,219
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,641,157 1,272,256
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,315,584 $ 1,536,475
============ ============
See accompanying notes.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
A. THE COMPANY AND BASIS OF PRESENTATION
Crosswalk.com, Inc. (including its subsidiaries, "Crosswalk" or the "Company")
is the creator of its Website www.crosswalk.comTM ("crosswalk.com"), which the
Company believes is the premier portal site for the online Christian and
family-friendly community, with a focus on "the intersection of faith and life",
covering a growing spectrum of everyday life within a Christian context.
Crosswalk.com offers to registered users and visitors, content channels focused
on entertainment, money, family living, teens, homeschooling, news, women,
spiritual life, sports, travel and classifieds; and services ranging from
Internet safety, and "mycrosswalk" customized start pages to online shopping,
family-friendly movie reviews, bible study, greeting cards, games, chat,
forums, local events, music, free email and more. Crosswalk also provides email
subscription service to send information to over 800,000 opt-in email
addresses.
The Company's business includes the development and aggregation of Internet
content and services, which it believes are conducive to the online Christian
and family-friendly community. The Company sells advertising in this venue and
generates royalty sales from products sold through affiliate vendors linked with
crosswalk.com. The Company intends to build traffic and visitors to
crosswalk.com through efficient marketing and product development activities,
with the goal of building market awareness and acceptance of its product, which
it believes will result in revenue growth and profitability. The Company
operates in one business segment.
The accompanying unaudited financial statements as of March 31, 2001 and 2000
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). In the opinion of management,
all adjustments considered necessary for a fair presentation have been included.
The balance sheet at December 31, 2000 has been derived from the audited
consolidated financial statements at that date. These financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000. The results of operations for the
three months ended March 31, 2001 are not necessarily indicative of the results
to be expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2001.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the
financial statements of Crosswalk.com, Inc. and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Use of estimates - Management uses estimates and assumptions in preparing
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that were used.
Cash equivalents - Cash and cash equivalents include cash and investments with
current maturities of three months or less from the date of the balance sheet.
Short and long-term investments - The Company invests in U.S. government bonds
and treasury notes, municipal bonds, and corporate bonds. Investments with
current maturities greater than three months but less than twelve months from
the balance sheet date are short-term investments. Those investments with
current maturities greater than twelve months from the balance sheet date are
long-term investments.
The Company's marketable securities are classified as available-for-sale as of
the balance sheet dates and are reported at fair value, with unrealized gains
and losses, net of tax, recorded in shareholders' equity. Realized gains or
losses and permanent declines in value, if any, on available-for-sale securities
are reported in other income or expense as incurred.
Depreciation and amortization - Property and equipment are stated at cost.
Depreciation is determined using the straight-line method over estimated useful
lives ranging from three to seven years. Leasehold improvements are amortized
over the life of the related lease. Intangible assets are amortized over useful
lives of five to ten years using the straight-line method.
Revenue recognition - As of January 1, 2000, the Company's revenues were
primarily derived from the sale of banner advertising. Advertising revenues are
recognized in the period in which the advertisement is displayed and collection
of the resulting receivable is probable.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's revenue model prior to January 1, 2000 included significant
revenues from third party sponsorships for prime Website exposure in which the
Company recognized nonrefundable revenue upon completing the integration of a
sponsor's web based material onto the Crosswalk.com site. The Company previously
recognized nonrefundable content integration and development fees as revenue
upon completion of content integration. Effective January 1, 2000, the Company
changed its method of accounting for nonrefundable fees for Web integration
contracts entered into prior to January 1, 2000, to recognize such fees over the
term of the related agreement, which is generally a one to two year period when
the Company is maintaining the integrated content. The Company believes the
change in accounting principle is preferable based on guidance provided in SEC
Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements.
The $1.4 million cumulative effect of the change in accounting principle was
reported as a charge in the quarter ended March 31, 2000, and represents the
associated revenues and related direct and incremental costs. The cumulative
effect was initially recorded as deferred revenue that will be recognized as
revenue over the remaining contractual terms of the agreements. During the
quarter ended March 31, 2000, the impact of the change in accounting was to
increase net loss by $1.0 million ($0.13 per share); comprised of the $1.4
million ($0.19 per share) cumulative effect of the change as described above,
net of $.4 million ($0.06 per share) of the related deferred revenue which was
recognized as revenue during the quarter. During the quarter ended March 31,
2001, the impact of the change in accounting was to decrease net loss by
$76,118, or $0.01 per share.
