U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-QSB
Quarterly Report under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For quarterly period ended March 31, 1998
Commission file number 10039
DYNAMICWEB ENTERPRISES, INC.
(Exact name of registrant as specified in this charter)
New Jersey 22-2267658
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
271 Route 46 West, Building F
Suite 209, Fairfield, New Jersey 07004
(Address of Principal Executive Offices)
(973) 244-1000
(Registrant's telephone number, including area code)
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 March 31, 1998, there were 2,874,704 shares of Common
stock, $0.0001 par value, of the registrant outstanding.
PART I
FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets as at March 31, 1998
(unaudited) and September 30, 1997.
Condensed Consolidated Statements of Operations for the
three months and six months ended March 31, 1998 and 1997
(unaudited).
Condensed Consolidated Statements of Cash Flows for the six
months ended March 31, 1998 and 1997 (unaudited).
Notes to Condensed Financial Statements
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, September 30,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $1,061,928 $ 188,270
Accounts receivable, less allow-
ance for doubtful accounts 89,659 100,425
Prepaid expenses and other current
assets 35,979 20,738
Total current assets 1,187,566 309,433
Property and equipment, less
accumulated depreciation 283,500 284,512
Patents and trademarks, less
accumulated amortization 29,661 21,808
Customer list, less accumulated
amortization 73,333 83,333
Software development costs, less
accumulated amortization 58,925
Deferred financing fees, less
accumulated amortization 51,373
Deferred registration costs 128,169
Other assets 9,088 9,088
Total Assets $1,642,073 $ 887,716
LIABILITIES AND STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 212,907 $ 182,340
Accrued expenses 15,428 165,941
Current maturities of long-term
debt 7,720 7,925
Loan payable - banks 24,049
Loans from stockholders 117,163
Deferred revenue 15,761 15,065
Subordinated loans payable -
interim less unamortized debt
discount of $259,127 840,873
Total current liabilities 25,816 1,353,356
Long term debt, less current
maturities 180,883 185,811
Total liabilities 432,699 1,539,167
Commitments, contingencies and
other
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Common stock, $.00001 par value,
50,000,000 shares authorized; 2,874,704
shares issued and outstanding at
March 31, 1998 and 2,141,740 shares
issued and outstanding at
September 30, 1997 287 214
Additional paid-in capital 10,326,516 3,530,324
Unearned portion of compensatory
stock options (146,500) (204,000)
Accumulated deficit (4,964,100) (3,577,989)
Total 5,216,203 (251,451)
Less treasury stock, at cost
721,257 at March 31, 1998 and
66,660 shares at September 30, 1997 (4,006,829) (400,000)
Total stockholders' equity
(capital deficiency) 1,209,374 (651,451)
Total liabilities and stockholders)
equity (capital deficiency) $ 1,642,073 $ 887,716
The accompanying notes are an integral part of these
financial statements.
