U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
Commission file number 10039
eB2B COMMERCE, INC.
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(Exact name of small business issuer as specified in its charter)
NEW JERSEY 22-2267658
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
757 THIRD AVENUE
NEW YORK, NY 10017
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(Address of Principal Executive Offices)
(212) 703-2000
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(Issuer's telephone number, including area code)
Check whether the issuer (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. YES [ X ] NO [ ]
As of May 10, 2001, there were 15,824,127 shares of Common Stock, $0.0001 par
value per share, of the registrant outstanding.
Transitional Small Business Disclosure format Yes No x .
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, December 31,
2001 2000
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(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,561 $ 9,650
Accounts receivable, net 1,696 1,530
Other current assets 314 409
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Total Current Assets 6,571 11,589
Property and equipment, net 4,151 4,272
Goodwill, net 50,972 54,104
Other intangibles, net 2,033 2,259
Other assets 1,682 995
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Total Assets $ 65,409 $ 73,219
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,000 $ 1,000
Accounts payable 2,111 1,806
Accrued and other 4,689 4,892
Deferred income 469 592
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Total Current Liabilities 8,269 8,290
Long-term debt, less current maturities 1,000 1,250
Capital lease obligations, less current maturities 183 212
Other 284 379
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Total Liabilities 9,736 10,131
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Commitments and contingencies
Stockholders' Equity
Undesignated preferred stock - no par value; 45,998,000 shares
authorized; no shares issued and outstanding
Preferred stock, convertible Series A - $.0001 par value;
2,000 shares authorized; 7 shares issued and outstanding - -
Preferred stock, convertible Series B - $.0001 par value;
4,000,000 shares authorized; 2,727,491 and 2,803,198 shares
issued and outstanding at March 31, 2001 and December 31,
2000, respectively - -
Common stock - $.0001 par value; 200,000,000 shares
authorized; 15,816,094 and 15,384,015 shares issued and
outstanding at March 31, 2001 and December 31, 2000,
respectively 2 2
Additional paid-in capital 144,459 144,459
Accumulated deficit (87,102) (79,005)
Unearned stock-based compensation (1,686) (2,368)
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Total Stockholders' Equity 55,673 63,088
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Total Liabilities and Stockholders' Equity $ 65,409 $ 73,219
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See accompanying notes to condensed consolidated financial statements.
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eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended
March 31,
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2001 2000
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Revenue $ 1,864 $ 415
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Costs and expenses
Cost of revenue 874 249
Marketing and selling (exclusive of
stock-based compensation expense of
$107 and $652 for the three months
ended March 31, 2001 and 2000,
respectively) 834 351
Product development costs (exclusive
of stock-based compensation expense
of $2 and $63 for three months
ended March 31, 2001 and 2000,
respectively) 1,145 658
General and administrative
(exclusive of stock-based
compensation expense of $573 and
$2,382 for the three months ended
March 31, 2001 and 2000,
respectively) 3,060 2,556
Amortization of goodwill and other
intangibles 3,401 88
Stock-based compensation expense 682 3,097
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Total costs and expenses 9,996 6,999
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Loss from operations (8,132) (6,584)
Interest and other, net 35 277
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Net loss $(8,097) $(6,307)
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Basic and diluted net loss per common
share $ (0.52) $ (0.85)
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Weighted average number of common
shares outstanding 15,562,775 7,430,550
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See accompanying notes to condensed consolidated financial statements.
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eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
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2001 2000
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Operating Activities
Net loss $ (8,097) $(6,307)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 3,907 783
Stock-based compensation expense 682 3,097
Management of operating assets and liabilities
Accounts receivable, net (248) (157)
Accounts payable 295 496
Accrued expenses and other liabilities (281) (95)
Other 76 (4)
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Net cash used in operating activities (3,666) (2,187)
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Investing Activities
Product development expenditures (896) (499)
Purchase of property and equipment (195) (156)
Proceeds from maturity of investments available-for-sale - 2,970
Acquisitions, net of cash acquired - (585)
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Net cash (used in) provided by investing activities (1,091) 1,730
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Financing Activities
Repayment of borrowings (250) (2,116)
Proceeds from borrowings - 2,500
Payment of capital lease obligations (82) (14)
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Net cash (used in) provided by financing activities (332) 370
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Net decrease in cash and cash equivalents (5,089) (87)
Cash and cash equivalents at beginning of period 9,650 9,907
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Cash and cash equivalents at end of period $ 4,561 $ 9,820
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Non-cash transactions
Common stock, options and warrants issued or exchanged in
connection with acquisition $ - $ 3,347
Cash paid during the period for
Interest $ 43 $ -
See accompanying notes to condensed consolidated financial statements.
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eB2B COMMERCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND PLAN OF OPERATION
eB2B Commerce, Inc (the "Company") utilizes proprietary software to provide a
technology platform for large buyers and large suppliers to transfer business
documents via the Internet to their small and medium-sized trading partners.
