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, 2002
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)
665 BROADWAY
NEW YORK, NY 11003
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(Address of Principal Executive Offices)
(212) 477-1700
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(Issuer's telephone number, including area code)
As of November 20, 2002, there were 2,361,796 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,
2002 2001
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 222 $ 2,098
Restricted cash 140 1,441
Accounts receivable, net 681 599
Other current assets 117 123
Net current assets from discontinued operations - 227
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Total Current Assets 1,160 4,488
Property and equipment, net 343 1,867
Goodwill, net 2,464 1,350
Other intangibles, net 1,115 815
Other assets 1,212 1,750
Net non-current assets from discontinued operations - 337
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Total Assets $ 6,294 $ 10,607
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 130 $ 126
Accounts payable 1,535 1,339
Accrued liabilities and other 2,051 1,570
Accrued interest 105 -
Lease termination costs - 1,299
Deferred income 366 164
Net current liabilities of discontinued operations 181 -
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Total Current Liabilities 4,368 4,498
Long-term debt, less current maturities 2,238 1,781
Capital lease obligations, less current maturities - 104
Lease termination costs - 595
Other - 991
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Total Liabilities 6,606 7,969
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Commitments and contingencies
Stockholders' Equity
Preferred stock, convertible Series A - $.0001 par value;
2,000 shares authorized; 7 shares issued and outstanding at - -
September 30, 2002 and December 31, 2001
Preferred stock, convertible
Series B - $.0001 par value;
4,000,000 shares authorized; 2,223,531 and 2,477,053
shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively
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Preferred stock, convertible Series C - $.0001 par value;
1,750,000 shares authorized; 763,125 shares
outstanding at September 30, 2002 and December 31, 2001 - -
Preferred stock, convertible Series D - $.0001 par value;
100,000 shares authorized; 95,000 shares issued and
outstanding at September 30, 2002 and December 31, 2001 - -
Common stock - $.0001 par value; 200,000,000 shares
authorized; 2,008,723 and 1,603,137 shares issued and
outstanding at September 30, 2002 and December 31, 2001,
respectively 2 2
Additional paid-in capital 158,054 155,903
Accumulated deficit (157,844) (152,499)
Unearned stock-based compensation (524) (768)
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Total Stockholders' Equity (312) 2,638
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Total Liabilities and Stockholders' Equity $ 6,294 $ 10,607
========= =========
See accompanying notes to condensed consolidated financial statements.
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eB2B COMMERCE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATI0NS (UNAUDITED)
(in thousands, except share and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenue $ 828 $ 950 $ 2,745 $ 3,193
----------- ----------- ----------- -----------
Costs and expenses
Cost of revenue 303 397 836 1,458
Marketing and selling
(exclusive of stock-based
compensation expense of $75 and $225
for the three and nine months
ended September 30, 2002, and $127
and $394 for the three and nine months
ended September 30, 2001 respectively) 93 181 341 1,610
General and administrative
(exclusive of stock-based compensation
expense of $4 and $12 for the three and
nine months ended September 30, 2002, and
$95 and $1,441 for the three and nine months
ended September 30, 2001, respectively) 1,169 2,162 4,328 7,653
Restructuring charge - 313 (655) 1,442
Amortization of other intangibles and goodwill 710 3,129 1,099 9,386
Amortization of product development costs
(exclusive of stock-based compensation
expense of $2 and $6 for the three and
nine months ended September 30, 2002 and
2001, respectively) 144 257 839 1,604
Impairment of goodwill - 42,403 - 42,403
Stock-based compensation expense 81 224 244 1,841
----------- ----------- ----------- -----------
Total costs and expenses 2,500 49,066 7,032 67,397
----------- ----------- ----------- -----------
Loss from operations (1,672) (48,116) (4,287) (64,204)
Interest and other, net (66) (1,527) (296) (3,037)
----------- ----------- ----------- -----------
Net loss from continuing operations $ (1,738) $ (49,643) $ (4,583) $ (67,241)
Net loss from discontinued operations (420) (1,327) (762) (1,939)
----------- ----------- ----------- -----------
Net loss $ (2,158) $ (50.970) $ (5,345) $ (69,180)
=========== =========== =========== ===========
Net loss per common share from
continuing operations $ (.88) $ (36.61) $ (2.40) $ (56.89)
Net loss per common share from
discontinued operations $ (.21) $ (.98) $ (.40) $ (1.64)
----------- ----------- ----------- -----------
Net loss per common share $ (1.09) $ (37.58) $ (2.80) $ (58.53)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 1,984,551 1,356,153 1,905,855 1,181,820
=========== =========== =========== ===========
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eB2B COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended September 30,
2002 2001
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Operating Activities
Net loss $ (5,345) (69,180)
Adjustments to reconcile net loss to net cash used in
operating activities
Impairment of goodwill -- 42,403
Depreciation and amortization 2,920 12,351
Stock-based compensation expense 244 1,841
Non-cash interest expense 199 3,120
Management of operating assets and liabilities
Accounts receivable, net 244 580
Accounts payable (6) (263)
Accrued expenses and other current liabilities 338 282
Lease termination costs and other (424) 330
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Net cash used in operating activities (1,830) (8,536)
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Investing Activities
Product development expenditures (367) (1,604)
Purchase of property and equipment (6) (596)
Acquisitions, net of cash acquired (198) --
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Net cash used in investing activities (571) (2,200)
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Financing Activities
Proceeds from borrowings and issuance of convertible notes, net 625 6,466
Repayment of borrowings -- (2,250)
Payment of capital lease obligations (100) (125)
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Net cash (used in) provided by financing activities 525 4,091
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Net decrease in cash and cash equivalents (1,876) (6,645)
Cash and cash equivalents at beginning of period 2,098 9,650
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Cash and cash equivalents at end of period 222 3,005
================= ==================
Non-cash transactions
Common and preferred stock issued in connection with
acquisition 1,240 --
Issuance of warrants with convertible debt 750 4,434
Issuance of long term note in connection with acquisition 397 --
Beneficial conversion with issuance of convertible debt 512 434
Common stock issued in exchange for accounts payable -- 48
Common stock and warrants issued for services -- --
Cash paid during the period for
Interest 4 136
See accompanying notes to condensed consolidated financial statements.
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eB2B COMMERCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND PLAN OF OPERATION
eB2B Commerce, Inc. (the "Company") utilizes proprietary software to
provide a technology platform for large buyers and large suppliers to transfer
business documents via the Internet to their small and medium-sized trading
partners. These documents include, but are not limited to, purchase orders,
purchase order acknowledgements, advanced shipping notices and invoices. The
Company provides access via the Internet to its proprietary software, which is
maintained on its hardware and on hosted hardware. The Company also offers
professional services, which provide consulting expertise to the same client
base, as well as to other businesses that prefer to operate or outsource the
transaction management and document exchange of their business-to-business
relationships. In addition, until it discontinued these operations as of
September 30, 2002, the Company provided authorized technical education to its
client base, and also designed and delivered custom computer and Internet-based
training seminars.