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales:
Transaction processing $ 84,833 $ 79,052 $ 178,583 $ 107,818
Professional services 84,589 60,181 140,392 108,693
Other - systems 33,412 41,322 50,510 58,941
-------- ---------- ---------- ----------
Total 202,834 180,554 369,486 275,451
-------- ---------- ---------- ----------
Cost of sales:
Transaction processing 76,030 27,921 143,691 48,548
Professional services 38,215 15,716 67,036 19,960
Other - systems 5,447 16,975 14,668 30,318
-------- ---------- ---------- ----------
Total 119,692 60,612 225,396 98,826
-------- ---------- ---------- ----------
Gross profit 83,143 119,942 144,090 176,626
-------- ---------- ---------- ----------
Expenses:
Marketing and sales 190,008 154,305 331,463 250,628
General and administrative 337,271 206,182 656,235 393,176
Research and development 128,525 66,199 190,308 93,424
-------- ---------- ---------- ----------
Total 655,804 426,686 1,178,006 737,228
-------- ---------- ---------- ----------
Operating (loss) (572,661) (306,744) (1,033,916) (560,602)
Purchased research and development (738,710)
Interest expense (including $310,500
amortization of deferred financing fee
and debt discount for six months
ended March 31, 1998 (18,922) (6,230) (363,628) (10,275)
Interest income 10,776 670 11,433 2,428
-------- ---------- ---------- ----------
Net (loss) before income tax benefit (580,807) (312,304) (1,386,111) (1,307,159)
Benefit for income taxes 21,700 21,700
-------- ---------- ---------- ----------
NET (LOSS) $(580,807) $ (290,604) $(1,386,111) $(1,285,459)
-------- ---------- ---------- ----------
Net (loss) per common share -
basic and diluted $ (.31) $ (.14) $ (.72) $ (.67)
-------- ---------- ---------- ----------
Weighted average number of shares 1,851,965 1,997,716 1,935,288 1,904,254
========= ========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
DYNAMICWEB ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
March 31,
------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net (loss) $(1,386,111) $(1,283,971)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities
Depreciation and amortization 35,020 21,038
Purchased research and development 738,710
Common stock issued for services 57,500
Deferred income taxes (21,700)
Changes in operating assets and liabilities:
Amortization of deferred financing fee and
debt discount 310,500
Decrease in accounts receivable 10,766 27,369
(Increase) decrease in prepaid expenses and
other current assets (19,921) 2,984
Increase in accounts payable 30,502 148,488
(Decrease) increase in accrued expenses (150,512) 3,362
Increase in deferred revenue 696 7,965
---------- ----------
Net cash (used in) operating activities: (1,111,560) (355,755)
---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (16,019) (52,576)
Proceeds from sale of equipment 1,954
Acquisition of patents and trademarks (10,757) (3,893)
Cash acquired upon acquisition 15,235
Increase in software development costs (60,848)
---------- ----------
Net cash (used in) investing activities: (87,624) (39,280)
---------- ----------
Cash flows from financing activities:
Payment of long-term debt (3,551) (5,120)
Net proceeds from issuance of common stock 3,189,436 250,000
Proceeds from loan - bank 74,557 4,750
Proceeds from loan - officer/
shareholder 117,800 50,000
Payment of loan - Bank (98,606)
Due to officer/stockholder (234,963)
Payment of subordinated debt (1,100,000)
Decrease of deferred registration costs 128,169
---------- ----------
Net cash provided by financing
activities 2,072,842 269,630
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 873,658 (125,405)
Cash and cash equivalents - beginning
of period 188,270 174,403
---------- ----------
CASH AND CASH EQUIVALENTS - END OF
PERIOD $1,061,928 $ 48,998
========== ==========
The accompanying notes are an integral part of these
financial statements.
DYNAMICWEB ENTERPRISES, INC. and SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(NOTE A) -- Basis of Presentation and the Company:
Basis of presentation:
The accompanying unaudited condensed financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-QSB and Article 3 of Regulations S-B.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included.
Operating results of the six-month period ended March 31, 1998
are not necessarily indicative of the results that may be
expected for the year ending September 30, 1998.
The balance sheet at September 30, 1997 has been derived
from the audited financial statements at the date but does not
include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the audited financial
statements and footnotes thereto included in the annual report on
Form 10-KSB.
The accompanying financial statements include the accounts
of DynamicWeb Enterprises, Inc. ("DWEB") and its wholly owned
subsidiaries, Megascore, Inc., DynamicWeb Transactions Systems,
Inc. ("DWTS") and Software Associates, from the date of its
acquisition (November 30, 1996) (collectively the "Company").
All significant inter-company balances and transactions have been
eliminated.
The Company:
DWEB is in the business of facilitating electronic commerce
transactions between business entities, developing, marketing and
supporting software products and other services that enable
business entities to engage in electronic commerce utilizing the
Internet and traditional Electronic Data Interchange ("EDI").
DWEB offers electronic commerce solutions in EDI and Internet-
based transactions processing.
Megascore, Inc. is a full-service systems integrator
specializing in distribution, accounting and point-of-sale
computer software consulting services for suppliers and
retailers.
Software Associates, Inc. is a service bureau engaged in the
business of helping companies realize the benefits of expanding
their data processing and electronic communications
infrastructures through the use of EDI.
