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 September 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 November 13, 2001, there were 20,837,297 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) September 30, December 31,
2001 2000
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 3,005 $ 9,650
Accounts receivable, net 950 1,530
Other current assets 301 409
-------- -------
Total Current Assets 4,256 11,589
Property and equipment, net 3,329 4,272
Goodwill, net 1,872 54,104
Other intangibles, net 951 2,259
Capitalized product development costs, net 1,774 905
Other assets 114 90
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Total Assets $ 12,296 $73,219
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ - $ 1,000
Accounts payable 1,543 1,806
Accrued expenses and other current liabilities 3,443 4,892
Deferred income 533 592
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Total Current Liabilities 5,519 8,290
Long-term debt, less current maturities -- 1,250
Capital lease obligations, less current maturities 136 212
Other liabilities 959 379
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Total Liabilities 6,614 10,131
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Commitments and contingencies
Stockholders' Equity
Undesignated preferred stock - no par value; 44,248,000 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; 2,610,771 and 2,803,198 shares
issued and outstanding at September 30, 2001 and December 31,
2000, respectively - -
Preferred stock, convertible Series C - $.0001 par value;
1,750,000 shares authorized; 762,999 shares issued and
outstanding at September 30, 2001 - -
Common stock - $.0001 par value; 200,000,000 shares authorized; 20,315,139
and 15,384,015 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively 2 2
Additional paid-in capital 154,483 144,459
Accumulated deficit (148,185) (79,005)
Unearned stock-based compensation (618) (2,368)
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Total Stockholders' Equity 5,682 63,088
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Total Liabilities and Stockholders' Equity $ 12,296 $73,219
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See accompanying notes to the condensed consolidated financial statements.
2
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND Three Months Ended Nine Months Ended
PER SHARE DATA) September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenue $ 1,501 $ 1,713 $ 5,044 $ 3,718
------------ ------------ ------------ ------------
Costs and expenses
Cost of revenue 694 855 2,459 1,991
Marketing and selling (exclusive
of stock-based compensation
expense of $127 and $394 for the
three and nine months ended
September 30, 2001, and $259
and $1,213 for the three and
nine months ended September
30, 2000, respectively) 237 1,007 1,644 2,023
Product development costs
(exclusive of stock-based
compensation expense of $2 and
$6 for the three and nine months
ended September 30, 2001, and
$63 and $189 for the three and
nine months ended September 30,
2000, respectively) 257 672 1,604 2,456
General and administrative
(exclusive of stock-based
compensation expense of $95
and $1,441 for the three and
nine months ended September
30, 2001, and $970 and $13,463
for the three and nine months
ended September 30, 2000,
respectively) 2,442 3,857 8,617 10,722
Restructuring charge 313 - 1,442 -
Amortization of goodwill and other
intangibles 3,402 3,368 10,205 6,195
Impairment of goodwill 43,375 - 43,375 -
Stock-based compensation expense 224 1,292 1,841 14,865
------------ ------------ ------------ ------------
Total costs and expenses 50,944 11,051 71,187 38,252
------------ ------------ ------------ ------------
Loss from Operations (49,443) (9,338) (66,143) (34,534)
Interest and other, net (1,527) 160 (3,037) 725
------------ ------------ ------------ ------------
Net loss $ (50,970) $ (9,178) $ (69,180) $ (33,809)
============ ============ ============ ============
Net loss per common share $ (2.51) $ (.71) $ (3.90) $ (3.18)
============ ============ ============ ============
Weighted average number of common
shares outstanding 20,342,288 13,004,153 17,728,796 10,629,495
============ ============ ============ ============
See accompanying notes to the condensed consolidated financial statements
3
eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS) Nine Months ended September 30,
2001 2000
---- ----
Operating Activities
Net loss $(69,180) $(33,809)
Adjustments to reconcile net loss to net cash used in
operating activities
Impairment of goodwill 43,375 -
Depreciation and amortization 12,351 8,998
Amortization of debt issuance costs on convertible notes
and related discount, conversion option and non
cash interest 3,120 -
Stock-based compensation expense 1,841 14,775
Write down of assets - 57
Shares and warrants issued for services - 90
Management of operating assets and liabilities
Accounts receivable, net 580 (214)
Accounts payable (263) 1,213
Accrued expenses and other liabilities 282 2,634
Other (642) (785)
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Net cash used in operating activities (8,536) (7,041)
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Investing Activities
Product development costs (1,604) (1,647)
Purchase of property and equipment (596) (989)
Increase in software costs - (2,200)
Proceeds from maturity of investments available-for-sale - 15,986
Cash acquired in acquisition - 419