These documents include, but are not limited to, purchase orders, purchase order
acknowledgements, advanced shipping notices and invoices. The Company does not
allow customers to take delivery of its proprietary software. The Company
provides access via the Internet to its proprietary software, which is
maintained on its hardware and on hosted hardware. The Company also offers
professional services, which provide consulting expertise to the same client
base, as well as to other businesses that prefer to operate or outsource the
transaction management and document exchange of their business-to-business
relationships. In addition, the Company provides authorized technical education
to its client base, and also designs and delivers custom computer and
Internet-based training seminars.
Since its inception, the Company has experienced significant losses from
operations and negative cash flows from operations in the transaction management
and document exchange services. Management has addressed the costs of providing
these services throughout 2000 and thus far in 2001. While the Company continues
to add large customers to its service, it is focused primarily on adding trading
partners who transact business with its largest existing customers.
To address the continuing loss from operations and negative cash flows from
operations, management enacted a plan for the Company, which included various
cost cutting measures, principally staffing reductions and discretionary
spending reductions in selling, marketing, general and administrative areas,
during the third and fourth quarter of 2000 and into 2001.
Additionally, during May 2001, the Company received financing of $7.5 million in
the form of convertible notes and warrants (see Note 3, Financing). The Company
has also agreed to issue approximately 2.5 million shares of currently
unregistered Company common stock in lieu of $1.5 million of payments to certain
vendors.
NOTE 2. BASIS OF PRESENTATION
The accompanying quarterly financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have been
included in the accompanying unaudited condensed consolidated financial
statements. All significant intercompany balances and transactions have been
eliminated in consolidation and certain other prior period balances have been
reclassified to conform to the current period presentation. The accompanying
unaudited condensed consolidated financial statements are not necessarily
indicative of full year results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations; however, management believes that the disclosures are
adequate to make the information presented not misleading. This report should be
read in conjunction with the consolidated financial statements and footnotes
therein included in the audited annual report on Form 10-KSB for the fiscal year
ended December 31, 2000.
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NOTE 3. FINANCING
On May 2, 2001, the Company completed a private placement of convertible notes
and warrants (the "Financing"). The gross proceeds of the Financing totaled $7.5
million. Pursuant to the Financing, the Company issued $7,500,000 of principal
amount of 7% convertible notes ("Convertible Notes"), convertible into an
aggregate of 15,000,000 shares of Company common stock ($0.50 per share), and
warrants to purchase an aggregate 15,000,000 shares of Company common stock at
$0.93 per share (the "Private Warrants").
The Convertible Notes have a term of 18 months, which period may be accelerated
in certain events. Interest is payable quarterly in cash, in identical
Convertible Notes or in shares of common stock, at the option of the Company. In
addition, the Convertible Notes will automatically convert into Series C
preferred stock if the Company receives the required consent of the holders of
the Company's Series B preferred stock to the issuance of this new series. The
Series C preferred stock would be convertible into common stock on the same
basis as the Convertible Notes. The Series C preferred stock have (i)
antidilution provisions, (ii) a liquidation preference, and (iii) can be
automatically converted by the Company in certain circumstances.
The Private Warrants will be exercisable for a period of two years from the
earlier of (i) the date the Company receives shareholder approval of the
Financing, (ii) the date such shareholder approval is no longer required, either
because the common stock of the Company is no longer listed on NASDAQ or
otherwise, or (iii) October 1, 2001.
The Company intends to seek shareholder approval of the Financing, as required
by the rules of NASDAQ.
In connection with the closing of the Financing, the Company canceled a
$2,050,000 line of credit issued in April 2001 (the "Line of Credit"), pursuant
to which it had not borrowed any funds. The Company incurred a cash fee
amounting to $61,500 in consideration of the availability of the Line of Credit.
In addition, the issuer of the Line of Credit was issued warrants to purchase
900,000 shares of Company common stock at $0.50 per share for a period of five
years in consideration of the availability of such line. These warrants were
valued using the Black-Scholes option pricing model at $549,000.
In connection with the Financing, the Company incurred a cash fee amounting to
$750,000 and issued (i) warrants to purchase 2,250,000 shares of Company common
stock with an exercise price of $0.93 for a period of five years and (ii) unit
purchase options to purchase Series C preferred stock convertible into an
aggregate of 2,250,000 shares of Company common stock with an exercise price of
$0.50 per share for a period of five years. These warrants and unit purchase
options were valued using the Black-Scholes option pricing model at $675,000 and
$810,000, respectively. Additionally, other expenses directly related the
Financing were approximately $400,000.
The assumptions used by the Company in determining the fair value of the above
warrants and unit purchase options were as follows: dividend yield of 0%,
risk-free interest of 6.5%, expected volatility of 80%, and expected life of 2
to 5 years.
