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, 2003
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 10012
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(Address of Principal Executive Offices)
(212) 477-1700
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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 September 30, 2003, there were 3,157,416 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.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30,
2003
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(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 277
Accounts receivable, net of allowance of $165 383
Other current assets 4
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Total Current Assets 664
Property and equipment, net 3
Product development costs, net of accumulated amortization of $5,562 438
Deferred financing costs, net of accumulated amortization of $163 302
Other intangibles, net of accumulated amortization of $2,997 231
Other assets 35
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Total assets $ 1,673
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 1,082
Accrued expenses and other current liabilities 1,085
Current maturities of long-term debt 2,835
Deferred revenue 275
Current liabilities of discontinued operations 252
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Total current liabilities 5,529
Long-term debt, less current maturities 384
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Total liabilities 5,913
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Commitments and contingencies
Stockholders' Deficit
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; 2,211,675 shares issued and outstanding --
Preferred stock, convertible Series C - $.0001 par value;
1,750,000 shares authorized; 732,875 shares issued and outstanding --
Common stock - $.0001 par value; 200,000,000 shares authorized;
3,157,416 shares issued and outstanding --
Additional paid-in capital 157,291
Accumulated deficit (161,531)
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Total stockholders' deficit (4,240)
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Total liabilities and stockholders' deficit $ 1,673
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See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue $ 823 $ 828 $ 3,067 $ 2,745
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of revenue 156 303 459 836
Marketing and selling 43 93 189 341
Amortization of product development costs 64 144 246 839
Amortization of other intangibles 83 710 407 1,099
General and administrative 550 1,169 1,851 4,328
Restructuring credit -- -- -- (655)
Settlement of licensing liability -- -- (566) --
Stock-based compensation expense -- 81 -- 244
----------- ----------- ----------- -----------
Total costs and expenses 896 2,500 2,586 7,032
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
interest and other expenses,net (73) (1,672) 481 (4,287)
Interest and other expenses, net (165) (66) (496) (296)
----------- ----------- ----------- -----------
Loss from continuing operations (238) (1,738) (15) (4,583)
Loss from discontinued operations -- (420) (6) (762)
----------- ----------- ----------- -----------
Net loss $ (238) $ (2,158) $ (21) $ (5,345)
=========== =========== =========== ===========
Loss per common share
from continuing operations $ (0.08) $ (0.88) $- $ (2.40)
Loss per common share
from discontinued operations -- (0.21) -- (0.40)
----------- ----------- ----------- -----------
Net loss per common $ (0.08) $ (1.09) $ -- $ (2.80)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 3,157,416 1,984,551 3,149,936 1,905,855
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
For the Nine Months
Ended September 30,
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2003 2002
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Cash flows from operating activities:
Net loss from continuing operations $ (15) $ (4,583)
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:
Depreciation and amortization 750 2,920
Gain on settlement of licensing liability (566) --
Stock-based compensation expense -- 244
Non-cash interest expense 316 199
Changes in operating assets and liabilities
Accounts receivable 225 244
Other current assets 50 --
Other assets 15 --
Accounts payable (314) (6)
Accrued expenses and other liabilities (120) 338
Deferred revenue (465) --
Lease termination cost and other -- (424)
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Net cash used in operating activities (124) (1,068)
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Cash flows from investing activities:
Acquisition of Bac-Tech Systems, Inc., net -- (198)
Purchases of property and equipment -- (6)
Product development expenditures (262) (367)
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Net cash used in investing activities (262) (571)
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Cash flows from financing activities:
Payments on borrowings (37) --
Proceeds from borrowings and issuance of convertible notes, net -- 625
Proceeds from long-term debt 275 --
Payment of capital lease obligations -- (100)
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Net cash provided by financing activities 238 525
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Net cash used in continuing operations (148) (1,114)
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Net cash used in discontinued operations (36) (762)
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Net change in cash and cash equivalents (184) (1,876)
Cash and cash equivalents - beginning of period 461 2,098
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Cash and cash equivalents - end of period $ 277 $ 222
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See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
(IN THOUSANDS)
For the Nine Months
Ended September 30,
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2003 2002
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Non-cash transactions
Common and preferred stock issued in connection with acquisition -- $ 1,240
Issuance of warrants with convertible debt -- 750
Issuance of long term not in connection with acquisition -- 397
Beneficial conversion with issuance of convertible debt -- 512
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2 $ 4
See accompanying notes to consolidated financial statements.