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Net cash (used in) provided by investing activities (2,200) 11,569
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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 (125) (119)
Proceeds from exercise of options and warrants - 144
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Net cash provided by financing activities 4,091 409
-------- --------
Net (decrease) increase in cash (6,645) 4,937
Cash and cash equivalents at beginning of period 9,650 9,907
-------- --------
Cash and cash equivalents at end of period $ 3,005 $ 14,844
======== ========
Non-cash transactions
Common stock, options and warrants issued or exchanged in
connection with acquisitions $ - $ 59,145
Warrants issued in connection with private placement of
convertible notes and availability of credit line $ 4,434
Equipment acquired under capital lease $ - $ 340
Shares issued in exchange for accounts payable $ 434 $ -
Shares and warrants issued for services $ 48 $ 387
Cash paid during the period for
Interest $ 136 $ 44
See accompanying notes to the 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 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 periods ended June 30 and September 30, 2001, the Company recorded
restructuring charges of $1,129,000 and $313,000, respectively, consisting
primarily of severance costs in relation to the elimination of 38 full-time
positions representing approximately 45% of the Company's workforce and the
elimination of a service contract related to hosting the Company's new software
platform.
Based on the Company's history of recurring operating losses and its market
capitalization being less than its stockholders' equity as of September 30,
2001, management assessed the recoverability of goodwill and other intangibles
based upon expectations of undiscounted future cash flows. Management determined
that goodwill as of September 30, 2001 was impaired and accordingly reduced the
carrying value by $43.4 million.
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 nine-month period ended September 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 September 30, 2001, this
difference was approximately $1,189,000, of which $230,000 was recorded as a
current liability and $959,000 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 related to the June 30,
2001 quarter, the Company elected to pay interest in the form of 455,000 shares
of common stock valued at approximately $85,000. As of September 30, 2001, the
Company issued additional Convertible Notes of approximately $131,000 in
relation to the quarterly interest due for the period from July 1, 2001 to
September 28, 2001, the date the Convertible Notes were converted into equity as
described below.
In addition, all Convertible Notes were automatically converted into Series C
preferred stock on September 28, 2001 when the Company received 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 is convertible into
common stock on the same basis as the Convertible Notes. The Series C preferred
stock has (i) anti-dilution 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
September 28, 2001.
At the Company's October 17, 2001 Annual Shareholders' Meeting (the "Annual
Meeting"), the Company received shareholder approval of the Financing, as
required by the rules of NASDAQ.
6
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. In connection with the Line of Credit,
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 $309,000. The $750,000 cash fee
paid, the other direct expenses of $309,000, 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 $2,544,000 and were amortized as interest expense in the
Company's statement of operations over the term of the Convertible Notes. The
unamortized balance of $1,853,000 of debt issue cost was charged to additional
paid-in capital on September 28, 2001, the date of the conversion of the
Convertible Notes.
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 discount on
the Convertible Notes was accreted as interest expense in the Company's
statement of operations over the term of the Convertible Notes. For the nine
months ended September 30, 2001, the Company recorded interest expense of
$658,000 related to such discount. The unamortized balance of the discount on
the Convertible Notes, $1,742,000, was charged to additional paid-in capital at
September 28, 2001. 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. Since 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. For the nine
months ended September 30, 2001, the Company recorded amortization expense of
$1,137,000 related to such conversion feature. The unamortized balance of the
conversion feature, $2,313,000, was charged to additional paid-in capital on
September 28, 2001, the date of the conversion of the Convertible Notes.
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 September 30, 2001, accumulated amortization related to the goodwill and
other intangibles acquired in the Netlan and DWeb acquisitions totaled
approximately $20.0 million.
The following represents the summary unaudited pro forma condensed consolidated
results of operations for the nine-month period ended September 30, 2000 as if
the acquisitions had occurred at the beginning of the period presented (in
thousands, except per share data):
Nine Months Ended
September 30, 2000
------------------
Revenue $ 5,323
--------
Net loss $(41,179)
--------
Basic and diluted net loss per common share $ (3.27)
--------
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.