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NOTE 4. ACQUISITIONS
DynamicWeb Enterprises, Inc.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation ("eB2B"), merged
with and into DynamicWeb Enterprises, Inc., a New Jersey corporation and an SEC
registrant ("DWeb"), with the surviving company using the name "eB2B Commerce,
Inc.". Pursuant to the Agreement and Plan of Merger between eB2B and DWeb, the
shareholders of DWeb retained their shares in DWeb, while the shareholders of
eB2B received shares, or securities convertible into shares, of common stock of
DWeb representing approximately 89% of the equity of the Company, on a fully
diluted basis. The transaction was accounted for as a reverse acquisition, a
purchase business combination in which eB2B was the accounting acquirer and DWeb
was the legal acquirer. Each share of common stock of DWeb remained outstanding
and each share of eB2B common stock was exchanged for the equivalent of 2.66
shares of DWeb's common stock. In addition, shares of eB2B preferred stock,
warrants and options were exchanged for like securities of DWeb, reflective of
the 2.66 to 1 exchange ratio. The management of eB2B remained the management of
the Company.
Netlan Enterprises, Inc.
On February 22, 2000, eB2B completed its acquisition of Netlan Enterprises, Inc.
and subsidiaries ("Netlan"). The acquisition was accounted for using the
purchase method.
At March 31, 2001, accumulated amortization related to the goodwill and other
intangibles acquired in the Netlan and DWeb acquisitions totaled approximately
$13.2 million.
The following represents the summary unaudited pro forma condensed consolidated
results of operations for the three-month period ended March 31, 2000 as if the
acquisitions had occurred at the beginning of the period presented (in
thousands, except per share data):
Three Months Ended
March 31, 2000
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Revenue $1,870
Net loss (18,981)
Basic and diluted net loss per common share (1.53)
The pro forma results are not necessarily indicative of what would have occurred
if the acquisitions had been in effect for the period presented. In addition the
pro forma results are not necessarily indicative of the results that will occur
in the future and do not reflect any potential synergies that might arise from
the combined operations.
NOTE 5. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted
loss per common share has not been reflected since the assumed conversion of
options, warrants and preferred shares would have been antidilutive. Had the
Company reported net income at March 31, 2001 and 2000, options and warrants to
purchase 23,255,737 and 14,026,554 common shares, and preferred shares
convertible into 13,200,448 and 16,358,995 common shares, respectively, would
have been
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included in the computation of diluted earnings per common share, to the extent
they were not antidilutive.
The unaudited pro forma net loss per common share presented in Note 4 herein has
been computed in the same manner as net loss per common share.
The weighted-average number of shares outstanding for purposes of presenting net
loss per common share on a comparative basis has been retroactively restated to
the earliest period presented to reflect the 2.66 to 1 exchange ratio in the
reverse acquisition described in Note 4 herein.
NOTE 6. PRODUCT DEVELOPMENT
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" requires companies to
capitalize qualifying computer software costs incurred during the application
development stage. All other costs incurred in connection with internal use
software were expensed as incurred. The useful life assigned to capitalized
product development costs should be based on the period such product is expected
to provide future utility to the Company. As of March 31, 2001 and December 31,
2000, capitalized product development costs, which have been classified as other
assets in the Company's balance sheets, were $1,565,000 and $905,000,
respectively. Total product development costs were approximately $1,145,000 and
$658,000, as expensed, for the three-month periods ended March 31, 2001 and
2000, respectively.
NOTE 7. RELATED PARTIES
A principal and Chief Executive Officer of a financial advisor (the "Financial
Advisor") is a director of the Company.
In connection with the closing of the Financing described in Note 3 herein, the
Financial Advisor and its affiliate received a cash fee in the amount of $61,500
in consideration of the availability of the Line of Credit. In addition, the
Financial Advisor was issued warrants to purchase 900,000 shares of Company
common stock at $0.50 per share for a period of five years in consideration of
the availability of such line. These warrants were valued using the
Black-Scholes option pricing model at $549,000.
For acting as a placement agent for the Financing, the Financial Advisor
received a cash fee in the amount of $637,500 and was issued (i) warrants to
purchase 1,875,000 shares of Company common stock with an exercise price of
$0.93 for a period of five years and (ii) unit purchase options to purchase
Series C preferred stock convertible into an aggregate of 1,875,000 shares of
Company common stock with an exercise price of $0.50 per share for a period of
five years. These warrants and unit purchase options were valued using the
Black-Scholes option pricing model at $562,500 and $675,000, respectively.
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NOTE 8. SEGMENT REPORTING
The following information is presented in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which established standards for reporting
information about operating segments in the Company's financial statements (in
thousands):
Three Months Ended March, 31
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2001 2000
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Revenue from external customers
Transaction processing and related services $ 1,165 $ 177
Training and client educational services 699 238
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$ 1,864 $ 415
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EBITDA (1)
Transaction processing and related services $ (3,642) $ (2,794)
Training and client educational services 93 29
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EBITDA (3,549) (2,765)
Depreciation and amortization (3,907) (783)
Stock-related compensation (682) (3,097)
Interest 41 338
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Net Loss $ (8,097) $ (6,307)
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(1) EBITDA is defined as net income (loss) adjusted to exclude: (i) provision
(benefit) for income taxes, (ii) interest income and expense, (iii)
depreciation, amortization and write-down of assets, (iv) stock-related
compensation.
