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 June 30, 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 August 10, 2001, there were 20,470,700 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)
June 30, 2001 December 31,
(unaudited) 2000
ASSETS
Current Assets
Cash and cash equivalents $ 4,693 $ 9,650
Accounts receivable, net 1,311 1,530
Other current assets 289 409
--------- ---------
Total Current Assets 6,293 11,589
Property and equipment, net 3,957 4,272
Goodwill, net 47,818 54,104
Other intangibles, net 1,785 2,259
Capitalized product development costs, net 1,861 905
Debt issuance costs, net 2,248 --
Other assets 115 90
--------- ---------
Total Assets $ 64,077 $ 73,219
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ -- $ 1,000
Accounts payable 1,883 1,806
Accrued expenses and other current liabilities 3,127 4,892
Deferred income 385 592
--------- ---------
Total Current Liabilities 5,395 8,290
Convertible notes, net of discount and conversion option of $5,221 2,279 --
Long-term debt, less current maturities -- 1,250
Capital lease obligations, less current maturities 153 212
Other liabilities 1,053 379
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Total Liabilities 8,880 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; 2,662,657 and 2,803,198 shares
issued and outstanding at June 30, 2001 and December 31,
2000, respectively -- --
Common stock - $.0001 par value; 200,000,000 shares
authorized; 19,926,776 and 15,384,015 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively 2 2
Additional paid-in capital 153,176 144,459
Accumulated deficit (97,215) (79,005)
Unearned stock-based compensation (766) (2,368)
--------- ---------
Total Stockholders' Equity 55,197 63,088
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Total Liabilities and Stockholders' Equity $ 64,077 $ 73,219
========= =========
See accompanying notes to condensed consolidated financial statements.
2
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenue $ 1,679 $ 1,590 $ 3,543 $ 2,005
------------ ------------ ------------ ------------
Costs and expenses
Cost of revenue 891 887 1,765 1,136
Marketing and selling (exclusive
of stock-based compensation
expense of $160 and $267 for the
three and six months ended June
30, 2001, and $302 and $954 for 573 665 1,407 1,016
the three and six months ended
June 30, 2000, respectively)
Product development costs
(exclusive of stock-based
compensation expense of $2 and
$4 for the three and six months
ended June 30, 2001, and $63 and
$126 for the three and six
months ended June 30, 2000,
respectively) 202 1,126 1,347 1,784
General and administrative
(exclusive of stock-based
compensation expense of $773 and
$1,346 for the three and six
months ended June 30, 2001, and
$10,111 and $12,493 for the
three and six months ended June
30, 2000, respectively) 3,115 4,309 6,175 6,865
Restructuring charge 1,129 -- 1,129 --
Amortization of goodwill and other
intangibles 3,402 2,739 6,803 2,827
Stock-based compensation expense 935 10,476 1,617 13,573
------------ ------------ ------------ ------------
Total costs and expenses 10,247 20,202 20,243 27,201
------------ ------------ ------------ ------------
Loss from Operations (8,568) (18,612) (16,700) (25,196)
Interest and other, net (1,545) 288 (1,510) 565
------------ ------------ ------------ ------------
Net loss $ (10,113) $ (18,324) $ (18,210) $ (24,631)
============ ============ ============ ============
Net loss per common share $ (0.59) $ (1.59) $ (1.11) $ (2.60)
============ ============ ============ ============
Weighted average number of common
shares outstanding 17,277,890 11,514,073 16,428,054 9,477,222
========== ========== ========== =========
See accompanying notes to condensed consolidated financial statements
3
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months ended June 30,
2001 2000
---- ----
Operating Activities
Net loss $(18,210) $(24,631)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 8,106 4,766
Amortization of debt issuance costs on convertible notes
and related discount, conversion option and non
cash interest 1,553 --
Stock-based compensation expense 1,617 13,573
Management of operating assets and liabilities
Accounts receivable, net 137 (299)
Accounts payable 75 1,638
Accrued expenses and other liabilities (479) 1,662
Other 135 (476)
-------- --------
Net cash used in operating activities (7,066) (3,767)
-------- --------
Investing Activities
Product development costs (1,394) (1,295)
Purchase of property and equipment (589) (357)
Proceeds from maturity of investments available-for-sale - 10,987
Acquisitions, net of cash acquired - (978)
-------- --------
Net cash (used in) provided by investing activities (1,983) 8,357
-------- --------
Financing Activities
Proceeds from borrowings and issuance of convertible
notes, net 6,466 2,500
Repayment of borrowings (2,250) (2,116)
Payment of capital lease obligations (124) (69)
Proceeds from exercise of options and warrants - 75
-------- --------
Net cash provided by financing activities 4,092 390
-------- --------
Net (decrease) increase in cash (4,957) 4,980
Cash and cash equivalents at beginning of period 9,650 9,907