Since its inception, the Company has experienced significant losses
from operations and negative cash flows from operations, which raises
substantial doubt about its ability to continue as a going concern. For the
three-month and nine month periods ended September 30, 2002 and 2001, the
Company incurred losses from continuing operations of approximately $1.7 million
and $4.6 million, respectively, in 2002 and $49.6 million and $67.2 million,
respectively, in 2001. The Company generated negative cash flows from
$1.8 million and $8.5 million for the nine month periods ended
September 30, 2002 and 2001, respectively. As of September 30, 2002, the Company
had a working capital deficit of approximately $3.2 million and an accumulated
deficit of approximately $157.8 million.
To address the continuing loss from operations and negative cash flows
from operations, management enacted a plan for the Company, which includes
various cost cutting measures during the third and fourth quarter of 2000 and
into 2001, as follows:
o We entered into agreements to settle approximately $425,000 in
severance and other contractual obligations through the
issuance of shares our common stock during the fourth quarter
of 2001 and restructured a current accrued liability of
$262,500 through the issuance a five year 7% senior
subordinated secured convertible note during January 2002
o We settled certain liabilities in December 2001 for
approximately $400,000 less than what was previously owed; and
o Savings of approximately $475,000 in monthly cash expenses as
a result of a restructuring plan initiated during the second
quarter of 2001, which included principally staffing
reductions and discretionary spending reductions in selling,
marketing, general and administrative expenses.
In 2002, the Company initiated the following actions to improve its
cash position and fund its operating losses:
o The Company reduced its staff by nine employees in the nine
months ended September 30, 2002 resulting in annual savings of
$1,015,000 in salaries and benefits;
o The Company discontinued its training and educational services
business segment as of September 30, 2002;
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o The Company has settled vendor obligations with unsecured
obligations totaling $766,000 for approximately $178,000,
which will be disbursed in various increments through March
2003. The Company continues to pursue negotiations with its
remaining unsecured creditors.
o The Company raised additional capital in a $1,200,000
financing by entering into a private financing agreement in
the third quarter of 2002, resulting in gross proceeds of
$625,000 to the Company during the quarter and an additional
$575,000 of gross proceeds being placed in escrow, to be
released to the Company upon achieving certain parameters.
In November 2002, the Company met these parameters and drew
down on an additional $275,000 so there is $300,000 remaining
in the escrow account as of this date.
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
year ended December 31, 2001.
In January 2002, the Company also completed a fifteen for one reverse
stock split. All shares and per share amounts have been adjusted to reflect this
reverse stock split.
NOTE 3. ACQUISITION OF BAC-TECH SYSTEMS
In January 2002, the Company acquired Bac-Tech Systems, Inc.
("Bac-Tech"), a New York City-based privately held e-commerce business, through
a merger. Pursuant to the merger agreement, the Company paid an aggregate of
$250,000 in cash and issued an aggregate of 200,000 shares of common stock and
95,000 shares of Series D preferred stock to the two stockholders of Bac-Tech.
In November 2002, the Series D preferred stock automatically converted into an
aggregate of 333,334 shares of common stock. The Company also issued secured
notes to the Bac-Tech stockholders in the aggregate amount of $600,000, payable
in three equal installments on May 1, 2003, January 1, 2004 and January 1, 2005,
which is included as long term debt in the accompanying condensed consolidated
balance sheet in the amount of $397,000 after discounting these notes using the
Company's estimated borrowing rate of 15 percent.
The Company has accounted for this acquisition using the purchase
method of accounting and determined the total purchase price to be $1,930,000,
which consisted of (i) cash of $250,000; (ii) 200,000 shares of the Company's
common stock at a price of $2.33 for total consideration of $465,000; (iii)
95,000 shares of Series D Preferred stock valued at $775,000;
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(iv) a three year non-interest bearing note with a face value of $600,000 and a
net present value of $397,000 assuming the Company's effective borrowing rate;
and (v) $43,000 in closing costs and other items.
The following is a summary of the initial allocation of the purchase
price of the Bac-Tech acquisition (in thousands):
Purchase price.............................................. $ 1,887
Acquisition costs........................................... 43
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Total purchase price........................................ $ 1,930
=======
Cash assumed................................................ $ 52
Accounts receivable, net.................................... 326
Other current assets........................................ 51
Property, plant, and equipment, net......................... 47
Accounts payable............................................ (196)
Accrued expenses and other current liabilities.............. (161)
Deferred revenue............................................ (110)
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Historical net assets acquired.............................. 9
Identifiable intangible assets.............................. 807
Goodwill.................................................... 1,114
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Total purchase price........................................ $ 1,930
=======
The Company is in the process of completing its estimate of the
allocation of the purchase price to identifiable and intangible assets. As of
this date, the Company estimated that the identifiable intangible assets include
(i) customer list of $188,000, which is estimated to have a useful life of three
years; (ii) Bac-Tech technology of $475,000, which is estimated to have a useful
life of two years; and (iii) below market lease for office space, which is
estimated at $144,000 and has a remaining life of 6 years, the remainder of the
lease term. The Company expects to complete the purchase price allocation by
December 31, 2002.
Because the acquisition of Bac-Tech occurred on the second day of the
year, the results of operations represents the full month period for both
companies. The following represents the summary unaudited pro forma condensed
consolidated results of operations for the three-month and nine month periods
ended September 30, 2001 as if the acquisition had occurred at the beginning of
the period presented (in thousands, except per share data):
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Three Months Ended Nine months Ended
September 30, 2001 September 30, 2001
------------------- -------------------
Revenue $ 1,293 $ 3,970
Net loss from continuing operations $ (49,957) $ (67,925)
Basic and diluted net loss per common share $ (29.64) $ (38.69)
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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 4. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
At the beginning of 2002, the Company adopted Statement of Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
eliminated the amortization of goodwill and certain intangibles with indefinite
lives and requires an impairment test of their carrying value. An initial
impairment test must be completed in the year of adoption with at least an
annual impairment test starting in the initial year of adoption and at the same
time in future years. The Company determined its reportable units to be its
Training and Client Educational Services, which was discontinued in the third
quarter of 2002, and Transaction Processing businesses for purposes of
allocating goodwill and testing it for impairment. The Company completed its
initial impairment test as of January 1, 2002 by September 30, 2002 and did not
record a write-down as a result of the initial adoption of SFAS No. 142. The
Company will complete its annual impairment test in the fourth quarter of 2002.
Therefore, the historical results of periods prior to 2002 in the
Company's Condensed Consolidated Statements of Operations do not reflect the
effects of SFAS No. 142 and accordingly the three and nine-month periods ended
September 30, 2001 includes amortization of goodwill in the amount of
approximately $3,180,000 and $9,536,000, respectively. During the three-month
periods ended September 30, 2002 and 2001, the Company recorded amortization
expense of $710,000 and $220,000, respectively, related to other intangible
assets with definitive useful lives, which will continue to be amortized over
their remaining useful lives. During the nine-month periods ended September 30,
2002 and 2001, the Company recorded amortization expense of $1,099,000 and
$669,000, respectively, related to these other intangible assets.