[1] Basic loss per share of common stock:
The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS No. 128). Basic loss per share of common
stock is based on the weighted average number of shares
outstanding and shares issuable. Contingent shares issuable in
connection with the acquisition of Software Associates, Inc. are
excluded from the weighted average shares outstanding. The
adoption of SFAS No. 128, which requires a retroactive adjustment
did not have a material effect on the Company's financial
statement.
[2] Software development costs:
Costs relating to the conceptual formulation and design of
software are expensed as research and development. Costs
incurred subsequent to establishment of technological feasibility
to produce the finished product are generally capitalized.
Technological feasibility was established when a product design
and a working model were completed. Capitalized software costs
are amortized by the straight-line method over a maximum of five
years or the expected life of the product, whichever is less.
(NOTE B) -- Contribution of Stock By Certain Shareholders
On December 23, 1997, certain of the Company's existing
shareholders, who in the aggregate held approximately 79% of the
issued and outstanding common stock of the Company, contributed
40% of their common stock to the capital of the Company in
exchange for warrants to purchase an aggregate of 125,000 shares
of the Company's common stock (the Contribution of Stock). The
total number of shares contributed was 654,597 shares,
representing approximately 32% of the issued and outstanding
common stock at the time of contribution. The effect of the
Contribution of Stock transaction was to reduce the outstanding
number of shares of common stock from 2,074,710 to 1,420,113.
The Company valued such transactions, based upon the market value
of the Company's common stock which aggregated $3,606,829.
(NOTE C) -- Public Offering:
On February 6, 1998 the Company completed a public offering
of 733,334 shares of its common stocks at $6.00 a share and
received net proceeds of approximately $3,179,000.
(NOTE D) -- Reverse Stock Split
At the Company's Annual Meeting held on June 12, 1997, the
Company's shareholders approved an amendment and restatement of
the Company's Certificate of Incorporation (the Amendment and
Restatement) which, among other things, effected a 0.2608491 -
for-one reverse stock split of the Company's common stock (the
Reverse Stock Split). The Amendment and Restatement was filed
with the New Jersey Secretary of State and took effect on
January 9, 1998. Pursuant to the reverse stock split, each share
of the Company's common stock outstanding on the effective date
was converted into 0.2608491 of one share, except that no
fractional shares were issued and shareholders who would
otherwise receive a fractional share as a result of the reverse
stock split will receive cash in lieu thereof.
(NOTE E) -- Acquisition of Design Crafting, Inc
On May 1, 1998, the Company purchased the outstanding stock
of Design Crafting Inc, an information technology professional
services company which was financed through the issuance of
92,500 shares of the Company's stock, and up to 10,000 additional
shares. The Company will audit the balance sheet of Design
Crafting and will be obligated to issue one additional share for
each $5.00 of (i) cash in the bank of Design and (ii) accounts
receivable collected within 120 days of closing, less $5,000.
All of the Company's shares will be restricted within the meaning
of Rule 144 under the Securities Act of 1933 (the Act), and will
not be registered under the Act. In addition, the Company's
shares will be subject to a restriction on sale for a period of
two years from the Closing Date, pursuant to a lock up agreement.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the financial statements included in this report
and in conjunction with the description of the Company's business
included in the Company's Form 10-KSB for the year ended
September 30, 1997. It is intended to assist the reader in
understanding and evaluating the financial position of the
Company.
This discussion contains, in addition to historical
information, forward looking statements that involve risks and
uncertainty. The Company's actual results could differ
materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such
differences include those discussed in the Company's Form 10-KSB
for the year ended September 30, 1997.
The financial statements included in this report are
consolidated for the Company and its three subsidiaries,
DynamicWeb Transaction Services, Inc., (DWTS)., Megascore, Inc.
(Megascore) and Software Associates, Inc. (Software Associates).
Financial Condition
As of March 31, 1998, the Company had cash of approximately
$1,062,000 and total current assets of approximately $1,188,000.
The Company had a net loss of approximately $1,386,000 for
the six months ended March 31, 1998 and negative operating cash
flow of $1,111,000. The Company's negative cash flow for the six
months was funded by proceeds from an issuance of common shares
of stock in February.