Barter transactions, amounting to approximately six percent of revenues for the
quarter ended March 31, 2001, are recorded at the lower of estimated fair value
of the goods or services received or the estimated fair value of the services
given based on like-cash transactions. Barter transactions consist of providing
web development services in return for advertising space in the customer's
magazine, and website presence on crosswalk.com in exchange for advertising
space on the customer's website, other web related services, magazine
advertisements, promotions at conferences or other related marketing services.
The revenues and equivalent cost of sales from these barter transactions are
recorded in the month in which the services are provided and/or received and are
recorded in the revenue category commensurate with the product or service
rendered.
Comprehensive income - Comprehensive income is defined as the change in equity
of a business enterprise during a period, from transactions and other events and
circumstances from non-owner sources. Accordingly, the Company presents the
elements of comprehensive income, which included net loss and unrealized losses
on available-for-sale securities. For the three months ended March 31, 2001 and
2000, the Company's comprehensive loss was $1,317,880 and $4,197,111,
respectively.
Deferred costs - Deferred costs at March 31, 2001 consisted of content fees,
conference fees, insurance costs, software maintenance, investor relations and
license fees and deferred barter costs associated with revenue deferred pursuant
to compliance with SEC Staff Accounting Bulletin No. 101. The software
maintenance and license fees are ratably expensed over the life of the
maintenance and license agreements. The content, conference and investor
relations fees are charged to expense once the services associated with these
fees have been delivered to the Company. Insurance costs are ratably expensed
over the life of the policy for which premiums have been paid. The barter costs
are recognized as services are rendered.
Derivative instruments and hedging activities - In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and in June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
An Amendment to FASB Statement No. 133."
These rules require that all derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities,
be reported in the consolidated financial statements at fair value. Changes in
the fair value of derivatives are to be recorded each period in earnings or
other comprehensive income, depending on whether the derivative is designated
and effective as part of a hedged transaction, and on the type of hedge
transaction. Gains and losses on derivative instruments reported in other
comprehensive income must be reclassified as earnings in the period in which
earnings are affected by the underlying hedged item, and the ineffective portion
of all hedges must be recognized in earnings in the current period. The Company
adopted SFAS No. 133 on January 1, 2001. Management believes that the adoption
of this standard has no material effect on the Company's financial position or
results of operations.
Reclassifications - Certain balances have been reclassified to conform to the
current period presentation.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
C. CASH AND CASH EQUIVALENTS, SHORT AND LONG-TERM INVESTMENTS
The Company invests in U.S. government bonds and treasury notes and corporate
bonds. All highly liquid instruments with current maturities of three months or
less are considered cash equivalents; those with current maturities greater than
three months but less than twelve months from the balance sheet date are
considered short-term investments; and those with maturities greater than twelve
months from the balance sheet date are considered long-term investments. The
Company's marketable securities are classified as available-for-sale as of the
balance sheet date and are reported at fair value, with unrealized gains and
losses, net of tax, recorded in shareholders' equity. Realized gains or losses
and permanent declines in value, if any, on available-for-sale securities are
reported in other income or expense as incurred.
Securities available-for-sale in the accompanying balance sheet at March 31,
2001 total $660,005 that includes $178,060 in Cash and Cash Equivalents having
current maturities of three months or less. The Company has recorded an
unrealized gain of $7,237 and no unrealized loss as of March 31, 2001. The
aggregate market value, cost basis, and unrealized gains and losses of
securities available for sale, by major security type, as of March 31, 2001, are
as follows:
Gross Unrealized Gross Unrealized
Market Value Cost Basis Gains (Losses)
---------- ---------- ---------- ----------
U.S. Govt. Debt Securities $ 583,872 $ 576,824 $ 7,048 $ ---
Municipal Debt Securities 15,615 15,577 38 ---
Corporate Debt Securities 60,518 60,367 151 ---
---------- ---------- ---------- ----------
Total at March 31, 2001 $ 660,005 $ 652,768 $ 7,237 $ ---
========== ========== ========== ==========
The Company recorded a net realized loss of $1,349 in the three months ended
March 31, 2001.