NOTE 5. RESTRUCTURING
To address the continuing loss from operations and negative cash flows from
operations, management enacted a plan for the Company. During the third and
fourth quarters of 2000 and continuing into 2001 the Company reduced
discretionary spending in selling, marketing, general and administrative areas.
In the second and third quarters of 2001, the Company's Board of Directors
approved and the Company announced a restructuring plan that streamlined
the organizational structure and reduced monthly cash charges by
approximately $475,000. The restructuring plan called for the following
cost cutting measures (in thousands):
8
Selling & General &
Marketing Administrative Other Total
--------- -------------- ----- -----
Salaries & benefits $125 $190 $ - $315
Fees to outside
contractors (1) - 50 70 120
Other expenses (2) 20 15 5 40
---- ---- ---- ----
Total $145 $255 $ 75 $475
==== ==== ==== ====
(1) including hosting, consulting, legal and recruiting
(2) including travel, entertainment, trade shows, advertising, dues &
subscriptions, and public relations
As a result of this reorganization the Company recorded restructuring charges of
$1,129,000 and $313,000 in the three-month periods ended June 30 and September
30, 2001 consisting of severance and contract termination costs totaling
$982,000 and $42,000 and $147,000 and $271,000, respectively. The severance
costs related to the elimination of 38 full-time positions representing
approximately 45% of the Company's workforce. The contract termination costs
related primarily to expenses incurred as part the cancellation of certain
long-term research subscription contracts and a contract with the Company's
website hosting provider.
The following is a summary of the restructuring charge recognized in the
nine-month period ended September 30, 2001 and the remaining accruals at
September 30, 2001 (in thousands):
Amounts paid
Restructuring as of Balance at
Charge September 30, 2001 September 30, 2001
-------------- ------------------ ------------------
Severance for 38 employees $1,024 $688 $ 336
Contract termination settlement 418 238 180
------ ---- ------
Total charges $1,442 $926 $ 516
====== ==== ======
The amount accrued for severance is based upon written severance agreements.
Based upon the written severance agreements and the severance accrual remaining
at September 30, 2001, the Company expects to pay $210,000 in the fourth quarter
of 2001 and $126,000 in the first quarter of 2002. The remaining contract
termination costs are expected to be paid $13,000 in the fourth quarter of 2001,
$83,000 in the first quarter of 2002 and $84,000 in the second quarter of 2002.
NOTE 6. GOODWILL AND OTHER INTANGIBLES
Based upon the Company's history of recurring operating losses and its market
capitalization being less than its stockholders' equity as of September 30,
2001, management assessed the carrying value of goodwill and other intangibles
and determined that such value may not be recoverable. If the sum of the
expected undiscounted future cash flows were less than the carrying amount of
the assets, the Company would recognize an impairment loss. The impairment loss
is measured as the amount by which the carrying amount of the goodwill and other
intangibles exceeds the fair value of the assets, as calculated utilizing the
discounted future cash flows. In accordance with this policy, the Company
recorded an impairment charge of $43,375,000.
9
The net book values of goodwill and other intangibles associated with the DWeb
and Netlan acquisitions as of September 30, 2001 are as follows (amounts in
thousands):
DWeb Netlan Total
---- ------ -----
Goodwill
Balance - September 30, 2001 $ 41,283 $ 3,380 $ 44,663
Reclass from other intangibles 425 159 584
Impairment charge (40,088) (3,287) (43,375)
-------- -------- --------
Adjusted balance $ 1,620 $ 252 $ 1,872
======== ======== ========
Other Intangibles
Balance - September 30, 2001 $ 1,376 $ 159 $ 1,535
Reclass of workforce as goodwill (425) (159) (584)
-------- -------- --------
Adjusted balance $ 951 $ - $ 951
======== ======== ========
Amortization expense related to goodwill for the nine-month period ended
September 30, 2001 was approximately $9,441,000. The Company also changed the
amortization period from five years to three years in accordance with applying
Statement of Financial Accounting Standards ("SFAS") No. 121. The Company
expects to record goodwill amortization in the 4th quarter of 2001 of $374,000.
Thereafter, it will no longer be amortized, but rather reviewed for impairment
in compliance with SFAS No. 142.
Remaining other intangibles after the impairment review relate to a customer
list acquired in April 2000 of $2,188,000, a non-compete agreement of $75,000
and the cost of acquiring the Company's domain name and establishing the
Company's web-site in 2000 and 2001 of $22,000. Amortization expense related to
other intangibles for the nine-month period ended September 30, 2001 was
approximately $747,000. The estimated useful life of these assets is 36 months.