EBITDA is presented because management considers it an important indicator of
the operational strength and performance of its business. The Company evaluates
the performance of its operating segments without considering the effects of (i)
debt financing interest expense and investment interest income, and (ii)
non-cash charges related to depreciation, amortization and stock-related
compensation, which are managed at the corporate level.
Transaction processing and related services include revenue for processing
transactions and consulting services. Revenue from transaction processing is
recognized on a "pay per transaction" basis or based on a monthly subscription
charge related to the overall number of transactions during the period. The
revenue from these services is recognized in the month in which the services are
rendered. Revenue from consulting services is recognized as services are
rendered over the contract term. The revenue derived from training and client
educational services is recognized as services are rendered for the respective
seminars, typically one to five days. Deferred income includes amounts billed
for the unearned portion of certain consulting contracts and training seminars.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
The following discussion and analysis should be read in conjunction with the
consolidated financial statements included in this report. It is intended to
assist the reader in understanding and evaluating the financial position of the
Company. This report contains, in addition to historical information,
forward-looking statements, as the term is defined in the Private Securities
Litigation Reform Act of 1995. Certain statements contained in this report are
subject to uncertainties and risks that may cause actual results to materially
differ from projections. Although the Company believes that its expectations are
reasonable assumptions within the bounds of its knowledge of its business
operations, there can be no assurance that actual results will not differ
materially from its expectations. The uncertainties and risks include, among
other things, the Company's plans, beliefs and goals, the Company's limited
operating history, the ability to raise additional capital, if needed, the risks
and uncertainties associated with rapidly changing technologies such as the
Internet, the risks of technology development and the risks of competition that
can cause actual results to differ materially from those in the forward-looking
statements.
Overview
The Company utilizes proprietary software to provide a technology platform for
large buyers and large suppliers to transfer business documents via the Internet
to their small and medium-sized trading partners. These documents include, but
are not limited to, purchase orders, purchase order acknowledgements, advanced
shipping notices and invoices. The Company does not allow customers to take
delivery of its proprietary software. The Company provides access via the
Internet to its proprietary software, which is maintained on its hardware and on
hosted hardware. The Company also offers professional services, which provide
consulting expertise to the same client base, as well as to other businesses
that prefer to operate or outsource the transaction management and document
exchange of their business-to-business relationships. In addition, the Company
is an authorized provider of technical education to its clients for products of
Citrix, Lotus Development Corporation, Microsoft Corporation, and Novell Inc.
The Company designs and delivers custom technical education for the same client
base and provides education through delivery of custom computer and
Internet-based on-line training seminars.
Revenue from transaction processing is recognized on a per transaction basis
when a transaction occurs between a buyer and a supplier. The fee is based
either on the volume of transactions processed during a specific period,
typically one month, or calculated as a percentage of the dollar volume of the
purchase related to the documents transmitted during a similar period. Revenue
from related implementation, if any, and monthly hosting fees are recognized on
a straight-line basis over the term of the contract with the customer. Deferred
income includes amounts billed for implementation and hosting fees, which have
not been earned. For related consulting arrangements on a time-and-materials
basis, revenue is recognized as services are performed and costs are incurred in
accordance with the billing terms of the contract. Revenues from related fixed
price consulting arrangements are recognized using the percentage-of-completion
method. Fixed price consulting arrangements are mainly short-term in nature and
the Company does not have a history of incurring losses on these types of
contracts. If the Company were to incur a loss, a provision for the estimated
loss on the uncompleted contract would be recognized in the period in which such
loss becomes probable and estimable. Billings in excess of revenue recognized
under the percentage-of-completion method on fixed price contracts is included
in deferred income.
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Revenue from training and client educational services is recognized upon the
completion of the seminar and is based upon class attendance. If a seminar
begins in one period and is completed in the next period, the Company recognizes
revenue based on the percentage of completion method for the applicable period.
Deferred income includes amounts billed for training seminars and classes that
have not been completed.
On February 22, 2000, eB2B completed its acquisition of Netlan. Pursuant to the
Agreement and Plan of Merger (the "Netlan Merger"), Netlan's stockholders
exchanged 100% of their common stock for 46,992 shares of eB2B common stock
(equivalent to 125,000 shares of Company common stock). Additionally, 75,188
shares of eB2B common stock (equivalent to 200,000 shares of Company common
stock) were issued, placed into an escrow account, and were released to certain
former shareholders of Netlan upon successful completion of escrow requirements,
including continued employment with the Company. The purchase price of the
Netlan Merger was approximately $1.6 million. The Company recorded approximately
$4,896,000 of goodwill and approximately $334,000 of other intangibles in
connection with this transaction.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation ("eB2B"), merged
with and into DWeb, a New Jersey corporation, with the surviving company using
the name "eB2B Commerce, Inc.". Pursuant to the Agreement and Plan of Merger
between eB2B and DWeb (the "Merger"), the shareholders of DWeb retained their
shares in DWeb, while the shareholders of eB2B received shares, or securities
convertible into shares, of common stock of DWeb representing approximately 89%
of the equity of the Company, on a fully diluted basis. The transaction was
accounted for as a reverse acquisition.