The following represents pro forma net loss and loss per share assuming
the adoption of SFAS No. 142 in the first quarter of 2001 ($ in thousands,
except per share data):
For the Three Months For the Nine Months
Ended 9/30/01 Ended 9/30/01
Reported net loss from continuing operations.......$(46,643) $(67,241)
Add: amortization of goodwill..................... 3,188 9,536
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Adjusted net loss from continuing operations.......$(46,463) $(57,705)
======== ========
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Basic and diluted earnings per share from
continuing operations............................. $(36.61) $(56.89)
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Add: Goodwill amortization.......................... 2.34 8.07
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Adjusted net loss from continuing operations......... $(34.27) $(48.82)
======= =======
NOTE 5. LONG TERM DEBT AND FINANCINGS
In December 2001, the Company raised gross proceeds of $2,000,000
through the issuance of 90 day, 7% Senior Subordinated Secured Notes ("Bridge
Notes") and warrants (Bridge Warrants") to purchase an aggregate of 266,670
shares of the Company's common stock at a price of $1.80 per share.
In January 2002, the Bridge Notes were exchanged for $2,000,000
principal amount of five year 7% senior subordinated secured convertible notes
("7% Notes"), which are due to be repaid in January 2007. The Company also
restructured a $263,000 long-term liability through the issuance of these 7%
Notes. The 7% notes were convertible into an aggregate of 934,922 shares of
common stock at a price of $2.42 per share. The holders of the Bridge Notes also
received, in exchange for the Bridge Notes, warrants to purchase 826,439 shares
of our common stock at a price of $2.90 per share ("Private Placement
Warrants"). Using the relative fair value method in accordance with EITF 00-27,
the Company determined that the Private Placement Warrants issued had a value of
$570,000 based on utilizing the Black-Scholes pricing with assumptions as
follows: (i) expected life of two years; (ii) volatility of 80 percent; (iii)
risk free borrowing rate of 4.9 percent; and (iv) allocation of 29 percent of
the proceeds to the warrants based on the relative fair values of the warrants
and the debt. Accordingly, the Company determined that there was a beneficial
conversion feature related to the 7% Notes of in the amount of $512,000. This
beneficial conversion feature was recorded as an unamortized discount on the 7%
Notes and is being accreted as interest expense over the five year life of the
7% Notes.
The warrants issued with the Bridge Notes were valued at $219,000 using
the Black-Scholes model assuming an expected life of two years, volatility of 80
percent, and a risk free borrowing rate of 4.9 percent. Using these same
assumptions under the Black Scholes model, the Company valued the Private
Placement Warrants at $570,000. Since the $2,000,000 of Bridge Notes and
$263,000 of a payable to a vendor were refinanced and exchanged for the 7%
Notes, which are not due to be repaid until January 2007, the aggregate of
$2,263,000, less the total unamortized discount related to the issuance of the
Bridge Warrants, Private Placement Warrants, and the beneficial conversion
feature of $1,207,000, net of accreted interest to date of $264,000, is included
in long term debt in the accompanying condensed consolidated financial
statements.
In connection with the December 2001 financing, the Company paid a cash
private placement fee of $200,000 and incurred approximately $85,000 in indirect
fees consisting of primarily legal expenses. The Company also issued warrants to
purchase 165,289 shares of our common stock at a price of $2.90 per share to our
placement agent in connection with the issuance of the 7% Note ("Agent
Warrants). The Agent Warrants were valued at $180,000 using the Black-Scholes
model using the assumptions noted above. These financing costs are also being
amortized and charged to interest expense over the five-year life of the debt.
The proceeds of the December 2001 financing were used to (i) fund
operating and working capital needs and (ii) to fund the $250,000 upfront cash
portion of the Bac-Tech acquisition. No cash payment of principal is required
prior to the maturity date in January 2007, however interest on the 7% Notes is
payable quarterly in either cash or shares of the Company's common stock.
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On July 15, 2002, the "Company initially closed a private placement
(the "July Financing") of five-year 7% senior subordinated secured notes (the
"July Notes") which are convertible into shares of common stock of the Company
at the conversion price of $0.101 per share (the closing price of the common
stock on the trading day prior to the closing). The Notes were purchased by ten
persons or entities, consisting of certain significant investors in the Company,
and by certain members of the Company's management. The gross proceeds of this
transaction were $1,200,000 and are intended to be utilized for working capital
and general corporate purposes. The Notes contain anti-dilution protection in
certain events, including the issuances of shares by the Company at less than
market price or the applicable conversion price.
The July Notes issued in the July Financing, together with the
$2,000,000 of the 7% Notes issued in the Company's private placement of notes
and warrants in January 2002, are secured by substantially all of the assets of
the Company. The security interest with respect to the July Notes are senior in
right to the security interest created with respect to the 7% Notes.
In connection with the Financing, all subscription proceeds were held
in escrow by an escrow agent for the benefit of the holders of the Notes pending
acceptance of subscriptions by the Company and shall be disbursed as provided in
the Escrow Agreement between the Company and the escrow agent (the "Escrow
Agreement"). On the closing of the Financing, proceeds of $350,000 were released
to the Company and the remaining proceeds were to be held in escrow (the
"Retained Proceeds"). As provided in the Escrow Agreement, the Retained Proceeds
will be disbursed as directed by the representative of the holders of the Notes,
or, upon request of the Company, after reducing its liabilities, existing as of
June 18, 2002, through negotiation with creditors. The Retained Proceeds may be
released in one-third increments provided that liabilities are reduced by
defined parameters. In this respect, in each of September 2002 and November
2002, $275,000 was released from escrow leaving a current balance of $300,000.
The January 2002 financing triggered anti-dilution provisions affecting
the conversion price of the Company's Series B preferred stock and Series C
preferred stock and the exercise price of and number of shares issuable under
various outstanding warrants. The July 2002 Financing also triggered
anti-dilution provisions as to such securities as well as in respect to the 7%
Notes.
NOTE 6. 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 and planned for the anticipated exit of its current
corporate office lease to a more modest facility. The following is a summary of
the restructuring charge recognized in the year ended December 31, 2001, which
was completed in the second quarter of 2002 (in thousands):
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Restructuring Payments Reversals to Balance at
Charge through 9/30/02 Income 9/30/02
------ --------------- ------ -------
Lease termination $1,765 $1,110 $(655) $ -
Severance for 40 employees 1,145 1,145 - -
Contract termination
Settlement 418 418 - -
------ ------ ----- --------
Total Charges $3,328 $2,673 $(655) $ -
====== ====== ===== ========
In December 2001, the Company issued 156,667 shares of common stock to
two former employees to satisfy $282,000 in severance claims, which is included
in the payments above. The Company made the final payment related to employee
severance in the second quarter of 2002 and finalized the lease termination for
less than the Company originally estimated. The remaining excess restructuring
accrual for lease termination costs of $655,000 was reversed into income through
the restructuring line item charge in the second quarter of 2002.
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, 2002 and 2001, options and warrants
to purchase 19,673,989 and 3,896,084 common shares, and preferred shares and
long term debt convertible into 38,186,058 and 2,274,789 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 Notes 3
and 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 incurred during the application
development stage. All other costs incurred in connection with internal use
software were expensed as incurred. The useful life assigned to capitalized
product development costs should be based on the period such product is expected
to provide future utility to the Company, which is currently two years for the
Company. As of September 30, 2002 and December 31, 2001, capitalized product
development costs, which have been classified as other assets in the Company's
balance sheets, were $701,145 and $1,631,000, respectively. Total product
development costs expensed as amortization were approximately $839,000 and
$1,604,000 for nine-month periods ended September 30, 2002 and 2001,
respectively.