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eB2B COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND LIQUIDITY PLANS
eB2B Commerce, Inc. (the "Company") utilizes proprietary software to
provide a technology platform for buyers and 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 accumulated deficits and negative
cash flows from operations, which raises substantial doubt about its ability to
continue as a going concern.
To ensure the success of the Company, and to address the accumulated
deficits and negative cash flows from operations, management enacted a plan for
the Company, which includes various cost cutting measures commencing in 2001.
Management is currently prepared to take the following actions:
o Raise additional capital, for which there can be no assurance
of obtaining, to fund the Company's internal growth, and to
sustain the Company if positive cash flow from operations is
not generated, or if there are unanticipated expenses.
o Continue to pursue negotiations with its remaining unsecured
creditors.
o Investigate potential transactions involving the sale or
merger of the Company.
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 audited consolidated financial statements
and footnotes therein included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2002.
In January 2002, the Company 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. DISCONTINUED OPERATIONS
In September 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. Accordingly, the related results of
operations and cash flows have been reflected as discontinued operations in
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NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)
the accompanying consolidated financial statements. For the nine months ended
September 30, 2003 and 2002, the Company's discontinued operations contributed
net sales of $0 and $724,000, respectively. As of September 30, 2003, there were
no assets relating to this segment, and only the liabilities appear on the
Company's balance sheet.
NOTE 4. ACCOUNTING FOR STOCK BASED COMPENSATION
Effective January 1, 2003, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting Standards ("FAS")
No. 123, "Accounting for Stock-Based Compensation", prospectively to all
employee awards granted, modified, or settled after January 1, 2003. Prior to
2003, the Company accounted for stock-based employee compensation under the
recognition and measurement provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in 2002 net income, as all options granted to
employees had an exercise price equal to the market value of the underlying
common stock on the date of grant. No stock-based compensation cost is reflected
in 2003 net income, as no awards were granted during the three and nine months
ended September 30, 2003. The following table illustrates the effect on net
income (loss) and income (loss) per share as if the fair value based method had
been applied to all outstanding and unvested awards in each period.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Loss from continuing operations, as reported $ (327) $ (1,738) $ (104) $ (4,583)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards -- -- -- (693)
------------ ------------ ------------ ------------
Pro forma loss from continuing operations, net of tax $ (327) $ (1,738) $ (104) $ (5,276)
============ ============ ============ ============
Loss from discontinued operations, as reported $ -- $ (420) $ (6) $ (762)
Deduct: Total stock-based employee compensation expense
Determined under fair value based method for all awards -- -- -- --
------------ ------------ ------------ ------------
Pro forma loss from discontinued operations, net of tax $ -- $ (420) $ (6) $ (762)
============ ============ ============ ============
Net loss, as reported $ (327) $ (2,158) $ (110) $ (5,345)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards -- -- -- (693)
------------ ------------ ------------ ------------
Pro forma net loss $ (327) $ (2,158) $ (110) $ (6,038)
============ ============ ============ ============
Loss per share:
Loss from continuing operations - as reported $ (0.10) $ (0.92) $ (0.03) $ (2.43)
============ ============ ============ ============
Loss from continuing operations - pro forma $ (0.10) $ (0.92) $ (0.03) $ (2.80)
============ ============ ============ ============
Loss from discontinued operations - as reported $ -- $ (0.22) $ -- $ (0.40)
============ ============ ============ ============
Loss from discontinued operations - pro forma $ -- $ (0.22) $ -- $ (0.40)
============ ============ ============ ============
Net loss - as reported $ (0.10) $ (1.14) $ (0.03) $ (2.83)
============ ============ ============ ============
Net loss - pro forma $ (0.10) $ (1.14) $ (0.03) $ (3.20)
============ ============ ============ ============
Weighted average number of common shares outstanding 3,157,416 1,892,196 3,140,931 1,883,730
============ ============ ============ ============
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NOTE 5. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted-average
number of common and dilutive common-equivalent shares outstanding during the
period. Dilutive common-equivalent shares consist of shares that would be issued
upon the exercise of stock options and warrants (computed using the treasury
stock method).