Amortization expense in future periods will be approximately $179,000 in the 4th
quarter of 2001, $717,000 in 2002 and $55,000 in 2003.
NOTE 7. 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 September 30, 2001 and 2000, options and warrants
to purchase 58,441,354 and 21,643,286 common shares, and preferred shares
convertible into 34,121,836 and 15,825,665 common shares, respectively, would
have been 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 8. 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
10
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 September 30, 2001 and December 31, 2000, capitalized product
development costs, net of accumulated amortization, were $1,774,000 and
$905,000, respectively. For the nine-month periods ended September 30, 2001 and
2000, the Company charged to operations $1,604,000 and $2,456,000, respectively,
for such costs.
NOTE 9. 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 10. SEGMENT REPORTING
The following information is presented in accordance with 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):
11
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenue from external customers
Transaction processing and related services $ 950 $ 950 $ 3,193 $ 2,015
Training and client educational services 551 763 1,851 1,703
-------- -------- -------- --------
$ 1,501 $ 1,713 $ 5,044 $ 3,718
======== ======== ======== ========
EBITDA (1)
Transaction processing and related services $ (1,519) $ (3,894) $ (8,491) $(10,989)
Training and client educational services (60) 134 (75) 272
-------- -------- -------- --------
EBITDA (1,579) (3,760) (8,566) (10,717)
Impairment of goodwill (43,375) - (43,375) -
Depreciation and amortization (4,245) (4,232) (12,351) (8,998)
Stock-related compensation (224) (1,292) (1,841) (14,865)
Write-down of assets - (57) - (57)
Interest, net (1,547) 163 (3,047) 828
-------- -------- -------- --------
Net Loss $(50,970) $ (9,178) $(69,180) $(33,809)
======== ======== ======== ========
(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 11. 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.
12
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 December 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. SFAS No. 143 applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of
long-lived assets, except for certain obligations of lessees. The
provisions of this Statement are required to be applied starting with fiscal
years beginning after June 15, 2001. Earlier application is encouraged. The
Company is currently evaluating the impact of the new accounting standard and
plans to adopt the new accounting standard in its financial statements for the
fiscal year ending December 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144,
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. This Statement also amends ARB No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
this Statement are required to be applied starting with fiscal years beginning
after December 15, 2001. The Company is currently evaluating the impact of the
new accounting standard on existing long-lived assets and plans to adopt the new
accounting standard in its financial statements for the fiscal year ending
December 2002.
13
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 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
14
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 Dynamic Web Enterprises, Inc. ("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" 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 was being
amortized over five years and other intangibles are being amortized over three
years. Amortization related to the goodwill and other intangibles acquired in
the Netlan and DWeb acquisitions for the three and nine-month periods ended
September 30, 2001 and 2000, totaled approximately $3.4 million and $10.2
million and $3.4 million and $6.2 million, respectively. Based upon the
Company's history of recurring operating losses and its market capitalization
being less than its stockholders' equity as of September 30, 2001, management
assessed the recoverability of goodwill and other
15
intangibles based upon expectations of future undiscounted cash flows.
Management determined that goodwill as of September 30, 2001 was impaired based
upon discounted future cash flows and accordingly reduced the carrying value by
$43.4 million and changed the amortization period of goodwill from five years to
three years.
The Company's financial condition and results from operations were significantly
different during the nine-month period ended September 30, 2001 and 2000. For
the nine months ended September 30, 2001, the Company's results reflected the
new operations of the Company, the operations of Netlan and the operations of
Dweb. For the nine months ended September 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 nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenue for the three-month period ended September 30, 2001 decreased $212,000
or 12% to $1,501,000 as compared to $1,713,000 for the three-month period ended
September 30, 2000. Revenue for the nine-month period ended September 30, 2001
increased $1,326,000 or 36% to $5,044,000 as compared to $3,718,000 for the
nine-month period ended September 30, 2000.