The reverse acquisition was accounted for as a purchase business combination in
which eB2B is the accounting acquirer and DWeb is the legal acquirer. As a
result of the reverse acquisition, (i) the financial statements of eB2B are the
historical financial statements of the Company; (ii) the results of the
Company's operations include the results of DWeb after the date of the Merger;
(iii) the acquired assets and assumed liabilities of DWeb were recorded at their
estimated fair market value at the date of the Merger; (iv) all references to
the financial statements of the "Company" apply to the historical financial
statements of eB2B prior to the Merger and to the consolidated financial
statements of the Company subsequent to the Merger; and (v) any reference to
eB2B applies solely to eB2B Commerce, Inc., a Delaware corporation, and its
financial statements prior to the Merger. The purchase price of the Merger was
approximately $59.1 million, of which approximately $1.9 million was allocated
to identifiable net liabilities assumed, $58.1 million was allocated to goodwill
and $2.9 million was allocated to other intangibles.
The goodwill resulting from the above purchase business combinations is being
amortized over five years and other intangibles are being amortized over three
years. For the three-month periods ended March 31, 2001 and 2000, amortization
related to the goodwill and other intangibles acquired in the Netlan and DWeb
acquisitions totaled approximately $3.4 million and $0.1 million, respectively.
The Company's financial condition and results from operations were dramatically
different during the three-month periods ended March 31, 2001 and 2000. For the
three months ended March 31, 2001, the Company's results reflected the new
operations of the Company, the operations of Netlan and the operations of Dweb.
For the three months ended March 31, 2000, the Company's results included the
operations of eB2B, the operations of Netlan from March 1, 2000 and did not
reflect the operations of DWeb. As a result, the Company believes that the
results of operations for the three months ended March 31, 2000 are not
comparable to the results of operations for the
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same period in 2001 and the Company's anticipated financial condition and
results of operations going forward. Furthermore, the Company's limited
operating history makes the prediction of future operating results very
difficult. The Company believes that period-to-period comparisons of operating
results should not be relied upon as predictive of future performance. The
Company's prospects must be considered in light of the risks, expenses and
difficulties encountered by companies at an early stage of development,
particularly companies in new and rapidly evolving markets. The Company may not
be successful in addressing such risks and difficulties.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Total revenue for the three-month periods ended March 31, 2001 and 2000 amounted
to $1,864,000 and $415,000, respectively, reflecting an increase of $1,449,000,
or 349%.
The Company's transaction processing and related services' reportable segment
generated revenue of $1,165,000 for the three-month period ended March 31, 2001
as compared to $177,000 for the three-month period ended March 31, 2000. Such
revenue in 2001 includes fees paid for processing transactions between buyers
and suppliers and related consulting revenue, and in 2000 reflected primarily
related consulting revenue from the Netlan operations acquired on February 22,
2000. The increase in revenue of $988,000, or 558%, in 2001 as compared to 2000
for the three-month period ended March 31 reflected revenue related to the DWeb
operations acquired on April 18, 2000, coupled with an increase in the average
fee paid per customer for transaction processing, partially offset by revenue in
the consulting services acquired from Netlan on February 22, 2000 as these
services have been eliminated during the latter part of 2000.
The Company's training and client educational services' reportable segment
generated revenue of $699,000 during the three-month period ended March 31, 2001
as compared to $238,000 for the same period in the previous year. The increase
in revenue of $461,000, or 194%, in 2001 as compared to 2000 for the three-month
period ended March 31 reflected revenue for the full three-month period in 2001
related to the Netlan acquisition on February 22, 2000.
In the three-month period ended March 31, 2001, one customer accounted for
approximately 20.7% of the Company's total revenue. No other customer accounted
for 10% or more of the Company's total revenue for the three-month period ended
March 31, 2001.
Cost of revenue consists primarily of salaries and benefits for employees
providing technical support as well as salaries and benefits of personnel and
consultants providing consulting and training services to clients. Total cost of
revenue for the three-month periods ended March 31, 2001 and 2000 amounted to
$874,000 and $249,000, respectively. The increase in cost of revenues of
$625,000, or 251%, in 2001 as compared to 2000 for the three-month period ended
March 31 reflected primarily the greater scope of operations of the Company as
compared to the same period in 2000.