Options and warrants to purchase 26,229,826 shares of common stock, and
preferred shares or long term debt convertible into 50,437,000 shares of common
stock for the three and nine months ended September 30, 2003 were not included
in diluted earnings per share as their effect would be anti-dilutive. Options
and warrants to purchase 8,958,653 shares of common stock, and preferred shares
or long term debt convertible into 8,103,759 shares of common stock for the
three and nine months ended September 30, 2002, respectively. were not included
in diluted loss per share because they would have been antidilutive.
NOTE 6. LONG-TERM DEBT
On March 27, 2003, the Company and the selling shareholders of Bac-Tech
Systems, Inc. amended the $600,000 non-interest bearing promissory notes,
whereby the $200,000 installment due to the selling shareholders of Bac-Tech
Systems, Inc. due May 1, 2003 was deferred until July 1, 2005. The installments
of $200,000 due on January 1, 2004 and January 1, 2005 remain unchanged.
In April 2003, the $275,000 of the retained proceeds from the private
financing of convertible notes in July 2002 was released from escrow. The
proceeds are to be used to pay for negotiated reduced liabilities and working
capital.
The Company is obligated to pay interest on its 5-year, 7%, senior
subordinated secured convertible notes issued in January 2002 on a quarterly
basis beginning March 2002, and each subsequent quarter thereafter, which
interest payments have not been made. If the Company does not make these
payments, or obtain waivers from the noteholders, the noteholders may pursue
whatever legal remedies are available to them under the terms of the notes,
which are secured by all of the assets of the Company. In view of the Company's
cash position, it intends to seek waivers from these holders. There can be no
assurance that such waivers can be obtained or that such holders will not
declare a default of their entire indebtedness. Accordingly, such notes have
been classified as current liabilities.
NOTE 7. ADDITIONAL PAID-IN CAPITAL
During December 2001, the Company renegotiated a potential $1,200,000
liability with a creditor relating to the licensing of software. The Company had
previously issued 145,986 shares of common stock to this party for amounts then
owing. The Company had agreed that in the event this party received gross
proceeds less than the amount originally owed, the Company would reimburse this
party for the shortfall. In December 2001, this agreement was amended whereby
the creditor agreed to be issued up to 266,667 shares of the Company's common
stock to offset any deficiency, and to the extent this amount is insufficient,
the creditor would be paid one-half the remaining balance in cash no earlier
than April 2003, with the other half forgiven.
At March 31, 2003, the Company remeasured its potential liability under
the agreement. As a result of the remeasurement, the Company reduced its
liability by $4,000 and increased additional paid-in capital as of March 31,
2003.
-8-
NOTE 8 - SETTLEMENT OF LICENSING LIABILITY
On July 8, 2003, the Company further amended the agreement discussed in
Note 7 and superceded the prior compensation arrangement. The amended agreement
provides for a two year term, continued use by the Company of the creditor's
software, and compensation to the creditor as follows: (i) $20,000 in cash, (ii)
such number of shares of common stock of the Company, if any, as is required to
bring the ownership of the creditor to 9.9% of the outstanding common shares of
the Company, (iii) 10% of the revenues that the Company generates through the
use of the software and (iv) 7.5%; of the revenues (excluding those generated
under provision (iii)) received by the Company from maintenance and other
services performed by the Company for third parties for or on account of the
software; in no event shall the amounts payable pursuant to provisions (iii) and
(iv) above exceed the aggregate amount of $300,000. The effect of this amended
agreement was to reduce the Company's licensing liability by $566,000.
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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, which
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, our limited cash
resources and negative working capital position, the risk that our secured
noteholders will seek our assets in view of default in payment in interest, 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 cannot
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 form 10-QSB. It is
intended to assist the reader in understanding and evaluating our financial
position.