On March 31, 1998, the capital resources available to the
Company were not adequate to finance the Company's activities for
the full year ended September 30, 1998. The Company will require
substantial additional financing during the 1998 calendar year to
continue its operations. There is no assurance that the Company
will receive additional financing.
Results of Operations
Beginning with the Company's filing of Form 10-QSB for the
reporting period ending December 31, 1997, the format of the
Company's financial reports has been changed to better reflect
its goals and objectives as an electronic commerce company. As
such, revenues will be presented for the Company's two principal
segments: transaction processing and professional services.
Similarly, expenses for marketing and sales have been separated
from expenses of general and administration to more accurately
reflect the Company's increased focus on marketing and sales.
Management believes that continuous investments in marketing and
sales are necessary to grow the Company's business, and that a
similar commitment to research and development will allow the
Company's technology to achieve and to maintain a value added
proposition in the marketplace.
The Company recognized net sales of approximately $203,000
for the quarter ended March 31, 1998, compared to approximately
$181,000 for the same period in 1997, and approximately $369,000
for the six month period ending March 31 1998 as compared to
approximately $ 275,000 for the same period in 1997. The increase
in revenue was attributable to new sales of the Company's EDI/
Internet services and products particularly its transaction
processing service, and sales of the Company's consulting
services provided through the Company's Professional Services
Group.
The increase in revenue for the Company's transaction
processing services, from approximately $79,000 for the three
months ended March 31, 1997 to approximately $ 85,000 for the
same period in 1998, is the result of a decline in sales to new
customers. This decline was offset by an increase in the number
of trading partners of existing customers accessing the Company's
service bureau, and by $7,000 in revenues from the sale of
preliminary services for the Company's new EDIxchangeConnect.
Also, the increase in revenue for the Company's transaction
processing services, from approximately $108,000 for the six
months ended March 31, 1997 to approximately $179,000 for the
same period in 1998, is largely attributable to an increase in
sales of EDI/Internet products and services, including the
addition of new transaction processing customers.
The increase in revenue of the Company's professional
services, from approximately $60,000 for the three months ended
March 31, 1997 to approximately $84,000 for the same period in
1998, is attributable to an increase in sales of consulting
services related to the sale and installation of annual software
updates. The increase in revenue for these services, from
approximately $109,000 for the six months ending March 31, 1997
to approximately $140,000 for the same period in 1998, is
attributable to the shift in the Company's core business from its
system integration services to electronic commerce services.
The decrease in revenue of the Company's other products,
from approximately $41,000 for the three months ended March 31,
1997 to approximately $33,000 for the same period in 1998, is
attributable to the shift in the Company's core business, from
its system integration services, particularly the sale of
computer hardware and software, to electronic commerce services.
The decrease in revenue from approximately $59,000 for the six
months ending March 31, 1997 to approximately $50,000 for same
period in 1998 is also attributable to this change.
Cost of transaction processing was approximately $76,000 for
the three months ended March 31, 1998 for a gross profit of 10%.
This compares approximately to $51,000 or 65% in 1997. The
decrease in profitability is attributable to a one time charges
of $2,500, which include installation and set up fees for new
equipment and reflects $7,000 of delayed billing for rental of
floor space for the Company's scalable network infrastructure.
Without these fees, the gross profit for transaction processing
would have been 22% for the three months ending March 31, 1998
and 25% for the six months ending March 31, 1998. A portion of
the increase is also attributable to the higher fixed cost of
operating the scalable network infrastructure and the first phase
of salary increases that took effect on March 1, 1998. In order
to remain competitive, the Company has committed to compensate
its employees at prevailing market rates. The second phase of
these salary increases will take effect during the quarter ending
June 30, 1998.
Cost of professional services was approximately $38,000 for
the three months ended March 31, 1998 or a gross profit of 55%.
This compares to approximately $44,000 or 74% for the same period
for 1997. The decrease is attributable to the ongoing
transition, including a redeployment of personnel from services
related to system integration to services related to EDI/Internet
solution. A portion of the increase is also attributable to the
first phase of salary increases that took effect on March 1,
1998.