-------- --------
Cash and cash equivalents at end of period $ 4,693 $ 14,887
======== ========
Non-cash transactions
Common stock, options and warrants issued or exchanged in
connection with acquisitions $ - $ 62,071
Warrants issued in connection with private placement of
convertible notes and availability of line of credit $ 4,434 $ -
Shares issued in exchange for accounts payable $ 733 $ -
Shares and warrants issued for services $ 48 $ 66
Cash paid during the period for
Interest $ 54 $ 44
See accompanying notes to condensed consolidated financial statements
4
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 and technical 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 courseware as well as web development 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. During the
three-month period ended June 30, 2001, the Company recorded a restructuring
charge of $1,129,000 consisting primarily of severance costs in relation to the
elimination of 30 full-time positions representing approximately 35% of the
Company's workforce.
From April 16 through May 2, 2001, the Company received financing of $7.5
million in the form of convertible notes and warrants (see Note 3, Financing).
During the three-month period ended June 30, 2001, the Company also issued
2,490,000 shares of currently unregistered Company common stock in lieu of
$1,463,000 of payments to certain vendors. In the event that within periods
ranging from one to two years these vendors receive gross proceeds of less than
$1,463,000 from selling the Company's 2,490,000 shares in the open market, the
Company agreed to make a cash payment equal to the difference between the gross
proceeds received by these vendors from the sale of the Company's shares of
common stock and the balance due to them. As of June 30, 2001, this difference
was approximately $890,000, of which $194,000 was recorded as a current
liability and $696,000 was recorded as a long-term liability in the Company's
balance sheet. In addition, the Company issued 665,000 shares of currently
unregistered Company common stock in lieu of $160,000 of severance payments to
certain former executives.
5
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.
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 (the "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.
With respect to the initial quarterly interest payment, the Company has elected
to pay interest in the form of shares of common stock. As of June 30, 2001, the
Company reserved approximately 455,000 shares of its common stock in relation to
the quarterly interest due in July 2001.
In addition, the Convertible Notes will automatically convert into Series C
preferred stock if the Company receives the required consent from the holders of
the Company's Series B preferred stock for 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 will have (i)
antidilution provisions, (ii) a liquidation preference, and (iii) could 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 is currently seeking to amend
these terms regarding exercisability.
6
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 cancelled 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 paid 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. The $61,500 cash fee paid
and the non-cash amount related to the warrants of $549,000 were recorded as
interest expense in the Company's statement of operations for the three-month
period ended June 30, 2001.
In connection with the Financing and as compensation to the placement agents,
the Company paid 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 per share 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 to the Financing, principally
legal and accounting fees, were approximately $284,000. The $750,000 cash fee
paid, the other direct expenses of $284,000, and the non-cash amounts related to
the warrants of $675,000 and the unit purchase options of $810,000 have been
capitalized as debt issuance costs in the Company's balance sheet for an
aggregate value of $2,519,000 and are being amortized as interest expense in the
Company's statement of operations over the term of the Convertible Notes, or 18
months.
The Company allocated $2,400,000 of the $6,750,000 net proceeds from the
Financing to the Private Warrants using the Black-Scholes option-pricing model
and recorded such amount as a discount on the Convertible Notes. The remaining
unallocated portion of the proceeds was used to determine the value of the
15,000,000 shares of Company common stock underlying the Convertibles Notes, or
$0.29 per share. As this value was $0.23 lower than the fair market value of the
Company's share of common stock as listed on NASDAQ on May 2, 2001, the date at
which the Financing was closed, the $3,450,000 intrinsic value of the conversion
option resulted in an additional reduction to the carrying amount of the
Convertible Notes and a credit to additional paid-in capital in the Company's
stockholders' equity. The $2,400,000 discount is being accreted as interest
expense in the Company's statement of operations over the term of the
Convertible Notes, or 18 months.