The Company's transaction processing and related services' business segment
generated revenue of $950,000 and $3,193,000 for the three and nine-month
periods ended September 30, 2001 as compared to $950,000 and $2,015,000 for the
three and nine-month periods ended September 30, 2000, an increase of $1,178,000
or 58% for nine-month period ended September 30, 2001 as compared to the
comparable period of the prior year. This increase in revenue for the period is
principally due to the following:
(i) Increased revenue in 2001 as a result of the full nine-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
nine-month period ended September 30, 2000 would have been $1,045,000
higher than the revenue reported by the Company;
(ii) Increased revenue in 2001 ($188,000 and $553,000 for the three and
nine-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 ($0 and $205,000 for the three and
nine-month periods, respectively) principally in connection with the
growth experienced in the Company's consulting services as compared to
the same respective periods in 2000, as well as the development of
certain other professional services, which the Company
16
did not provide in 2000. These other professional services generated
revenue of $24,000 and $97,000 for the three and nine-month period
ended September 30, 2001. The Company eliminated these other
professional services in order to improve its operating margins during
the second quarter of 2001 as part of the implementation of its
reorganization plan; partially offset by
(iv) Decreased revenue in 2001 ($170,000 and $625,000 for the three and
nine-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 $551,000 and $1,851,000 for the three and nine-month
periods ended September 30, 2001 as compared to $763,000 and $1,703,000 for the
three and nine-month periods ended September 30, 2000. The $212,000 or 28%
decrease in the three-month period ended September 30, 2001 as compared to the
three-month period ended September 30, 2000 is mainly attributable to the
reduction of discretionary training spending by the Company's largest customers
in this business segment. The Company filed an insurance claim of approximately
$110,000 for revenues lost in the three-month period ended September 30, 2001
due to cancellations caused by the September 11, 2001 terrorist attack in New
York. The Company also expects to see a negative impact on its 4th quarter 2001
revenues but expects to record additional revenues in the first quarter of 2002
as customers reschedule the cancelled classes. The $148,000 or 9% increase in
the nine-month period ended September 30, 2001 as compared to the comparable
period in the previous year is chiefly associated with the full nine months of
operations of Netlan in the 2001 period versus seven months of operations in the
2000 period as these operations were reflected from March 1, 2000, offset by the
negative effect of the terrorist attack in New York. 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
nine-month period ended September 30, 2000.
In the three and nine-month periods ended September 30, 2001, one customer
accounted for approximately 19.6% and 21.1% of the Company's total revenue,
respectively. No other customer accounted for 10% or more of the Company's total
revenue for the three and nine-month periods ended September 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
nine-month periods ended September 30, 2001 amounted to $694,000 and $2,459,000
as compared to $855,000 and $1,991,000 for the three and nine-month periods
ended September 30, 2000, a decrease of $161,000 or 18% for the three-month
period ended September 30, 2001 as compared to the prior year period and an
increase of $468,000 or 23% for the nine-month period ended September 30, 2001
as compared to the comparable period of the prior year. The decrease in the
three-month period ended September 30, 2001 compared to the prior year period
resulted principally from the termination of a contract with the Company's
hosting provider. The increase in cost of revenue for the nine-month period
ended September 30, 2001 compared to the prior year period reflected primarily
the different scope of operations of the Company in 2001 as compared to the same
periods in 2000, including full nine-month of the operations of Netlan and DWeb.
17
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 nine-month periods ended September
30, 2001 amounted to $237,000 and $1,644,000 as compared to $1,007,000 and
$2,023,000 for the three and nine-month periods ended September 30, 2000, a
decrease of $770,000 or 76% for the three-month period ended September 30, 2001
and a decrease of $379,000 or 19% for the nine-month period ended September 30,
2001 as compared to the comparable periods of the prior year. The $770,000
decrease in the three-month period ended September 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 and third quarters 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 $379,000 decrease in the
nine-month period ended September 30, 2001 versus the same period in 2000 is
chiefly associated with the reorganization plan implemented prior to and during
the second and third quarters of 2001, offset by the full three and nine-months
of operations of both Netlan and Dweb in 2001.