On April 18, 2000, eB2B Commerce, Inc., a Delaware corporation, merged
with DynamicWeb, which is a New Jersey corporation, which was the surviving
legal entity. Following the merger, although the merged company maintained the
corporate and legal identity of DynamicWeb, we changed our name from DynamicWeb
Enterprises, Inc. to eB2B Commerce, Inc. and assumed the accounting history of
the former eB2B Commerce, Inc. (i.e. the Delaware corporation).
Overview
We are a provider of business-to-business transaction management
services designed to simplify trading partner integration, automation and
collaboration.
We use proprietary software to provide services that enable more
efficient trading to take place between business partners. Our technology
platform allows business partners to electronically initiate, communicate, and
respond to business documents, regardless of the differences in the partners'
respective computer systems.
Through our service offerings and technology, we:
o receive business documents including, but are not limited to,
purchase orders, purchase order acknowledgments, advanced
shipping notices and invoices in any data format,
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o ensure that the appropriate data has been sent,
o translate the document into any other format readable by the
trading partner,
o transmit the documents correctly to the respective trading
partner,
o acknowledge the flow of transactions to each partner,
o allow the partners to view and interact with other supply
chain information,
o alert the partners to time-critical information.
We provide access to our services via the Internet and traditional
communications methodologies. Our software is maintained on both on-site
hardware and remotely hosted hardware.
We also provide professional services and consulting services to tailor
our software to our customers' specific needs with regard to automating the
customers' transactions with their suppliers, as well as to businesses that wish
to build, operate or outsource the transaction management of their
business-to-business trading partner relationships and infrastructure.
In some instances, we provide access to our software to third-party
software vendors as resellers, who use our solutions to meet their customers'
requirements in this area. We may also allow certain of these customers to take
delivery of our proprietary software on a licensed basis to support our services
remotely.
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 the Notes to the Financial Statements included in our Form
10-KSB for the year ended December 31, 2002.
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
on the volume of transactions processed during a specific period, typically one
month. 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 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 or large project arrangements are recognized using either the
contract completion or percentage-of-completion method. The revenue recognized
from fixed price consulting arrangements is based on the
percentage-of-completion method if management can accurately allocate (i) the
ongoing costs to undertake the project relative to the contracted price and
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projected margin; and (ii) the degree of completion at the end of the applicable
accounting period. Otherwise, revenue is recognized upon customer acceptance of
the completed project. 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 are
included in deferred income.
Accounting for Business Combinations and 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 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, 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 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 for impairment using the guidance of
applicable accounting literature.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Total revenue for the third quarter ended September 30, 2003 was
$823,000, compared to $828,000 for the same period in 2002, a decrease of
$5,000, or 1%. Compared to revenue of $1,213,000 for the second quarter of 2003,
total revenue decreased by $390,000, or 32%. The decrease in sequential revenue
is primarily attributable to the timing of completed large projects and revenue
recognition based on completion. Revenue for the nine-month periods ended
September 30, 2003 and 2002 amounted to $3,067,000 and $2,745,000, respectively,
an increase of $322,000, or 12%.
Revenue from the Company's core transaction services business was
$622,000, an increase of $69,000, or 12%, for the third quarter from the same
period in 2002. Core transaction services revenue decreased by $98,000, or 14%,
from the $720,000 realized in the second quarter of 2003 due to timing issues
from completed projects. For the nine-month periods ended September 30, 2003 and
2002, core transaction services revenue was $2,088,000 and $1,785,000
respectively, an increase of $303,000, or 17%. The increase in overall revenue
is attributable to completion of new software development projects for both
existing and new customers, as well as growth in eB2B's Trade GatewayTM supplier
network. Professional services consulting revenue for the third quarter
decreased by $74,000, or 27%, from the same period in 2002, and by $95,000, or
32% from the second quarter of 2003. The decline was primarily attributable to
fewer professional services hours billable to the Company's largest client as it
reduced overall IT spending levels during the summer of 2003. While the Company
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expects revenue from this business line to remain relatively stable as a result
of billing increases to this and other clients, it can give no assurances in
this regard.
In the three-month periods ended September 30, 2003 and 2002, one
customer accounted for approximately 23% and 24% of our total revenue,
respectively. No other customer accounted for 10% or more of our total revenue
for the respective periods.