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.
7
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 (i.e. the "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 the acquisition of Netlan Enterprises, Inc.
and subsidiaries ("Netlan"). The acquisition was accounted for using the
purchase method.
At June 30, 2001, accumulated amortization related to the goodwill and other
intangibles acquired in the Netlan and DWeb acquisitions totaled approximately
$16.6 million.
The following represents the summary unaudited pro forma condensed consolidated
results of operations for the six-month period ended June 30, 2000 as if the
acquisitions had occurred at the beginning of the period presented (in
thousands, except per share data):
Six Months Ended
June 30, 2000
-------------------
Revenue $3,610
Net loss (31,904)
Basic and diluted net loss per common share (2.65)
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 June 30, 2001 and 2000, options and warrants to
purchase 54,733,233 and 21,249,411 common shares, and preferred shares
convertible into 34,501,675 and 16,358,994 common shares, respectively, would
have been
8
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.
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, or generally two years, was based on the period such
product is expected to provide future utility to the Company. As of June 30,
2001 and December 31, 2000, capitalized product development costs were
$1,861,000 and $905,000, respectively.
NOTE 7. RELATED PARTIES
Two executive officers of a financial advisor to the Company (the "Financial
Advisor") are directors of the Company. In addition, the Financial Advisor is a
significant security holder of the Company.
In connection with the closing of the Financing described in Note 3 herein, an
affiliate of the Financial Advisor was paid a cash fee in the amount of $61,500
in consideration of the availability of the Line of Credit. In addition, an
affiliate of 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.
In consideration 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 per share 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.
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):
9
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenue from external customers
Transaction processing and related services $ 1,078 $ 888 $ 2,243 $ 1,065
Training and client educational services 601 702 1,300 940
-------- -------- -------- --------
$ 1,679 $ 1,590 $ 3,543 $ 2,005
======== ======== ======== ========
EBITDA (1)
Transaction processing and related services $ (3,330) $ (4,302) $ (6,972) $ (7,095)
Training and client educational services (108) 110 (15) 138
-------- -------- -------- --------
EBITDA (3,438) (4,192) (6,987) (6,957)
Depreciation and amortization (4,199) (3,960) (8,106) (4,766)
Stock-related compensation (935) (10,476) (1,617) (13,573)
Interest, net (1,541) 304 (1,500) 665
-------- -------- -------- --------
Net Loss $(10,113) $(18,324) $(18,210) $(24,631)
======== ======== ======== ========
(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, and (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.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations". SFAS No. 141 applies prospectively to all
business combinations initiated after June 30, 2001 and to all business
combinations accounted using the purchase method for which the date of
acquisition is July 1, 2001, or later. This statement requires all business
combinations to be accounted for using one method, the purchase method. Under
previously existing accounting rules, business combinations were accounted for
using one of two methods, the pooling-of-interests method or the purchase
method.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible
10
assets. Under SFAS No. 142, goodwill and some intangible assets will no longer
be amortized, but rather reviewed for impairment on a periodic basis. The
provisions of this Statement are required to be applied starting with fiscal
years beginning after December 15, 2001. This Statement is required to be
applied at the beginning of the Company's fiscal year and to be applied to all
goodwill and other intangible assets recognized in its financial statements at
that date. Impairment losses for goodwill and certain intangible assets that
arise due to the initial application of this Statement are to be reported as
resulting from a change in accounting principle. Goodwill and intangible assets
acquired after June 30, 2001, will be subject immediately to the provisions of
this Statement. The Company is currently evaluating the impact of the new
accounting standard on existing goodwill and other intangible assets and plans
to adopt the new accounting standard in its financial statements for the fiscal
year ending 2002.