Product development costs 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 costs (exclusive
of stock-based compensation) were approximately $257,000 and $1,604,000 for the
three and nine-month periods ended September 30, 2001 as compared to $672,000
and $2,456,000 for the three and nine-month periods ended September 30, 2000, a
decrease of $415,000 and $852,000 or 62% and 35% for the three and nine-month
periods ended September 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 nine-month periods ended
September 30, 2001, total general and administrative expenses (exclusive of
stock-based compensation) amounted to $2,442,000 and $8,617,000 as compared to
$3,857,000 and $10,722,000 for the three and nine-month periods ended September
30, 2000, a decrease of $1,415,000 and $2,105,000 or 37% and 20% for the three
and nine-month periods ended September 30, 2001 as compared to the comparable
periods of the prior year. These decreases in general and administrative
expenses for the three and nine-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 $1,257,000 in the nine-month period in 2000 that did not
exist in the 2001 period, coupled with
(ii) a reduction of monthly salaries and benefits of approximately $190,000
on a recurring basis as a result of the cost cutting measures
implemented by the Company during and prior to the second and third
quarters of 2001, partially offset by
18
(iii) the different scope of operations of the Company in 2001 and increased
expenses to manage and operate the companies acquired during 2000.
As a result of the reorganization plan implemented throughout the three-month
periods ended June 30, 2001 and September 30, 2001, the Company recorded
restructuring charges of $1,129,000 and $313,000, respectively. The
restructuring charges consisted of severance totaling $982,000 and $42,000,
and contract termination costs of $147,000 and $271,000, for the three-month
periods ended June 30, 2001 and September 30, 2001, respectively. The severance
costs related to the elimination of 38 full-time positions representing
approximately 45% of the Company's workforce. As of September 30, 2001, the
Company paid $688,000 of the $982,000 severance costs recorded in the
three-month period ended June 30, 2001 and none of the severance costs recorded
in the three-month period ended September 30, 2001. The $336,000 balance of all
severance costs is expected to be paid $210,000 in the fourth quarter of 2001
and $126,000 in the first quarter of 2002. The $147,000 contract termination
costs recorded in the three-month period ended June 30, 2001 related primarily
to expenses incurred as part the cancellation of certain long-term research
subscription contracts. The charge recorded in the thee-month period ended
September 30, 2001 is related to a contract settlement reached with the
Company's former hosting provider. As a result of changing hosting providers
the Company expects to realize monthly savings of approximately $55,000. The
Company paid $238,000 of the total $418,000 contract termination costs in
the three-month period ended September 30, 2001 and expects to pay $13,000
in the fourth quarter of 2001, $83,000 in the first quarter of 2002 and
$84,000 in the second quarter of 2002 for such costs.
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 $10,205,000 for the three and nine-month periods ended September
30, 2001 as compared to $3,368,000 and $6,195,000 for the three and nine-month
periods ended September 30, 2000, an increase of $34,000 and $4,010,000 or 1%
and 65% for the three and nine-month periods ended September 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.
Based upon the Company's history of recurring operating losses and its market
capitalization being less than its stockholders' equity as of September 30,
2001, management assessed the carrying value of goodwill and other intangibles
and determined that such value may not be recoverable. If the sum of the
expected undiscounted future cash flows were less than the carrying amount of
the assets, the Company would recognize an impairment loss. The impairment loss
is measured as the amount by which the carrying amount of the goodwill and other
intangibles exceeds the fair value of the assets, as calculated utilizing the
discounted future cash flows. In accordance with this policy, the Company
recorded an impairment charge of $43,375,000.
During the three and nine-month periods ended September 30, 2001, stock-based
compensation expense amounted to $224,000 and $1,841,000 as compared to
$1,292,000 and $14,865,000 for the three and nine-month periods ended Sept 30,
2000, a decrease of $1,068,000 and $13,024,000 or 83% and 88% for the three and
nine-month periods ended September 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 related to
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
19
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 September 30, 2001 was approximately $618,000. This
balance will be amortized at approximately $75,000 per quarter through September
2003.
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 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 nine-month periods ended September 30, 2001, EBITDA was a loss
of $1,579,000 and $8,566,000 as compared to a loss of $3,760,000 and $10,717,000
for the three and nine-month periods ended September 30, 2000, a decrease of
$2,181,000 and $2,151,000 or 58% and 20% for the three and nine-month periods
ended September 30, 2001 as compared to the comparable periods of the prior
year. During the three and nine-months ended September 30, 2001, the Company
expensed non-cash items including impairment of goodwill, depreciation,
amortization and stock-based compensation expense, and recorded interest
aggregating $39,454,000 and $50,677,000 compared to $5,418,000 and $23,092,000
for the same periods a year earlier. Excluding the $313,000 restructuring
charges recorded by the Company during the third quarter of 2001, recurring
EBITDA would have been a loss of $1,266,000 for the three-month period ended
September 30, 2001 versus a loss of $3,760,000 for the three-month period ended
September 30, 2000, which corresponds to a $2,494,000 or 66% improvement.