Cost of revenue consists primarily of salaries and benefits for
employees providing technical support as well as salaries of personnel and
consultants providing consulting services to clients. Total cost of revenue for
the three-month periods ended September 2003 and 2002 amounted to $156,000 and
$303,000, respectively, a decrease of $147,000 or 49% percent. The decrease was
a result of fewer professional services hours used during the quarter. For the
nine-month periods ended September 30, 2003 and 2002, cost of revenue was
$459,000 and $836,000, respectively. The decrease of $377,000, or 45%, was
attributable to decreases in professional services hours used in 2003.
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) decreased by $50,000, or 54%, to $43,000
for the three months ended September 30, 2003, from the $93,000 for the three
months ended September 30, 2002, due to a decrease in travel and related
expenses. For the nine-month periods ended September 30, 2003 and 2002,
marketing and selling expense was $189,000 and $341,000 respectively. The
decrease of $152,000, or 45% reflected a decrease in travel and related expense
and the elimination of two sales positions.
Product development expenses mainly represent amortization of
capitalized software development costs and related costs associated with the
development of our intellectual property and technology infrastructure necessary
to capture and process transactions. Product development expenses (exclusive of
stock-based compensation) were approximately $64,000 and $144,000 for the
three-month periods ended September 30, 2003 and 2002, respectively. The
decrease of $80,000, or 56%, was primarily attributable to a stabilized
technology platform in 2002 and 2003, resulting in less development expense
capitalized in prior periods and subsequent reduction in amortization in 2003.
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 of our software are implemented. Product
development expense for the nine-month periods September 2003 and 2002 were
$246,000 and $839,000 respectively. The decrease of $593,000 or 71% was due to
the stabilized technology platform and subsequent reduction of amortization
expense mentioned above.
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, 2003 and 2002, total general and administrative expenses
(exclusive of stock-based compensation) amounted to $550,000 and $1,169,000,
respectively, a decrease of $619,000, or 53%. The decrease is attributable
primarily to (i) reductions in employees resulting in savings on salaries,
severance and related benefits of $260,000, (ii) reduction of healthcare
expenses of $25,000, (iii) reduction in insurance, legal, consulting, and
accounting of $97,000, and (iv) telecommunications of $129,000. For the
nine-month periods September 2003 and 2002, general and administrative expenses
were $1,851,000 and $4,328,000, respectively. The decrease of $2,477,000, or 57%
was primarily due to (i) reduction in employee salaries and benefits of
$1,053,000 (ii) reduction in healthcare expense of $93,000, (iii) reduction in
insurance, legal, consulting and accounting of $416,000, (iv) reduction in
marketing and public relations expense of $157,000 and, (v) reduction in
telecommunications expense of $254,000.
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Amortization of other intangibles are non-cash charges associated with
the DynamicWeb, and Bac-Tech business combinations. Amortization expense was
$83,000 and $710,000 for the three-month periods ended September 30, 2003 and
2002, respectively. The decrease of $627,000 is due primarily to the completion
of amortization of intangible assets acquired in the DWEB acquisition. For the
nine-month periods ending September 30, 2003 and 2002, amortization expense was
$407,000 and $1,099,000 respectively, a decrease of $692,000, or 63%, also
related to the completion of amortization of DWEB intangibles.
During the three-month periods ended September 30, 2003 and 2002,
stock-based compensation expense amounted to $0 and $81,000, respectively. The
deferred stock compensation cost in 2002 related to warrants issued to
non-employees, and was expensed over the period of the expected benefit. The
balance of unearned stock-based compensation at September 30, 2003 was zero. For
the nine-month periods ending September 30,2003 and 2002, stock-based
compensation expense amounted to $0 and $244,000 respectively, related to the
aforementioned warrants.
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
and amortization, and (iv) income or loss from discontinued operations.
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, 2003 and 2002, EBITDA
from continuing operations was $89,000 versus an EBITDA loss of $719,000,
respectively, an improvement of $808,000. For the nine-months ended September
30, 2003, EBITDA was $1,231,000, as compared to the loss of $1,367,000 reported
for the same period in 2002, an improvement of $2,598,000. The improvement in
EBITDA is a result of the savings from the Company's restructuring and cost
reduction measures implemented in 2002, particularly in regard to general and
administrative expense, negotiated settlements of outstanding liabilities, as
well as an overall increase in revenues.