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
condensed 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 forward-looking statements that
reflect the current assumptions of the Company and expectations regarding future
events. While these statements reflect the Company's current judgment, they are
subject to risks and uncertainties. Actual results may differ significantly from
projected results due to a number of factors, including, but not limited to, the
Company's limited operating history; the Company's ability to raise additional
capital, if needed; the soundness of the Company's business strategies relative
to the perceived market opportunities; the Company's ability to successfully
develop, market, sell and improve its business to business transaction services
to retailers, suppliers, buyers or sellers; the Company's ability to compete
effectively on price and support services; the risks associated with rapidly
changing technologies, such as the Internet; and the Company's assessment of its
specific vertical industry's need to become technology efficient. These factors
and other risk factors are more fully discussed in the Company's filings with
the Securities and Exchange Commission, which you are strongly urged to read.
The Company expressly disclaims any intent or obligation to update any
forward-looking statements. When used in this report, the words "believes,"
"estimated," "estimates," "expects," "expected," "anticipates," "may" and
similar expressions are intended to identify 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 and technical 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
11
designs and delivers custom computer courseware for the same client base and
provides education through delivery of web development 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 yet 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.
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 (i.e.
the "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"
12
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 June 30, 2001 and 2000, amortization
related to the goodwill and other intangibles acquired in the Netlan and DWeb
acquisitions totaled approximately $3.4 million and $2.7 million, respectively.
The Company's financial condition and results from operations were dramatically
different during the six-month period ended June 30, 2001 and 2000. For the six
months ended June 30, 2001, the Company's results reflected the new operations
of the Company, the operations of Netlan and the operations of Dweb. For the six
months ended June 30, 2000, the Company's results included the operations of
eB2B, the operations of Netlan from March 1, 2000 and the operations of DWeb
from April 19, 2000. As a result, the Company believes that the results of
operations for the six months ended June 30, 2000 are not comparable to the
results of operations for the 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 AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Revenue for the three-month period ended June 30, 2001 increased $89,000 or 6%
to $1,679,000 as compared to $1,590,000 for the three-month period ended June
30, 2000. Revenue for the six-month period ended June 30, 2001 increased
$1,538,000 or 77% to $3,543,000 as compared to $2,005,000 for the six-month
period ended June 30, 2000.
The Company's transaction processing and related services' business segment
generated revenue of $1,078,000 and $2,243,000 for the three and six-month
periods ended June 30, 2001 as compared to $888,000 and $1,065,000 for the three
and six-month periods ended June 30, 2000, an increase of $190,000 and
$1,178,000 or 21% and 111% for the three and six-month periods ended June 30,
2001 as compared to the comparable periods of the prior year. These increases in
revenue for the three and six-month periods are principally due to the
following:
(i) Increased revenue in 2001 as a result of the full three and six months
of operations acquired from DWeb on April 18, 2000 and reflected from
April 19, 2000. Had the Company acquired DWeb on January 1, 2000, the
revenue from transaction processing and related services for the three
and six-month periods ended June 30, 2000 would have been $150,000 and
$1,045,000 higher than the revenue reported by the Company in the
respective periods;
13
(ii) Increased revenue in 2001 ($188,000 and $365,000 for the three and
six-month periods, respectively) as a result of an increase in the
average fee paid per customer for transaction processing services as
well as additions of new customers to the Company's service, net of
cancellations of this service by certain inactive or very low volume
customers; and
(iii) Increased revenue in 2001 ($142,000 and $222,000 for the three and
six-month periods, respectively) principally in connection with the
growth experienced in the Company's core consulting services as
compared to the same respective periods in 2000, as well as the
development of certain other professional services, which the Company
did not provide in 2000. These other professional services generated
revenue of $24,000 and $97,000 for the three and six-month period
ended June 30, 2001. The Company eliminated these other professional
services during the second quarter of 2001 as part of the
implementation of its reorganization plan; partially offset by
(iv) Decreased revenue in 2001 ($290,000 and $454,000 for the three and
six-month periods, respectively) in relation to consulting services
acquired from Netlan on February 22, 2000 and reflected from March 1,
2000, which have been eliminated during the latter part of 2000.