The improvement in EBITDA reflects the significant reductions in costs
effected by the Company in 2001 without a corresponding decrease in revenues.
Interest and other, net was an expense of $1,527,000 and $3,037,000 for the
three and nine-month periods ended September 30, 2001 as compared to income of
$160,000 and $725,000 for the three and nine-months periods ended September 30,
2000. For the three and nine-month periods of 2001, such expense was primarily
due a total of $1,547,000 and $3,190,000 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 nine-month periods ended September 30, 2001 was
$50,970,000 and $69,180,000 as compared to $9,178,000 and $33,809,000 for the
three and nine-month periods ended September 30, 2000, an increase of
$31,855,000 and $25,434,000 or 347% and 75% for the three and nine-month periods
ended September 30, 2001 as compared to the comparable periods of the prior
year.
20
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company's principal source of liquidity was
approximately $3.0 million of cash and cash equivalents against which a bank
held a custody account with approximately $1,444,000 as security on a $1,300,000
line of credit with the bank, the equivalent of 111% of the line of credit. The
line of credit secures approximately $1,444,000 of letters of credit that are
outstanding at September 30, 2001 in relation to the Company's leased facilities
and certain other equipment. The Company anticipates spending approximately $0.5
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 September 30,
2001, and, if required, additional operational cutbacks (as described below),
will enable the Company to meet anticipated working capital and capital
expenditure requirements until at least December 31, 2001. The Company intends
to seek additional capital prior to December 31, 2001 in order to fund its
internal growth and a contemplated acquisition, and also to help it fund its
working capital and capital expenditure requirements. The Company has signed a
letter of intent to acquire one company and may seek to grow by additional
acquisitions. There can be no assurances provided that a funding will be
concluded, or that, if concluded, will be concluded on acceptable terms or
adequate to accomplish the Company's goals. The letter of intent with respect to
the proposed acquisition is not a binding agreement and there can be no
assurance that this or any other acquisition can be concluded or, if concluded,
will achieve the results desired by the Company.
The Company used approximately $500,000 of cash in September 2001. As a result
of the cost cutting measures carried out as part of its 2001 plan, the Company's
anticipated use of cash, including the payout of previously accrued
restructuring costs, will be less than $750,000 in the fourth quarter of 2001
and the Company expects to be cash-flow breakeven from ongoing operations in the
first quarter 2002 and cash flow positive from ongoing operations through the
balance of 2002. The expected reduction in use of cash reflects staffing
reductions and operational cost reductions implemented during the six-month
period ended September 30, 2001. There can be no assurances that such measures
will be sufficient to successfully reduce the current use of cash. The Company
also anticipates increased revenue in the fourth quarter of 2001 resulting in
increased cash collections compared to the quarter ended September 2001. If the
Company is unsuccessful in generating increased cash flows before December 2001,
further cost reductions will be necessary. The Company is also seeking to exit
approximately 22,000 square feet of leased space in New York City that it uses
for its corporate headquarters and back office operations. In this respect, the
Company is seeking to utilize significantly smaller space, which would result in
reduced rental and security obligations. The Company's current monthly rental
cost is approximately $100,000 and it has a letter of credit of approximately
$1.3 million securing the lease. The lease terminates in April 2007 and is
subject to annual cost of living adjustments.
In the event the Company fails to secure the necessary capital to continue its
growth plan, the Company anticipates modifying its growth plan, renegotiating
other contracts and further scaling back its operations. If the Company is able
to reduce its use of cash from ongoing operations to less than $750,000 and
increase its revenues in the fourth quarter of 2001, reduce its lease and
security obligations to reflect its current scope of operations and reach
operating cash flow breakeven in the first quarter of 2002, the Company believes
it will have sufficient cash to continue its operations for the next twelve
months. Reference is made to "Forward Looking Statements" for a description of
certain risks that may affect the achievement of the Company's objectives and
results discussed herein.
21
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 September 30, 2001, this difference was approximately
$1,189,000. 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.