D. RELATED PARTY TRANSACTIONS
At March 31, 2001, the Company had a Note receivable from an officer of the
Company totaling $22,417. The Company is accruing interest at the minimum
federal statutory rate of the time of issuance of 5.7%. The due date was
extended to July 31, 2001 with the same terms.
E. NET LOSS PER COMMON SHARE
The following is a reconciliation of the basic and diluted EPS calculations for
the periods presented:
For the Three Months
Ended March 31,
---------------
2000 2001
------------ ------------
Net loss (numerator) $ (4,185,284) $ (1,324,274)
Weighted average shares (denominator) 7,623,572 7,926,971
Basic net loss per share $ (0.55) $ (0.17)
------------ ------------
Dilutive shares (denominator) 7,623,572 7,926,971
Diluted net loss per share $ (0.55) $ (0.17)
------------ ------------
As required by Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 98, the above calculation of EPS is based on SFAS No. 128 "Earnings
Per Share." Thus, 47,409 and 45,730 stock options and purchase warrants granted
at below market prices outstanding in the three months ended March 31, 2000 and
March 31, 2001, respectively, are not included in the calculation of diluted EPS
as their inclusion would be anti-dilutive.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
F. COMMITMENTS
In September 1999, the Company entered into a one-year Network Title Sponsorship
Agreement ("Agreement") with The Christian Network, Inc., which includes "Praise
on Pax" and "Worship on Pax." Under this Agreement, the Company was entitled to
a national title sponsorship on "Praise on Pax" telecasts and a national
corporate sponsorship on "Worship on Pax" telecasts. The Company also received
advertising and promotional rights. The total cost for these sponsorship and
advertising rights was $1,025,000, payable quarterly in cash or, at the
Company's option, in shares of the Company's common stock having a fair market
value equal to the required payment. The Company was also obligated to issue
additional shares of common stock for each new member generated for
Crosswalk.com as a result of these sponsorship and advertising arrangements,
based on a valuation of $1.00 for each member generated. In February, April,
July, and September 2000, respectively, 39,018, 52,196, 90,102, and 128,125
shares of Crosswalk common stock were issued for services rendered under this
Agreement that terminated September 30, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BACKGROUND
Crosswalk.com, Inc. ("the Company") is primarily known as the creator of
crosswalk.com(TM), an interactive Website, which provides information and
resources that the Company believes generally appeals to the Christian and
family-friendly community. The information and resources are developed and made
available, both by the Company, and by Christian and secular retailers,
publishers, charities and ministries. The Company generates revenues through the
sale of online and offline advertising, and online sponsorship contracts
("Advertising/sponsorship sales"); select online retailing of Christian and
family-friendly products (music, books, apparel, gifts, etc.) manufactured or
developed by others, and referral fees from co-marketing relationships ("Retail
sales"); and the provision of an array of Internet services ("Internet
services"). In 2000, the Company abandoned the pursuit of sponsorship
agreements, transitioning to an ad sales model. Thus sponsorship revenues
generated in 2001 were in recognition of services provided under contracts
signed prior to 2000. During the third quarter of 2000, the Company transitioned
from online retail sales to an affiliate model that provides advertising and
royalties to the Company for their products offered on crosswalk.com. This
transition has enabled the Company, and its affiliated distributors, the
opportunity to synergistically focus on core strengths, which the Company
believes will generate better margins and provide a better experience for users.
As a result of these developments, the Company's revenue mix between
advertisers, sponsors, retail and Internet services has changed over the years.
During the first quarter ended March 31, 2001, the Company announced the
implementation of a restructuring involving the consolidation of functions to
the Chantilly, VA headquarters, implementation of more cost-effective means of
generating content and further proficiency in utilizing viral marketing. This
action resulted in staff reduction of fifteen, bringing total employment at that
time to forty-nine. In addition, the restructuring also included the appointment
of Scott Fehrenbacher as President, CEO and director, succeeding William Parker,
effective as of January 11, 2001.