The Company's training and client educational services' business segment
generated revenue of $601,000 and $1,300,000 for the three and six-month periods
ended June 30, 2001 as compared to $702,000 and $940,000 for the three and
six-month periods ended June 30, 2000. The $101,000 or 14% decrease in the
three-month period ended June 30, 2001 as compared to the three-month period
ended June 30, 2000 is mainly attributable to the reduction of discretionary
training spending by the Company's largest customers in this business segment.
The $360,000 or 38% increase in the six-month period ended June 30, 2001 as
compared to the comparable period in the previous year is chiefly associated
with the full six months of operations of Netlan in the 2001 period versus four
months of operations in the 2000 period as these operations were reflected from
March 1, 2000. Had the Company acquired Netlan on January 1, 2000, the revenue
from training and client educational services would have been $329,000 higher
than the revenue reported in the six-month period ended June 30, 2000.
In the three and six-month periods ended June 30, 2001, one customer accounted
for approximately 23.1% and 21.8% of the Company's total revenue, respectively.
No other customer accounted for 10% or more of the Company's total revenue for
the three-month period ended June 30, 2001.
Cost of revenue consists primarily of (i) salaries and benefits for employees
providing technical support, (ii) salaries and benefits of personnel and
consultants providing consulting and training services to clients and (iii)
communication and hosting expenses associated with the transmittal and hosting
of the Company's transaction data. Total cost of revenue for the three and
six-month periods ended June 30, 2001 amounted to $891,000 and $1,765,000 as
compared to $887,000 and $1,136,000 for the three and six-month periods ended
June 30, 2000, an increase of $4,000 and $629,000 or 0.5% and 55% for the three
and six-month periods ended June 30, 2001 as compared to the comparable periods
of the prior year. These increases in cost of revenue reflected primarily the
greater scope of operations of the Company in 2001 as compared to the same
periods in 2000. In connection with the launch of the Company's new technology
platform on April 16, 2001, the Company incurred off-site hosting costs
amounting to approximately $197,000 for the three-month period ended June 30,
2001.
14
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) for the three and six-month periods ended June 30,
2001 amounted to $573,000 and $1,407,000 as compared to $665,000 and $1,016,000
for the three and six-month periods ended June 30, 2000, a decrease of $92,000
or 38% for the three-month period ended June 30, 2001 and an increase of
$391,000 or 38% for the six-month period ended June 30, 2001 as compared to the
comparable periods of the prior year. The $92,000 decrease in the three-month
period ended June 30, 2001 versus the same period in 2000 is principally a
result of the reorganization plan implemented by the Company during and prior to
the second quarter of 2001, by which the Company (i) eliminated approximately
$125,000 in monthly salaries and benefits on a recurring basis and (ii) reduced
or eliminated expenses related to trade shows and other marketing programs. The
$391,000 increase in the six-month period ended June 30, 2001 versus the same
period in 2000 is chiefly associated with the full three and six-months of
operations of both Netlan and Dweb in 2001, partially offset by the
reorganization plan implemented by the Company during the second quarter of
2001.
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 $202,000 and
$1,347,000 for the three and six-month periods ended June 30, 2001 as compared
to $1,126,000 and $1,784,000 for the three and six-month periods ended June 30,
2000, a decrease of $924,000 and $437,000 or 82% and 24% for the three and
six-month periods ended June 30, 2001 as compared to the comparable periods of
the prior year. On April 16, 2001, the Company put its new technology platform
in service and started amortizing the related capitalized costs. During the
first quarter of 2001, the Company had expensed approximately $910,000 in
relation to costs chiefly associated with the transition of certain of its
existing customers to this new technology platform. In 2000, the Company was
amortizing the prior version of its 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 and six-month periods ended
June 30, 2000, total general and administrative expenses (exclusive of
stock-based compensation) amounted to $3,115,000 and $6,175,000 as compared to
$4,309,000 and $6,865,000 for the three and six-month periods ended June 30,
2000, a decrease of $1,194,000 and $690,000 or 28% and 10% for the three and
six-month periods ended June 30, 2001 as compared to the comparable periods of
the prior year. These decreases in general and administrative expenses for the
three and six-month periods are principally due to the following:
(i) consulting fees in relation to the design and the implementation of
the Company's strategy, business model and management structure of
approximately $772,000 in the six-month period in 2000 that did not
exist in the 2001 period, coupled with
(ii) a reduction of monthly salaries and benefits of approximately
$170,000 on a recurring basis as a result of the cost cutting
measures implemented by the Company during and prior to the second
quarter of 2001, partially offset by
(iii) the greater scope of operations of the Company in 2001 and increased
expenses to manage and operate the companies acquired during 2000.