Cost of other products was approximately $5,000 in 1998, or
a gross profit of 84, as compared to approximately $17,000, or a
gross profit of 59% in 1997. This increase is attributable to the
transition from sales of low margin computer products ancillary
to system integration services and a redeployment of resources
despite the continued demand for computer products.
Quarterly marketing and sales expenses increased by
approximately $36,000 from approximately $154,000 for the three
months ending March 31, 1997 to approximately $190,000 in 1997.
The increase is attributable to attendance at trade shows by
more Company personnel. A portion of the increase is also
attributable to the first phase of salary increases that took
effect on March 1, 1998. The increase in marketing and sales
expenses, from approximately $251,000 for the six months ending
March 31, 1997 to approximately $331,000 for the same period in
1998, is attributable to the costs of increased attendance at
trade shows, salaries for new hires and the phase-in of salary
increases.
General and administration expenses increased by
approximately $129,000 from approximately $206,000 for the three
months ending March 31, 1997 to approximately $335,000 in 1998.
The increase is attributable to the cost of new hires in general
and administrative, the cost of legal and financial consulting
services, the cost of administrative support for new hires in
other departments, the cost of insurance coverage for the
Company's directors, the addition of a senior executive and
compensation expense for the 1997 Employee Stock Ownership plan.
A portion of the increase is also attributable to the cost of
recruiting the new hires, and first phase of salary increases
that took effect on March 1, 1998. The increase in general and
administration expenses, from approximately $393,000 for the six
months ending March 31, 1997 to approximately $656,000 for the
same period in 1998, is attributable to the costs of new hires in
general and administrative and other departments, the cost of
insurance coverage for the Company's directors, the addition of a
senior executive, compensation expense for the 1997 Employee
Stock Ownership plan and the phase-in of salary increases.
Research and development expenses increased by approximately
$62,000 for the quarter, from approximately $66,000 for the three
months ending March 31, 1997 to approximately $128,000 in 1998.
The increase is attributable to expanded development of existing
services, and ongoing development of new services such as
EDIxchangeConnect, EDIxchangeEnabler, EDIxchangeASN. A portion of
the increase is also attributable to new hires and the first
phase of salary increases that took effect on March 1, 1998.
Interest expense increased by approximately $13,000 from
approximately $6,000 for the three months ended March 31, 1997 to
approximately $19,000 in 1998, and by approximately $353,000 from
$10,000 for the six months ended March 31, 1997, to approximately
$364,000 in 1998. The increase is attributable to amortization
of debt discount and deferred financing fees of approximately
$310,000 and interest on bridge related financings of $43,000.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable
Item 5. Other Information
(a) Public Offering Completed
On February 6, 1998 the Company completed a
public offering of 733,334 shares of its common stock
at $6.00 a share. The Company received net proceeds of
approximately $3,179,000.
(b) Acquisition of Design Crafting, Inc
On May 1, 1998, the Company purchased the
outstanding stock of Design Crafting Inc, an
information technology professional services company,
in a stock-for-stock exchange. The Company issued
92,500 shares of the Company's common stock, and may be
obligated to issue up to 10,000 additional shares of
common stock. The Company will audit the balance sheet
of Design Crafting and will be obligated to issue one
additional share for each $ 5.00 of (1) cash in the
bank of Design Crafting, Inc. and (2) accounts
receivable of Design Crafting, Inc. collected within
120 days of closing, less $5,000. All of those shares
will be restricted within the meaning of Rule 144 under
the Securities Act of 1933 (the Act), and will not be
registered under the Act. In addition, the Company's
shares will be subject to a restriction on sale for a
period of two years from the Closing Date, pursuant to
a lock up agreement.
Item 6. Exhibits and Reports on Form 8 -K
Not applicable
SIGNATURES
In accordance with the requirements of the Securities
Exchange of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
May 15, 1998 DynamicWeb Enterprises, Inc.
(Registrant)
By:/s/ Steve Vanechanos, Jr.
Chief Executive Officer