One of the key objectives of the Company is to operate on a cash flow positive
basis. Management believes that there is potential that this objective may be
achieved sometime in the fourth quarter of 2001. In order to execute on this
objective, the Company must increase margins through generating growth in higher
margin cash advertising revenue, create new revenue streams and continue focus
on efficient delivery of content on crosswalk.com. Advertisers are organizations
placing ads on crosswalk.com, for which Crosswalk.com is paid a flat fee or a
fee per ad impression delivered. Sponsors are organizations that receive
premiere positioning for their content on various areas of crosswalk.com and in
effect become a "sponsor" of those areas, a service for which Crosswalk.com
receives a fee. The Company has not accepted any new barter arrangements since
1999, but is committed to performing on those previously contracted. The
progress of this transition is that barter revenue dropped to 6% for the first
quarter of 2001, from 25% in the same period of 2000, and cash revenues
generated from online ad sales grew by 165% for the first three months of 2001
over the same period of 2000. In the first quarter of 2001, the Company
experienced its highest gross margin ever recorded of 68.2%, versus 51.0% in the
first quarter of 2000 and 58.4% in the preceding fourth quarter of 2000.
In the first quarter of 2001, the Company continued its focus on maintaining
consistent improvement in reducing the cash burn rate by making prudent expense
reductions and evaluating economies of scale to streamline operations. By
operating under this discipline, the Company reduced the monthly cash burn rate
to $280,000 in the first quarter of 2001, down from $800,000 per month in the
first quarter of 2000 and $365,000 per month in the fourth quarter of 2000.
One of the key contributors to the Company's ability to cost-efficiency in
delivering content on crosswalk.com was the recently announced alliance with
Christianity.com, the full-service Web network designed to bring technology
solutions to the Christian community. They will become the primary Web content
management and network infrastructure solution for Crosswalk.com. This
partnership clarifies both companies' focus and their individual roles in the
Christian Internet market and provides Crosswalk.com with a strategic
partnership that the company believes will prove to efficiently meet the
technology needs of its growing community for years to come.
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Crosswalk.com received the prestigious National Religious Broadcasters Internet
Award for 2001 on February 13, 2001. This award recognized the excellence,
creativity and effectiveness of the crosswalk.com Website over the past year.
Nielsen NetRatings recently ranked crosswalk.com the number one "Religion and
Spirituality" Website based on time spent per person and the number one
"Religion and Spirituality" Website based on the highest number of visits per
person. Advertising click-thru rates reported by Nielsen ranked higher than any
site among the Web's 10 largest advertising venues and more than twice as high
as averages for the Top 10, 25, and 50 advertising supported sites. The Company
believes that by effectively serving its statistically proven loyal Christian
and family-friendly niche, it will continue to accelerate traffic and thus
revenue growth over time. The Company plans to continue enhancing crosswalk.com
in order to maintain its leadership position as the preferred online resource
for Christians in search of information, interaction and involvement
opportunities that help them apply a Christian worldview across the breadth of
their life and interests.
The Company believes that these independently derived demographics will attract
potential advertisers in recognizing that one of the most effective ways to
reach the Christian and family-friendly niche is to advertise on crosswalk.com.
The Company is actively seeking to generate strategic partnerships to enhance
long-term revenue opportunities with quality organizations, thus limiting
dependence on Internet companies for advertising on crosswalk.com. In the first
quarter of 2001, the Company announced long-term advertising Agreements with
Christian Book Distributors, the largest Christian retailer and Trinity College
and Seminary, the largest Bible centered distance learning institution. In the
first quarter 2001, online advertising grew 165% over the first quarter of 2000,
and was flat to the seasonally peak fourth quarter of 2000.
The Company's progress in developing crosswalk.com is also evidenced by the
growth in registered users and average monthly page views on crosswalk.com and
email views. The number of active, registered users at the end of the quarter
was reported at 1,396,868, which represents a growth of 9.8% over the 1,272,006
registered users reported at the end of 2000. In the future, Crosswalk.com plans
to report and track unique visitors rather than registered users. Unique
visitors are determined through analysis of visitor data in Web server files,
and will provide a much more accurate and industry-comparative measurement. The
Company believes that this reporting change will deliver statistics more
relevant to its base and pipeline of advertising customers. Page views and email
views are a measure of total pages viewed by visitors to crosswalk.com and the
number of emails sent at the request of Crosswalk.com's constituents in a month.