Marketing and selling expenses consist primarily of employee salaries, benefits
and commissions, and the costs of promotional materials, trade shows and other
sales and marketing programs. Marketing and selling expenses (exclusive of
stock-based compensation) were approximately $834,000 and $351,000 for the
three-month periods ended March 30, 2001 and 2000, respectively. The increase in
marketing and selling expenses of $483,000, or 138%, in 2001 as compared to 2000
for the three-month period ended March 31 consisted principally of the
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additional costs associated with marketing and selling the services acquired in
the Dweb acquisition, coupled with an increase in general marketing expenses.
Product development expenses mainly represent payments to outside contractors
and personnel and related costs associated with the development of the Company's
technological infrastructure necessary to process transactions, including the
amortization of certain capitalized costs. Product development expenses
(exclusive of stock-based compensation) were approximately $1,145,000 and
$658,000 for the three-month periods ended March 31, 2001 and 2000,
respectively. The increase in product development expenses for the three-month
period ended March 31, 2001 as compared to the same period of 2000 was $487,000,
or 74%. During the first quarter ended March 31, 2001, the Company expensed
approximately $910,000 in relation with costs chiefly associated with the
transition of certain of its existing customers to its new technology platform.
The Company capitalizes qualifying computer software costs incurred during the
application development stage. Accordingly, the Company anticipates that product
development expenses will fluctuate from quarter to quarter as various
milestones in the development are reached and future versions are implemented.
General and administrative expenses consist primarily of employee salaries and
related expenses for executives, administrative and finance personnel, as well
as other consulting, legal and professional fees, and, to a lesser extent,
facility and communication costs. During the three-month periods ended March 31,
2001 and 2000, total general and administrative expenses (exclusive of
stock-based compensation) amounted to $3,060,000 and $2,556,000, respectively.
The increase in general and administrative expenses of $504,000, or 20%, in 2001
as compared to 2000 for the three-month period ended March 31 reflected
increased expenses to manage and operate the companies acquired during 2000,
partially offset by non-recurring outside contractor and consulting fees in
relation with the design and the implementation of the Company's strategy and
management structure of approximately $772,000 in the same period in 2000.
Amortization of goodwill and other intangibles are non-cash charges associated
with the DWeb and Netlan business combinations. Such amortization expenses were
$3,401,000 and $88,000 for the three-month periods ended March 31, 2001 and
2000, respectively. The increase is due primarily to amortization of goodwill
and other intangibles in the 2001 period for the Dweb acquisition from April 18,
2000 versus none in the three-month period ended March 31, 2000, and a full
quarter of amortization on the Netlan acquisition from March 1, 2000 versus one
month in 2000. The Company periodically assesses the recoverability of goodwill
and other intangibles based upon expectations of undiscounted future cash flows.
Depending on the result of such assessment in future periods, management may
deem it necessary to record an impairment charge.
During the three-month periods ended March 31, 2001 and 2000, stock-based
compensation expense amounted to $682,000 and $3,097,000, respectively. The
deferred stock compensation is being amortized over the vesting periods of the
related options and warrants contingent upon continued employment of the
respective option or warrant holders. The vesting period of the options and
warrants ranges principally from two to four years. The balance of unearned
stock-based compensation at March 31, 2001 was approximately $1,686,000. This
balance will be amortized at varying amounts per quarter through March 2002.
The Company defines Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") as net income (loss) adjusted to exclude: (i) provision
(benefit) for income taxes, (ii) interest income and expense, (iii)
depreciation, amortization and write-down of assets, and (iv) stock-related
compensation.
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EBITDA is discussed because management considers it an important indicator of
the operational strength and performance of its business based in part on the
significant level of non-cash expenses recorded by the Company to date, coupled
with the fact that these non-cash items are managed at the corporate level.
EBITDA, however, should not be considered an alternative to operating or net
income as an indicator of the performance of the Company, or as an alternative
to cash flows from operating activities as a measure of liquidity, in each case
determined in accordance with accounting principles generally accepted in the
United States of America. See Liquidity and Capital Resources for a discussion
of cash flow information.
For the three-month periods ended March 31, 2001 and 2000, EBITDA was a loss of
$3,549,000 and $2,765,000, respectively. During the three months ended March 31,
2001, the Company expensed non-cash items including depreciation, amortization
and stock-based compensation expense aggregating to $4,589,000, compared to
$3,880,000 for the same period in 2000.
Interest and other, net amounted to $35,000 and $277,000 for the three-month
periods ended March 31, 2001 and 2000, respectively. Such income, net of other
expenses, related primarily to interest earned on cash balances and
available-for-sale marketable securities during the respective periods. The
decrease in interest and other, net during the 2001 period as compared to the
2000 period was principally associated with the reduced cash balance and
available-for-sale marketable securities during the 2001 period as compared to
the 2000 period.
Net loss for the three-month periods ended March 31, 2001 and 2000 was
$8,097,000 and $6,307,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception on November 6, 1998, the Company has incurred significant
operating losses, net losses and negative cash flows from operations, due in
large part to the start-up and development of its operations and the development
of proprietary software and technological infrastructure for its platform to
process transactions. The Company expects that its net losses and negative cash
flows from operations will continue as it implements its growth strategy. The
Company anticipates increased revenues throughout 2001 combined with reduced
expenses compared to 2000, which, if achieved, will reduce its net losses and
improve cash flows from operations in 2001 as compared to 2000. There can be no
assurances that revenues will improve or the expenses will decline in 2001, or
that net losses and negative cash flows from operations will be reduced.