15
As a result of the reorganization plan implemented throughout the three-month
period ended June 30, 2001, the Company recorded a $1,129,000 restructuring
charge consisting of severance and contract termination costs totaling $982,000
and $147,000, respectively. The severance costs related to the elimination of 30
full-time positions representing approximately 35% of the Company's workforce.
As of June 30, 2001, the Company paid $325,000 of the $982,000 total severance
costs. The $657,000 balance is expected to be paid $473,000 in the third quarter
of 2001, $142,000 in the fourth quarter of 2001 and $42,000 in the first quarter
of 2002. The $147,000 contract termination costs, which related primarily to
expenses incurred as part the cancellation of certain long-term research
subscription contracts, are expected to be paid $103,000 in the third quarter of
2001, $33,000 in the fourth quarter of 2001 and $11,000 in the first quarter of
2002.
Amortization of goodwill and other intangibles are non-cash charges associated
with the DWeb and Netlan business combinations. Such amortization expenses were
$3,402,000 and $6,803,000 for the three and six-month periods ended June 30,
2001 as compared to $2,739,000 and $2,827,000 for the three and six-month
periods ended June 30, 2000, an increase of $663,000 and $3,976,000 or 24% and
141% for the three and six-month periods ended June 30, 2001 as compared to the
comparable periods of the prior year. These increases are due to the timing of
the Netlan and the Dweb acquisitions, which took place on February 22, 2000 and
April 18, 2000, respectively, and the resulting full periods of amortization of
the related goodwill and other intangibles in 2001 versus partial periods of
amortization in 2000 as the operations of Netlan and DWeb were reflected from
March 1, 2000 and April 19, 2000, respectively. 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 and six-month periods ended June 30, 2000, stock-based
compensation expense amounted to $935,000 and $1,617,000 as compared to
$10,476,000 and $13,573,000 for the three and six-month periods ended June 30,
2000, a decrease of $9,541,000 and $11,956,000 or 91% and 88% for the three and
six-month periods ended June 30, 2001 as compared to the comparable periods of
the prior year. During the second quarter ended June 30, 2000, the Company
recorded a one-time charge of approximately $8.8 million in relation with
500,000 warrants to purchase 1,330,000 shares Company common stock, which vested
upon the completion of the Merger. The deferred stock compensation is
principally 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 June 30, 2001 was approximately $766,000. 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.
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
16
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 and six-month periods ended June 30, 2001, EBITDA was a loss of
$3,438,000 and $6,987,000 as compared to a loss of $4,192,000 and $6,957,000 for
the three and six-month periods ended June 30, 2000, a decrease of $754,000 or
18% for the three-month period ended June 30, 2001 and an increase of $30,000 or
0.4% for the six-month period ended June 30, 2001 as compared to the comparable
periods of the prior year. During the three and six-months ended June 30, 2001,
the Company expensed non-cash items including depreciation, amortization and
stock-based compensation expense, and recorded interest aggregating to
$6,675,000 and $11,223,000 compared to $14,132,000 and $17,674,000 for the same
periods a year earlier. Excluding the $1,129,000 restructuring charge recorded
by the Company during the second quarter of 2001, recurring EBITDA would have
been a loss of $2,309,000 for the three-month period ended June 30, 2001 versus
a loss of $4,192,000 for the three-month period ended June 30, 2000, which
corresponds to a $1,883,000 or 45% improvement. Recurring EBITDA for the
three-month period ended March 31, 2001 was a loss $3,549,000, which translates
into a $1,240,000 or 35% sequential improvement as compared to the $2,309,000
recurring EBITDA loss recorded during the second quarter of 2001.