Average monthly page views tallied in the first quarter of 2001 increased 7.2%
to 22,317,502, compared with 20,825,393 last quarter. Average monthly pageviews
in the first quarter 2001 increased 20.6%, compared with 18,503,272 during the
first quarter of 2000. Email views in the first quarter of 2001 remained at
approximately 17.2 million as compared to the fourth quarter of 2000, due to the
fact that the Company transitioned to a new and more reliable method of
delivering this opt-in email traffic during the first quarter. The Company
believes that this performance reflects the continued user loyalty. The
opportunity for the Company to generate increasing revenues is largely
predicated upon increasing this membership and traffic.
The Company has a limited operating history upon which an evaluation of the
Company and its business can be based. The Company's business must be considered
in light of the risks, expenses and problems frequently encountered by companies
in their early stage of development, particularly companies in new and rapidly
evolving markets, such as the Internet. The market for the Company's services
and products has only very recently begun to develop, is rapidly evolving, and
is characterized by an increasing number of market entrants who have introduced
or developed services and products for use on the Internet. As a result, the
Company's mix of services and products may undergo substantial changes as the
Company reacts to competitive and other developments in the overall Internet
market. The Company has incurred net losses since inception and expects to
continue to operate at a loss until sufficient revenues are generated to cover
expenses. As of March 31, 2001, the Company had an accumulated deficit of
$33,399,246.
The Company's expense levels are based in part on possible future revenues, of
which there can be no assurance. The Company's ability to generate revenue from
the commercial sale of advertising space on crosswalk.com is tied to its ability
to generate traffic on the Website and emails, and the effectiveness of its
sales staff. The Company plans to significantly increase its sales efforts,
however a shortfall in revenues without commensurate reductions in cost, could
have an immediate adverse impact on the Company's business, results of
operations and financial condition. The Company expects to experience
significant fluctuations in future quarterly operating results and believes
that
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period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as any indication of future
performance.
The management and directors of Crosswalk.com are committed to removing doubt
that Crosswalk.com will ever join the ranks of the insolvent. They are dedicated
to the judicious use of cash, which will result in conservative growth estimates
for revenues and cash flow. Accordingly, the Company is deferring any
investments to initiate additional revenue streams, unless risk is shared
through partnerships or until the goal of becoming cash flow positive is
achieved. It is the Company's intention to develop a business that endures and
to achieve this through prudent investing in our portal and constant attention
to the bottom line.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," and in June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment to FASB Statement No. 133."
These rules require the Company to recognize all derivatives on the consolidated
balance sheet at fair value. Derivatives that are not designed, as part of a
hedging relationship, must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, the effective
portion of the hedge's change in fair value is either (1) offset against the
change in fair value of the hedged asset, liability or firm commitment through
income, or (2) held in equity until the hedged item is recognized in income. The
ineffective portion of a hedge's change in fair value is immediately recognized
in income. The Company adopted SFAS No. 133 on January 01, 2001. Management
believes that the adoption of this standard will have no material effect on the
Company's financial position or results of operations.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NET LOSS
For the quarter ended March 31, 2001, the Company incurred a net loss of
$1,324,274, as compared to a net loss before cumulative effect of a change in
accounting practice of $2,777,695 the same quarter in 2000. The decreased loss
before cumulative effect of a change in accounting practice for the first
quarter of 2001 over the same period in 2000 was $1,453,421 (52%). It was due
primarily to a decrease in operating expenses, cost of goods sold, and revenues.
The decreased loss consisted of a $1,619,954 (44%) decrease in operating
expenses excluding cost of goods sold for the quarter ended March 31, 2001 as
compared to the quarter ended March 31, 2000, offset by a $49,009 (89%) decrease
in other income, and a $117,524 (14%) decrease in gross margin.
The net loss after cumulative effect of a change in accounting practice for the
quarter ended March 31, 2001 was $1,324,274 versus $4,185,284 for the same
quarter in 2000. In the first quarter of 2000, the Company recorded a
($1,407,589) one-time adjustment in response to the Securities and Exchange
Commission Staff Accounting Bulletin 101 issued in December 1999. In this
regard, the Company chose to change its revenue and applicable cost recognition
on the integration and development fee portion of prior year sponsorship
contracts, to a more preferable method of deferral ratably over the term of the
contract.