NOTE 9. RELATED PARTIES
The Chief Operating Officer of a securities firm that has in the past
provided financial advisory services to the Company (the "Financial Advisor") is
a director of the Company. In additional, until recently, a principal and Chief
Executive Officer of the Financial Advisor was a director of the Company. For
acting as a placement agent for the Bridge and Private Placement Financings, the
Financial Advisor received a cash fee in the amount of $200,000 and was issued
warrants to purchase 165,289 shares of Company common stock with an exercise
price of $2.40
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for a period of two years. These warrants were valued using the Black-Scholes
option-pricing model at $180,900 assuming 80 percent volatility, a bond
equivalent yield of 4.9%, and at a price of $2.40. They are included on the
accompanying condensed consolidated balance sheet as deferred financing fees and
are being amortized and included as interest expense over the five-year life of
the debt.
The Company also paid its new Chairman of the Board of the Company
$30,100 and $70,300 during the three month and nine month periods ended
September 30, 2002, respectively, to provide consulting services related to the
restructuring of the Company's current business operations as well as to
evaluate the Company's overall business strategies. The Company has committed
to pay this individual $10,000 per month plus out of pocket expenses through
December 31, 2002.
NOTE 10. DISCONTINUED OPERATIONS
As of September 30, 2002, the Company discontinued its Training and
Educational Services business segment. The Company was unable to find a buyer
for this business segment and determined that it was in the best interests of
its shareholders to discontinue its operations rather than continue to fund its
working capital needs and operating losses. For the nine months ended September
30, 2002 and 2001, the Company's discontinued operations contributed net sales
of $1,105,000 and $1,851,000, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
The statements contained in this Form 10-QSB that are not historical
facts may be "forward-looking statements," as defined in Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, that
contain risks and uncertainty. Such statements can be identified by the use of
forward-looking terminology such as "estimates," "projects," "anticipates,"
"expects," "intends," "believes," or the negative of each of these terms or
other variations thereon or comparable terminology or by discussions of strategy
that involve risks and uncertainties. Although we believe that our expectations
are reasonable within the bounds of our knowledge of our business operations,
there can be no assurance that actual results will not differ materially from
our expectations. The uncertainties and risks include, among other things, our
plans, beliefs and goals, estimates of future operating results, our limited
operating history, the ability to raise additional capital, if needed, the risks
and uncertainties associated with rapidly changing technologies such as the
Internet, the risks of technology development and the risks of competition that
can cause actual results to differ materially from those in the forward-looking
statements.
Forward-looking statements are only estimates or predictions and should
be relied upon. We can give you no assurance that future results will be
achieved. Actual events or results may differ materially as a result of risks
facing us or actual results differing from the assumptions underlying such
statements. These risks and assumptions could cause actual results to vary
materially from the future results indicated, expressed or implied in the
forward-looking statements included in this Form 10-QSB. We disclaim any
obligation to update information contained in any forward-looking statement.
General
The following discussion and analysis should be read with the financial
statements and accompanying notes, included elsewhere in this prospectus. It is
intended to assist the reader in understanding and evaluating our financial
position.
Overview
We are a provider of business-to-business transaction management
services designed to simplify trading partner integration, automation and
collaboration. We utilize 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
acknowledgments, advanced shipping notices and invoices. We provide access via
the Internet to our proprietary software, which is maintained on our hardware
and on hosted hardware. In some instances, we will allow customers who are also
resellers of our services to take delivery of our proprietary software on a
licensed basis as a result of the Bac-Tech acquisition in January 2002.
We also offer 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.
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In January 2002, we acquired Bac-Tech Systems, Inc., a New York
City-based privately held e-commerce business, through a merger. Pursuant to the
merger agreement, the Company paid an aggregate of $250,000 in cash and issued
an aggregate of 200,000 shares of common stock and 95,000 shares of Series D
preferred stock to the two stockholders of Bac-Tech. In November 2002, the
Series D preferred stock automatically converted into an aggregate of 333,334
shares of common stock. We also issued secured notes to the Bac-Tech
stockholders in the aggregate amount of $600,000, payable in three equal
installments on May 1, 2003, January 1, 2004 and January 1, 2005, which is
included as long term debt in the accompanying condensed consolidated balance
sheet.
We accounted for this acquisition using the purchase method of
accounting and determined the total purchase price to be $1,930,000, which
consisted of (i) cash of approximately $250,000; (ii) 200,000 shares of our
common stock at a price of $2.33 for total consideration of $465,000; (iii)
95,000 shares of Series D Preferred stock valued at $775,000; (iv) a three year
non-interest bearing notes, present valued at $397,000 utilizing our estimated
borrowing rate of 15 percent; and (v) $52,000 in closing costs and other items.
As a result of the acquisition of Bac-Tech Systems, our financial
condition and results of operations were significantly different during the
three-month and nine-month periods ended September 30, 2002 and 2001. Therefore,
we believe that the results of operations for the three-month and nine-month
periods ended September 30, 2002 may not be comparable in certain respects to
the results of operations for the same period in 2001, and our anticipated
financial condition and results of operations going forward. Furthermore, our
limited operating history makes the prediction of future operating results very
difficult. We believe that period-to-period comparisons of operating results
should not be relied upon as predictive of future performance. Our 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. We may not be successful in addressing such risks and
difficulties.
In August 2002, our common stock was delisted from the NASDAQ small cap
market and commenced trading on the over the counter bulletin board.
Impact of Critical Accounting Policies
The SEC has recently issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies"
("FRR 60"), suggesting companies provide additional disclosure and commentary on
those accounting policies considered most critical. FRR 60 considers an
accounting policy to be critical if it is important to our financial condition
and results, and requires significant judgment and estimates on the part of
management in its application. Management believes the following represent our
critical accounting policies as contemplated by FRR 60. For a summary of all of
our significant accounting policies, including the critical accounting policies
discussed below, see our Form 10-KSB for the year ended December 31, 2001.
Revenue Recognition
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, annual subscription and monthly hosting
fees are recognized on a straight-line basis over the term of the contract with
the customer. Deferred
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income includes amounts billed for implementation, annual subscription and
hosting fees, which have not been earned. For related consulting arrangements on
a time-and-materials basis, revenue is recognized as services are performed and
costs are incurred in accordance with the terms of the contract. Revenues from
related fixed-price consulting arrangements are recognized using the
percentage-of-completion method. The revenue recognized from fixed price
consulting arrangements is dependent on: management's estimate of (i) the total
costs to complete the project; and (ii) the degree of completion at the end of
the applicable accounting period. Fixed-price consulting arrangements are mainly
short-term in nature and we do not have a history of incurring losses on these
types of contracts. If we 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.
Accounting for Business Combinations, Goodwill, and Other Intangible Assets
The judgments made in determining the estimated fair value and expected
useful lives assigned to each class of assets and liabilities acquired can
significantly impact net income. For example, different classes of assets will
have useful lives that differ--the useful life of a customer list may not be the
same as the other intangible assets, such as patents, copyrights, or to other
assets, such as software licenses. Consequently, to the extent a longer-lived
asset (e.g., patents) is ascribed greater value or a greater part of the
purchase price is allocated to goodwill, which is no longer amortized, than to a
shorter-lived asset with a definitive life (e.g. customer lists and software
licenses) there may be less amortization recorded in a given period.