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 will continue as
it implements its growth strategy, however, it believes that negative cash flows
from ongoing operations will be eliminated in the first quarter of 2002. The
Company anticipates increased revenue in the fourth quarter of 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, 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 September 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 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 Convertible
Notes were
22
converted into the Series C preferred stock on September 28, 2001 when the
Company received the required consents from the holders of the Company's Series
B preferred stock. The Series C preferred stock is convertible into common stock
on the same basis as the Convertible Notes were. The Private Warrants will be
exercisable for a period of two years from the date the Company received
shareholder approval of the Financing, October 17, 2001.
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 $309,000.
Net cash used in operating activities totaled approximately $8,536,000 for the
nine months ended September 30, 2001 as compared to net cash used in operating
activities of approximately $7,041,000 for the same period in 2000. Net cash
used in operating activities for the nine months ended September 30, 2001
resulted primarily from (i) the $69,180,000 net loss in the period and (ii) a
$43,000 use of cash from operating assets and liabilities, offset by (iii) an
aggregate of $60,087,000 of non-cash charges consisting primarily of
depreciation, amortization and stock-based compensation expense and the
impairment of goodwill. Net cash used in operating activities for the
nine-months ended September 30, 2000 resulted primarily from (i) the $33,809,000
net loss in the period, offset by (ii) $2,848,000 of cash provided by operating
assets and liabilities, and (iii) an aggregate of $23,920,000 of non-cash
charges consisting primarily of depreciation, amortization and stock-based
compensation expense.
Net cash used in investing activities totaled approximately $2,200,000 for the
nine months ended September 30, 2001 as compared to net cash provided by
investing activities of approximately $11,569,000 for the same period in 2000.
Net cash used in investing activities for the nine months ended September 30,
2001 resulted from (i) the purchase of capital assets for $596,000, and (ii)
$1,604,000 in product development costs consisting of fees of outside
contractors and capitalized salaries. Net cash provided by investing activities
for the nine months ended September 30, 2000 resulted from (i) $15,986,000 net
proceeds from maturity of investments available-for-sale offset by (ii) the
purchase of capital assets for $989,000, (ii) $1,647,000 in product development
costs consisting of fees of outside contractors and capitalized salaries, (iii)
the $2,200,000 for the increase in capitalized software costs, and (vi) the
positive $419,000 net cash effect of the DWeb and Netlan Merger.
Net cash provided by financing activities totaled approximately $4,091,000 for
the nine months ended September 30, 2001 as compared to approximately $409,000
for the same period in 2000. On May 2, 2001, the Company completed its $7.5
million Financing. In connection with the
23
Financing, the Company paid a cash fee amounting to $750,000 and incurred direct
expenses, principally legal and accounting fees, aggregating $311,000. 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.
New Pronouncements
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 next
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.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. Under SFAS No. 143, applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of
long-lived assets, except for certain obligations of lessees. The
provisions of this Statement are required to be applied starting with fiscal
years beginning after June 15, 2001. Earlier application is encouraged. The
Company is currently evaluating the impact of the new accounting standard and
plans to adopt the new accounting standard in its financial statements for the
fiscal year ending December 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144,
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. This Statement also amends ARB No. 51,
Consolidated Financial Statements, to
24
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions of this Statement are required to be
applied starting with fiscal years beginning after December 15, 2001. The
Company is currently evaluating the impact of the new accounting standard on
existing long-lived assets and plans to adopt the new accounting standard in its
financial statements for the fiscal year ending December 2002.
25
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On September 28, 2001, the Company's 7% Convertible Notes were automatically
converted into Series C preferred stock of the Company. The Series C preferred
stock is convertible on the same basis as the Convertible Notes.
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 July 23, 2001 with respect to the appointment of Richard
S. Cohan as Chief Executive Officer and the resignation of Alan Andrieni as
Chief Executive Officer and a member of the Company's Board of Directors.
A Form 8-K was filed on July 30, 2001 with respect to certain disclosures made
by the Company under Item 9 - Regulation FD Disclosure.
A Form 8-K was filed on August 9, 2001 with respect to the Company's Board of
Directors authorizing a change to the Company's Certificate of Incorporation
pursuant to which a reverse stock split may be effectuated.
A form 8-K was filed on September 6, 2001 with respect to a proposed October 4,
2001 hearing with NASDAQ regarding de-listing of the Company's common stock,
which was subsequently cancelled by NASDAQ.
26
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)
November 14, 2001 By: /s/ Richard S. Cohan
------------------------------
Chief Executive Officer
November 14, 2001 By: /s/ Peter J. Fiorillo
---------------------------
Chief Financial Officer
27