REVENUES
Total revenue for the first quarter 2001 of $1,064,305 was down 36% or $587,386
from the first quarter of 2000, due to the Company's phase out of an aggregate
difference of $850,000 of barter and nonrecurring sponsorship deals, which
represented 25% and 35% respectively of total revenue in the first quarter of
2000. The Company also discontinued unprofitable direct retail sales in the
third quarter of 2000. This contributes to about $125,000 of the quarterly year
on year revenue reduction. However, as a result of these management initiatives,
the Company
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experienced its highest gross margin ever recorded of 68.2%, versus 51.0% in the
first quarter of 2000 and 58.4% in the preceding fourth quarter of 2000.
Barter agreements which allow for the exchange of goods and services such as
advertising, marketing, and content services on the Company's and the customer's
Internet websites, amounted to six percent of the revenue earned in the first
quarter of 2001. This compared to twenty-five percent of revenue in the first
quarter of 2000. Advertising/sponsorship sales decreased because of a
significant reduction in the low margin, high dollar sponsorship revenue, and a
significant reduction in barter revenue, due to the Company's growing emphasis
on leveraging content and attracting advertisers to the loyal niche that
Crosswalk.com serves.
In response to the Securities and Exchange Commission Staff Accounting Bulletin
101 issued in December 1999, the Company chose to change its revenue recognition
on the integration and development fee portion of prior year sponsorship deals,
to a more preferable method of deferral ratably over the term of the contract.
Under this method, the amount of deferred revenue recorded in the first quarter
of 2000 was $590,692 versus $136,387 recorded in the first quarter of 2001, a
reduction of $454,305 or 77%. Total revenue in the first quarter of 2000 and
2001 would have been $1,060,999 and $927,918 respectively net of the impact of
this change in accounting method. Gross margin in the first quarter of 2000,
would have been reduced by $380,635 or 45% to $462,335, representing a 43.5%
gross margin net of the impact of this change in accounting method. In the first
quarter 2001, gross margin would have been reduced by $76,118 or 10% to
$649,328, representing a 70.0% gross margin net of the impact of this change in
accounting method.
The Company's emphasis going forward will be on leveraging what the Company
believes is content which is engaging to its niche, the personal experiences
shared on crosswalk.com, and the great affinity of crosswalk visitors and the
Christian community. The market share potential for the Company has changed
significantly over the last year, with the dissolution of several competitive
Websites and partnerships the Company has with the few remaining sizeable
Websites serving the Christian and family-friendly niche. The Company hopes to
also leverage this market position through additional strategic relationships
and long-term advertising agreements. With continued growth in site traffic, and
strategic alliances, improved market position, and successful viral marketing
campaigns, the Company hopes to achieve continued progress in generating quality
advertising revenues.
COST OF GOODS AND SERVICES
Cost of goods and services, consisting of costs related to the integration of
client content on crosswalk.com; retailing Christian interest products on
crosswalk.com; and, the provision of Internet services was $338,859 and $808,721
for the quarters ended March 31, 2001 and 2000, respectively. The Company's
gross margin for the quarter ended March 31, 2001 increased to 68% from 51% for
the same period in 2000. This increase is due primarily to the decrease in
barter transactions, which accounted for 6% of revenues in the quarter ended
March 31, 2001 versus 25% in the same period in 2000; a decrease in accepting
low margin, high dollar sponsorship deals; and curtailed low margin direct
retail activities.
In response to the Securities and Exchange Commission Staff Accounting Bulletin
101 issued in December 1999, the Company chose to change its revenue and
applicable cost recognition on the integration and development fee portion of
1999-year sponsorship deals, to a more preferable method of deferral ratably
over the term of the contract. Under this method, the amount of deferred cost
recorded in the first quarter of 2000 was $210,057 versus $60,268 recorded in
the first quarter of 2001, a reduction of $149,789 or 71%. Total cost of goods
and services in the first quarter of 2000 and 2001 would have been $598,664 and
$278,591 respectively net of the impact of this change in accounting method.
Gross margin in the first quarter of 2000, would have been reduced by $380,635
or 47% to $462,335, representing a 43.5% gross margin net of the impact of this
change in accounting method. In the first quarter 2001, gross margin would have
been reduced by $76,118 or 22% to $649,328, representing a 70.0% gross margin
net of the impact of this change in accounting method.