Furthermore, there is also judgment involved in determining whether goodwill and
other intangibles are impaired.
Determining the fair value of certain assets and liabilities acquired
is judgmental in nature and often involves the use of significant estimates and
assumptions. One of the areas that requires more judgment in determining fair
values and useful lives is intangible assets. While there were a number of
different methods used in estimating the value of the intangibles acquired,
there were two approaches primarily used: discounted cash flow and market
multiple approaches. Some of the more significant estimates and assumptions
inherent in the two approaches include: projected future cash flows (including
timing); discount rate reflecting the risk inherent in the future cash flows;
perpetual growth rate; determination of appropriate market comparables; and the
determination of whether a premium or a discount should be applied to
comparables. The value of our intangible assets, including goodwill, is exposed
to future adverse changes if our company experiences decline in operating
results or experiences significant negative industry or economic trends or if
future performance is below historical trends. We periodically review intangible
assets and goodwill for impairment using the guidance of applicable accounting
literature. In 2002, we are adopting new rules for measuring the impairment of
goodwill and certain intangible assets. The estimates and assumptions described
above, as well as the determination as to how goodwill will be our operating
segments, will impact the amount of impairment, if any, to be recognized upon
adoption of the new accounting standard.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
As a result of continuing operating losses, negative cash flows,
working capital constraints, and the inability to sell the business as of
September 30, 2002, we discontinued our Training and Client Educational Services
business segment. As a result, the financial results from all current period
periods have been restated to reflect this business segment as a discontinued
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operation and the Company now has one business segment, Transaction Processing
Services.
Total revenue for the three-month periods ended September 30, 2002 and
2001 amounted to $828,000 and $950,000 respectively, reflecting a decrease of
$122,000 or 13 percent for the three-month period ended September 30, 2002.
Revenue for the nine-month periods ended September 30, 2002 and 2001 amounted to
$2,745,000 and $3,193,000, respectively, reflecting a decrease of $448,000 or 14
percent for the nine-month period ended September 30, 2002. The decline in
transaction revenues is primarily attributable to a slower economy and reduced
marketing spending as well as a decline in non-core pieces of our overall
transaction processing business, which came along with various acquisitions,
including the following: (i) a $64,000 reduction in professional services to
$236,000 in the third quarter of 2002 compared to $300,000 in the similar period
in the prior year as a result of certain cost containment measures by a key
customer; (ii) elimination of a web design business, which consisted of
$286,000 in revenues for nine-month period ended September 30, 2001, and
(iii) anticipated continued contraction of a legacy outsourced
EDI business acquired from DynamicWeb, representing approximately $98,000 of the
decline in revenue during the third quarter of 2002.
On a pro forma basis, assuming the acquisition of Bac-Tech was
completed on January 1, 2001, our revenues for the three-month period ended
September 30, 2001 would have been $1,293,000, representing a decline of
$464,000 or 36 percent for the three months ended September 30, 2002 compared
to the similar period in the prior year. For the nine-month period ended
September 30, 2001, the pro forma revenues would have been $3,970,000
representing a decline of $1,225,000 or 31 percent for the nine months ended
September 30, 2002 compared to the similar period in the prior year. This is
as a result of the declines discussed above and due to a lower volume of
revenues from the acquired Bac-Tech business as a result of an economic
slowdown in the high tech and software sectors.
One professional services customer accounted for approximately 27
percent and 24 percent of our total revenue for the three and nine months ended
September 30, 2002, respectively and 31 percent and 33 percent of our total
revenue for the similar periods in 2001, respectively. For the three months
ended September 30, 2002, revenues from this customer declined to $225,000 from
$294,000 for the similar period for the prior year, representing a decline of
$69,000 or 23 percent. This reduction is due to cost containment measures being
taken by this customer and we expect quarterly revenues from this customer to
stabilize at this level, although there can be no assurance in this regard. No
other customer accounted for 10% or more of our total revenue for the three and
nine-month periods ended September 30, 2002 and 2001.
Cost of revenue consists primarily of salaries and benefits for
employees providing technical support as well as salaries and benefits of
personnel and consultants providing consulting services to clients.
Total cost of revenue for the three-month periods ended September 30, 2002 and
September 30, 2001 amounted to $303,000 and $397,000, respectively, representing
a decrease in cost of revenues of $94,000 or 24 percent. For the nine-month
periods ended September 30, 2002 and September 30, 2001, total cost of revenue
amounted to $836,000 and $1,458,000, respectively, representing a decrease of
$622,000 or 43 percent. This decrease was a result of (i) lower revenues and
(ii) cancellation of duplicate web hosting facilities and VAN charges, resulting
in approximately $230,000 and $610,000 in cost savings for the respective
three-month and nine-month periods during 2002.
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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 month period ended
September 30, 2002 amounted to $93,000 as compared to $181,000 for the three
month period ended September 30, 2001, a decrease of $88,000 or 49 percent. For
the nine-month periods ended September 30, 2002 and 2001, marketing and selling
expenses were $341,000 and $1,610,000, respectively, representing a decrease of
$1,269,000, or 79 percent. The decrease is chiefly associated with the
reorganization plan implemented by us prior to and during 2001 by which we (i)
eliminated approximately $125,000 in monthly salaries and benefits on a
recurring basis, yielding quarterly savings of $375,000; and (ii) reduced or
eliminated expenses related to trade shows and other marketing programs, which
amounted to $456,000 during the nine months ended September 30, 2001 and were
$10,000 during the nine months ended September 30, 2002.
Product development expenses mainly represent amortization of
capitalized software development costs and payments to outside contractors and
personnel and related costs associated with the development of our technological
infrastructure necessary to process transactions. Product development expenses
(exclusive of stock-based compensation) were approximately $144,000 and $257,000
for the three-month periods ended September 30, 2002 and 2001, respectively. The
decrease in product development expenses for the three-month period ended
September 30, 2002 as compared to the same period of 2001 was $113,000 or 44
percent. This is attributable to a nonrecurring pick up to income of $220,000 as
a result of a settlement agreement with a large vendor, who developed software
for previously written off costs. Product development expenses (exclusive of
stock-based compensation) were approximately $839,000 and $1,604,000 for the
nine-month periods ended September 30, 2002 and 2001, respectively. The decrease
in product development expenses for the nine-month period ended September 30,
2002 as compared to the same period of 2001 was $765,000 or 48 percent. During
the nine months ended September 30, 2002 such amount consists entirely of
amortization of capitalized software development costs offset by the reversal of
$220,000 for the vendor settlement discussed above; whereas during the nine
months ended September 30, 2001, we expensed approximately $910,000 in relation
with costs chiefly associated with the transition of certain of our existing
customers to our new technology platform. We capitalize qualifying computer
software costs incurred during the application development stage. Accordingly,
we anticipate that product development expenses will fluctuate from quarter to
quarter as various milestones in the development are reached and future versions
are implemented.