Historically, the Company has funded its losses and capital expenditures through
borrowings and the net proceeds of prior securities offerings. From inception
through March 31, 2001, net proceeds from private sales of securities totaled
approximately $29.9 million.
Management has addressed the costs of providing transaction management and
document exchange services throughout 2000 and thus far in 2001. While the
Company continues to add large customers to its service, it is focused primarily
on adding trading partners who transact business with its largest existing
customers.
To address the continuing loss from operations and negative cash flows from
operations, management enacted a plan for the Company, which included various
cost cutting measures, principally staffing reductions and discretionary
spending reductions in selling, marketing, general and administrative areas,
during the third and fourth quarter of 2000 and into 2001.
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On May 2, 2001, the Company completed a private placement of convertible notes
and warrants (the "Financing"). The gross proceeds of the Financing totaled $7.5
million. Pursuant to the Financing, the Company issued $7,500,000 of principal
amount of 7% convertible notes ("Convertible Notes"), convertible into an
aggregate of 15,000,000 shares of Company common stock ($0.50 per share), and
warrants to purchase an aggregate 15,000,000 shares of Company common stock at
$0.93 per share (the "Private Warrants"). The Convertible Notes have a term of
18 months, which period may be accelerated in certain events. Interest is
payable quarterly in cash, in identical Convertible Notes or in shares of common
stock, at the option of the Company. In addition, the Convertible Notes will
automatically convert into Series C preferred stock if the Company receives the
required consent of the holders of the Company's Series B preferred stock to the
issuance of this new series. The Series C preferred stock would be convertible
into common stock on the same basis as the Convertible Notes. The Private
Warrants will be exercisable for a period of two years from the earlier of (i)
the date the Company receives shareholder approval of the Financing, (ii) the
date such shareholder approval is no longer required, either because the common
stock of the Company is no longer listed on NASDAQ or otherwise, or (iii)
October 1, 2001. The Company intends to seek shareholder approval of the
Financing, as required by the rules of NASDAQ.
In connection with the closing of the Financing, the Company canceled a
$2,050,000 line of credit issued in April 2001 (the "Line of Credit"), pursuant
to which it had not borrowed any funds. The Company incurred a cash fee
amounting to $61,500 in consideration of the availability of the Line of Credit.
In addition, the issuer of the Line of Credit was issued warrants to purchase
900,000 shares of Company common stock at $0.50 per share for a period of five
years in consideration of the availability of such line. These warrants were
valued using the Black-Scholes option pricing model at $549,000.
In connection with the Financing, the Company incurred a cash fee amounting to
$750,000 and issued (i) warrants to purchase 2,250,000 shares of Company common
stock with an exercise price of $0.93 for a period of five years and (ii) unit
purchase options to purchase Series C preferred stock convertible into an
aggregate of 2,250,000 shares of Company common stock with an exercise price of
$0.50 per share for a period of five years. These warrants and unit purchase
options were valued using the Black-Scholes option pricing model at $675,000 and
$810,000, respectively. Additionally, other expenses directly related the
Financing were approximately $400,000.
Net cash used in operating activities totaled approximately $3,666,000 for the
three months ended March 31, 2001 as compared to net cash used in operating
activities of approximately $2,187,000 for the same period in 2000. Net cash
used in operating activities for the three months ended March 31, 2001 resulted
primarily from (i) the $8,097,000 net loss in the period and (ii) a $158,000 use
of cash from operating assets and liabilities, offset by (iii) an aggregate of
$4,589,000 of non-cash charges consisting primarily of depreciation,
amortization and stock-based compensation expense. Net cash used in operating
activities for the three months ended March 31, 2000 resulted primarily from (i)
the $6,307,000 net loss in the period, offset by (ii) $240,000 of cash provided
by operating assets and liabilities, and (iii) an aggregate of $3,880,000 of
non-cash charges consisting primarily of depreciation, amortization and
stock-based compensation expense.
Net cash used in investing activities totaled approximately $1,091,000 for the
three months ended March 31, 2001 as compared to net cash provided by investing
activities of approximately $1,730,000 for the same period in 2000. Net cash
used in investing activities for the three months ended March 31, 2001 resulted
from (i) the purchase of capital assets for $195,000, primarily
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computer and office equipment, and (ii) $896,000 in product development costs
consisting of fees of outside contractors and capitalized salaries. Net cash
provided by investing activities for the three months ended March 31, 2000
resulted from (i) $2,970,000 net proceeds from maturity of investments
available-for-sale offset by (ii) the purchase of capital assets for $156,000,
primarily computer and office equipment, (ii) $499,000 in product development
costs consisting of fees of outside contractors and capitalized salaries, and
(iii) the $585,000 net cash effect of the Netlan Merger.