CROSSWALK OPERATIONS
Crosswalk operations expenses, consisting primarily of costs related to the
Company's development, maintenance, and enhancements for the Company's
interactive Website (crosswalk.com), decreased to $901,896 for the quarter
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ended March 31, 2001, as compared to $1,599,704 for the same period in 2000. The
44% ($697,808) decrease in cost of Crosswalk operations was due primarily to
reduction in staffing. Other expenses included in this category of content
expenses, software license and maintenance charges, consulting expenses and
various other staff related costs such as travel and office supplies, accounted
for approximately 10% of the overall reduction.
SALES AND MARKETING
In the first quarter of 2001, sales and marketing expenses decreased to $418,906
as compared to $1,241,097 for the same period in 2000. Sales and marketing
expenses decreased 66% ($822,191) largely due to maximizing efficient methods of
corporate marketing. The Company was able to increase the number of register
users and Website traffic through efficient viral marketing, instead of the
expensive cross-media marketing campaign that the Company engaged in earlier.
GENERAL AND ADMINISTRATIVE
The Company decreased its general & administrative costs in the first quarter of
2001, to $734,817 from $834,772 in the first quarter of 2000. This 12% decrease
($99,955) is mostly due to reductions ($71,862) in facility related expenses
commensurate with the Company's consolidation to the Chantilly, VA office. Third
party administrative expenses related to legal, accounting and investor
relations services were also reduced by $54,930 offset to an extent by the
accrual of $30,000 for the dividend payable on Series "A" preferred shares which
had not existed in the first quarter of 2000.
OTHER INCOME NET
Other income net consists of interest income that decreased 35% to $35,623 from
$54,908 for the quarters ended March 31, 2001 and 2000, respectively. This
$19,285 decrease is due to the use of investments for working capital. The
remaining other income net for the first quarter ended March 31, 2001 consisted
of $27,532 for realized loss on disposed property and equipment, and interest
expense of $2,192 for costs associated with the capital leases, versus no costs
in these areas for the same period of 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the quarters ending March 31, 2001 and 2000, net cash used in operating
activities was $796,879 and $3,386,923 respectively. Net cash provided by
investing activities was $1,061,098 for the first quarter of 2001, and
$3,072,579 for the same period of 2000. There was no cash provided by or used in
financing activities for the quarter ended March 31, 2001. Net cash used in
financing activities for the quarter ended March 31, 2000 was $11,229.
The Company issued 80,000 shares of Series "A" preferred stock on September 29,
2000. The three-year Series "A" preferred Stock is convertible into 862,069
shares of common stock. This is the equivalent to $2.32 per common share,
representing a 42.8% premium over the average closing price of Crosswalk's
common stock for the five trading days preceding closing. The Series "A"
preferred Stock also accrues a 6% dividend per annum.
The Company currently anticipates that its $1,804,200 working capital balance at
March 31, 2001, consisting primarily of the proceeds from the sale of Series "A"
preferred stock, will be sufficient to meet the Company's anticipated working
capital, lease commitments, and capital expenditure requirements for the
remainder of 2001. However, the Company may seek to raise additional funds (1)
in order to expand the overall marketing of crosswalk.com and to pursue
potential leveraged joint marketing opportunities, (2) in the event that the
Company's estimates of operating losses and capital requirements change or prove
inaccurate, or (3) in order that the Company may respond to increased demand or
to take advantage of other unanticipated opportunities. There can be no
assurance that current working capital will be sufficient to meet the Company's
needs, or that additional financing will be available to the Company or will be
available on acceptable terms.
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POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's limited operating history and the rapid
technological change experienced in the Internet industry generally, the Company
has limited historical financial data upon which to base future operating
expenses. Accordingly, the Company's expense levels are based in part on its
expectations as to future revenues, of which there can be no assurance. There
can be no assurance that the Company will be able to accurately predict the
levels of future revenues, if any, and the failure to do so would have a
materially adverse effect on the Company's business, results of operations and
financial condition
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by multiple factors. Causes of such
significant fluctuations may include, among other factors, demand for the
Company's services, the number, timing and significance of new service
announcements by the Company and its competitors, acceptance of its marketing
initiatives, the ability of the Company to develop, market and introduce new and
enhanced versions of its services on a timely basis, the level of product and
price competition, changes in operating expenses, changes in service mix,
changes in the Company's sales incentive strategy, and general economic factors.