General and administrative expenses consist primarily of employee
salaries and related expenses for executives, administrative and finance
personnel, as well as other consulting, legal and professional fees and, to a
lesser extent, facility and communication costs. During the three-month periods
ended September 30, 2002 and 2001, total general and administrative expenses
(exclusive of stock-based compensation) amounted to $1,168,000 and $2,162,000,
respectively, representing a decrease of $994,000 or 46 percent. During the
nine-month periods ended September 30, 2002 and 2001, general and administrative
expenses amounted to $4,328,000 and $7,653,000, respectively, representing a
decrease of $3,325,000 or 43 percent. The decrease is attributable to: (i) the
write-off of the lease at 757 Third Avenue in the fourth quarter of 2001 as a
restructuring charge and subsequent termination of this agreement, resulting in
quarterly savings of $285,000; (ii) a reduction of quarterly salaries and
benefits of approximately $570,000 per quarter as a result of the cost cutting
measures implemented by us during 2001 and 2002; (iii) reduction of fees paid to
outside contractors by approximately $210,000 per quarter; and (iv) lower legal
expenses in 2002 by $365,000 for nine months ended September 30, 2002.
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As a result of the above reorganization plan implemented, we recorded a
total restructuring charge of $313,000 and $1,442,000 during the three and
nine-month periods ended September 30, 2001, respectively, primarily for
employee severance and contract termination costs. During the nine months ended
September 30, 2002, the Company settled with its landlord at its prior executive
offices at 757 Third Avenue in New York City resulting in an early termination
of the lease relating to these premises and this restructuring was finalized.
The amount by which the estimated restructuring charge taken in 2001 exceeded
the actual restructuring costs to terminate this lease as determined in 2002, in
the amount of $655,000, was reversed into income in the restructuring caption
during the second quarter of 2002.
Amortization of goodwill and other intangibles are non-cash charges
associated with the DynamicWeb, Netlan, and Bac-Tech business combinations.
Amortization expense was $710,000 and $3,129,000 for the three-month periods
ended September 30, 2002 and 2001, respectively. For the nine months ended
September 30, 2002 and 2001, amortization expense was $1,099,000 and $9,386,000,
respectively. The decreases of $2,410,000 and $6,257,000 for the three-month and
nine month periods ended September 30, 2002, respectively, are due to the
implementation of SFAS No. 142 during 2002. SFAS No. 142 eliminated the
amortization of goodwill and certain intangibles with indefinite lives and
requires an annual impairment test of their carrying value. During the
three-month and nine-month periods ended September 30, 2001, we recorded
amortization expense of $3,180,000 and $9,536,000, respectively, related to
goodwill, which would not have been amortized under SFAS No. 142.
During the three-month periods ended September 30, 2002 and 2001,
stock-based compensation expense amounted to $81,000 and $224,000, respectively.
During the nine-month periods ended September 30, 2002 and 2001, stock-based
compensation expense was $244,000 and $1,841,000, respectively. The deferred
stock compensation is being amortized over the vesting periods of the related
options and warrants contingent upon continued employment of the respective
option or warrant holders. The vesting period of the options and warrants ranges
principally from two to four years. The balance of unearned stock-based
compensation at September 30, 2002 was approximately $524,000. This balance will
be amortized at varying amounts per quarter through March 2004.
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-month periods ended September 30, 2002 and 2001, EBITDA
was a loss of $365,000 and $1,519,000, respectively. For the nine-month periods
ended September 30, 2002 and 2001 EBITDA was a loss of $985,000 and $8,478,000
respectively. During the three and nine-month periods ended September 30, 2002,
the Company expensed non-cash items including impairment of goodwill,
depreciation, amortization and stock-based compensation expense aggregating to
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$1,373,000 and $3,598,000, respectively, compared to $48,124,000 and $58,763,000
for the similar periods in 2001. The improvement in EBITDA during 2002 is a
result of the cost savings from the restructuring discussed above, particularly
in general and administrative expenses and marketing. The substantial
improvement in EBITDA during 2002 is also a result of reversing the excess
restructuring charge of $655,000 into income during the second quarter of 2002.
Excluding this nonrecurring increase to income, EDITDA for the three and nine
month periods ended September 30, 2002 would have been a loss of $365,000 and
$1,640,000, respectively.
Interest and other, net amounted to an expense of $66,000 and $296,000
for the three and nine-month periods ended September 30, 2002, respectively,
compared to an expense of $1,527,000 and $3,037,000 for the three and nine-month
periods ended September 30, 2001, respectively. The expense in both periods is
primarily non cash and is due to the amortization of (i) debt issuance costs,
(ii) the applicable discount on the debt, and (iii) the beneficial conversion
feature.
Net loss for the three-month periods ended September 30, 2002 and 2001
was $2,158,000 and $50,970,000, respectively. For the nine-month periods ended
September 30, 2002 and 2001, net loss was $5,345,000 and $69,180,000,
respectively. The decrease in net loss is a combined result of the changes
discussed above and the fact that we recorded a charge for the impairment of
goodwill of $42,403,000 during the third quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the significant cost cutting measures carried out as
part of our 2001 restructuring plan, our ongoing quarterly cash expenses more
closely approximate our quarterly revenues, although we still reported negative
cash flows from operations and an EBITDA loss for both the first three quarters
of 2002 and 2001 and the year ended December 31, 2001. At our current quarterly
expense rates, including the impact of the Bac-Tech acquisition and after
discontinuing the operations of Netlan, we will require approximately $1.1
million in quarterly revenues and $1.3 million in cash collections,
respectively, to report positive EBITDA and cash flow from operations,
respectively. To the extent our quarterly revenues and cash collections are
below this amount, we are prepared to take additional actions, including further
cost reduction measures.
As of September 30, 2002, our principal source of liquidity was
approximately $222,000 of cash and cash equivalents that was unrestricted.
The company expects at least $54,000 of the restricted cash balance of $140,000
to become available toward working capital needs within 90 days. As of
September 30, 2002, we had a negative working capital position of $3,208,000.
Excluding deferred revenue of $366,000, which represents projects that we expect
to complete in the fourth quarter of 2002, and net current liabilities of
discontinued operations we had a negative working capital balance of $2,661,000.
The negative working capital position does not reflect the anticipated reduction
in liabilities from settlements reached with unsecured vendors totalling
$766,000. There can be no assurance that we will be successful in further
reducing these liabilities. If we are unsuccessful in reducing these
liabilities and do not see an increase in revenues and cash collections to
the previously mentioned levels or cannot raise additional capital, we are
unlikely to have the capital to fund our operations through 2003. The report
of our independent auditors on our financial statements as of and for the
year ended December 31, 2001 contains an unqualified report with an
explanatory paragraph which states that our recurring losses from operations
and negative cash flows from operations raise substantial doubt about our
ability to continue as a going concern.