A reconciliation of net loss to EBITDA for the three and nine months
ended September 30, 2003 and 2002 is as follows (in thousands):
For the three months For the nine months
Ended September 30, Ended September 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss $ (238) $ (2,158) $ (21) $ (5,345)
Loss from discontinued operations -- 420 6 762
---------- ---------- ---------- ----------
Loss from continuing operations (238) (1,738) (15) (4,583)
Amortization of product
development costs 64 144 246 839
Depreciation and amortization 98 710 504 2,081
Interest 165 165 496 296
---------- ---------- ---------- ----------
EBITDA $ 89 $ (719) $ 1,231 $ (1,367)
========== ========== ========== ==========
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Interest and other expenses, net amounted to an expense of $165,000 for
the three-month period ended September 30, 2003 compared to $66,000 for the
three-month period ended September 30, 2002. The higher interest expense for the
third quarter 2003 is a result of non-cash interest expense of $106,000 related
to the amortization of deferred financing fees and debt discount related to
warrants combined with interest of $26,000 on the notes issued during the second
half of 2002 and $33,000 of interest expense related to the $2 million senior
subordinated convertible notes issued in January 2002 compared to interest
expense offset by interest earned on a higher average cash balance in the
three-month period ended September 30, 2002.
Net loss in the third quarter of 2003 was $238,000, or $(0.08) per
share, compared to a net loss of $2,158,000, or ($1.09) per share, for the same
period last year, representing an improvement of $1,920,000. For the nine-month
period ended September 30, 2003, net loss was $21,000, or ($0.00) per share
compared to a net loss of $5,345,000, or ($2.80) per share for the nine-month
period ended September 30, 2002. The improvement in net loss is a combined
result of the changes discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, our principal source of liquidity was
approximately $277,000 of cash and cash equivalents. The Company drew down the
remaining funds held in escrow pursuant to our July 2002 financing on April 29,
2003. As of September 30, 2003, we had a negative working capital position of
$4,865,000. The report of our independent auditors' on our financial statements
as of and for the year ended December 31, 2002 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.
As of November 20, 2003, our unaudited cash and cash equivalent balance
was approximately $115,000. Though our ongoing quarterly cash expenses more
closely approximate our quarterly revenue, the Company requires additional
capital to resolve its outstanding obligations, improve its working capital
position, and accelerate its growth.
Though the Company has shown stronger financial performance in the past
nine months, its reported EBITDA, which has been positive for the prior four
quarters, and its small 2003 net loss are partially due to gains as a result of
negotiated settlements with creditors or reversals of accruals associated with
resolved issues. Though the Company has reported positive EBITDA for the first
nine months of 2003, it still has negative cash flows from operations for this
period. We used $124,000 of cash in continuing operations for the nine-months
ended September 30, 2003. At our current quarterly expense rates, we will
require approximately $875,000 in quarterly revenue and $930,000 in cash
collections, respectively, to report positive EBITDA and cash flow from
operations. However, there can be no assurances in this regard.
Currently, we are dependent on our month-to-month collection activity
as well as our best efforts in anticipating expenses in order to continue
operations. Any unexpected shortfall in collections or unanticipated major
expense could cause us to scale back our operations or even cause us to suspend
or cease operations.
The Company currently has contractual commitments from existing and
prospective customers to proceed with projects sufficient, along with current
capital, to fund its ongoing near term operational needs. However, should the
Company not be successful in meeting deliverable schedules or project
milestones, and is unsuccessful in pursuing potential remedies discussed below,
it will need additional capital immediately.
-15-
The Company successfully settled a potential liability of approximately
$566,000 with a creditor who holds a license to software used by the Company to
support its Trade Gateway TM platform. The settlement included an ongoing
royalty of between seven and one-half (7.5) and ten (10.0) percent of revenue
generated by the platform, up to a maximum payment of $300,000. As a result of
the settlement, eB2B's quarterly margin derived from the platform will decrease
by the amount of the royalty. Over the two year period of the agreement, the
Company anticipates that growth of the Trade Gateway network will more than
offset the effect of the royalty payments, however, in the near term, cash
generated by the platform will be negatively affected.