Interest and other, net was an expense of $1,545,000 and $1,510,000 for the
three and six-month periods ended June 30, 2001 as compared to income of
$288,000 and $565,000 for the three and six-months periods ended June 30, 2000.
In 2001, such expense was primarily due a total of $1,553,000 amortization
expense associated with debt issuance costs on the Convertible Notes, and
related discount, non-cash interest and conversion option. In 2000, such income,
net of other expenses, related primarily to interest earned on cash balances and
available-for-sale marketable securities during the respective periods.
Net loss for the three and six-month periods ended June 30, 2001 was $10,113,000
and $18,210,000 as compared to $18,324,000 and $24,631,000 for the three and
six-month periods ended June 30, 2000, a decrease of $8,211,000 and $6,421,000
or 45% and 26% for the three and six-month periods ended June 30, 2001 as
compared to the comparable periods of the prior year.
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 revenue 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 revenue 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 June 30, 2001, net proceeds from private sales of securities and
issuance of convertible notes totaled approximately $36.7 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
17
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.
From April 16 through May 2, 2001, the Company received gross proceeds of $7.5
million from a private placement of convertible notes and warrants to certain
accredited investors (the "Financing"). 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 for 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. The Company is
currently seeking to amend these terms regarding exercisability.
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 and as compensation to the placement agents,
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, principally legal
and accounting fees, amounted to approximately $284,000.
Net cash used in operating activities totaled approximately $7,066,000 for the
six months ended June 30, 2001 as compared to net cash used in operating
activities of approximately $3,767,000 for the same period in 2000. Net cash
used in operating activities for the six months ended June 30, 2001 resulted
primarily from (i) the $18,210,000 net loss in the period and (ii) a $132,000
use of cash from operating assets and liabilities, offset by (iii) an aggregate
of $11,276,000 of non-cash charges consisting primarily of depreciation,
amortization and stock-based compensation
18
expense. Net cash used in operating activities for the three months ended June
30, 2000 resulted primarily from (i) the $24,631,000 net loss in the period,
offset by (ii) $2,525,000 of cash provided by operating assets and liabilities,
and (iii) an aggregate of $18,339,000 of non-cash charges consisting primarily
of depreciation, amortization and stock-based compensation expense.
Net cash used in investing activities totaled approximately $1,983,000 for the
six months ended June 30, 2001 as compared to net cash provided by investing
activities of approximately $8,357,000 for the same period in 2000. Net cash
used in investing activities for the six months ended June 30, 2001 resulted
from (i) the purchase of capital assets for $589,000, and (ii) $1,394,000 in
product development costs consisting of fees of outside contractors and
capitalized salaries. Net cash provided by investing activities for the six
months ended June 30, 2000 resulted from (i) $10,987,000 net proceeds from
maturity of investments available-for-sale offset by (ii) the purchase of
capital assets for $357,000, (ii) $1,295,000 in product development costs
consisting of fees of outside contractors and capitalized salaries, and (iii)
the $978,000 net cash effect of the DWeb and Netlan Merger.
Net cash provided by financing activities totaled approximately $4,092,000 for
the six months ended June 30, 2001 as compared to net cash used in financing
activities of approximately $390,000 for the same period in 2000. On May 2,
2001, the Company completed its $7.5 million Financing. In connection with the
Financing, the Company paid a cash fee amounting to $750,000 and incurred direct
expenses, principally legal and accounting fees, aggregating $284,000. 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. Beginning
December 1, 2000, the term loan required ten quarterly principal payments of
$250,000. On March 1, 2001, the Company made a $250,000 quarterly payment. In
addition, the Company paid the $2.0 million 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 June 30, 2001. The line of credit
secures approximately $1,178,000 of letters of credit that are outstanding at
June 30, 2001 in relation to the Company's leased facilities and certain other
equipment. The line is secured by a custodial cash account in the amount of
approximately 111% of the line.
As of June 30, 2001, the Company's principal source of liquidity was
approximately $4.7 million of cash and cash equivalents against which the Bank
held a custody account with approximately $1,389,000 as security on the term
loan and line of credit with the Bank.