In 2002, we initiated the following actions to improve our cash
position and fund our operating losses:
o Our staff was reduced by eight employees in the nine months
ended September 30, 2002 resulting in annual savings of
$1,015,000 in salaries and benefits;
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o As a result of our inability to sell the business, we
discontinued our training and client educational services
business segment to preserve capital;
o We settled vendor obligations with unsecured obligations
totaling $766,000 for approximately $178,000, which will be
disbursed in various increments through March 2003. The
Company continues to pursue negotiations with its remaining
unsecured creditors;
o We determined to raise additional capital, in which respect,
we entered into a private financing agreement in July 2002,
resulting in gross proceeds of $350,000 to the Company and
$850,000 of gross proceeds being placed in escrow, to be
released to the Company upon achieving certain parameters. We
received additional proceeds from escrow of $275,000 in each
of September and November of 2002. As of November 14, 2002, we
have successfully drawn on a total of $900,000 from the escrow
with $300,000 remaining in escrow.
We are also taking aggressive steps to renegotiate old contracts and
existing liabilities. In the second quarter of 2002, we entered into an
agreement to terminate 22,000 square feet of leased space in New York City that
we previously used for our corporate headquarters and back office operations.
This action reduced our monthly rental cost by approximately $100,000 per month
including certain utilities. To terminate the lease, we surrendered a letter
of credit of approximately $1.2 million securing this lease and granted the
landlord 240,000 warrants to purchase our common stock at a per share price of
$.101. The warrants were valued at $13,190 using the Black-Scholes model
assuming an expected life of three years, volatility of 85 percent, and a risk
free borrowing rate of 4.5 percent. During the year ended December 31, 2001, we
recorded a restructuring charge of $1,765,000 to account for the estimated costs
to terminate the lease. During the three-month period ended September 30, 2002,
we reversed $655,000, which is the portion his restructuring charge that we
over-estimated in excess of the actual lease termination costs.
At September 30, 2002, we accrued approximately $594,000 potentially
owing to a creditor. We had previously issued shares of our common stock to this
party for payment of obligations then owing, and had agreed that in the event it
received gross proceeds from the sale of these shares less than the amount
originally owing of $1,200,000, then we would issue additional shares to cover
the shortfall. In December 2001, we amended our agreement with this creditor
whereby the creditor agreed to be issued up to 266,667 shares of our common
stock to offset any deficiency, and to the extent such amount is insufficient,
then to be paid one-half of the remaining balance in cash no earlier than April
2003, with the other one-half to be forgiven. We are currently engaged in
negotiations with this vendor to renegotiate this liability.
We anticipate spending approximately $0.6 million on capital
expenditures over the next twelve months, primarily on capitalized product
development costs.
In July 2002, we initially closed a private placement of five-year 7%
senior subordinated secured notes, which are convertible into shares of our
common stock at the conversion price of $0.101 per share (the closing price of
the common stock on the trading day prior to the closing). Ten persons or
entities, consisting of certain of our significant investors, and members of our
management, purchased these notes. The gross proceeds of this transaction were
$1,200,000 and are intended to be utilized for working capital and general
corporate purposes. These notes contain full ratchet anti-dilution protection in
certain events, including the issuances of shares of stock at less than market
price or the applicable conversion price. These notes along with the $2,000,000
of notes issued in the January 2002 private placement are secured by
substantially all
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of our assets. The security interest with respect to the notes issued in the
July 2002 financing is senior in right to the security interest created with
respect to the notes issued in January 2002.
In connection with the July 2002 financing, all subscription proceeds
were held in escrow by an escrow agent for the benefit of the holders of these
notes pending our acceptance of subscriptions and shall be disbursed as provided
in the escrow agreement between the escrow agent and us. On the closing of this
financing, proceeds of $350,000 were released to us and the remaining proceeds
are being held in escrow. As provided in our escrow agreement, the remaining
proceeds will be disbursed as directed by the representative of the holders of
these notes, or, upon our request, after reducing our liabilities, existing as
of June 18, 2002, through negotiation with creditors. In this respect, the
retained proceeds may be released in one-third increments provided that
liabilities are reduced by defined parameters. As of November 14, 2002, we have
drawn on $900,000 from the escrow. It is by no means certain that we will be
successful in reducing our liabilities to a level whereby we can draw on the
remaining $300,000 in escrow. This financing triggered anti-dilution provisions
affecting the conversion price of the Company's notes issued in January 2002
(the 7% Notes as defined below), Series B preferred stock and Series C preferred
stock and the exercise price of and number of shares issuable under various
outstanding warrants.
In December 2001, we raised gross proceeds of $2,000,000 through the
issuance of 90 day, 7% Senior Subordinated Secured Bridge Notes ("Bridge Notes")
and warrants (Bridge Warrants") to purchase an aggregate of 266,670 shares of
the Company's common stock at a price of $1.80 per share.
In January 2002, the Bridge Notes were exchanged for five year 7%
senior subordinated secured convertible notes ("7% Notes"), which are due to be
repaid in January 2007. The Company also restructured a $263,000 long-term
liability through the issuance of these 7% Notes. The 7% Notes were initially
convertible into an aggregate of 934,922 shares of common stock at a price of
$2.42 per share. The holders of the Bridge Notes also received, in exchange for
the Bridge Notes, warrants to purchase 826,439 shares of our common stock at a
price of $2.90 per share ("Private Placement Warrants"). Using the relative fair
value method in accordance with EITF 00-27, the Company determined that 29
percent of the $2 million proceeds received in the financing related to the
Private Placement Warrants issued. Accordingly, the Company determined that
there was a beneficial conversion feature related to the 7% Notes of in the
amount of $512,000.
The Bridge Warrants were valued at $219,000 using the Black-Scholes
model assuming an expected life of two years, volatility of 80 percent, and a
risk free borrowing rate of 4.88 percent. Using these same assumptions under the
Black Scholes model, the Company valued the Private Placement Warrants at
$570,000. Since the $2,000,000 of Bridge Notes and $263,000 of a payable to a
vendor were refinanced and exchanged for the 7% Notes, which are not due to be
repaid until January 2007, the aggregate of $2,263,000, less the total
unamortized discount related to the issuance of the Bridge Warrants, Private
Placement Warrants, and the beneficial conversion feature of $1,125,000, net of
accreted interest to date of $176,000, is included in long term debt in the
accompanying condensed consolidated financial statements.
In connection with the December 2001 and January 2002 financings, the
Company paid a cash private placement fee of $200,000 and incurred approximately
$85,000 in indirect fees consisting of primarily legal expenses. The Company
also issued warrants to purchase 165,289 shares of our common stock at a price
of $2.90 per share to our placement agent in connection with the issuance of the
7% Notes ("Agent Warrants). The Agent Warrants were valued at
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$180,000 using the Black Scholes model using the assumptions noted above. These
financing costs are also being amortized and charged to interest expense over
the five-year life of the debt.
The proceeds of these financings are being used to (i) fund operating
and working capital needs and (ii) to fund the $250,000 upfront cash portion of
the Bac-Tech acquisition. No cash payment of principal is required prior to the
maturity date of January 7, 2007. Interest on the 7% Notes is payable quarterly
in either cash or shares of the Company's common stock.