The Company's operating expense levels are based, in significant part, on the
Company's expectations of future revenue on a quarterly basis. If actual revenue
levels on a quarterly basis are below management's expectations, both gross
margins and results of operations are likely to be adversely affected because a
relatively small amount of the Company's costs and expenses varies with its
revenue in the short term.
FORWARD LOOKING STATEMENTS
Certain information in this quarterly report on Form 10-Q may contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact are forward-looking statements for purposes of these provisions,
including any projections of earnings, revenues or other financial items, any
statements of the plans and objectives of management for future operations, any
statements concerning proposed new products or services, any statements
regarding future economic conditions or performance, and any statement of
assumptions underlying any of the foregoing. In some cases, forward-looking
statements can be identified by the use of terminology such as "may," "expects,"
"believes," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology. Although the Company
believes that the expectations reflected in its forward-looking statements are
reasonable, it can give no assurance that such expectations or any of its
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the Company's
forward-looking statements.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
None to report.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None to report.
ITEM 2. CHANGE IN SECURITIES
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None to report.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On Wednesday, May 2, 2001, the Company held its Annual Meeting of
Stockholders. Proxies for the meeting were solicited pursuant to Regulation 14A
under the Exchange Act.
(b) The Board of Directors of Crosswalk set the number of directors constituting
the Board at eleven. The Company's shareholders of record, as of the close of
business on March 16, 2001, approved the election of the following seven
individuals to the Company's Board of Directors, all of whom served as directors
of the Company on the date of the meeting:
James G. Buick
Scott Fehrenbacher
Bruce E. Edgington
Clay T. Whitehead
Earl E. Gjelde
W.R. 'Max' Carey
Jon M. Morgan
Each director will hold office until the annual meeting of stockholders in the
year 2002 or until his successor is duly elected and qualified. The Board of
Directors intends to seek nominees to fill the remaining positions as soon as
possible following the Annual Stockholder Meeting:
(c) The results of the vote on the election of nominees to the Company's Board
of Directors was 7,203,998 shares voting for all members or 96.3% of the votes
cast with 275,478 shares withholding on one or more of the directors up for
election, and thus by plurality of the votes cast, the Board stands elected.
The Stockholders also approved the ratification of the selection of Ernst and
Young LLP as the Company's independent accountants. The result of the election
was 7,465,103 shares voting for the proposal, 8,149 shares voted against, 6,224
shares voted to abstain. Thus by majority of the votes cast, the selection of
independent auditor was ratified.
(d) There were no settlements to report.
ITEM 5. OTHER INFORMATION
None to report.
ITEM 6. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
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11 Computation of Earnings Per Share For the Three Month ended March 31, 2001
(b) Reports on Form 8-K
During the first quarter ended March 31, 2001, the Company filed a Form 8K with
the Securities and Exchange Commission on January 11, 2001, recognizing that a
press release had been issued, announcing the implementation of a Company
restructuring. The restructuring involved the consolidation of functions to the
Chantilly, VA headquarters, implementation of more cost-effective means of
generating content and further proficiency in utilizing
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viral marketing. This action resulted in staff reduction of fifteen, bringing
total employment at that time to forty-nine. In addition, the restructuring also
included the appointment of Scott Fehrenbacher as President, CEO and director,
succeeding William Parker, effective as of January 11, 2001. There was no
dispute by Mr. Parker in this regard. Mr. Fehrenbacher was Vice President,
Editor in Chief of Crosswalk.com. A copy of Crosswalk.com's press release
announcing this change was attached and incorporated by reference into the
report.
SIGNATURES
In accordance with the requirements of Securities Act of 1934, Crosswalk.com,
Inc., the registrant, has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CROSSWALK.COM, INC.
May 14, 2001 By: /s/ Scott Fehrenbacher
----------------------
Scott Fehrenbacher
Chief Executive Officer and President
May 14, 2001 By: /s/ Gary A. Struzik
-------------------
Gary A. Struzik, Chief Financial Officer and
Secretary, Chief Accounting Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
11 Computation of Earnings Per Share For the Three Months ended March 31, 2001 1
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