Net cash used in financing activities totaled approximately $332,000 for the
three months ended March 31, 2001 as compared to net cash provided by financing
activities of approximately $370,000 for the same period in 2000. In February
2000, eB2B obtained a $2,500,000 term loan from a bank (the "Bank"). The
proceeds from the term loan were primarily used to refinance the $2,116,000 debt
of Netlan paid by eB2B in connection with the Netlan Merger. The term loan had a
term of three years, was interest-only until December 1, 2000, and bore interest
at a rate equal to LIBOR plus 1%. Beginning December 1, 2000, the term loan
required ten quarterly principal payments of $250,000. At March 31, 2001 the
outstanding balance of the term loan was $2.0 million. The loan was secured by a
custodial cash account in the amount of approximately 111% of the outstanding
balance of the term loan. The Company paid the outstanding balance of the loan
in full on April 2, 2001 using cash held in the custodial cash account. The
Company also has a $1,250,000 line of credit with the Bank. No amounts were
borrowed under the line of credit as of March 31, 2001. The line of credit
secures approximately $1,178,000 of letters of credit that are outstanding at
March 31, 2001. The line is secured by a custodial cash account in the amount of
approximately 111% of the line.
As of March 31, 2001, the Company's principal source of liquidity was
approximately $4.6 million of cash and cash equivalents against which the Bank
held a custody account with approximately $3,611,000 as security on the term
loan and line of credit with the Bank. During April 2001 the Company paid the
remaining outstanding balance on the term loan of $2.0 million. Accordingly, the
required balance in the custodial cash account has been reduced to $1,389,000.
As of March 31, 2001, the Company had commitments for software license and
maintenance fees as well as outside consulting fees in the aggregate amount of
approximately $2.2 million with two vendors. During April 2001, the Company
renegotiated the payment schedule with these vendors and accordingly paid cash
of approximately $0.5 million and has agreed to issue approximately 2.5 million
shares of currently unregistered Company common stock in lieu of $1.5 million of
payments to these vendors. The remaining $0.2 million represents sales tax
payable on the software license and maintenance agreements, which will be paid
in May 2001.
The Company anticipates spending approximately $1.4 million on capital
expenditures over the next twelve months, primarily on capitalized product
development costs.
Management believes that the Company's available cash resources at March 31,
2001, coupled with the proceeds from the sale of $7.5 million of convertible
notes and warrants, will be sufficient to meet anticipated working capital and
capital expenditure requirements for the next twelve months. The Company's
current use of cash approximates $1.0 million per month. As a result of the cost
cutting measures carried out as part of its 2001 plan, the Company anticipates
that its use of cash will be below $500,000 per month by the end of the third
quarter of 2001 and expects to use less than $250,000 per month by the end of
2001. The expected reduction in use of cash reflects an anticipated increase in
revenue, coupled with staffing reductions and operational cost reductions
implemented in April and May 2001. There can be no assurances that such measures
will be sufficient to successfully reduce the current use of cash.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company reported that Richard S. Cohan was elected President and Chief
Operating Officer. In addition, the Company announced that Stephen J. Warner and
Harold S. Blue were elected members of the Board of Directors. Reference is made
to the press release dated May 8, 2001 reporting the election of these
individuals, a copy of which is included herewith as Exhibit 99.1 and
incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Press release dated May 8, 2001
(b) Reports on Form 8-K
A Form 8-K was filed on January 12, 2001 with respect to a notification to
holders of the Company's Series B preferred stock and related warrant holders
informing them that the Company's Registration Statement on Form S-4, which
became effective on March 22, 2000, did not cover either the issuance or resale
of the shares of common stock underlying the warrants and convertible Series B
preferred stock.
A Form 8-K was filed on January 29, 2001 with respect to a further notification
to holders of the Company's Series B preferred stock and related warrant holders
informing them that the shares of common stock issued or issuable as a result of
the conversion of the Company's Series B preferred stock could be sold in
accordance with the requirements of Rule 144 promulgated under the Securities
Act of 1933.
A Form 8-K was filed on March 2, 2001 with respect to an offer to certain
securityholders for the purpose of simplifying the Company's capital structure.
A Form 8-K was filed on March 5, 2001 with respect to an adjustment made to the
terms of the warrants issued in connection with the Company's December 1999
private placement that reduced the exercise price from approximately $2.07 to
$1.861 per share and the number of warrants held by each holder was increased by
11.1%.
A Form 8-K was filed on March 12, 2001 with respect to an extension of the
Company's offer to certain private investors to convert preferred stock and
exercise warrants for the purpose of simplifying its capital structure.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eB2B Commerce, Inc.
-------------------
(Registrant)
May 15, 2001 By: /s/ Alan J. Andreini
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Chief Executive Officer
May 15, 2001 By: /s/ Peter J. Fiorillo
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Chief Financial Officer
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