In January 2002, utilizing a portion of the proceeds of the December
2001 financing, we acquired Bac-Tech Systems, Inc., a privately-held New York
City-based e-commerce company. As a result of the Bac-Tech acquisition, the
Series D preferred stock transaction requires shareholder approval by November
30, 2002. If such approval is not obtained by November 30, 2002, the Series D
preferred stock becomes redeemable, at the option of the holders, for $10 per
share in cash, plus accrued dividends. The Series D preferred stock
automatically converted into common stock during November 2002. We may also seek
to grow by additional acquisitions. There can be no assurances provided that any
additional funding will be concluded, or that, if concluded, will be concluded
on acceptable terms or be adequate to accomplish our goals. There can be no
assurance that any other additional acquisitions can be concluded or, if
concluded, will achieve the results desired by us.
From April 16 through May 2, 2001, we received gross proceeds of $7.5
million from a private placement of convertible notes and warrants to certain
accredited investors. Pursuant to the financing, we issued $7,500,000 of
principal amount of 7% convertible notes, convertible into an aggregate of
1,000,000 shares of our common stock ($7.50 per share), and warrants to purchase
an aggregate 1,000,000 shares of our common stock at $13.95 per share. The
convertible notes had a term of 18 months. Interest was payable quarterly in
cash, in identical convertible notes or in shares of common stock, at our
option. In addition, the convertible notes were automatically convertible into
Series C preferred stock if we received the required consent of the holders of
our Series B preferred stock for the issuance of this new series. The
convertible notes were converted into the Series C preferred stock on September
28, 2001 when we received the required consents from the holders of our 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 placement warrants
are exercisable through October 17, 2003.
In connection with the closing of the April/May 2001 financing, we
canceled a $2,250,000 line of credit issued in April 2001, pursuant to which we
had not borrowed any funds. We 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 60,000 shares of our
common stock at $7.50 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 $548,000.
In connection with the April/May 2001 financing and as compensation to
the placement agents, we incurred a cash fee amounting to $750,000 and issued
(i) warrants to purchase 150,000 shares of our common stock with an exercise
price of $13.95 for a period of five years and (ii) unit purchase options to
purchase Series C preferred stock convertible into an aggregate of 150,000
shares of common stock with an exercise price of $7.50 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 April/May 2001 financing,
principally legal and accounting fees, amounted to approximately $309,000.
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Net cash used in operating activities totaled approximately $1.8
million for the nine-month period ended September 30, 2002 as compared to net
cash used in operating activities of approximately $8.5 million for the same
period in 2001. Net cash used in operating activities for nine-month period
ended September 30, 2002 resulted primarily from (i) the $5.3 million net loss
in the period and (ii) a $348,000 use of cash from operating assets and
liabilities primarily to settle old outstanding liabilities, offset by (iii) an
aggregate of $3.4 million of non-cash charges consisting primarily of
depreciation, amortization, stock-based compensation expense, restructuring
charges and the impairment of goodwill. Net cash used in operating activities
for the nine month period ended September 30, 2001 resulted primarily from (i)
the $69.1 million net loss in the period, offset by (ii) $43,400 decrease in
cash from the management of operating assets and liabilities, and (iii) an
aggregate of $ $60.1 million of non-cash charges consisting primarily of
depreciation, amortization and stock-based compensation expense.
Net cash used in investing activities totaled approximately $571,000
for the nine-month period ended September 30, 2002 as compared to net cash used
in investing activities of approximately $2.2 million for the same period in
2001. Net cash used in investing activities for the nine months ended September
30, 2002 resulted from (i) the purchase of capital assets for $40,000; (ii)
acquisition of Bac-Tech using $198,000, net of cash acquired; and (ii) $367,000
in product development costs consisting primarily of capitalized salaries. 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 financing activities totaled approximately
$525,000 for the nine-month period ended September 30, 2002, which consisted
exclusively of repayment of capital lease obligations of $100,000 offset by
$625,000 received in financings. This compared to net cash generated by
financing activities of $4,091,000 for nine-month period ended September 30,
2001, which consisted of (i) repayment of borrowings of $2,250,000 under a
$2,500,000 term loan from a bank; (ii) repayment of capital lease obligations of
$125,000; and (iii), the net cash of $6,466,000 raised from our May 2001
financing transaction.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations".
SFAS No. 141 applies prospectively to all business combinations initiated after
September 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 intangible assets with indefinite lives. 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 at the beginning of our next fiscal year
and to be applied
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to all goodwill and other intangible assets recognized in our 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 September 30, 2001 will be subject immediately
to the provisions of this Statement. We are currently evaluating the impact of
the new accounting standard on existing goodwill and other intangible assets and
plan to adopt the new accounting standard in our financial statements for the
fiscal year ending December 31, 2002. We have completed the transitional
impairment test and did not record an impairment charge as a result of the
initial adoption of SFAS No. 142. We have defined our two reportable business
units as our Transaction Business and Related Consulting Services. We will
also perform our annual impairment test as of the end of the year.
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, and 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. We are currently
evaluating the impact of the new accounting standard and plan to adopt the new
accounting standard in our financial statements for the fiscal year ending
December 31, 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. We are currently evaluating
the impact of the new accounting standard on existing long-lived assets and plan
to adopt the new accounting standard in our financial statements for the fiscal
year ending December 31, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses the
financial accounting and reporting of expenses related to restructings
initiated after 2002, and applies to costs associated with an exit activity
(including a restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS No. 146, a company will record a liability for a cost associated with an
exit or disposal activity when the liability is incurred and can be measured at
fair value. The provisions of this Statement are effective prospectively for
exit or disposal activities initiated after December 31, 2002. We have not
determined the impact of the adoption of this Statement on future periods.
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ITEM 3. CONTROLS AND PROCEDURES
Our principal executive and financial officer has concluded, based on
his evaluation as of a date within 90 days before the filing of this Form
10-QSB, that our disclosure controls and procedures under Rule 13a-14 of the
Securities Exchange Act of 1934 are effective to ensure that information we are
required to disclose in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and include controls and procedures designed to
ensure that information we are required to disclose in such reports is
accumulated and communicated to management, including our principal executive
and financial officer, as appropriate to allow timely decisions regarding
required disclosure.
During the past two years, our company has undergone substantial
restructuring, which included the elimination of several positions in our
accounting and finance department. This has impacted our ability to close the
books in a timely manner on a consistent basis. For the last three quarters,
we have required additional time to file our Form 10Q's. Management is in the
process of addressing this issue by simplifying and consolidating our
accounting and reporting processes and systems, which will allow our company
to close its books in a timely manner with current staff levels. While some of
these process changes have already been implemented, we are currently
instituting additional management controls over the closing process.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K
A Form 8-K was filed on September 13, 2002 to disclose that the Company received
$275,000 in financing from escrow.
A Form 8-K was filed on August 29, 2002 to disclose the delisting of the
Company's common stock from the NASDAQ Small Cap market.
A Form 8-K was filed on August 13, 2002 to disclose a change in the Company's
independent auditors.
A Form 8-K was filed on August 12, 2002 to disclose that the Company received
$350,000 in financing with an additional $850,000 being placed in escrow.
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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)
November 25, 2002 By: /s/ Richard Cohan
- ----------------- ---------------------------
Chief Executive Officer and President
(Principal Executive and Financial officer)
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I, Richard S. Cohan, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of eB2B Commerce,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 25, 2002
/s/ Richard S. Cohan
----------------------------------
Richard S. Cohan
Chief Executive Officer and
President (Principal Executive and
Financial Officer)
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