Further, the Company is obligated to pay interest on its five-year, 7%,
senior subordinated secured convertible notes issued in January 2002 on a
quarterly basis beginning March 2002, and each subsequent quarter thereafter,
which interest payments have not been made. As a result of this default, the
Company has likely cross-defaulted on its July 2002 five-year, 7%, senior
secured convertible notes. If the Company does not make these payments, or
obtain waivers from the noteholders, the noteholders may pursue whatever legal
remedies are available to them under the terms of the notes, which are secured
by all of the assets of the Company. In view of the Company's cash position, it
has sought waivers from these holders. There can be no assurance that such
waivers can be obtained or that such holders will not declare a default of their
entire indebtedness and make claim to all of the assets of the Company. As of
September 30, 2003 the aforementioned waivers had not been obtained.
Because of the substantial anti-dilution provisions contained in the
Company's previous rounds of financing, in addition to the security interests of
its noteholders, the Company is seriously constrained by its current capital
structure, limiting its ability to raise additional capital and making
traditional financing from banks or corporate lenders extremely difficult, if
not impossible, to secure.
As a result of the above constraints, the Company has and will continue
to explore both its strategic and structural options to resolve its issues,
including filing for bankruptcy protection under Chapter 11. The Company has
retained a creditor's rights attorney, a counsel to the Board, a valuation
analyst and will retain other advisors as appropriate.
We have taken actions to improve our cash position and fund any
remaining operating losses including:
o Additional cost reduction measures, which have reduced annual
salaries, benefits or other operating expenses by
approximately $20,000 per month,
o Discussions aimed at securing additional capital, through
commercial banking, investment banking, and receivables
financing channels, which to date have not resulted in
additional funds being available to the Company,
o Discussions with potential sale or merger partners of the
Company.
o Discussions with secured and unsecured creditors regarding the
Company's financial status.
These concerns about capital may lead us to take additional steps to
eliminate or curtail certain projects and conserve cash that may adversely
affect operations. If we are unable to obtain additional capital as needed, we
may be required to cease operations altogether. If we are able to raise
additional funds on an equity basis, for which there can be no assurance,
extensive dilution to existing shareholders would likely occur in light of the
antidilution provisions of our preferred stock, notes, and related warrants. In
fact, under certain scenarios, there may be virtually no value remaining to the
common stock shareholders. Some of the alternatives that we are pursuing,
however, may be less dilutive to existing shareholders.
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Notwithstanding the foregoing, the Company believes that our cash flow
will continue to improve on a quarterly basis. A large percentage of our
operating expense is fixed and as we increase our revenues, for which there can
be no assurance, our operating expenses will remain relatively stable. In
addition, during the third quarter, the Company finalized a contract with a
major retailer to perform integration and outsourcing services, as well as
provide its Trade Gatewaytm supplier enablement program to the customer's small
and medium suppliers. The Company estimates that when fully implemented the
contract will generate over $25,000 per month in recurring revenue.
The Company has entered into various financing and commercial
commitments. The Company's long-term debt is carried on its financial statements
net of discounts of $869,000 at September 30, 2003. Following is a summary of
required cash obligations as they come due:
Year Ended September 30,
--------------------------------------------------------------
2004 2005 2006 2007 2008
---------- ---------- ---------- ---------- ----------
Long-term debt $3,688,000 $ 200,000 $ 200,000 $ -- $ --
Operating leases 113,000 117,000 120,000 124,000 52,000
Capital leases 57,000 -- -- -- --
---------- ---------- ---------- ---------- ----------
$3,858,000 $ 317,000 $ 320,000 $ 124,000 $ 52,000
========== ========== ========== ========== ==========
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,
amounting to $1,200,000, have been used 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 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 were disbursed as provided in the escrow agreement. On the
closing of this financing, proceeds of $350,000 were released to us. As provided
in our escrow agreement, the remaining proceeds were disbursed as follows:
$275,000 in September 2002, $275,000 in November 2002 and $300,000 in April
2003.
On April 29, 2003, we drew down the remaining funds held in escrow. The
draw down on our financing triggered anti-dilution provisions affecting the
conversion price of the Company's notes issued in January 2002, Series B
preferred stock and Series C preferred stock and the exercise price of and
number of shares issuable under various outstanding warrants.