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 $2.0 million with two vendors. During April and May 2001, the
Company renegotiated the payment schedule with these vendors and accordingly
paid cash of approximately $0.5 million and issued 2,490,000 shares of currently
unregistered Company common stock in lieu of the remaining $1,463,000 balance
due to these vendors. In the event that within periods ranging from one to two
years these vendors receive gross proceeds of less than $1,463,000 from selling
the Company's 2,490,000 shares in the open market, the Company agreed to make a
cash payment equal to the difference between the gross proceeds received by
these vendors from the sale of the Company's shares of common stock and the
balance due to them. As of June 30, 2001, this difference was approximately
$890,000. In addition, the Company issued 665,000 shares of currently
19
unregistered Company common stock in lieu of $160,000 of severance payments to
certain former executives.
The Company anticipates spending approximately $1.0 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 June 30, 2001
will be sufficient to meet anticipated working capital and capital expenditure
requirements until at least March 31, 2002. The Company's current use of cash
approximates $750,000 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 during the
three-month period ended June 30, 2001. There can be no assurances that such
measures will be sufficient to successfully reduce the current use of cash.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 applies prospectively to all business combinations initiated after June 30,
2001 and to all business combinations accounted using the purchase method for
which the date of acquisition is July 1, 2001, or later. This statement
requires all business combinations to be accounted for using one method, the
purchase method. Under previously existing accounting rules, business
combinations were accounted for using one of two methods, the
pooling-of-interests method or the purchase method.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under SFAS No. 142, goodwill and some
intangible assets will no longer be amortized, but rather reviewed for
impairment on a periodic basis. The provisions of this Statement are required
to be applied starting with fiscal years beginning after December 15, 2001.
This Statement is required to be applied at the beginning of the Company's
fiscal year and to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. Impairment losses for
goodwill and certain intangible assets that arise due to the initial
application of this Statement are to be reported as resulting from a change in
accounting principle. Goodwill and intangible assets acquired after June 30,
2001, will be subject immediately to the provisions of this Statement. The
Company is currently evaluating the impact of the new accounting standard on
existing goodwill and other intangible assets and plans to adopt the new
accounting standard in its financial statements for the fiscal year ending 2002.
20
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) In May 2001, the Company completed a private placement of convertible notes
and warrants to thirty-three accredited investors. Pursuant to the financing,
the Company issued $7,500,000 of principal amount of 7% convertible notes (the
"Convertible Notes"), convertible into an aggregate of 15,000,000 shares of
Company common stock, and warrants to purchase an aggregate 15,000,000 shares of
Company common stock at an exercise price of $0.93 per share. In addition, the
Convertible Notes will automatically convert into Series C preferred stock if
the Company receives the required consent from the holders of the Company's
Series B preferred stock for 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 issuance of these securities was exempt from registration
by Rule 506 promulgated pursuant to Section 4(2) of the Securities Act.
Commonwealth Associates L.P. and Gruntal & Co., LLC acted as placement agents
for this private placement. In consideration for acting as placement agents,
Commonwealth Associates L.P., Gruntal & Co., LLC and their respective designees
received in the aggregate (i) a cash fee amounting to $750,000, (ii) warrants to
purchase 2,250,000 shares of Company common stock with an exercise price of
$0.93 per share for a period of five years and (iii) 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
A Form 8-K was filed on April 26, 2001 with respect to the Company's results of
operations for the year ended December 31, 2000, as well as other corporate
matters.
A Form 8-K was filed on May 9, 2001 with respect to the completion of the
Financing.
A Form 8-K was filed on May 18, 2001 with respect to the appointment of Peter J.
Fiorillo as Chief Financial Officer.
A Form 8-K was filed on May 23, 2001 with respect to a letter from NASDAQ
indicating that the common stock of the Company had not maintained a minimum bid
price of $1.00 over the last 30 consecutive trading days. The Company was
provided 90 days, or until August 20, 2001, to regain compliance.
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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)
August 13, 2001 By: /s/ Richard S. Cohan
- ----------------- ----------------------------
Chief Executive Officer
August 13, 2001 By: /s/ Peter J. Fiorillo
- ----------------- ---------------------------
Chief Financial Officer
22