Net cash used in continuing operating activities totaled approximately
$124,000 for the nine-months ended September 30, 2003 as compared to $1,830,000
for the same period in 2002. Net cash used in continuing operating activities
for the nine-month period resulted primarily from (i) a $609,000 use of cash
from operating assets and liabilities, including the recognition of a
significant portion of deferred revenue, (ii) a $15,000 use of cash from
continuing operations and (iii) an aggregate of $500,000 of non-cash charges
consisting primarily of depreciation, amortization, stock-based compensation
expense, non-cash interest expense less the gain from the creditor settlement
discussed previously. Net cash used in operating activities for the nine-months
ended September 30, 2002, resulted primarily from (i) the $5,345,000 net loss
from continuing operations offset by (ii) $152,000 of cash provided by operating
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assets and liabilities, (iii) an aggregate of $3,363,000 of non-cash charges
consisting primarily of depreciation, amortization and stock-based compensation
expense, less a restructuring credit.
Net cash used in investing activities totaled approximately $262,000 of
product development costs for the nine-months ended September 30, 2003 as
compared to net cash used by investing activities of approximately $571,000 for
the same period in 2002. Net cash used in investing activities for the
nine-months ended September 30,2002 resulted from (i) the acquisition of
Bac-Tech Systems, Inc., including net cash outlays of $198,000, (ii) $367,000 in
product development costs consisting of fees of outside contractors and
capitalized salaries, and (iii) $6,000 of property and equipment acquisitions.
Net cash provided by financing activities totaled $238,000 for the
nine-months ended September 30,2003 and resulted from the draw down of the
remaining funds in escrow from the July 2002 financing of $275,000 less payments
of borrowings totaling $37,000. Net cash provided by financing activities of
$525,000 for the nine-months ended September 30, 2002 resulted from payments of
capital leases totaling $100,000 and $625,000 drawn from escrow from the July
2002 financing.
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our principal executive and financial officer has reviewed and
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934 (the "Exchange Act")), as of a date within ninety days before the filing of
this quarterly report. Based on that evaluation, such officer has concluded that
our current disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the Commission's rules and forms.
Changes in internal controls.
There have not been any significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or material
weakness in the internal controls, and therefore no corrective actions were
taken.
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PART II. OTHER INFORMATION
ITEM 3. DEFAULT ON SENIOR SECURITIES
According to the terms of its January 2002 five-year, 7%, subordinated
senior secured notes, the Company was obligated to begin making interest
payments each quarter, in cash or registered shares of company stock, beginning
March 2002. To date, the Company has paid no cash interest and because we do not
have an effective registration statement covering the applicable shares, we are
in default in the approximate amount of $238,000, representing interest payments
for March, June, September, and December of 2002, as well as March and September
2003. The total amount of indebtedness equals $2,262,500 plus the unpaid
interest.
Because of the amount owing on the January 2002 notes, it is likely
that we are in a cross-default position regarding our July 2002 notes, which
limit the amount of indebtedness the Company may incur. The total amount of the
July 2002 notes is $1,200,000.
ITEM 5. OTHER INFORMATION
The Board of Directors approved an amendment to the Company By-laws on
October 9, 2003, so that the Company could maintain a Board of Directors
consisting of a single Director, the minimum allowable under the laws of the
State of New Jersey. Subsequent to the approval of the amendment, Thom Waye
resigned as a Director of the Company. The current Board consists of Richard
Cohan, Chairman and Chief Executive Officer. A copy of the amendment and
adopting resolution is attached as Exhibit 3.2.5.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.2.1 Amended and Restated Bylaws of the Registrant adopted March 7,
1997.
3.2.2 Amendments adopted January 21, 1998 to Bylaws of the
Registrant
3.2.3 Amendments adopted October 9, 2003 to Bylaws of the Registrant
31. Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32. 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 July 22, 2003 to report an Amendment to the
Company's agreement with Interworld Corporation.
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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 26, 2003
By: /s/ RICHARD COHAN
-------------------------------------
Chief Executive Officer and President
(Principal financial officer)
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